<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 March 31, 1999
------------------
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 March 31, 1999)
<PAGE>
CAPITAL INCOME PROPERTIES-C LIMITED PARTNERSHIP
INDEX TO FORM 10-Q
FOR THE QUARTER ENDED March 31, 1999
Page
----
PART I. Financial Information
Item 1. Financial Statements
Consolidated Balance Sheets - March 31, 1999
and December 31, 1998 . . . . . . . . . . . . . . 1
Consolidated Statements of Operations - for the
three months ended March 31, 1999 and 1998 (as
restated for 1998) . . . . . . . . . . . . . . . 3
Consolidated Statement of Changes in Partners'
Deficit - for the three months ended
March 31, 1999 . . . . . . . . . . . . . . . . . 5
Consolidated Statements of Cash Flows - for the three
months ended March 31, 1999 and 1998 (as restated
for 1998) . . . . . . . . . . . . . . . . . . . . 6
Notes to Consolidated Financial Statements -
March 31, 1999 and 1998 (as restated for 1998) . 7
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations . . 21
Item 3. Quantitative and Qualitative Disclosures About
Market Risk . . . . . . . . . . . . . . . . . . . 28
PART II. Other Information
Item 6. Exhibits and Reports on Form 8-K . . . . . . . . . 28
Signature . . . . . . . . . . . . . . . . . . . . . . . . 29
Exhibit Index . . . . . . . . . . . . . . . . . . . . . . . . 30
<PAGE>
CAPITAL INCOME PROPERTIES-C LIMITED PARTNERSHIP
CONSOLIDATED BALANCE SHEETS
ASSETS
<TABLE>
<CAPTION>
March 31, December 31,
1999 1998
------------- -------------
(Unaudited)
<S> <C> <C>
Current assets:
Cash and cash equivalents $ 5,109,096 $ 4,628,707
Restricted cash and cash equivalents 3,324,242 2,970,343
Accounts receivable, less allowance for doubtful accounts
of $84,320 and $85,310, respectively 1,409,377 1,107,240
Prepaid expenses 557,268 793,231
Current portion of deferred rent receivable 181,472 181,472
Inventory and other assets 68,093 70,536
------------- -------------
Total current assets 10,649,548 9,751,529
------------- -------------
Property and equipment:
Buildings and tenant improvements 123,741,469 123,741,442
Furniture and equipment 16,432,731 16,084,500
------------- -------------
140,174,200 139,825,942
Less-accumulated depreciation (64,516,914) (63,440,811)
------------- -------------
Property and equipment, net 75,657,286 76,385,131
------------- -------------
Other assets:
Deferred charges, less accumulated amortization
of $4,009,407 and $3,793,947, respectively 2,425,359 2,601,472
Deferred rent receivable, less reserve of $246,863 805,979 805,979
Escrows and deposits 360,819 551,303
------------- -------------
Total other assets 3,592,157 3,958,754
------------- -------------
Total assets $ 89,898,991 $ 90,095,414
============= =============
(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>
March 31, December 31,
1999 1998
------------- -------------
(Unaudited)
<S> <C> <C>
Current liabilities:
Current portion of first mortgage note $ 5,255,541 $ 5,398,922
Accounts payable 721,391 734,162
Accrued expenses 1,108,160 989,079
Due to affiliates 5,426,791 5,441,810
------------- -------------
Total current liabilities 12,511,883 12,563,973
First mortgage note 49,608,514 51,267,336
Second mortgage note 13,622,490 13,963,080
Third mortgage note 6,657,000 6,589,500
Due to guarantor of operating deficits 2,626,870 2,599,769
Deferred gain on debt restructuring 99,392,433 98,998,507
Deferred revenue and security deposits 335,969 487,678
------------- -------------
Total liabilities 184,755,159 186,469,843
------------- -------------
Commitments and contingencies
Partners' deficit (94,856,168) (96,374,429)
------------- -------------
Total liabilities and partners' deficit $ 89,898,991 $ 90,095,414
============= =============
</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
March 31,
-----------------------------
1999 1998
(as restated)
------------ ------------
<S> <C> <C>
Revenue:
Rooms $ 3,818,786 $ 3,476,404
Food and beverage 1,682,070 1,412,214
Telephone 168,230 149,487
Office, retail and parking rentals 2,441,695 2,512,046
Other 40,066 27,304
------------ ------------
8,150,847 7,577,455
------------ ------------
Departmental expenses:
Rooms 817,049 770,210
Food and beverage 1,279,344 1,121,491
Telephone 96,486 86,893
Other 80,552 98,448
------------ ------------
2,273,431 2,077,042
------------ ------------
Other operating expenses:
Administrative 455,985 491,937
Marketing 308,677 315,154
Energy costs 397,196 380,910
Property operations and maintenance 513,938 498,345
------------ ------------
1,675,796 1,686,346
------------ ------------
Operating income before other income, fixed charges and other deductions 4,201,620 3,814,067
------------ ------------
Other income 45,251 10,709
------------ ------------
Fixed charges and other deductions:
Depreciation 1,076,103 1,062,256
Amortization 152,638 88,462
Interest expense 255,495 260,598
Management fees 475,241 297,458
Real estate and personal property taxes 266,836 259,015
Ground rent 400,000 400,000
Other 102,297 95,144
------------ ------------
2,728,610 2,462,933
------------ ------------
Net income 1,518,261 1,361,843
Net income attributed to minority interest (1,539,710) (1,369,556)
------------ ------------
Net loss attributed to Partnership $ (21,449) $ (7,713)
============ ============
</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
March 31,
-----------------------------
1999 1998
(as restated)
------------ ------------
<S> <C> <C>
Net loss attributed to Partnership $ (21,449) $ (7,713)
============ ============
Net loss allocated to General
Partners and affiliated Initial
Limited Partner (1%) $ (214) $ (77)
============ ============
Net loss allocated to Additional
Limited Partners (99%) $ (21,235) $ (7,636)
============ ============
Net loss per unit of Additional Limited
Partnership interest based 600 units
issued and outstanding $ (35.39) $ (12.73)
============ ============
</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, January 1, 1999 $(530,118) $248,987 $ (96,093,298) $(96,374,429)
