<PAGE>
FORM 10-Q
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
Quarterly Report Under Section 13 or 15(d)
of the Securities Exchange Act of 1934
For the Quarter Ended September 30, 1995
----------------------
Commission file number 1-9793
----------------------
CAPITAL REALTY INVESTORS TAX EXEMPT FUND LIMITED PARTNERSHIP
-------------------------------------------------------------------------
(Exact name of registrant as specified in charter)
Delaware 52-1483643
- ----------------------------------------- ------------------------
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
11200 Rockville Pike, Rockville, Maryland 20852
- ----------------------------------------- ------------------------
(Address of principal executive officer) (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.
Yes [X] No [ ]
As of November 6, 1995, 2,280,000 Series I and 3,238,760 Series II
Beneficial Assignee Certificates were outstanding.
<PAGE>
CAPITAL REALTY INVESTORS TAX EXEMPT FUND LIMITED PARTNERSHIP
INDEX TO FORM 10-Q
FOR THE QUARTER ENDED SEPTEMBER 30, 1995
Page
----
PART I. Financial Information (Unaudited)
Item 1. Financial Statements
Consolidated Balance Sheets - September 30, 1995
and December 31, 1994 . . . . . . . . . . . . . . . 1
Consolidated Statements of Operations - for the three
and nine months ended September 30, 1995 and 1994 . 5
Consolidated Statements of Changes in Partners'
Capital (Deficit) - for the nine months ended
September 30, 1995 . . . . . . . . . . . . . . . . . 9
Consolidated Statements of Cash Flows - for the nine
months ended September 30, 1995 and 1994 . . . . . . 10
Notes to Consolidated Financial Statements . . . . . . 14
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations . . . . . . . 29
PART II. Other Information
Item 1. Legal Proceedings . . . . . . . . . . . . . . . . . . 39
Item 6. Exhibits and Reports on Form 8-K . . . . . . . . . . . 40
Signature . . . . . . . . . . . . . . . . . . . . . . . . . . 41
<PAGE>
PART I. FINANCIAL INFORMATION
---------------------
ITEM 1. FINANCIAL STATEMENTS
---------------------
CAPITAL REALTY INVESTORS TAX EXEMPT FUND LIMITED PARTNERSHIP
CONSOLIDATED BALANCE SHEETS
ASSETS
<TABLE>
<CAPTION>
Series I
----------------------------
As of As of
September 30, December 31,
----------------------------
1995 1994
------------ ------------
(Unaudited)
<S> <C> <C>
Investments in real estate:
Land $ 2,071,822 $ 2,071,822
Buildings and personal property 35,649,844 35,649,844
------------ ------------
37,721,666 37,721,666
Less:
Accumulated depreciation (7,977,029) (6,877,327)
------------ ------------
29,744,637 30,844,339
Mortgage revenue bond 1,600,000 1,600,000
Cash and cash equivalents 36,577 103,864
Restricted cash and cash equivalents 1,660,008 1,251,815
Marketable securities 688,085 1,089,522
Working capital reserves invested
in marketable securities 1,111,767 921,929
Receivables and other assets 298,020 393,469
------------ ------------
Total assets $ 35,139,094 $ 36,204,938
============ ============
</TABLE>
The accompanying notes are an integral part
of these consolidated financial statements.
-1-
<PAGE>
PART I. FINANCIAL INFORMATION
---------------------
ITEM 1. FINANCIAL STATEMENTS
---------------------
CAPITAL REALTY INVESTORS TAX EXEMPT FUND LIMITED PARTNERSHIP
CONSOLIDATED BALANCE SHEETS - Continued
LIABILITIES AND PARTNERS' CAPITAL (DEFICIT)
<TABLE>
<CAPTION>
Series I
----------------------------
As of As of
September 30, December 31,
----------------------------
1995 1994
------------ ------------
(Unaudited)
<S> <C> <C>
Distributions payable $ 621,881 $ 1,151,631
Accrued mortgage administration and
servicing fees due to related parties 1,225,393 1,093,242
Other liabilities related to real
estate operations 1,004,146 688,704
Deferred revenue 710,118 710,118
Accounts payable and accrued expenses 183,052 77,235
------------ ------------
Total liabilities 3,744,590 3,720,930
------------ ------------
Partners' capital (deficit):
General partner (219,984) (208,980)
Beneficial Assignee Certificates
(BACs) - issued and outstanding
(2,280,000 of Series I BACs) 31,614,488 32,692,988
------------ ------------
Total partners' capital 31,394,504 32,484,008
------------ ------------
Total liabilities and partners'
capital $ 35,139,094 $ 36,204,938
============ ============
</TABLE>
The accompanying notes are an integral part
of these consolidated financial statements.
-2-
<PAGE>
PART I. FINANCIAL INFORMATION
---------------------
ITEM 1. FINANCIAL STATEMENTS
---------------------
CAPITAL REALTY INVESTORS TAX EXEMPT FUND LIMITED PARTNERSHIP
CONSOLIDATED BALANCE SHEETS
ASSETS
<TABLE>
<CAPTION>
Series II
----------------------------
As of As of
September 30, December 31,
----------------------------
1995 1994
------------ ------------
(Unaudited)
<S> <C> <C>
Investment in real estate:
Land $ 4,945,198 $ 4,945,198
Buildings and personal property 51,436,807 51,436,807
------------ ------------
56,382,005 56,382,005
Less:
Accumulated depreciation (10,977,598) (9,481,589)
------------ ------------
45,404,407 46,900,416
Cash and cash equivalents 45,968 101,283
Restricted cash and cash equivalents 2,026,600 1,526,228
Marketable securities 791,750 1,447,843
Working capital reserves invested
in marketable securities 1,992,550 1,646,746
Receivables and other assets 369,674 457,368
------------ ------------
Total assets $ 50,630,949 $ 52,079,884
============ ============
</TABLE>
The accompanying notes are an integral part
of these consolidated financial statements.
-3-
<PAGE>
PART I. FINANCIAL INFORMATION
---------------------
ITEM 1. FINANCIAL STATEMENTS
---------------------
CAPITAL REALTY INVESTORS TAX EXEMPT FUND LIMITED PARTNERSHIP
CONSOLIDATED BALANCE SHEETS - Continued
LIABILITIES AND PARTNERS' CAPITAL (DEFICIT)
<TABLE>
<CAPTION>
Series II
----------------------------
As of As of
September 30, December 31,
----------------------------
1995 1994
------------ ------------
(Unaudited)
<S> <C> <C>
Distributions payable $ 883,387 $ 1,635,903
Accrued mortgage administration and
servicing fees due to related parties 1,847,496 1,670,426
Other liabilities related to real
estate operations 707,486 461,336
Deferred revenue 594,180 594,180
Accounts payable and accrued expenses 203,754 99,475
------------ ------------
Total liabilities 4,236,303 4,461,320
------------ ------------
Partners' capital (deficit):
General partner (283,276) (270,915)
Beneficial Assignee Certificates
(BACs) - issued and outstanding
(3,238,760 of Series II BACs) 46,677,922 47,889,479
------------ ------------
Total partners' capital 46,394,646 47,618,564
------------ ------------
Total liabilities partners'
capital $ 50,630,949 $ 52,079,884
============ ============
</TABLE>
The accompanying notes are an integral part
of these consolidated financial statements.
