<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 September 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 September 30, 1998)
<PAGE>
CAPITAL INCOME PROPERTIES-C LIMITED PARTNERSHIP
INDEX TO FORM 10-Q
FOR THE QUARTER ENDED SEPTEMBER 30, 1998
Page
----
PART I. Financial Information (Unaudited)
Item 1. Financial Statements
Consolidated Balance Sheets - September 30, 1998
and December 31, 1997 . . . . . . . . . . . . . . 1-2
Consolidated Statements of Operations - for the
three and nine months ended September 30, 1998
and 1997 . . . . . . . . . . . . . . . . . . . . 3-4
Consolidated Statement of Changes in Partners'
Deficit - for the nine months ended
September 30, 1998 . . . . . . . . . . . . . . . 5
Consolidated Statements of Cash Flows - for the nine
months ended September 30, 1998 and 1997 . . . . 6
Notes to Consolidated Financial Statements -
September 30, 1998 and 1997 . . . . . . . . . . . 7-18
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations . . 19-25
PART II. Other Information
Item 6. Exhibits and Reports on Form 8-K . . . . . . . . . 25
Signature . . . . . . . . . . . . . . . . . . . . . . . . 26
Exhibit Index . . . . . . . . . . . . . . . . . . . . . . . . 27
<PAGE>
CAPITAL INCOME PROPERTIES-C LIMITED PARTNERSHIP
CONSOLIDATED BALANCE SHEETS
ASSETS
<TABLE>
<CAPTION>
September 30, December 31,
1998 1997
------------- -------------
(Unaudited)
<S> <C> <C>
Current assets:
Cash and cash equivalents $ 3,991,203 $ 2,071,829
Restricted cash and cash equivalents 2,538,281 2,433,117
Accounts receivable, less allowance for doubtful accounts
of $86,012 and $86,439, respectively 1,603,262 1,317,229
Prepaid expenses 1,048,116 771,659
Current portion of deferred rent receivable 136,579 136,579
Inventory and other assets 59,453 70,790
------------- -------------
Total current assets 9,376,894 6,801,203
------------- -------------
Property and equipment:
Buildings and tenant improvements 123,445,794 123,255,734
Furniture and equipment 15,874,435 15,514,277
------------- -------------
139,320,229 138,770,011
Less-accumulated depreciation (62,323,169) (59,136,401)
------------- -------------
Property and equipment, net 76,997,060 79,633,610
------------- -------------
Other assets:
Deferred charges, less accumulated amortization
of $3,642,664 and $3,188,815, respectively 2,486,227 2,878,253
Deferred rent receivable, less reserve of $171,763 and
$171,763, respectively 550,472 550,472
Escrows and deposits 580,870 456,470
------------- -------------
Total other assets 3,617,569 3,885,195
------------- -------------
Total assets $ 89,991,523 $ 90,320,008
============= =============
(Continued)
</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>
September 30, December 31,
1998 1997
------------- -------------
(Unaudited)
<S> <C> <C>
Current liabilities:
Current portion of first mortgage note $ 5,546,563 $ 5,748,221
Accounts payable 784,738 551,409
Accrued expenses 718,508 997,275
Due to affiliates 4,813,531 4,616,073
------------- -------------
Total current liabilities 11,863,340 11,912,978
First mortgage note 52,924,277 57,026,686
Second mortgage note 14,303,671 15,325,443
Third mortgage note 6,522,000 6,319,500
Due to guarantor of operating deficits 2,582,739 2,490,352
Deferred gain on debt forgiveness 43,374,185 54,491,976
Deferred revenue and security deposits 583,788 532,658
------------- -------------
Total liabilities 132,154,000 148,099,593
------------- -------------
Commitments and contingencies
Partners' deficit (42,162,477) (57,779,585)
------------- -------------
Total liabilities and partners' deficit $ 89,991,523 $ 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 nine months ended
September 30, September 30,
----------------------------- -----------------------------
1998 1997 1998 1997
------------ ------------ ------------ ------------
<S> <C> <C> <C> <C>