Net loss attributed to Partnership (214) (21,235) -- (21,449)
Net income attributed to minority
interest (Note 1) -- -- 1,539,710 1,539,710
--------- -------- ------------- ------------
Balance, March 31, 1999 $(530,332) $227,752 $ (94,553,588) $(94,856,168)
========= ======== ============= ============
</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 three months ended
March 31,
-------------------------------
1999 1998
(as restated)
------------ ------------
<S> <C><C>
Cash flows from operating activities:
Net income $ 1,518,261 $ 1,361,843
Adjustments to reconcile net income to net cash provided by
operating activities:
Depreciation 1,076,103 1,062,256
Amortization 152,638 88,462
Interest expense related to the amortization of financing costs 62,822 62,822
Net interest expense added to debt 94,602 98,296
Interest payments treated as a reduction in mortgage debt (1,469,540) (1,551,034)
Changes in assets and liabilities:
Increase in restricted cash and cash equivalents (353,899) (314,305)
Increase in accounts receivable, net (302,137) (222,201)
Decrease in prepaid expenses 235,963 215,220
Decrease in inventory and other assets 2,443 1,681
Decrease (increase) in escrows and deposits 190,484 (64,180)
(Decrease) increase in accounts payable (12,771) 10,358
Increase in accrued expenses 119,081 143,152
(Decrease) increase in deferred revenue and security deposits (151,709) 58,609
------------ ------------
Net cash provided by operating activities 1,162,341 950,979
------------ ------------
Cash flows from investing activities:
Purchase of property and equipment (348,258) (123,923)
------------ ------------
Net cash used in investing activities (348,258) (123,923)
------------ ------------
Cash flows from financing activities:
Proceeds from mortgage debt 45,671 265,785
Payments on mortgage debt (324,999) (324,999)
Net (repayments of) advances from affiliates (15,019) 104,828
Payment of leasing costs (39,347) (61,751)
------------ ------------
Net cash used in financing activities (333,694) (16,137)
------------ ------------
Net increase in cash and cash equivalents 480,389 810,919
Cash and cash equivalents, beginning of period 4,628,707 2,071,829
------------ ------------
Cash and cash equivalents, end of period $ 5,109,096 $ 2,882,748
============ ============
Supplemental disclosure of cash flow information:
Cash paid during the period for interest $ 1,469,540 $ 1,551,034
============ ============
</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
MARCH 31, 1999 AND 1998
(AS RESTATED FOR 1998)
(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 March 31, 1999, and the results of its
operations and its cash flows for the three months ended March 31, 1999 and
1998. The results of operations for the interim period ended March 31, 1999,
are not necessarily indicative of the results to be expected for the full year.
The accompanying unaudited consolidated 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, 1998.
Certain amounts in the 1998 financial statements have been reclassified to
conform to the 1999 presentation.
The accompanying unaudited consolidated financial statements for the three
months ended March 31, 1998, have been restated in order to properly account for
the restructuring of the Partnership's mortgage debt, as discussed in Note 4.
The estimated extraordinary gain calculated by the Partnership due to the
restructuring was originally deferred and was being amortized into income over
the term of the restructured mortgage debt. The Partnership's financial
statements for the three months ended March 31, 1998 have been restated to
eliminate the amortization of the extraordinary gain, and therefore, deferring
the gain from the restructuring until realized, as required under Statement of
Financial Accounting Standards No. 15 (SFAS 15), "Accounting by Debtors and
Creditors for Troubled Debt Restructurings." Due to this restatement, net
income of the Partnership decreased $3,471,808 for the three months ended March
31, 1998. The restatement had no effect on the Partnership's net income before
extraordinary item, as previously reported. The entire effect of this
restatement is attributable to BMCLP and not to the partners of the Partnership.
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 340,000 square feet of net rentable
office space and approximately 14,000 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 (collectively, the Development).
-7-
<PAGE>
CAPITAL INCOME PROPERTIES-C LIMITED PARTNERSHIP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 1999 AND 1998
(AS RESTATED FOR 1998)
(Unaudited)
2. THE PARTNERSHIP - Continued
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. Martin C.
Schwartzberg retired from CRI and its affiliated businesses effective January 1,
1990 and has had no role in management of the Partnership since then. 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 the Special Limited
Partners). Since CRCC is a wholly owned affiliate of CRI, the accompanying
unaudited financial statements as of March 31, 1999 and December 31, 1998 and
for each of the three-month periods ended March 31, 1999 and 1998 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
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.
Of the total partners deficit of $94,856,168 and $96,374,429 as of March
31, 1999 and December 31, 1998, respectively, $94,553,588 and $96,093,298,
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: (1) 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 (2) cumulative net BMCLP losses since June 15, 1992 of
$17,080,749 and $18,620,459 as of March 31, 1999 and December 31, 1998,
respectively. BMCLP income and losses subsequent to June 15, 1992, have been
consolidated into the operating accounts of the Partnership in the accompanying
consolidated statements of operations. BMCLP income has been allocated 100% to
the minority interest and will continue to be allocated in this manner until the
minority interest's cumulative losses have been eliminated.