-4-
<PAGE>
PART I. FINANCIAL INFORMATION
---------------------
ITEM 1. FINANCIAL STATEMENTS
---------------------
CAPITAL REALTY INVESTORS TAX EXEMPT FUND LIMITED PARTNERSHIP
CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
<TABLE>
<CAPTION>
Series I
--------------------------------------------------------
For the three months ended For the nine months ended
September 30, September 30,
--------------------------- ----------------------------
1995 1994 1995 1994
------------- ------------- ------------- -------------
<S> <C> <C> <C> <C>
Income from invest-
ments in real
estate:
Rental revenue $ 1,602,681 $ 1,490,642 $ 4,637,938 $ 4,333,008
Rental expenses (905,345) (803,189) (2,612,028) (2,416,124)
Depreciation (366,567) (395,154) (1,099,702) (1,185,462)
------------ ------------ ------------ ------------
Net rental
income 330,769 292,299 926,208 731,422
Mortgage revenue
bond interest 32,000 32,000 96,000 96,000
------------ ------------ ------------ ------------
362,769 324,299 1,022,208 827,422
------------ ------------ ------------ ------------
Other income
(expenses):
Interest and
other income 19,927 8,084 53,642 32,736
Merger-related
expenses (143,162) -- (143,162) --
General and
admini-
strative (33,972) (25,291) (127,309) (120,721)
Professional
fees (10,299) (15,275) (29,240) (39,661)
------------ ------------ ------------ ------------
(167,506) (32,482) (246,069) (127,646)
------------ ------------ ------------ ------------
Net income $ 195,263 $ 291,817 $ 776,139 $ 699,776
============ ============ ============ ============
</TABLE>
The accompanying notes are an integral part
of these consolidated financial statements.
-5-
<PAGE>
PART I. FINANCIAL INFORMATION
---------------------
ITEM 1. FINANCIAL STATEMENTS
---------------------
CAPITAL REALTY INVESTORS TAX EXEMPT FUND LIMITED PARTNERSHIP
CONSOLIDATED STATEMENTS OF OPERATIONS - Continued
(Unaudited)
<TABLE>
<CAPTION>
Series I
-------------------------------------------------------
For the three months ended For the nine months ended
September 30, September 30,
-------------------------- ---------------------------
1995 1994 1995 1994
------------ ------------ ------------ ------------
<S> <C> <C> <C> <C>
Net income allo-
cated to General
Partner (1.01%) $ 1,972 $ 2,948 $ 7,839 $ 7,068
============ ============ ============ ============
Net income allo-
cated to BAC
Holders
(98.99%) $ 193,291 $ 288,869 $ 768,300 $ 692,708
============ ============ ============ ============
Net income per
BAC $ 0.09 $ 0.12 $ 0.34 $ 0.30
============ ============ ============ ============
BACs outstanding 2,280,000 2,280,000 2,280,000 2,280,000
============ ============ ============ ============
</TABLE>
The accompanying notes are an integral part
of these consolidated financial statements.
-6-
<PAGE>
PART I. FINANCIAL INFORMATION
---------------------
ITEM 1. FINANCIAL STATEMENTS
---------------------
CAPITAL REALTY INVESTORS TAX EXEMPT FUND LIMITED PARTNERSHIP
CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
<TABLE>
<CAPTION>
Series II
--------------------------------------------------------
For the three months ended For the nine months ended
September 30, September 30,
--------------------------- ----------------------------
1995 1994 1995 1994
------------- ------------- ------------- -------------
<S> <C> <C> <C> <C>
Income from invest-
ments in real
estate:
Rental revenue $ 2,244,450 $ 2,076,012 $ 6,462,377 $ 5,970,854
Rental expenses (1,195,397) (1,247,463) (3,301,199) (3,451,935)
Depreciation (498,670) (510,824) (1,496,009) (1,532,471)
------------ ------------ ------------ ------------
Net rental
income 550,383 317,725 1,665,169 986,448
------------ ------------ ------------ ------------
Other income
(expenses):
Interest and
other income 29,780 12,678 95,660 63,365
Merger-related
expenses (143,215) -- (143,215) --
General and
admini-
strative (41,619) (33,324) (152,181) (151,935)
Professional
fees (12,967) (5,930) (39,190) (51,529)
------------ ------------ ------------ ------------
(168,021) (26,576) (238,926) (140,099)
------------ ------------ ------------ ------------
Net income $ 382,362 $ 291,149 $ 1,426,243 $ 846,349
============ ============ ============ ============
</TABLE>
The accompanying notes are an integral part
of these consolidated financial statements.
-7-
<PAGE>
PART I. FINANCIAL INFORMATION
---------------------
ITEM 1. FINANCIAL STATEMENTS
---------------------
CAPITAL REALTY INVESTORS TAX EXEMPT FUND LIMITED PARTNERSHIP
CONSOLIDATED STATEMENTS OF OPERATIONS - Continued
(Unaudited)
<TABLE>
<CAPTION>
Series II
--------------------------------------------------------
For the three months ended For the nine months ended
September 30, September 30,
--------------------------- ----------------------------
1995 1994 1995 1994
------------- ------------- ------------- -------------
<S> <C> <C> <C> <C>
Net income allo-
cated to General
Partner (1.01%) $ 3,862 $ 2,941 $ 14,405 $ 8,548
============ ============ ============ ============
Net income allo-
cated to BAC
Holders
(98.99%) $ 378,500 $ 288,208 $ 1,411,838 $ 837,801
============ ============ ============ ============
Net income per
BAC $ 0.12 $ 0.09 $ 0.44 $ 0.26
============ ============ ============ ============
BACs outstanding 3,238,760 3,238,760 3,238,760 3,238,760
============ ============ ============ ============
</TABLE>
The accompanying notes are an integral part
of these consolidated financial statements.