Revenue:
Rooms $ 3,346,438 $ 3,256,438 $ 10,912,146 $ 10,038,020
Food and beverage 1,471,827 1,362,189 4,660,392 4,414,168
Telephone 156,158 164,761 478,332 481,902
Office, retail and parking rentals 2,490,693 2,289,838 7,492,709 6,789,957
Other 32,195 24,793 108,687 70,800
------------ ------------ ------------ ------------
7,497,311 7,098,019 23,652,266 21,794,847
------------ ------------ ------------ ------------
Departmental expenses:
Rooms 794,588 722,998 2,410,674 2,179,176
Food and beverage 1,134,241 1,071,035 3,469,573 3,382,111
Telephone 75,571 103,728 256,392 306,130
------------ ------------ ------------ ------------
2,004,400 1,897,761 6,136,639 5,867,417
------------ ------------ ------------ ------------
Other operating expenses:
Administrative 509,432 477,656 1,554,500 1,417,267
Marketing 305,678 281,609 930,246 884,967
Energy costs 617,642 615,617 1,470,792 1,466,200
Property operations and maintenance 686,166 441,590 1,724,515 1,439,026
------------ ------------ ------------ ------------
2,118,918 1,816,472 5,680,053 5,207,460
------------ ------------ ------------ ------------
Operating income before other income, fixed
charges and other deductions, extraordinary
item and total income attributed to minority
interest 3,373,993 3,383,786 11,835,574 10,719,970
------------ ------------ ------------ ------------
Other income 52,215 7,148 76,069 30,734
------------ ------------ ------------ ------------
Fixed charges and other deductions:
Depreciation 1,062,256 1,203,064 3,186,768 3,609,192
Amortization 88,462 130,860 265,386 392,580
Interest expense 277,436 229,833 799,060 677,158
Management fees 305,449 285,072 942,791 844,946
Real estate and personal property taxes 270,328 237,468 788,359 746,211
Ground rent 400,000 400,000 1,200,000 1,200,000
Other 91,557 104,878 286,481 323,344
------------ ------------ ------------ ------------
2,495,488 2,591,175 7,468,845 7,793,431
------------ ------------ ------------ ------------
(Continued)
</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,
----------------------------- -----------------------------
1998 1997 1998 1997
------------ ------------ ------------ ------------
<S> <C> <C> <C> <C>
Income before extraordinary item $ 930,720 $ 799,759 $ 4,442,798 $ 2,957,273
Extraordinary item-gain on debt forgiveness 3,990,101 3,457,215 11,174,310 10,444,093
------------ ------------ ------------ ------------
Net income 4,920,821 4,256,974 15,617,108 13,401,366
Total income attributed to minority interest (4,932,263) (4,265,436) (15,645,495) (13,426,300)
------------ ------------ ------------ ------------
Net loss attributed to Partnership $ (11,442) $ (8,462) $ (28,387) $ (24,934)
============ ============ ============ ============
Net loss allocated to General
Partners and affiliated Initial
Limited Partner (1.01%) $ (116) $ (85) $ (287) $ (252)
============ ============ ============ ============
Net loss allocated to Additional
Limited Partners (98.99%) $ (11,326) $ (8,377) $ (28,100) $ (24,682)
============ ============ ============ ============
Net loss per unit of Additional Limited
Partnership interest based on 600
units issued and outstanding $ (18.88) $ (13.96) $ (46.83) $ (41.14)
============ ============ ============ ============
</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 (287) (28,100) -- (28,387)
Total income attributed to minority
interest -- -- 15,645,495 15,645,495
--------- -------- ------------- -------------
Balance, September 30, 1998 $(530,045) $256,482 $ (41,888,914) $ (42,162,477)
========= ======== ============= =============
</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,
-------------------------------
1998 1997
------------ ------------
<S> <C> <C>
Cash flows from operating activities:
Net income $ 15,617,108 $ 13,401,366
Adjustments to reconcile net income to net cash provided by