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
MARCH 31, 1999 AND 1998
(AS RESTATED FOR 1998)
(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
--------------
March 31, December 31,
1999 1998
------------ ------------
(Unaudited)
<S> <C><C>
Total assets $ 127 $ 126
============ ============
Total liabilities $ 302,707 $ 281,257
Partners' deficit (302,580) (281,131)
------------ ------------
Total liabilities and partners' deficit $ 127 $ 126
============ ============
</TABLE>
STATEMENTS OF OPERATIONS
------------------------
(Unaudited)
<TABLE>
<CAPTION>
For the three months ended
March 31,
-----------------------------
1999 1998
------------ ------------
<S> <C> <C>
Revenue $ 1 $ --
Professional fees (15,550) (2,730)
Other expenses (5,900) (4,983)
------------ ------------
Net loss $ (21,449) $ (7,713)
============ ============
</TABLE>
-9-
<PAGE>
CAPITAL INCOME PROPERTIES-C LIMITED PARTNERSHIP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 1999 AND 1998
(AS RESTATED FOR 1998)
(Unaudited)
3. INVESTMENT IN BETHESDA METRO CENTER LIMITED PARTNERSHIP - Continued
Condensed financial information of BMCLP on an unconsolidated basis
follows.
BALANCE SHEETS
--------------
<TABLE>
<CAPTION>
March 31, December 31,
1999 1998
------------ -------------
(Unaudited)
<S> <C> <C>
Investment in real estate, at cost, net $ 75,657,286 $ 76,385,131
Current assets 10,649,421 9,751,403
Other assets 3,592,157 3,958,754
------------ ------------
Total assets $ 89,898,864 $ 90,095,288
============ ============
Current liabilities $ 12,209,176 $ 12,282,716
Other liabilities 172,243,276 173,905,870
Partners deficit (94,553,588) (96,093,298)
------------ ------------
Total liabilities and partners deficit $ 89,898,864 $ 90,095,288
============ ============
</TABLE>
STATEMENTS OF OPERATIONS
------------------------
(Unaudited)
<TABLE>
<CAPTION>
For the three months ended
March 31,
-----------------------------
1999 1998
(as restated)
------------ ------------
<S> <C> <C>
Revenue $ 8,196,097 $ 7,588,164
Expenses (6,656,387) (6,218,608)
------------ ------------
Net income $ 1,539,710 $ 1,369,556
============ ============
</TABLE>
-10-
<PAGE>
CAPITAL INCOME PROPERTIES-C LIMITED PARTNERSHIP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 1999 AND 1998
(AS RESTATED FOR 1998)
(Unaudited)
4. MORTGAGE DEBT
Restructuring of Mortgage Debt
------------------------------
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 amended and
restated the First Mortgage note (the Restated First Mortgage Note) to a
principal amount of $48,000,000 and sold the Restated First Mortgage Note to
General Electric Capital Corporation (GECC). 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. Of
the total $58 million principal amount of the Restated Notes, $55 million was
paid to Great Western in consideration for the Notes, approximately $1.8 million
was used to fund loan fees and related costs on behalf of BMCLP, approximately
$200,000 was used to fund interest and insurance premiums at the closing date,
and the remaining amount of approximately $1.0 million was deposited into an
escrow account restricted for working capital requirements.
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 March 31, 1999 and December 31, 1998 was 4.99% and 5.27%, 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. One of the major tenants of the
Office Building cancelled its lease at the end of 1998 and moved out of its
space at the end of February 1999. As of May 14, 1999, 39% of the space leased
to this former major tenant has been leased to new tenants. No additional
principal payments have been paid to GECC or requested to be paid by GECC, and
therefore have not been reflected in the accompanying consolidated financial
statements. 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 three months ended March 31, 1999 and 1998, GECC advanced $0
and $222,434, 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 was established. Monthly payments of $23,125 were made into
this reserve from January 1, 1995 through December 1, 1998. As of March 31,
1999 and December 31, 1998, the interest reserve balance was $1,158,171 and
$1,135,046, respectively; this amount is reflected in restricted cash and cash
equivalents in the accompanying consolidated balance sheets.
-11-
<PAGE>
CAPITAL INCOME PROPERTIES-C LIMITED PARTNERSHIP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 1999 AND 1998
(AS RESTATED FOR 1998)
(Unaudited)
4. MORTGAGE DEBT - Continued
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 priority, as follows:
(1) Debt service and reserves on the Restated First Mortgage Note.
(2) Establishment of working capital reserves of $50,000 plus an amount
reasonably required to pay ordinary and necessary expenses of
operations.
(3) Debt service on the Restated Second Mortgage Note (to the extent of
available cash flow).
(4) Principal and interest on additional advances, as discussed below, if
any, made to BMCLP by BMC.
(5) 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:
(1) 75% of the amount by which the "Economic Value" of the Development, as
defined, up to $100 million, exceeds the unpaid principal balance and
accrued interest under the Restated Notes, and
(2) 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.
Historically, the Partnership has not received appraisals of the Development in
order to determine the Economic Value. However, in the opinion of the Managing
General Partner, based on its knowledge of the Development and recent purchase
offers, the Economic Value Participation Interest due to BMC as of March 31,
1999 and December 31, 1998, is not in excess of the deferred gain recorded by
the Partnership as of each of those dates.
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,
-12-
<PAGE>
CAPITAL INCOME PROPERTIES-C LIMITED PARTNERSHIP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 1999 AND 1998
(AS RESTATED FOR 1998)
(Unaudited)
4. MORTGAGE DEBT - Continued
to make up to $5 million 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 May 14, 1999, no additional advances
have been made.
BMC required that BMCLP deposit a deed in lieu of foreclosure in escrow to
be recordable in the event of a default under the Restated Second Mortgage Note.
CRCC agreed to amend and restate various "no bankruptcy" agreements of the type
the original lender, Great Western, had required of it and certain affiliates.
The new agreements are not secured or guaranteed, but a default thereunder could
trigger the recordation of the escrowed deed in lieu of foreclosure. An event
of default would occur if an entity other than CRCC became a General Partner of
BMCLP (and could potentially put BMCLP in bankruptcy).