-8-
<PAGE>
PART I. FINANCIAL INFORMATION
---------------------
ITEM 1. FINANCIAL STATEMENTS
---------------------
CAPITAL REALTY INVESTORS TAX EXEMPT FUND LIMITED PARTNERSHIP
CONSOLIDATED STATEMENTS OF CHANGES IN PARTNERS' CAPITAL (DEFICIT)
For the nine months ended September 30, 1995
(Unaudited)
<TABLE>
<CAPTION>
SERIES I
---------------------------------------
Beneficial
Assignee
Certificate General
Holders Partner Total
------------ ----------- ------------
<S> <C> <C> <C>
Balance, December 31, 1994 $ 32,692,988 $ (208,980) $ 32,484,008
Net income 768,300 7,839 776,139
Distributions paid or accrued
of $0.81 per BAC (including
return of capital of $0.47
per BAC) (1,846,800) (18,843) (1,865,643)
------------ ----------- ------------
Balance, September 30, 1995 $ 31,614,488 $ (219,984) $ 31,394,504
============ =========== ============
SERIES II
---------------------------------------
Beneficial
Assignee
Certificate General
Holders Partner Total
------------ ----------- ------------
<S> <C> <C> <C>
Balance, December 31, 1994 $ 47,889,479 $ (270,915) $ 47,618,564
Net income 1,411,838 14,405 1,426,243
Distributions paid or accrued
of $0.81 per BAC (including
return of capital of $0.37
per BAC) (2,623,395) (26,766) (2,650,161)
------------ ----------- ------------
Balance, September 30, 1995 $ 46,677,922 $ (283,276) $ 46,394,646
============ =========== ============
</TABLE>
The accompanying notes are an integral part
of these consolidated financial statements.
-9-
<PAGE>
PART I. FINANCIAL INFORMATION
---------------------
ITEM 1. FINANCIAL STATEMENTS
---------------------
CAPITAL REALTY INVESTORS TAX EXEMPT FUND LIMITED PARTNERSHIP
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
<TABLE>
<CAPTION>
Series I
----------------------------
For the nine months ended
September 30,
----------------------------
1995 1994
------------ ------------
<S> <C> <C>
Cash flows from operating activities:
Net income $ 776,139 $ 699,776
Adjustments to reconcile net income
to net cash provided by operating
activities:
Depreciation 1,099,702 1,185,462
Changes in assets and liabilities:
Increase in restricted cash and
cash equivalents (408,193) (512,823)
Decrease in receivables and other
assets 95,449 32,606
Increase in accrued mortgage admini-
stration and servicing fees due to
related parties 132,151 199,476
Increase (decrease) in accounts payable
and accrued expenses 105,817 (16,612)
Increase in other liabilities related
to real estate operations 315,442 285,775
------------ ------------
Net cash provided by operating
activities 2,116,507 1,873,660
------------ ------------
Cash flows from investing activities:
Net sales of marketable securities 401,437 748,671
Net deposits to working capital
reserves invested in marketable
securities (189,838) (193,603)
------------ ------------
Net cash provided by investing
activities 211,599 555,068
------------ ------------
</TABLE>
The accompanying notes are an integral part
of these consolidated financial statements.
-10-
<PAGE>
PART I. FINANCIAL INFORMATION
---------------------
ITEM 1. FINANCIAL STATEMENTS
---------------------
CAPITAL REALTY INVESTORS TAX EXEMPT FUND LIMITED PARTNERSHIP
CONSOLIDATED STATEMENTS OF CASH FLOWS - Continued
(Unaudited)
<TABLE>
<CAPTION>
Series I
----------------------------
For the nine months ended
September 30,
----------------------------
1995 1994
------------ ------------
<S> <C> <C>
Cash flows from financing activities:
Distributions to BAC Holders
and General Partner (2,395,393) (2,303,263)
------------ ------------
Net (decrease) increase in
cash and cash equivalents (67,287) 125,465
Cash and cash equivalents, beginning
of period 103,864 33,549
------------ ------------
Cash and cash equivalents, end
of period $ 36,577 $ 159,014
============ ============
</TABLE>
The accompanying notes are an integral part
of these consolidated financial statements.
-11-
<PAGE>
PART I. FINANCIAL INFORMATION
---------------------
ITEM 1. FINANCIAL STATEMENTS
---------------------
CAPITAL REALTY INVESTORS TAX EXEMPT FUND LIMITED PARTNERSHIP
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
<TABLE>
<CAPTION>
Series II
----------------------------
For the nine months ended
September 30,
----------------------------
1995 1994
------------ ------------
<S> <C> <C>
Cash flows from operating activities:
Net income $ 1,426,243 $ 846,349
Adjustments to reconcile net income
to net cash provided by operating
activities:
Depreciation 1,496,009 1,532,471
Changes in assets and liabilities:
Increase in restricted cash and
cash equivalents (500,372) (462,081)
Decrease in receivables and other
assets 87,694 67,089
Increase in accrued mortgage admini-
stration and servicing fees due to
related parties 177,070 293,473
Increase (decrease) in accounts payable
and accrued expenses 104,279 (20,618)
Increase in other liabilities related
to real estate operations 246,150 369,724
------------ ------------
Net cash provided by operating
activities 3,037,073 2,626,407
------------ ------------
Cash flows from investing activities:
Net sales of marketable securities 656,093 809,878
Net deposits to working capital
reserves invested in marketable
securities (345,804) (277,536)
------------ ------------
Net cash provided by investing
activities 310,289 532,342
------------ ------------
</TABLE>
The accompanying notes are an integral part
of these consolidated financial statements.
-12-
<PAGE>
PART I. FINANCIAL INFORMATION
---------------------
ITEM 1. FINANCIAL STATEMENTS
---------------------
CAPITAL REALTY INVESTORS TAX EXEMPT FUND LIMITED PARTNERSHIP
CONSOLIDATED STATEMENTS OF CASH FLOWS - Continued
(Unaudited)
<TABLE>
<CAPTION>
Series II
----------------------------
For the nine months ended
September 30,
----------------------------
1995 1994
------------ ------------
<S> <C> <C>
Cash flows from financing activities:
Distributions to BAC Holders
and General Partner (3,402,677) (3,271,805)
------------ ------------
Net decrease in cash and cash equivalents (55,315) (113,056)
Cash and cash equivalents, beginning
of period 101,283 202,810
------------ ------------
Cash and cash equivalents, end
of period $ 45,968 $ 89,754
============ ============
</TABLE>
The accompanying notes are an integral part
of these consolidated financial statements.
-13-
<PAGE>
CAPITAL REALTY INVESTORS TAX EXEMPT FUND LIMITED PARTNERSHIP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
1. BASIS OF PRESENTATION
In the opinion of CRITEF Associates Limited Partnership (the General
Partner), the accompanying unaudited consolidated financial statements of
Capital Realty Investors Tax Exempt Fund Limited Partnership (the Partnership)
contain all adjustments of a normal recurring nature necessary to present fairly
the Partnership's consolidated financial position as of September 30, 1995 and
December 31, 1994, and the results of its consolidated operations for the three
and nine months ended September 30, 1995 and 1994 and its consolidated cash
flows for the nine months ended September 30, 1995 and 1994.