operating activities:
Depreciation 3,186,768 3,609,192
Amortization 265,386 392,580
Extraordinary item-gain on debt forgiveness (11,174,310) (10,444,093)
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 (4,663,408) (4,678,636)
Changes in assets and liabilities:
Increase in restricted cash and cash equivalents (105,164) (236,602)
Increase in accounts receivable, net (286,033) (540,848)
Increase in prepaid expenses (276,457) (218,617)
Decrease in inventory and other assets 11,337 8,095
Increase in escrows and deposits (124,400) (49,579)
Increase (decrease) in accounts payable 233,329 (70,020)
(Decrease) increase in accrued expenses (278,767) 88,862
Increase (decrease) in deferred revenue and security deposits 51,130 (141,031)
------------ ------------
Net cash provided by operating activities 2,939,870 1,604,020
------------ ------------
Cash flows from investing activities:
Purchase of building improvements (190,060) (724,351)
Purchase of furniture and equipment (360,158) (391,401)
Payment of leasing costs (61,823) (516,088)
------------ ------------
Net cash used in investing activities (612,041) (1,631,840)
------------ ------------
Cash flows from financing activities:
Proceeds from mortgage debt 369,084 642,490
Payments on mortgage debt (974,997) (974,997)
Advances from affiliates 197,458 167,717
------------ ------------
Net cash used in financing activities (408,455) (164,790)
------------ ------------
(Continued)
</TABLE>
The accompanying notes are an integral part
of these consolidated financial statements.
-6-
<PAGE>
CAPITAL INCOME PROPERTIES-C LIMITED PARTNERSHIP
CONSOLIDATED STATEMENTS OF CASH FLOWS - Continued
(Unaudited)
<TABLE>
<CAPTION>
For the nine months ended
September 30,
-------------------------------
1998 1997
------------ ------------
<S> <C> <C>
Net increase (decrease) in cash and cash equivalents $ 1,919,374 $ (192,610)
Cash and cash equivalents, beginning of period 2,071,829 2,015,244
------------ ------------
Cash and cash equivalents, end of period 3,991,203 1,822,634
============ ============
Supplemental disclosure of cash flow information:
Cash paid during the period for interest $ 4,663,408 $ 4,678,636
============ ============
</TABLE>
The accompanying notes are an integral part
of these consolidated financial statements.
-7-
<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 September 30, 1998, and the results of its
operations for the three and nine months ended September 30, 1998 and 1997, and
its cash flows for the nine months ended September 30, 1998 and 1997. The
results of operations for the interim period ended September 30, 1998, are not
necessarily indicative of the results to be expected for the full year.
The accompanying unaudited financial statements have been prepared in
accordance with generally accepted accounting principles and with the 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 such rules and regulations. These
condensed financial statements should be read in conjunction with the financial
statements and notes thereto included in the Partnership's annual report on Form
10-K at December 31, 1997.
Certain amounts in the 1997 financial statements have been reclassified to
conform to 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 September 30, 1998 and December 31, 1997 and for each
of the three-month and nine-month periods ended September 30, 1998 and 1997 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
-8-
<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 $42,162,477 and $57,779,585 as
of September 30, 1998 and December 31, 1997, respectively, $41,888,914 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 $35,583,925 and $19,938,430 as of September 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).
-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 the Partnership on an unconsolidated
basis follows.