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 March 31, 1999 and December 31,
1998, the balance in this escrow account was $319,294; this amount is reflected
in restricted cash and cash equivalents in the accompanying consolidated balance
sheets. There were no withdrawals from or deposits to this escrow account by
BMCLP during the three months ended March 31, 1999 or 1998.
In connection with the debt 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 is to be deferred without interest and is to be paid,
together with the outstanding principal balance of the Third Mortgage Note, upon
the earliest of: (1) sale of the assets of BMCLP; (2) refinancing of the
Restated Notes for an amount in excess of the aggregate outstanding principal
balances due thereunder; or (3) one day later than the later of any maturity
date under the Restated Notes. As of March 31, 1999 and December 31, 1998,
accrued interest of approximately $3,657,000 and $3,589,500, 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 the Third Mortgage Note during the three months
ended March 31, 1999 or 1998.
Debt Restructuring
------------------
BMCLP's outstanding obligation under the Restated Notes prior to the
restructuring was $197,754,727. In accordance with SFAS 15, the net carrying
amount of the outstanding principal and accrued interest prior to the
restructuring in excess of the total estimated future cash payments for
principal and interest (based on the interest rate in effect on the date of
-13-
<PAGE>
CAPITAL INCOME PROPERTIES-C LIMITED PARTNERSHIP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 1999 AND 1998
(AS RESTATED FOR 1998)
(Unaudited)
4. MORTGAGE DEBT - Continued
restructuring of the Restated First Mortgage Note) of the Restated Notes was
recorded as a deferred gain on debt restructuring in the accompanying
consolidated balance sheets. Under SFAS 15, a debtor should not recognize a
gain on restructuring involving indeterminate future cash payments (the floating
rate interest on the Restated First Mortgage Note and the Economic Value
Participation Interest on the Restated Second Mortgage Note) as long as the
maximum total future cash payments may exceed the carrying amount of the debt.
For purposes of applying SFAS 15, the Restated Notes have been aggregated, as
the restructuring was negotiated between BMCLP and a single lender.
Based on the Restated First Mortgage Note s interest rates of 9.24% and
9.52% in effect at March 31, 1999 and December 31, 1998, 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 $54,864,055 and $56,666,258 at March 31, 1999 and December 31, 1998,
respectively, including additional draws subsequent to the restructuring. 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 total estimated future
obligation resulting from interest rate changes are reflected as a
reclassification between the Restated First Mortgage Note and deferred gain on
debt restructuring. For the three months ended March 31, 1999 and 1998,
$458,891 and $328,005, respectively, were reclassified from the Restated First
Mortgage Note to the deferred gain on debt restructuring resulting from
decreases in the future obligation based on decreases in the underlying index.
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 amount of
the Restated Second Mortgage Note at November 16, 1994, of $19,380,974. As
noted above, the Restated Notes have been aggregated for accounting purposes.
Therefore, in accordance with SFAS 15, this difference of $1,819,026, which
represents a constant additional interest obligation based on the fixed interest
rate, is being accrued and added to the Restated Second Mortgage Note principal
balance over the term of the Restated Second Mortgage Note as a reclassification
from the deferred gain on debt restructuring. For the three months ended both
March 31, 1999 and 1998, $64,965 was reclassified from the deferred gain on debt
restructuring to the Restated Second Mortgage Note.
Due to the variable interest rate on the Restated First Mortgage Note and
BMCLP's potential liability to BMC as a result of the Economic Value
Participation Interest, the total future obligations under the Restated Notes,
including future interest and contingent payments, cannot currently be
determined. Therefore, the deferred gain on debt restructuring will not be
recognized as an extraordinary gain unless it is realized through repayment or
refinancing of the Restated Notes. As of March 31, 1999 and December 31, 1998,
the deferred gain on debt restructuring was $99,392,433 and $98,998,507,
respectively.
-14-
<PAGE>
CAPITAL INCOME PROPERTIES-C LIMITED PARTNERSHIP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 1999 AND 1998
(AS RESTATED FOR 1998)
(Unaudited)
4. MORTGAGE DEBT - Continued
Statement of Financial Accounting Standards No. 107, "Disclosures About
Fair Value of Financial Instruments" (SFAS 107), requires the disclosure of fair
value information about financial instruments for which it is practicable to
estimate that value. The Partnership has determined that the carrying amount of
the total future obligation of the Restated First Mortgage Note, which
represents the estimated total future obligation of principal and interest,
approximates fair value based on the variable nature of the Restated First
Mortgage Note's interest rate. Because future debt service payments are
contingent upon changes in the underlying index upon which the interest rate is
calculated, the total future obligation of the Restated First Mortgage Note is
expected to fluctuate with changing market rates of interest. The Partnership
has determined that it is not practicable to estimate the fair value for the
Restated Second Mortgage Note or the Third Mortgage Note due to: (1) the lack
of an active market for these types of financial instruments, (2) the variable
nature of the remaining net cash flow payments payable to BMC under the Restated
Second Mortgage Note, as discussed above, (3) the variable nature of the Third
Mortgage Note's interest payments as a result of its dependence on available
cash flow from BMCLP, and (4) the excessive costs associated with an independent
appraisal of the Restated Second Mortgage Note and the Third Mortgage Note.
-15-
<PAGE>
CAPITAL INCOME PROPERTIES-C LIMITED PARTNERSHIP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 1999 AND 1998
(AS RESTATED FOR 1998)
(Unaudited)
5. RELATED-PARTY TRANSACTIONS
Amounts due to affiliates were as follows.