These unaudited consolidated financial statements have been prepared
pursuant to the rules and regulations of the Securities and Exchange Commission.
Certain information and note disclosures normally included in consolidated
financial statements prepared in accordance with generally accepted accounting
principles have been condensed or omitted. While the General Partner believes
that the disclosures presented are adequate to make the information not
misleading, it is suggested that these consolidated financial statements be read
in conjunction with the consolidated financial statements and the notes included
in the Partnership's Annual Report filed on Form 10-K for the year ended
December 31, 1994.
The Partnership's consolidated balance sheets reflect the financial
position of the properties for the dates presented. The Partnership's
consolidated statements of income include the rental income, rental expenses and
depreciation of nine of its ten properties, exclusive of debt service due to the
Partnership, as a result of the receipt of deeds in lieu of foreclosure. The
underlying real estate for Observatory II (formerly known as Greenhaven) in
Series I is not included in this consolidation because the investment is
accounted for as a loan for financial statement purposes.
Certain amounts in the 1994 financial statements have been reclassified to
conform to 1995 presentation.
2. MERGER PROPOSAL
On September 11, 1995, the Partnership and its General Partner entered into
a merger agreement, subject to BAC Holder approval, with an affiliate of Capital
Apartment Properties, Inc. (CAPREIT), a private real estate investment trust.
An affiliate of CAPREIT is the property manager for four of the five properties
securing the bonds held by Series I, and all five properties securing the bonds
in Series II. If the merger proposal is approved by a majority vote of BAC
Holders, all of the BACs in both Series I and Series II will be redeemed for
cash and the interests represented by such BACs will be canceled. The
redemption price per BAC will be $13.761 and $13.313 for Series I and Series II,
respectively. In addition, the General Partner will sell its 1.01% general
partnership interest in the Partnership to CAPREIT for $500,000. CAPREIT will
also acquire an account receivable held by an affiliate and a former affiliate
of the General Partner for the accrued mortgage servicing and administration
fees on the related property mortgage loans of both Series I and Series II by
paying the discounted amount of $2,929,035.
Consummation of the merger is contingent upon the approval of a majority of
combined Series I and Series II BAC Holders, voting together as one class. The
proposed merger is also contingent upon receiving a favorable opinion regarding
the fairness of the redemption price to BAC Holders from a financial point of
view. A proxy statement is expected to be issued to BAC Holders after it is
-14-
<PAGE>
CAPITAL REALTY INVESTORS TAX EXEMPT FUND LIMITED PARTNERSHIP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
2. MERGER PROPOSAL - Continued
filed with and reviewed by the Securities and Exchange Commission. This proxy
statement will include a full description of the proposed merger and the
independent fairness opinion.
3. INVESTMENTS
SERIES I
--------
Series I invested in five federally tax-exempt mortgage revenue bonds with
a current aggregate principal amount of $44,155,000. As discussed in the
Partnership's Annual Report filed on Form 10-K for the year ended December 31,
1994, all five properties collateralizing the bonds have been transferred by
foreclosure or deed in lieu of foreclosure to nominees of the Partnership
(Observatory II was subsequently sold to an unaffiliated third party and the
related bond modified). As a result, the Partnership accounts for four of the
five investments as real estate for financial statement purposes. Accordingly,
the consolidated balance sheets reflect the investments in real estate in the
amounts of $29,744,637 and $30,844,339 as of September 30, 1995 and December 31,
1994, respectively, net of accumulated depreciation, based on the lower of cost
or fair value at the date of deed transfer or in-substance foreclosure (ISF).
The Partnership continues to evaluate these investments on a lower of cost or
net realizable basis, taking into consideration the Partnership's intention to
hold these properties for the long term if necessary, and with investor consent,
in order to recover its recorded investment. The financial statement
presentation is independent of the characterization of the bonds as loans for
federal income tax purposes and the tax-exempt nature of the mortgage revenue
bond interest. Additionally, the Partnership accounts for the investment in the
Observatory II mortgage revenue bond as a loan with a carrying value of
$1,600,000 as of both September 30, 1995 and December 31, 1994.
As of September 30, 1995, Series I had cash and cash equivalents of
$36,577, unrestricted marketable securities of $688,085, restricted cash and
cash equivalents of $1,660,008, and working capital reserves invested in
marketable securities of $1,111,767. Marketable securities consist of
tax-exempt municipal bonds which generally contain a seven-day put option with
established banks or brokerage houses, and are stated at cost, which generally
represents par value and approximates market value. The Partnership has
classified these investments as Available for Sale in accordance with SFAS 115.
Realized gains and losses on the sale of marketable securities were determined
on a specific identification basis. There were no net unrealized holding gains
or losses recognized during the three and nine months ended September 30, 1995
as there was no material difference between the cost for the tax-exempt
municipal bonds and fair value throughout the first three quarters of 1995.
No significant events have occurred during the nine months ended September
30, 1995 in connection with the Series I properties.
SERIES II
---------
Series II invested in five federally tax-exempt mortgage revenue bonds with
an aggregate principal amount of $62,608,001. As discussed in the Partnership's
Annual Report filed on Form 10-K for the year ended December 31, 1994, all five
-15-
<PAGE>
CAPITAL REALTY INVESTORS TAX EXEMPT FUND LIMITED PARTNERSHIP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
3. INVESTMENTS - Continued
properties collateralizing the bonds have been transferred by deed in lieu of
foreclosure to nominees of the Partnership. As a result, the Partnership
accounts for these investments as real estate for financial statement purposes.
Accordingly, the consolidated balance sheets reflect the investments in real
estate in the amounts of $45,404,407 and $46,900,416 as of September 30, 1995
and December 31, 1994, respectively, net of accumulated depreciation, based on
the lower of cost or fair value at the date of deed transfer or ISF. The
Partnership continues to evaluate these investments on a lower of cost or net
realizable basis, taking into consideration the Partnership's intention to hold
these properties for the long term if necessary, and with investor consent, in
order to recover its recorded investment. The financial statement presentation
is independent of the characterization of the bonds as loans for federal income
tax purposes and the tax-exempt nature of the mortgage revenue bond interest.
As of September 30, 1995, Series II had cash and cash equivalents of
$45,968, unrestricted marketable securities of $791,750, restricted cash and
cash equivalents of $2,026,600, and working capital reserves invested in
marketable securities of $1,992,550. Marketable securities consist of
tax-exempt municipal bonds which generally contain a seven-day put option with
established banks or brokerage houses, and are stated at cost, which generally
represents par value and approximates market value. The Partnership has
classified these investments as Available for Sale in accordance with SFAS 115.