<TABLE>
<CAPTION>
BALANCE SHEETS
--------------
September 30, December 31,
1998 1997
------------ ------------
(Unaudited)
<S> <C> <C>
Total assets $ 116 $ 116
============ ============
Total liabilities $ 273,679 $ 245,292
Partners' deficit (273,563) (245,176)
------------ ------------
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,
----------------------------- -----------------------------
1998 1997 1998 1997
------------ ------------ ------------ ------------
<S> <C> <C> <C> <C>
Professional fees $ (10,680) $ (5,250) $ (15,989) $ (18,974)
Other expenses (762) (3,212) (12,398) (5,960)
------------ ------------ ------------ ------------
Net loss $ (11,442) $ (8,462) $ (28,387) $ (24,934)
============ ============ ============ ============
</TABLE>
-10-
<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>
September 30, December 31,
1998 1997
------------- -------------
(Unaudited)
<S> <C> <C>
Investment in real estate, at cost, net $ 76,997,060 $ 79,633,610
Current assets 9,376,778 6,801,087
Other assets 3,617,569 3,885,195
------------- -------------
Total assets $ 89,991,407 $ 90,319,892
============= =============
Current liabilities $ 11,589,661 $ 11,667,686
Other liabilities 120,290,660 136,186,615
Partners' deficit (41,888,914) (57,534,409)
------------- -------------
Total liabilities and partners' deficit $ 89,991,407 $ 90,319,892
============= =============
</TABLE>
STATEMENTS OF OPERATIONS
------------------------
(Unaudited)
<TABLE>
<CAPTION>
For the three months ended For the nine months ended
September 30, September 30,
----------------------------- -----------------------------
1998 1997 1998 1997
------------ ------------ ------------ ------------
<S> <C> <C> <C> <C>
Revenue $ 7,549,526 $ 7,105,167 $ 23,728,335 $ 21,825,581
Expenses (6,607,364) (6,296,946) (19,257,150) (18,843,374)
------------ ------------ ------------ ------------
Net income before extraordinary item 942,162 808,221 4,471,185 2,982,207
Extraordinary gain - debt forgiveness 3,990,101 3,457,215 11,174,310 10,444,093
------------ ------------ ------------ ------------
Net income $ 4,932,263 $ 4,265,436 $ 15,645,495 $ 13,426,300
============ ============ ============ ============
</TABLE>
-11-
<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 September 30, 1998 and December 31, 1997 was 5.64% 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 such 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,
1998 and 1997, GECC advanced $222,434 and $535,899, 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 September 30, 1998 and December 31, 1997, $1,040,625 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).
-12-
<PAGE>
CAPITAL INCOME PROPERTIES-C LIMITED PARTNERSHIP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
3. INVESTMENT IN BETHESDA METRO CENTER LIMITED PARTNERSHIP - Continued
(d) Principal and interest on additional advances, as discussed below, if
any, made to BMCLP by BMC.
(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 at 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 5, 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 by demonstrating
the need for such funds to BMC. As of both September 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
-13-
<PAGE>
CAPITAL INCOME PROPERTIES-C LIMITED PARTNERSHIP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
3. INVESTMENT IN BETHESDA METRO CENTER LIMITED PARTNERSHIP - Continued
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
due thereunder; or (iii) one day later than the later of any maturity date under
the Restated Notes. As of September 30, 1998 and December 31, 1997, accrued
interest of approximately $3,522,000 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 nine months ended September 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 rates of 9.9% and
10.04% in effect at September 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 $58,470,840 and $62,774,907 at September 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 $101,845,025 and $117,266,883 at September 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 $43,374,185 and $54,491,976
differences between the carrying value and total future obligation of the debt
at September 30, 1998 and December 31, 1997, respectively, were deferred and are
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, 1998, $251,414 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 nine months ended September 30, 1997, $334,050 was reclassified
-14-
<PAGE>
CAPITAL INCOME PROPERTIES-C LIMITED PARTNERSHIP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
3. INVESTMENT IN BETHESDA METRO CENTER LIMITED PARTNERSHIP - Continued
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. 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 nine months ended September 30, 1998, amortization of
this deferred debt forgiveness amounted to $4,055,066 and $11,369,205
respectively, and $3,522,180 and $10,638,988 for the three and nine months ended
September 30, 1997, respectively. The amortization of deferred gain is included
in the extraordinary item of $3,990,101 and $11,174,310 for the three and nine
months ended September 30, 1998, respectively, and $3,457,215 and $10,444,093
for the three and nine months ended September 30, 1997, respectively, in the
accompanying consolidated statements of operations, as such extraordinary item
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 both September 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 nine months
ended both September 30, 1998 and 1997, respectively, 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
Amounts due to affiliates were as follows.