<TABLE>
<CAPTION>
Additions/
Accrued
Balance at Interest Balance at
Affiliate December 31, 1998 (Payments) March 31, 1999
------------- ----------------- ---------- --------------
<S> <C> <C> <C>
CRI $ 467,133 $ 22,191 $ 489,324
CHG 1,390,760 20,411 1,411,171
Realty 1,614,642 24,250 1,638,892
Hyatt 1,969,275 (81,871) 1,887,404
----------- --------- -----------
$ 5,441,810 $ (15,019) $5,426,791
=========== ========= ===========
</TABLE>
The $489,324 and $467,133 due to CRI as of March 31, 1999 and December 31,
1998, respectively, are partially comprised of $142,792 of advances to BMCLP to
fund Excess Payments due on its former mortgages with Great Western. 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
$1,411,171 and $1,390,760 due to CHG as of March 31, 1999 and December 31, 1998,
respectively, and $1,638,892 and $1,614,642 due to Realty as of March 31, 1999
and December 31, 1998, respectively, represent advances made to BMCLP and
interest accrued thereon, to fund Excess Payments on the Great Western Notes, as
discussed in Note 4. The advances from CRI, CHG and Realty accrue interest at
the prime rate (7.75% as of March 31, 1999) 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 4. Finally, the $1,887,404 and
$1,969,275 due to Hyatt as of March 31, 1999 and December 31, 1998,
respectively, consist of $1,585,496 and $1,845,766, respectively, 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. During the three months ended March 31, 1999 and 1998,
Hyatt was paid $260,270 and $0, respectively, of incentive management fees
earned during 1998 and 1997, respectively. Additionally, Hyatt earned incentive
management fees of $161,827 and $0 during the three months ended March 31, 1999
and 1998, respectively. The incentive management fees earned during the first
quarter of 1999 remain unpaid as of May 14, 1999. The remaining unpaid
incentive management fees have been deferred by Hyatt in accordance with the
Management Agreement. The remaining $301,908 and $123,509 balance due to Hyatt
as of March 31, 1999 and December 31, 1998, respectively, consist of trade
payables to Hyatt for various services as described in Note 7.
-16-
<PAGE>
CAPITAL INCOME PROPERTIES-C LIMITED PARTNERSHIP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 1999 AND 1998
(AS RESTATED FOR 1998)
(Unaudited)
5. RELATED-PARTY TRANSACTIONS - Continued
CRCC 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 4. CRCC
received a payment of $50,000 on May 14, 1998 from remaining net cash flow
relating to 1997. Additionally, $50,000 was accrued as of both March 31, 1999
and December 31, 1998 for fiscal year 1998 management fees in the accompanying
consolidated balance sheets. This amount was paid on April 19, 1999.
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 earned or
paid for either of the three month periods ended March 31, 1999 and 1998.
Realty Management Company, which is a former affiliate of one of the
Special Limited Partners, provides management and leasing services related to
the Office Building, while Iroquois Financial Corporation, which is an affiliate
of the Special Limited Partners, has provided financing through the Third
Mortgage Note.
6. 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.
7. 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, absent earlier termination. 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, above the base management fee. Management fees paid to
Hyatt for the three months ended March 31, 1999 and 1998 were $224,008 and
$199,124, respectively. Incentive management fees paid to Hyatt during the
three months ended March 31, 1999 and 1998 were $260,270 and $0, respectively,
for fees earned during 1998 and 1997, respectively. Hyatt earned an additional
$161,827 of incentive management fees during the three months ended March 31,
1999; these fees have not been paid as of May 14, 1999.
BMCLP can terminate the Management Agreement upon no less than 60 days
written notice if, for two successive fiscal years after December 31, 1995
-17-
<PAGE>
CAPITAL INCOME PROPERTIES-C LIMITED PARTNERSHIP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 1999 AND 1998
(AS RESTATED FOR 1998)
(Unaudited)
7. COMMITMENTS AND CONTINGENCIES - Continued
(referred to as the Sixth Full Year), the Owner's Remittance Amount (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 management agreement
with a lower fee and other provisions more favorable to BMCLP than the existing
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 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 Management Agreement effective July 31, 1998. At the same
time, BMCLP exercised its right under the 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 parties subsequently extended these dates several times. The arbitration
extension expired April 1, 1999 and accordingly, the parties have begun the
arbitration process. The termination date was extended to May 17, 1999. The
parties are presently negotiating an agreement pursuant to which, during the
pendency of the arbitration, the Partnership will not seek to enforce the
termination without at least 90 days notice to Hyatt, and Hyatt will not cease
managing the hotel without at least 90 days notice to the Partnership. 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.
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 both March 31, 1999 and December 31, 1998, approximately
$124,000 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 consolidated financial statements. The
reserve balances included in escrows and deposits at March 31, 1999 and December
31, 1998, were approximately $298,000 and $489,000, respectively.
-18-
<PAGE>
CAPITAL INCOME PROPERTIES-C LIMITED PARTNERSHIP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 1999 AND 1998
(AS RESTATED FOR 1998)
(Unaudited)
7. COMMITMENTS AND CONTINGENCIES - Continued
BMCLP entered into a management agreement with Realty, an affiliate prior
to July 1, 1988 of one of the Special Limited Partners, dated January 31, 1985,
pursuant to which Realty was to manage the Office Building for a term of 20
years commencing with the date the Office Building opened. Under the terms of
that agreement, Realty received a monthly management fee equal to 4% of all
income collected from the operation of the Office Building. Realty had agreed
to allow BMCLP to defer payments of all management fees, effective January 1,
1992, through the date of the restructuring of the original mortgage debt. In
connection with the debt restructuring, which occurred November 16, 1994, BMC
Lender Partnership (the holder of the Restated Second Mortgage Note) paid Realty
$1,000,000 to terminate its former management contract with BMCLP. At that time
BMCLP entered into a new management contract with Realty for a term of one year
which will automatically renew for successive one year periods so long as Realty
is not then in default of the management contract. The agreement provides for a
management fee in the amount of 4% of total revenues. Management fees for the
three months ended March 31, 1999 and 1998, were approximately $89,000 and
$98,000, respectively, and are included in management fees in the accompanying
consolidated statements of operations.