Realized gains and losses on the sale of marketable securities were determined
on a specific identification basis. There were no net unrealized holding gains
or losses recognized during the three and nine months ended September 30, 1995
as there was no material difference between the cost for the tax-exempt
municipal bonds and fair value throughout the first three quarters of 1995.
The following is an update of significant events affecting the Series II
properties during the nine months ended September 30, 1995:
-16-
<PAGE>
CAPITAL REALTY INVESTORS TAX EXEMPT FUND LIMITED PARTNERSHIP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
3. INVESTMENTS - Continued
Ethan's Ridge and Ethan's Glen IIB
- ----------------------------------
In April 1995, Ethan's Ridge and Ethan's Glen IIB suffered damage to
certain roofs due to a severe hail storm. The cost to repair the damaged roofs
was paid by the properties' insurance carrier, less a minimal deductible.
SERIES I and II
---------------
In 1991, the U. S. Supreme Court decided a case, Cottage Savings
Association v. Commissioner (Cottage Savings), that could be interpreted to
compromise the tax-exempt status of mortgage revenue bonds which have been
modified. In response to this decision, in December 1992, the Internal Revenue
Service (IRS) issued proposed regulations in connection with the modification of
debt instruments. If the regulations are adopted in their present form, they
would alter existing authority and curtail the type and extent of modifications
that could be made by a bond owner/lender without adversely affecting the tax-
exempt status of bonds. It is not clear at this time what effect the Cottage
Savings decision or the proposed regulations may have on the Partnership with
respect to the bonds secured by loans on properties currently held by nominees.
The General Partner continues to believe that these bonds remain tax-exempt.
The General Partner will continue its efforts to protect the tax-exempt status
of the bonds and the interest thereon. However, in light of the Cottage Savings
decision and the proposed regulations, there can be no assurance that the
General Partner will be successful in its efforts.
4. DISTRIBUTIONS TO BAC HOLDERS
The Partnership expects to continue to make distributions to BAC Holders on
a semi-annual basis. The merger agreement stipulates that current year
distributions cannot exceed nine cents per BAC per month for Series I and nine
cents per BAC per month for Series II. The agreement also stipulates that
distributions during 1996 cannot exceed 95% of Cash Flow as defined in the
Partnership Agreement. There are no other legal restrictions on the
Partnership's present or future ability to make cash distributions. However,
property level reserves are depleted and estimated cash flow from the
properties' operations are insufficient to pay full monthly base interest
(except for Observatory II in Series I), therefore, the distributions to BAC
Holders may fluctuate from current levels. The Partnership seeks to optimize
cash flow from the properties owned by nominees. Despite these efforts, the
amounts paid to the Partnership from the properties' operations may be expected
to fluctuate from period to period due to changes in occupancy rates, rental
rates, operating expenses and other variables. Based upon the current
operations of the Partnership, the General Partner expects the 1995 distribution
for both Series I and Series II to approximate $1.08 per BAC.
-17-
<PAGE>
CAPITAL REALTY INVESTORS TAX EXEMPT FUND LIMITED PARTNERSHIP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
4. DISTRIBUTIONS TO BAC HOLDERS - Continued
SERIES I
--------
The following distributions were paid or accrued to BAC Holders of record
during the nine months ended September 30, 1995 and 1994:
<TABLE>
<CAPTION>
1995 1994
Distributions to Distributions to
BAC Holders BAC Holders
--------------------- ---------------------
Quarter Ended Total Per BAC Total Per BAC
- ------------- ----------- ------- ----------- -------
<S> <C> <C> <C> <C>
March 31, $ 615,600 $ 0.27 $ 570,000 $ 0.25
June 30, 615,600 0.27 570,000 0.25
September 30, 615,600 0.27 570,000 0.25
----------- ------- ----------- -------
Total $ 1,846,800 $ 0.81 $ 1,710,000 $ 0.75
=========== ======= =========== =======
</TABLE>
Distributions to BAC Holders for the three and nine months ended September
30, 1995 and 1994 were funded as follows:
<TABLE>
<CAPTION>
For the three months ended
September 30,
--------------------------
1995 1994
------------ ------------
<S> <C> <C>
Cash Available for Distribution:
Cash flow (1) $ 687,175 $ 611,246
Net deposits to working capital reserves (65,294) (35,430)
------------ ------------
Total cash available for distribution $ 621,881 $ 575,816
============ ============
Distributions to:
General partner (1.01%) $ 6,281 $ 5,816
============ ============
BAC Holders (98.99%) $ 615,600 $ 570,000
============ ============
</TABLE>
-18-
<PAGE>
CAPITAL REALTY INVESTORS TAX EXEMPT FUND LIMITED PARTNERSHIP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
4. DISTRIBUTIONS TO BAC HOLDERS - Continued
<TABLE>
<CAPTION>
For the nine months ended
September 30,
--------------------------
1995 1994
------------ ------------
<S> <C> <C>
Cash Available for Distribution:
Cash flow (1) $ 2,055,481 $ 1,921,050
Net deposits to working capital reserves (189,838) (193,603)
------------ ------------
Total cash available for distribution $ 1,865,643 $ 1,727,447
============ ============
Distributions to:
General partner (1.01%) $ 18,843 $ 17,447
============ ============
BAC Holders (98.99%) $ 1,846,800 $ 1,710,000
============ ============
</TABLE>
(1) As defined in the Partnership Agreement.
The General Partner expects the distribution for the six months ending
December 31, 1995 to total approximately $0.54 per BAC, payable on February 29,
1996, or possibly earlier depending on the merger closing date, payable to
Series I BAC Holders of record as of the last day in each month during this
period.