<TABLE>
<CAPTION>
Additions/
Balance at Accrued Balance at
Affiliate December 31, 1997 Interest September 30, 1998
------------- ----------------- --------- ------------------
<S> <C> <C> <C>
CRI $ 405,810 $ 52,871 $ 458,681
CHG 1,303,861 66,478 1,370,339
Realty 1,511,128 78,986 1,590,114
Hyatt 1,395,274 (877) 1,394,397
----------- --------- -----------
$ 4,616,073 $ 197,458 $ 4,813,531
=========== ========= ===========
</TABLE>
-15-
<PAGE>
CAPITAL INCOME PROPERTIES-C LIMITED PARTNERSHIP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
4. RELATED-PARTY TRANSACTIONS - Continued
The $458,681 and $405,810 due to CRI as of September 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
$1,370,339 and $1,303,861 due to Capitol Hotel Group (CHG), an affiliate of the
General Partners, as of September 30, 1998 and December 31, 1997, respectively,
and $1,590,114 and $1,511,128 due to Realty Management Company (Realty), a
former affiliate of one of the Special Limited Partners, as of September 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 (8.25% effective September 30, 1998 and
8.00% effective October 16, 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 $1,394,397 and $1,395,274 due to
Hyatt Corporation (Hyatt) as of September 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 September 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 nine month periods ended September 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
(as defined in the Partnership Agreement) 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.
-16-
<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 with 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,
1998 were approximately $195,000 and $633,000, respectively, and for the three
and nine months ended September 30, 1997 were approximately $187,000 and
$583,000, 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 initially agreed to postpone the termination until
October 31, 1998 and the arbitration for 90 days. The arbitration has been
further postponed for 60 additional days and the termination date has been
delayed until December 31, 1998 to allow time potentially to resolve their
differences. The Managing General Partner 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 September 30, 1998 and December 31, 1997 approximately $110,000
-17-
<PAGE>
CAPITAL INCOME PROPERTIES-C LIMITED PARTNERSHIP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
6. COMMITMENTS AND CONTINGENCIES - Continued
of this related party payable is recorded as due to affiliates in the
accompanying consolidated financial statements.
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 September 30, 1998 and December 31,
1997, were approximately $518,000 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, but which is terminable by BMCLP under various
circumstances including sale or refinancing, or seven years after the date of
the 1994 mortgage refinancing. 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 nine months ended September 30, 1998, were
approximately $110,000 and $309,000, respectively, and approximately $98,000 and
$262,000 for the three and nine months ended September 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 which
resulted 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 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 September 30, 1998 and December 31, 1997, the Registrant had $116 in
available cash.
During the nine months ended September 30, 1998, the Registrant's available
cash remained constant at $116, whereas accounts payable increased $28,387. The
increase in accounts payable includes an increase of $29,277 in loan payable to
its Managing General Partner for administrative expenses and a decrease of $890
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 $3,991,087 and $2,071,713 at
September 30, 1998 and December 31, 1997, respectively. During the nine months
ended September 30, 1998, unrestricted cash and cash equivalents increased by
$1,919,374; operating activities provided $2,939,870, offset by $612,041 used in
investing activities and $408,455 used in financing activities. Unrestricted
cash and cash equivalents increased $1,919,374 even though the Registrant
recorded income of $15,617,108. The $13,697,734 difference was due largely to
the non-cash gain on debt forgiveness of $11,174,310, as well as the net debt
and interest payments of $5,638,405, fixed asset additions of $550,218 and a
$286,033 increase in accounts receivable, all of which were partially offset by
depreciation and amortization totaling $3,452,154 and proceeds of mortgage debt
of $369,084.