In addition to management fees, Realty also receives leasing commissions
for leasing certain space in the Office Building. For the three months ended
March 31, 1999 and 1998, approximately $15,233 and $0, respectively, were paid
to Realty for such leasing commissions.
Examination of Federal Income Tax Return
----------------------------------------
The 1994 federal income tax return of BMCLP is being examined by the
Internal Revenue Service, primarily due to the refinancing of the Notes and the
subsequent election available to the individual partners of the Partnership to
postpone recognition of income taxable to them as a result of the restructuring
of the Notes. Management cannot currently project the outcome of the
examination. However, any impact of the examination will be allocated to the
individual partners for Federal and state income tax purposes.
8. SEGMENT REPORTING
BMCLP has two reportable operating segments, the Hotel and the Office
Building. The Managing General Partner evaluates the performance of each based
on gross operating profit (calculated as total revenues less operating expenses,
excluding depreciation, management fees and other fixed costs). The accounting
policies applicable to the operating segments are the same as those described
above in the summary of significant accounting policies.
-19-
<PAGE>
CAPITAL INCOME PROPERTIES-C LIMITED PARTNERSHIP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 1999 AND 1998
(AS RESTATED FOR 1998)
(Unaudited)
8. SEGMENT REPORTING - Continued
Information related to the reportable operating segments for each of the
three months ended March 31, 1999 and 1998, follows (dollars in thousands).
<TABLE>
<CAPTION>
1999
---------------------------------------------
Office Total Per
Hotel Building Consolidated Data
--------- --------- -----------------
<S> <C> <C> <C>
Total Revenue $ 5,709 $ 2,442 $ 8,151
Operating Expenses (3,352) (597) (3,949)
--------- --------- --------
Gross Operating Profit $ 2,357 $ 1,845 $ 4,202
========= ========= ========
</TABLE>
<TABLE>
<CAPTION>
1998
---------------------------------------------
Office Total Per
Hotel Building Consolidated Data
--------- --------- -----------------
<S> <C> <C> <C>
Total Revenue $ 5,065 $ 2,512 $ 7,577
Operating Expenses (3,039) (724) (3,763)
-------- -------- --------
Gross Operating Profit $ 2,026 $ 1,788 $ 3,814
======== ======== ========
</TABLE>
BMCLP does not consider the total assets of each segment in evaluating the
operating performance or in determining the allocation of resources. Therefore,
this information has not been presented.
-20-
<PAGE>
PART I. FINANCIAL INFORMATION
---------------------
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
-------------------------------------------------
CONDITION AND RESULTS OF OPERATIONS
-----------------------------------
Liquidity
---------
The Partnership does not have adequate cash reserves or any source of cash
to fund its projected cash requirements in 1999, 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 Partnership will receive any cash distribution
from its investment in BMCLP in 1999 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 Partnership has
represented a willingness to fund projected cash flow requirements of the
Partnership for the year ending December 31, 1999.
At March 31, 1999 and December 31, 1998, the Partnership had $127 and $126,
respectively, in available cash.
During the three months ended March 31, 1999, the Partnership's available
cash increased due to interest income, whereas accounts payable increased
$21,450. The increase in accounts payable includes an increase of $14,450 in
loan payable to its Managing General Partner for administrative expenses and an
increase of $7,000 in third-party payables.
Capital Resources
-----------------
BMCLP, of which the Partnership owns a 92.5% limited partner interest, had
unrestricted cash and cash equivalents of $5,108,969 and $4,628,581 at March 31,
1999 and December 31, 1998, respectively. During the three months ended March
31, 1999, BMCLP's unrestricted cash and cash equivalents increased by $480,388;
operating activities provided $1,162,340, offset by $348,258 used in investing
activities and $333,694 used in financing activities. The increase of $480,338
was due to net income of $1,539,710, net of net principal and interest payments
totaling $1,794,539, fixed asset additions and payments of leasing costs of
$348,258 and $39,347, respectively, and a $353,899 increase in restricted cash
and cash equivalents. All of these factors were partially offset by
depreciation and amortization totalling $1,228,741, proceeds from mortgage debt
of $45,671, and non-cash interest expense of $157,424.
BMCLP had restricted cash of $3,324,242 and $2,970,343 at March 31, 1999
and December 31, 1998, respectively.
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 (1) 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 (2) the amount that
-21-
<PAGE>
PART I. FINANCIAL INFORMATION
---------------------
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
-------------------------------------------------
CONDITION AND RESULTS OF OPERATIONS - Continued
-----------------------------------
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 March 31,
1999, BMCLP estimates that R&K's total operating deficit obligation has
increased to approximately $29,000,000, although R&K do not concur with this
amount. As of March 31, 1999 and December 31, 1998, R&K had provided $2,626,870
and $2,599,769, 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
$1,387,983 and $1,360,882 at March 31, 1999 and December 31, 1998, respectively,
and has been added to the original advance amount. For the three month periods
ended March 31, 1999 and 1998, no amounts were advanced to BMCLP for operating
deficits because R&K have 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 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 three
months ended March 31, 1999 and 1998, GECC advanced $0 and $222,434,
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 of the
Development, including payments under the Restated Notes. As of both March 31,
1999 and December 31, 1998, the balance in this escrow account was $319,294;
this amount is reflected in restricted cash and cash equivalents in the
accompanying consolidated balance sheets. There were no withdrawals from or
deposits to this escrow account by BMCLP during the three months ended March 31,
1999 or 1998.
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 during the three months ended March 31, 1999 or 1998.