SERIES II
---------
The following distributions were paid or accrued to BAC Holders of record
during the nine months ended September 30, 1995 and 1994:
<TABLE>
<CAPTION>
1995 1994
Distributions to Distributions to
BAC Holders BAC Holders
--------------------- ---------------------
Quarter Ended Total Per BAC Total Per BAC
- ------------- ----------- ------- ----------- -------
<S> <C> <C> <C> <C>
March 31, $ 874,465 $ 0.27 $ 809,690 $ 0.25
June 30, 874,465 0.27 809,690 0.25
September 30, 874,465 0.27 809,690 0.25
----------- ------- ----------- -------
Total $ 2,623,395 $ 0.81 $ 2,429,070 $ 0.75
=========== ======= =========== =======
</TABLE>
Distributions to BAC Holders for the three and nine months ended September
30, 1995 and 1994 were funded as follows:
-19-
<PAGE>
CAPITAL REALTY INVESTORS TAX EXEMPT FUND LIMITED PARTNERSHIP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
4. DISTRIBUTIONS TO BAC HOLDERS - Continued
<TABLE>
<CAPTION>
For the three months ended
September 30,
--------------------------
1995 1994
------------ ------------
<S> <C> <C>
Cash Available for Distribution:
Cash flow (1) $ 930,135 $ 1,003,964
Net deposits to working capital reserves (46,748) (186,014)
------------ ------------
Total cash available for distribution $ 883,387 $ 817,950
============ ============
Distributions to:
General partner (1.01%) $ 8,922 $ 8,260
============ ============
BAC Holders (98.99%) $ 874,465 $ 809,690
============ ============
</TABLE>
<TABLE>
<CAPTION>
For the nine months ended
September 30,
--------------------------
1995 1994
------------ ------------
<S> <C> <C>
Cash Available for Distribution:
Cash flow (1) $ 2,995,965 $ 2,731,389
Net deposits to working capital reserves (345,804) (277,536)
------------ ------------
Total cash available for distribution $ 2,650,161 $ 2,453,853
============ ============
Distributions to:
General partner (1.01%) $ 26,766 $ 24,783
============ ============
BAC Holders (98.99%) $ 2,623,395 $ 2,429,070
============ ============
</TABLE>
(1) As defined in the Partnership Agreement.
The General Partner expects the distribution for the six months ending
December 31, 1995 to total approximately $0.54 per BAC, payable on February 29,
1996, or possibly earlier depending on the merger closing date, payable to
Series II BAC Holders of record as of the last day in each month during this
period.
5. INCOME TAXES
For income tax purposes, base interest income is accrued when earned. The
accrual of interest is discontinued when, at the time of accrual, ultimate
collectibility of the interest due is considered unlikely. Once a loan has been
placed on a non-accrual status, income is recorded only as cash payments are
-20-
<PAGE>
CAPITAL REALTY INVESTORS TAX EXEMPT FUND LIMITED PARTNERSHIP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
5. INCOME TAXES - Continued
received from the borrower until such time as the uncertainty of collection of
unpaid base interest is eliminated. As of December 31, 1993, all loans except
Observatory II were placed on a non-accrual status for income tax purposes;
therefore, income is recognized to the extent of cash received. Contingent
interest from the investment is recognized as revenue when collected. No
contingent interest was recognized for the nine months ended September 30, 1995
and 1994.
A publicly traded partnership is treated as a corporation for income tax
purposes unless it meets certain exceptions. To qualify under these exceptions,
the General Partner annually invests in de minimus taxable investments for both
Series I and Series II.
SERIES I
--------
As discussed in Note 3, four of the five investments in Series I mortgage
revenue bonds are accounted for as investments in real estate for financial
statement purposes as of September 30, 1995. However, for federal income tax
purposes, the investments in all of the mortgage revenue bonds are treated as
loans, interest on which is exempt from federal income tax. A reconciliation of
the primary differences between the financial statement net income and municipal
income for tax purposes is as follows:
-21-
<PAGE>
CAPITAL REALTY INVESTORS TAX EXEMPT FUND LIMITED PARTNERSHIP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
5. INCOME TAXES - Continued
<TABLE>
<CAPTION>
For the three months For the nine months
ended September 30, ended September 30,
------------------------- --------------------------
1995 1994 1995 1994
---------- ---------- ----------- -----------
<S> <C> <C> <C> <C>
Financial statement
net income $ 195,263 $ 291,817 $ 776,139 $ 699,776
Municipal interest
income not
recognized (1) 822,683 611,541 2,205,550 1,952,697
Rental income,
net (2) (330,769) (292,299) (926,208) (731,422)
---------- ---------- ----------- -----------
Municipal income,
net for tax
purposes $ 687,177 $ 611,059 $ 2,055,481 $ 1,921,051
========== ========== =========== ===========
Municipal income
per BAC out-
standing $ 0.30 $ 0.27 $ 0.89 $ 0.83
========== ========== =========== ===========
</TABLE>
(1) Represents the adjustment for interest income received or receivable during
the period, which was previously eliminated from net income for financial
statement purposes.
(2) Represents net rental income from investments accounted for as real estate.
Although the Partnership accounted for four of the five mortgage loan
investments as real estate for financial statement purposes during the nine
months ended September 30, 1995 and 1994 and reclassified the cash flow from the
properties as rental income and expense, the Partnership continued to charge the
borrowers interest under the terms of the original loans and interest on unpaid
base interest. The Observatory II mortgage revenue bond investment is not shown
in the table below since it pays all debt service currently. The following
tables summarize the full interest payments for the nine months ended September
30, 1995 and 1994 that are due to the Partnership from the properties:
-22-
<PAGE>
CAPITAL REALTY INVESTORS TAX EXEMPT FUND LIMITED PARTNERSHIP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
5. INCOME TAXES - Continued
<TABLE>
<CAPTION>
For the nine months ended September 30, 1995
----------------------------------------------------
Base Base
Interest Interest Current
Current Base Paid From Paid From Base
Interest Properties' Non-Operating Interest
Due(1) Operations Sources(2) Not Paid
------------ ----------- ------------- ----------
<S> <C> <C> <C> <C>
Royal Oaks $ 801,972 $ 602,387 $ -- $ 199,585
Trailway Pond 345,366 182,636 -- 162,730
Valley Creek 994,764 677,430 -- 317,334
White Bear Woods 983,194 688,514 -- 294,680
------------ ----------- ------------- ----------
$ 3,125,296 $ 2,150,967 $ -- $ 974,329
============ =========== ============= ==========
</TABLE>
<TABLE>
<CAPTION>
For the nine months ended September 30, 1994
----------------------------------------------------
Base Base
Interest Interest Current
Current Base Paid From Paid From Base
Interest Properties' Non-Operating Interest
Due(1) Operations Sources(2) Not Paid
------------ ----------- ------------- ----------
<S> <C> <C> <C> <C>
Royal Oaks $ 801,972 $ 541,320 $ -- $ 260,652
Trailway Pond 345,366 173,983 -- 171,383
Valley Creek 994,764 564,212 -- 430,552
White Bear Woods 983,194 629,129 -- 354,065
------------ ----------- ------------- ----------
$ 3,125,296 $ 1,908,644 $ -- $1,216,652
============ =========== ============= ==========
</TABLE>
(1) Although these loans were placed on non-accrual status for income tax
purposes, the Partnership also charges the borrowers interest on unpaid
base interest, which totalled $569,902 and $420,125 for the nine months
ended September 30, 1995 and 1994, respectively.
(2) Amounts were funded from reserves provided for from the mortgage loan
proceeds.