Operating Deficit Reserve
-------------------------
For operating deficits which arise, the Limited Partnership Agreement (LPA)
provides that Allen E. Rozansky and Alan I. Kay 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
-19-
<PAGE>
PART I. FINANCIAL INFORMATION
---------------------
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
-------------------------------------------------
CONDITION AND RESULTS OF OPERATIONS - Continued
-----------------------------------
September 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 September 30, 1998 and December 31, 1997, R&K
has provided $2,582,739 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
$1,343,852 and $1,251,465 at September 30, 1998 and December 31, 1997,
respectively, and has been added to the original advance amount. For the nine
month periods ended September 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 nine months ended September 30, 1998
and 1997, GECC advanced $222,434 and $535,899, 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
September 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% of 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.
-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, 1998 versus September 30, 1997
- ---------------------------------------------------------------
The Registrant recorded a net loss for the three months ended September 30,
1998 of $11,442 compared to a net loss of $8,462 for the corresponding period in
1997. Operating expenses during the third quarter of 1998 were $2,980 higher
than 1997 primarily due to an increase in professional fees, partially offset by
a decrease in other expenses.
Nine months ended September 30, 1998 versus September 30,1997
- -------------------------------------------------------------
The Registrant recorded a net loss for the nine months ended September 30,
1998 of $28,387 compared to a net loss of $24,934 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 September 30, 1998 versus September 30, 1997
- ---------------------------------------------------------------
BMCLP's net income for the third quarter 1998 increased $666,827 or 16%
from the corresponding period in 1997, primarily as a result of increases in
office, retail and parking rentals revenue, food and beverage revenue and rooms
revenue. Contributing to the increase in BMCLP's net income were an increase in
extraordinary gain on debt forgiveness due to fluctuations in the underlying
debt interest rate, and a decrease in depreciation expense.
Rooms revenue for the third quarter of 1998 increased by $90,000 or 3% from
the third quarter of 1997 primarily due to growth in the transient market
average rate. Hotel occupancy decreased 4% to 76% and the average room rate
increased $10 to $125 in the third quarter of 1998 compared to the third quarter
of 1997. Rooms expense for the third quarter of 1998 increased $71,590 or 10%
from the third quarter of 1997 due to increased payroll related expenses and
direct expenses for uniforms, guest supplies and travel agent commissions. Food
and beverage revenue for the third quarter of 1998 increased by $109,638 or 8%
from the third quarter of 1997 primarily due to increased public room rental and
audio visual revenues. Food and beverage expense for the third quarter of 1998
increased by $63,206 or 6% from the third quarter of 1997 primarily due to
increased payroll, training, laundry, dry cleaning and contract service
expenses. The increases in rooms revenue and food and beverage revenue,
partially offset by the increases in rooms expense and food and beverage
expense, contributed to third quarter gross operating profits for the hotel
which exceeded the same period last year by approximately $10,035 or 0.6%.
-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 1998 increased $200,855 or
9% from the second quarter of 1997 primarily due to increased occupancy and
rental rates. The occupancy of the office building increased from 98% to 100%
and the rental rate increased from $24 to $25 per square foot. The retail and
marketplace occupancy increased from 86% to 89%. The retail and marketplace
average rental rate increased from $31 to $34 per square foot during the third
quarter of 1998 compared to the third quarter of 1997. There is no assurance
that these occupancy levels or rental rates will be maintained.
Operating expenses of the office building for the third quarter of 1998
increased $220,684 or 32% from the third quarter of 1997 primarily due to
increased building maintenance expenses.