-22-
<PAGE>
PART I. FINANCIAL INFORMATION
---------------------
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
-------------------------------------------------
CONDITION AND RESULTS OF OPERATIONS - Continued
-----------------------------------
Results of Operations
---------------------
Partnership
- -----------
Three months ended March 31, 1999 versus March 31, 1998
- -------------------------------------------------------
The Partnership recorded a net loss for the three months ended March 31,
1999 of $21,449 compared to a net loss of $7,713 for the corresponding period in
1998. Operating expenses during the first quarter of 1999 were $13,737 higher
than 1998 primarily due to increases in professional fees and other expenses.
The Partnership recognized interest revenue of $1 and $0 during the three months
ended March 31, 1999 and 1998, respectively.
Bethesda Metro Center Limited Partnership
- -----------------------------------------
Three months ended March 31, 1999 versus March 31, 1998
- -------------------------------------------------------
BMCLP had net income of $1,539,710 for the first quarter of 1999 compared
to net income of $1,369,556 during the corresponding period in 1998. This was
primarily the result of increases in rooms revenue and food and beverage
revenue. BMCLP's net income was negatively impacted by increases in rooms
expense, food and beverage expense, management fees and a decrease in office,
retail and parking rentals revenue.
Rooms revenue for the first quarter of 1999 increased by $342,382, or 10%,
from the corresponding period in 1998, primarily due to increased occupancy and
increased transient and group revenue. Hotel occupancy increased from 82% to
84% and the average room rate increased from $123 to $132 during the first
quarter of 1999 compared to the first quarter of 1998. Food and beverage
revenue increased $269,856, or 19%, from the first quarter of 1998 primarily due
to increased banquet dining revenue and public room rental revenue. Rooms
expense for the first quarter of 1999 increased by $46,839, or 6%, from the
corresponding period in 1998, primarily due to increased occupancy and increased
payroll related expenses. Food and beverage expense increased $157,853, or 14%,
from the first quarter of 1998 primarily due to increased payroll related
expenses. Management fees for the hotel increased $186,711, or 94%, due to
incentive management fees of $161,827 earned during the three months ended March
31, 1999 versus $0 earned during the three months ended March 31, 1998. The
increases in rooms revenue and food and beverage revenue, offset by the
increases in rooms expense and food and beverage expense resulted in first
quarter 1999 gross operating profits for the hotel exceeding first quarter 1998
by $330,698, or 16%.
Office building revenue for the first quarter of 1999 decreased $70,351, or
3%, from the first quarter of 1998 primarily due to decreased occupancy. The
average occupancy of the office building decreased from 100% to 95% while the
average rental rate increased from $25 to $26 per square foot. The retail and
marketplace average occupancy decreased from 89% to 88%. The retail and
marketplace average rental rate increased from $32 to $34 per square foot during
-23-
<PAGE>
PART I. FINANCIAL INFORMATION
---------------------
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
-------------------------------------------------
CONDITION AND RESULTS OF OPERATIONS - Continued
-----------------------------------
the first quarter of 1999 compared to the first quarter of 1998. There is no
assurance that these occupancy levels or rental rates will be maintained.
Operating expenses of the office building for the first quarter of 1999
decreased $127,206, or 18%, from the first quarter of 1998 primarily due to
decreased administrative expenses.
Selected data regarding the operations of the office building and hotel
follow.
OFFICE BUILDING
---------------
(Unaudited)
<TABLE>
<CAPTION>
For the three months ended
March 31,
-------------------------------
1999 1998
------------ ------------
<S> <C> <C>
Leasing:
-------
Average Space Occupied:
Office 95% 100%
Retail and Marketplace 88% 89%
Average Rental Rate:
Office $26 $25
Retail and Marketplace $34 $32
Operations:
----------
Total Income $ 2,441,695 $ 2,512,046
Operating Expenses (597,262) (724,468)
------------ ------------
Gross Operating Profits
(Before Depreciation, Management
Fees, and Other Fixed Costs) $ 1,844,433 $ 1,787,578
============ ============
</TABLE>
-24-
<PAGE>
PART I. FINANCIAL INFORMATION
---------------------
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
-------------------------------------------------
CONDITION AND RESULTS OF OPERATIONS - Continued
-----------------------------------
HOTEL
---------------
(Unaudited)
<TABLE>
<CAPTION>
For the three months ended
March 31,
-------------------------------
1999 1998
------------ ------------
<S> <C> <C>
Actual Average Occupancy 84% 82%
Actual Average Room Rate $132 $123
Room Revenue $ 3,818,786 $ 3,476,404
Food & Beverage Revenue $ 1,682,070 $ 1,412,214
Room Profits $ 3,001,737 $ 2,706,194
Food & Beverage Profits $ 402,726 $ 290,723
Gross Operating Profits
(Before Depreciation, Management
Fees and Other Fixed Costs) $ 2,357,187 $ 2,026,489
</TABLE>
It should be noted that BMCLP's investment in the Development is a
high-risk investment involving many factors beyond the control of its Managing
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. Local market conditions
could be affected by the addition of over
1 million square feet of new office space currently under construction in
downtown Bethesda.
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.
Sale Negotiations
-----------------
The Partnership has received several inquiries and offers to purchase the
Development owned by BMCLP; these inquiries and offers were unsolicited by
-25-
<PAGE>
PART I. FINANCIAL INFORMATION
---------------------
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
-------------------------------------------------
CONDITION AND RESULTS OF OPERATIONS - Continued
-----------------------------------
BMCLP. On January 22, 1999, BMCLP entered into a contract for the sale of the
Development. On February 25, 1999, the Partnership confidentially filed
preliminary proxy materials with the Securities and Exchange Commission (the
Commission) to solicit approval of the sale contract by the Partnership's
limited partners. On March 12, 1999, before the proxy materials were delivered
to the Partnership's limited partners, the parties decided to terminate the
contract. However, the prospective purchaser has indicated that it is still
interested in acquiring the Development, and the parties continue to negotiate.