-23-
<PAGE>
CAPITAL REALTY INVESTORS TAX EXEMPT FUND LIMITED PARTNERSHIP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
5. INCOME TAXES - Continued
SERIES II
---------
As discussed in Note 3, the five investments in Series II mortgage revenue
bonds are accounted for as investments in real estate for financial statement
purposes as of September 30, 1995. However, for federal income tax purposes,
the investments in these mortgage revenue bonds are treated as loans, interest
on which is exempt from federal income tax. A reconciliation of the primary
differences between the financial statement net income and municipal income for
tax purposes is as follows:
<TABLE>
<CAPTION>
For the three months For the nine months
ended September 30, ended September 30,
-------------------------- --------------------------
1995 1994 1995 1994
----------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
Financial statement
net income $ 382,362 $ 291,149 $ 1,426,243 $ 846,349
Municipal interest
income not
recognized (1) 1,098,156 1,030,541 3,234,890 2,871,487
Rental income,
net (2) (550,383) (317,725) (1,665,169) (986,448)
----------- ----------- ----------- -----------
Municipal income,
net for tax
purposes $ 930,135 $ 1,003,965 $ 2,995,964 $ 2,731,388
=========== =========== =========== ===========
Municipal income
per BAC out-
standing $ 0.29 $ 0.31 $ 0.92 $ 0.83
=========== =========== =========== ===========
</TABLE>
(1) Represents the adjustment for interest income received or receivable during
the period, which was previously eliminated from net income for financial
statement purposes.
(2) Represents net rental income from investments accounted for as real estate.
Although the Partnership accounted for all of the mortgage loan investments
as real estate for financial statement purposes during the nine month ended
September 30, 1995 and 1994 and reclassified the cash flow from the properties
as rental income and expense, the Partnership continued to charge the borrowers
interest under the terms of the original loans and interest on unpaid base
interest. The following tables summarize the full interest payments for the
nine months ended September 30, 1995 and 1994 that are due to the Partnership
from the properties:
-24-
<PAGE>
CAPITAL REALTY INVESTORS TAX EXEMPT FUND LIMITED PARTNERSHIP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
5. INCOME TAXES - Continued
<TABLE>
<CAPTION>
For the nine months ended September 30, 1995
----------------------------------------------------
Base Base
Interest Interest Current
Current Base Paid From Paid From Base
Interest Properties' Non-Operating Interest
Due(1) Operations Sources(2) Not Paid
------------ ----------- ------------- ----------
<S> <C> <C> <C> <C>
Ethan's Ridge and
Ethan's Glen IIB $ 1,139,062 $ 871,763 $ -- $ 267,299
Fountain Place 1,489,125 1,090,395 -- 398,730
James Street
Crossing 1,001,818 794,261 -- 207,557
Trailway Pond II 752,250 412,189 -- 340,061
------------ ----------- ------------- ----------
$ 4,382,255 $ 3,168,608 $ -- $1,213,647
============ =========== ============= ==========
For the nine months ended September 30, 1994
----------------------------------------------------
Base Base
Interest Interest Current
Current Base Paid From Paid From Base
Interest Properties' Non-Operating Interest
Due(1) Operations Sources(2) Not Paid
------------ ----------- ------------- ----------
<S> <C> <C> <C> <C>
Ethan's Ridge and
Ethan's Glen IIB $ 1,139,062 $ 855,849 $ 27,500 $ 255,713
Fountain Place 1,489,125 906,407 -- 582,718
James Street
Crossing 1,001,818 671,759 -- 330,059
Trailway Pond II 752,250 311,626 -- 440,624
------------ ----------- ------------- ----------
$ 4,382,255 $ 2,745,641 $ 27,500 $1,609,114
============ =========== ============= ==========
</TABLE>
(1) Although certain loans were placed on non-accrual status for income tax
purposes, the Partnership also charges the borrowers interest on unpaid
base interest, which totalled $874,077 and $674,154 for the nine months
ended September 30, 1995 and 1994, respectively.
(2) Amounts were funded from reserves provided for from the mortgage loan
proceeds and/or from partners of the borrowers.
-25-
<PAGE>
CAPITAL REALTY INVESTORS TAX EXEMPT FUND LIMITED PARTNERSHIP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
6. LITIGATION
On September 22, 1995, a purported class-action lawsuit (styled Zakin v.
Dockser, et. al.) was filed by Irving Zakin (the Plaintiff), a BAC Holder of the
Partnership against the Partnership, its general partner (CRITEF Associates
Limited Partnership), its Assignor Limited Partner (CRITEF, Inc.), C.R.I., Inc.,
William B. Dockser, H. William Willoughby, Capital Realty Investors Tax Exempt
Fund III Limited Partnership, CRITEF III Associates Limited Partnership, CRITEF
III, Inc., and CAPREIT (collectively, the Defendants) in Chancery Court for the
State of Delaware. The lawsuit alleges, among other matters, that certain
Defendants breached their fiduciary duty to the BAC Holders by failing to fully
disclose their intentions regarding the proposed merger. The lawsuit also
alleges that the Defendants' merger negotiations have not been conducted at
arms-length, resulting in self-dealing among certain of the Defendants. The
lawsuit seeks, among other things, to enjoin the proposed merger, to require
arms-length negotiations purportedly to increase the price to be paid to BAC
Holders, to evaluate alternatives to the proposed merger, and to pay Plaintiff's
costs.
On October 5, 1995, a second purported class-action lawsuit (styled Wingard
v. Dockser, et. al.) was filed by David and Johanna Wingard, BAC Holders of the
Partnership, against the same Defendants, in Chancery Court for the State of
Delaware. The second lawsuit makes the same allegations as the first lawsuit.
A request to the court has been made by the Plaintiffs in both lawsuits to
consolidate the two complaints.
The Partnership Agreement provides that the costs incurred in connection
with any litigation in which the Partnership is involved be borne by the
Partnership itself. At this time, there is no estimate as to the timing or
amount, if any, of the outcome of the lawsuits, therefore, the Partnership's
financial statements do not include any adjustment that might result from the
outcome of the lawsuits. The Defendants believe that the lawsuits are without
merit and intend to defend themselves vigorously against the allegations
contained in both lawsuits.
7. RELATED-PARTY TRANSACTIONS
The General Partner and its affiliates are entitled to receive
reimbursements from the Partnership for actual costs and expenses incurred in
connection with the operation of the Partnership.
SERIES I
--------
Expense reimbursements to an affiliate of the General Partner for the three
and nine months ended September 30, 1995 were $21,847 and $76,632, respectively,
and for the three and nine months ended September 30, 1994 were $26,503 and
$88,868, respectively. These expenses are included in general and
administrative expense and merger-related expenses in the consolidated
statements of income.