Nine months ended September 30, 1997 versus September 30, 1997
- --------------------------------------------------------------
BMCLP's net income for the first nine months of 1998 increased $2,219,195
or 17% from the corresponding period in 1997, primarily as a result of increases
in office retail and parking rentals revenue, rooms revenue and food and
beverage revenue. Contributing to the increase in BMCLP's net income were an
increase in extraordinary gain on debt forgiveness due to fluctuations in the
underlying debt interest rate, and a decrease in depreciation expense.
Rooms revenue for the first nine months of 1998 increased by $874,126 or 9%
from the corresponding period in 1997 primarily due to growth in the transient
market average rate. Hotel occupancy increased 1% to 82% and the average room
rate increased $8 to $127 during the first nine months of 1998 compared to the
corresponding period in 1997. Food and beverage revenue for the first nine
months of 1998 increased by $246,224 or 6% from the corresponding period in 1997
primarily due to increases public room rental and audio visual revenues. Rooms
expense for the first nine months of 1998 increased $231,498 or 11% from the
corresponding period in 1997 due to increased payroll related expenses, guest
supplies and travel agent commissions. Food and beverage expense for the first
nine months of 1998 increased by $87,462 or 3% from the corresponding period in
1997 primarily due to increased payroll related expenses, training and contract
service expenses. The increases in room revenue and food and beverage revenue,
partially offset by the increases in rooms expense and food and beverage
expense, contributed to gross operating profits for the hotel during the first
nine months of 1998 which exceeded the same period last year by approximately
$653,000 or 11%.
Office building revenue for the first nine months of 1998 increased
$702,752 or 10% from the corresponding period during 1997 primarily due to
increased occupancy and rental rates. The occupancy of the office building
increased from 96% to 100% and the rental rate increased from $24 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 first nine 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 nine months of 1998
increased $240,148 or 12% from the corresponding period in 1997 primarily due to
increased building maintenance, utility and administrative expenses.
-22-
<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 nine months ended
September 30, September 30,
----------------------------- -----------------------------
1998 1997 1998 1997
------------ ------------ ------------ ------------
<S> <C> <C> <C> <C>
Actual Average Occupancy 76% 80% 82% 81%
Actual Average Room Rate $125 $115 $127 $119
Room Revenues $ 3,346,438 $ 3,256,438 $ 10,912,146 $ 10,038,020
Food & Beverage Revenues $ 1,471,827 $ 1,362,189 $ 4,660,392 $ 4,414,168
Room Profits $ 2,551,850 $ 2,533,440 $ 8,501,472 $ 7,858,844
Food & Beverage Profits $ 337,586 $ 291,154 $ 1,190,819 $ 1,032,057
Gross Operating Profits
(Before Depreciation, Management
Fees and Other Fixed Costs) $ 1,803,704 $ 1,793,668 $ 6,582,902 $ 5,929,902
</TABLE>
OFFICE BUILDING
---------------
(Unaudited)
<TABLE>
<CAPTION>
For the three months ended For the nine months ended
September 30, September 30,
----------------------------- -----------------------------
1998 1997 1998 1997
------------ ------------ ------------ ------------
<S> <C> <C> <C> <C>
Leasing:
- -------
Average Space Occupied:
Office 100% 98% 100% 96%
Retail and Marketplace 89% 86% 89% 84%
Average Rental Rate:
Office $25 $24 $25 $24
Retail and Marketplace $34 $31 $33 $31
Operations:
- ----------
Total Income $ 2,490,693 $ 2,289,838 $ 7,492,709 $ 6,789,957
Operating Expenses (920,404) (699,720) (2,240,037) (1,999,889)
------------ ------------ ------------ ------------
Gross Operating Profits
Before Depreciation, Management
Fees, and Other Fixed Costs) $ 1,570,289 $ 1,590,118 $ 5,252,672 $ 4,790,068
============ ============ ============ ============
</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.