If a proposal for sale of the Development which appears advantageous to the
Partnership's investors is obtained from any prospective purchaser, 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. The Y2K Project consists of four phases -- Planning,
Assessment, Implementation and Testing. The Planning Phase began early in 1998
and is complete. Under the Planning Phase, the Managing General Partner
conducted an inventory of all internal hardware and software systems, data
interfaces, business operations and non-information technology functions which
may be susceptible to the Y2K issue. This phase was completed at the end of
November, 1998. Under the next phase, the Assessment Phase, all applications
and functions identified in the Planning Phase were analyzed to determine Y2K
compliance and the materiality of each identified risk. In the event of
noncompliance, for material risks, timetables for corrective action, as well as
estimated costs to achieve compliance, were determined. This phase was
completed during the first quarter of 1999. The Implementation Phase is now
underway. Renovation and replacement of existing internal hardware and software
systems have 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, began during January
1999 and will continue throughout 1999. Contingency planning commenced during
the fourth quarter of 1998 and will 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.
-26-
<PAGE>
PART I. FINANCIAL INFORMATION
---------------------
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
-------------------------------------------------
CONDITION AND RESULTS OF OPERATIONS - Continued
-----------------------------------
The Partnership has been informed that Realty has chosen to address the Y2K
computer issue by retaining a consultant in the area of real estate and
accounting software. The consultant is assisting Realty in researching and
selecting a new property management accounting software package that is expected
to be fully functional by August 1, 1999. Realty has represented that they are
committed to making any hardware changes required for the Y2K as part of this
program. With regard to building systems, including energy management systems,
elevator systems, and access control systems, Realty has completed an inventory
and has contacted building vendors to determine their current level of Y2K
compliance. For those systems not in compliance, Realty is in the process of
purchasing required software. Realty does not expect the expense associated
with the Y2K project to be material.
The Partnership has been informed that Hyatt is working with Computer
Sciences Corporation (CSC) and Sabre Technology Solutions (STS), its technology
outsourcing partners, to address the Y2K compliance status of each of its major
systems and has implemented a plan in an attempt to ensure that each of its
systems is Y2K compliant by a goal date of July 1999.
Hyatt's major systems include: (1) SPIRIT - a world-wide reservations
system; (2) Envision - a sales system used by its hotels and national sales
force; (3) Revenue Management System - used by hotels to develop forecasts and
establish rate guidelines; (4) Property Management System - used for hotel
operations; and (5) Sales and Catering Automation System - used by hotels to
manage meeting room inventory and the service requirements of group customers.
The evaluation of these systems began in 1995 and has led to a remediation
plan specific to each system. Hyatt's technology outsourcers have reviewed the
application business logic, application development tools, database, system
management tools, operating systems, hardware and network for each system. Once
each of these components is determined to be Y2K compliant, all components will
be tested together transitioning to the Y2K and operating in the Y2K. Hyatt has
represented that each of its major systems has been or is scheduled to be
certified as Y2K compliant by June 1999. Hyatt does not expect the expense
associated with the Y2K project for the Hotel to be material.
Although Realty and Hyatt are coordinating the Y2K compliance efforts at
the Office Building and the Hotel, respectively, it is ultimately the
Partnership's responsibility to ensure that the operations are Y2K compliant.
-27-
<PAGE>
PART I. FINANCIAL INFORMATION
---------------------
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
----------------------------------------------------------
There has been no change to the information required by this item since
reported in the Partnership's annual report on Form 10-K at December 31, 1998.
PART II. OTHER INFORMATION
-----------------
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
--------------------------------
a. None.
b. On February 24, 1999, the Partnership filed a report on Form 8-K
regarding the restatement of the Partnership's financial statements to
properly reflect the restructuring of the Partnership's mortgage debt
in accordance with Statement of Financial Accounting Standards No. 15
"Accounting by Debtors and Creditors for Troubled Debt
Restructurings." See Note 1 to the consolidated financial statements
for additional information.
On April 19, 1999, the Partnership filed a report on Form 8-K dated
March 12, 1999, announcing the termination of the sales contract
entered into by BMCLP on January 22, 1999 for the sale of the
Development.
All other items are not applicable.
-28-
<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
May 14, 1999 by: /s/ Michael J. Tuszka
- ---------------- ---------------------------------------
DATE Michael J. Tuszka
Vice President
and Chief Accounting Officer
(Principal Financial Officer
and Principal Accounting Officer)
-29-
<PAGE>
EXHIBIT INDEX
-------------
Exhibit Method of Filing
- ------- -----------------------------
27 Financial Data Schedule Filed herewith electronically
-30-
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM
THE FIRST QUARTER 10-Q AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE
TO SUCH 10-Q.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-START> JAN-01-1999
<PERIOD-END> MAR-31-1999
<CASH> 8,433,338
<SECURITIES> 0
<RECEIVABLES> 1,493,697
<ALLOWANCES> 84,320
<INVENTORY> 68,093
<CURRENT-ASSETS> 10,649,548
<PP&E> 140,174,200
<DEPRECIATION> 64,516,914
<TOTAL-ASSETS> 89,898,991
<CURRENT-LIABILITIES> 12,511,883
<BONDS> 69,888,004
0
0
<COMMON> 0
<OTHER-SE> (94,856,168)
<TOTAL-LIABILITY-AND-EQUITY> 89,898,991
<SALES> 0
<TOTAL-REVENUES> 8,196,098
<CGS> 0
<TOTAL-COSTS> 3,949,227
<OTHER-EXPENSES> 2,473,115
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 255,495
<INCOME-PRETAX> 1,518,261
<INCOME-TAX> 0
<INCOME-CONTINUING> 1,518,261
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 1,518,261
<EPS-PRIMARY> (35.39)
<EPS-DILUTED> (35.39)
</TABLE>