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 three 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. To address
the issue, the Managing General Partner has developed and is currently
implementing a plan (the "Y2K Project") designed to ensure that the Y2K date
change will not have an adverse impact on the Partnership's operations. The Y2K
Project is on schedule and the Managing General Partner expects completion by
the end of 1999.
-24-
<PAGE>
PART I. FINANCIAL INFORMATION
---------------------
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
-------------------------------------------------
CONDITION AND RESULTS OF OPERATIONS - Continued
-----------------------------------
The Y2K Project consists of four phases -- Planning, Assessment,
Implementation and Testing. The Planning Phase began early in 1998 and is
substantially complete. Under the Planning Phase, the Managing General Partner
conducted an inventory of all internal hardware and software systems, data
interfaces, business operations and non-information technology functions which
may be susceptible to the Y2K issue. The Managing General Partner expects final
completion of this phase by November 30, 1998. The Assessment Phase is
currently underway. Under the Assessment Phase, all applications and functions
identified in the Planning Phase are being analyzed to determine Y2K compliance
and the materiality of each identified risk is being determined. In the event
of noncompliance, for a material risk, timetables for corrective action, as well
as estimated costs to achieve compliance, are being determined. Completion of
this phase is expected by December 31, 1998. The Implementation Phase is also
underway. Renovation and replacement of existing internal hardware and software
systems has begun and completion is expected by June 1999. Additionally, the
Managing General Partner is currently working with third party vendors and
service providers to verify their Y2K compliance. Final completion of this
phase is expected by June 1999. The Testing Phase, which will include testing
of internal applications as well as third party systems, is expected to begin
during January 1999 and continue throughout 1999. Contingency planning is
scheduled to commence during the fourth quarter 1998 and be completed by year-
end 1999. Although the expense associated with the Y2K Project cannot presently
be determined, the Managing General Partner does not expect it to be material.
PART II. OTHER INFORMATION
-----------------
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
--------------------------------
a. None.
b. No reports on Form 8-K were filed with the Commission during the
quarter ended September 30, 1998.
All other items are not applicable.
-25-
<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
November 5, 1998 by: /s/ Michael J. Tuszka
- ---------------- ---------------------------------------
DATE Michael J. Tuszka
Vice President
and Chief Accounting Officer
(Principal Financial Officer
and Principal Accounting Officer)
-26-
<PAGE>
EXHIBIT INDEX
-------------
Exhibit Method of Filing
- ------- -----------------------------
27 Financial Data Schedule Filed herewith electronically
-27-
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTRED FROM
THE THIRD QUARTER 10-QSB AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE
TO SUCH 10-QSB.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> JAN-01-1998
<PERIOD-END> SEP-30-1998
<CASH> 6,529,484
<SECURITIES> 0
<RECEIVABLES> 1,689,274
<ALLOWANCES> 86,012
<INVENTORY> 59,453
<CURRENT-ASSETS> 9,376,894
<PP&E> 139,320,229
<DEPRECIATION> 62,323,169
<TOTAL-ASSETS> 89,991,523
<CURRENT-LIABILITIES> 11,863,340
<BONDS> 73,749,948
0
0
<COMMON> 0
<OTHER-SE> (42,162,477)
<TOTAL-LIABILITY-AND-EQUITY> 89,991,523
<SALES> 0
<TOTAL-REVENUES> 23,728,335
<CGS> 0
<TOTAL-COSTS> 11,816,692
<OTHER-EXPENSES> 6,669,785
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 799,060
<INCOME-PRETAX> 4,442,798
<INCOME-TAX> 0
<INCOME-CONTINUING> 4,442,798
<DISCONTINUED> 0
<EXTRAORDINARY> 11,174,310
<CHANGES> 0
<NET-INCOME> 15,617,108
<EPS-PRIMARY> (46.83)
<EPS-DILUTED> (46.83)
</TABLE>