CRICO Mortgage Company, Inc. (CRICO Mortgage), a former affiliate of the
General Partner, was entitled to annual mortgage administration and servicing
fees from the borrowers which were payable from operating revenues each month
after payment of debt service on the mortgage loans. On June 30, 1995, CRICO
Mortgage merged with and into an affiliate of CRIIMI MAE Inc., a publicly traded
-26-
<PAGE>
CAPITAL REALTY INVESTORS TAX EXEMPT FUND LIMITED PARTNERSHIP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
7. RELATED-PARTY TRANSACTIONS - Continued
real estate investment trust (the REIT). The REIT was originally sponsored by
C.R.I., Inc. (CRI), a general partner of the General Partner, but is not
controlled by CRI, although the CRI stockholders are officers and major
stockholders of the REIT. Pursuant to the REIT merger agreement, the right to
receive the accrued and unpaid mortgage administration and servicing fees as of
the date of the REIT merger was distributed by CRICO Mortgage to its
shareholders and contributed by them to CRI. As of June 30, 1995, the mortgage
administration and servicing are being performed by an affiliate of the REIT and
mortgage administration and servicing fees are paid to that entity. This merger
did not result in any increase in fees or changes in the amount of fees which
are currently payable. Unpaid fees of $1,225,393 and $1,093,242 were due to CRI
as of September 30, 1995 and December 31, 1994, respectively. Unpaid fees of
$67,325 were due to the affiliate of the REIT as of September 30, 1995, and are
included in other liabilities related to real estate operations in the
consolidated balance sheets. The unpaid fees are payable from available cash
flow after payment of all current and delinquent base interest and accrued
interest on delinquent base interest. If available cash flow from the borrower
is insufficient to pay the fee, it is payable on the earlier of prepayment or
maturity of the loan, after debt repayment. Any payments made with respect to
unpaid fees will be applied against the oldest outstanding fees first. During
the six months ended June 30, 1995, the fees paid by the borrowers to CRICO
Mortgage totalled $5,000. During the three months ended September 30, 1995, the
fees paid by the borrowers to CRI totalled $833. During the three months ended
September 30, 1995, the fees paid by the borrowers to the affiliate of the REIT
totalled $2,500. Fees paid by the borrowers to CRICO Mortgage for the three and
nine months ended September 30, 1994 were $2,500 and $7,500, respectively.
In addition, CRICO Management of Minnesota, Inc. (CRICO Minnesota), an
affiliate of the General Partner, provided property management services to White
Bear Woods, Trailway Pond, Royal Oaks and Valley Creek through January 31, 1994.
Management fees of $16,916 were paid or accrued to this affiliate of the General
Partner by the properties for the month ended January 31, 1994. On February 1,
1994, CRICO Minnesota contributed its property management contracts and
personnel to CAPREIT Residential Corporation (Residential). Residential was
formed by CRI but is not owned or controlled by CRI and/or its affiliates.
SERIES II
---------
Expense reimbursements to an affiliate of the General Partner for the three
and nine months ended September 30, 1995, were $27,339 and $89,907,
respectively, and for the three and nine months ended September 30, 1994 were
$32,645 and $101,010, respectively. These expenses are included in general and
administrative expense and merger-related expenses in the consolidated
statements of income.
CRICO Mortgage, a former affiliate of the General Partner, was entitled to
annual mortgage administration and servicing fees from the borrowers which were
payable from operating revenues each month after payment of debt service on the
mortgage loans. On June 30, 1995, CRICO Mortgage merged with and into an
affiliate of the REIT. The REIT was originally sponsored by CRI, but is not
controlled by CRI, although the CRI stockholders are officers and major
stockholders of the REIT. Pursuant to the REIT merger agreement, the right to
receive the accrued and unpaid mortgage administration and servicing fees as of
-27-
<PAGE>
CAPITAL REALTY INVESTORS TAX EXEMPT FUND LIMITED PARTNERSHIP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
7. RELATED-PARTY TRANSACTIONS - Continued
the date of the REIT merger was distributed by CRICO Mortgage to its
shareholders and contributed by them to CRI. As of June 30, 1995, the mortgage
administration and servicing are being performed by an affiliate of the REIT and
mortgage administration and servicing fees are paid to that entity. This merger
did not result in any increase in fees or changes in the amount of fees which
are currently payable. Unpaid fees of $1,847,496 and $1,670,426 were due to CRI
as of September 30, 1995 and December 31, 1994, respectively. Unpaid fees of
$97,824 were due to the affiliate of the REIT as of September 30, 1995, and are
included in other liabilities related to real estate operations in the
consolidated balance sheets. The unpaid fees are payable from available cash
flow after payment of all current and delinquent base interest and accrued
interest on delinquent base interest. If available cash flow from the borrower
is insufficient to pay the fee, it is payable on the earlier of prepayment or
maturity of the loan, after debt repayment. Any payments made with respect to
unpaid fees will be applied against the oldest outstanding fees first. During
the three and nine months ended September 30, 1995 and 1994, no fees were paid
by the borrowers.
In addition, CRICO Minnesota provided property management services to
Trailway Pond II, Ethan's Ridge and Ethan's Glen IIB through January 31, 1994.
Additionally, CRICO Management Northwest, Inc. (CRICO Northwest) provided
property management services to James Street Crossing. Management fees of
$15,446 were paid or accrued to these affiliates of the General Partner by the
properties for the month ended January 31, 1994. On February 1, 1994, CRICO
Minnesota and CRICO Northwest contributed their property management contracts
and personnel to Residential. Residential was formed by CRI but is not owned or
controlled by CRI and/or its affiliates.
-28-
<PAGE>
PART I. FINANCIAL INFORMATION
---------------------
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
-------------------------------------------------
CONDITION AND RESULTS OF OPERATIONS
-----------------------------------
Business
--------
SERIES I AND SERIES II
----------------------
On September 11, 1995, the Partnership and its General Partner entered into
a merger agreement, subject to BAC Holder approval, with an affiliate of Capital
Apartment Properties, Inc. (CAPREIT), a private real estate investment trust.
An affiliate of CAPREIT is the property manager for four of the five properties
securing the bonds held by Series I, and all five properties securing the bonds
in Series II. If the merger proposal is approved by a majority vote of BAC
Holders, all of the BACs in both Series I and Series II will be redeemed for
cash and the interests represented by such BACs will be canceled. The
redemption price per BAC will be $13.761 and $13.313 for Series I and Series II,
respectively. In addition, the General Partner will sell its 1.01% general
partnership interest in the Partnership to CAPREIT for $500,000. CAPREIT will
also acquire an account receivable held by an affiliate and a former affiliate
of the General Partner for the accrued mortgage servicing and administration
fees on the related property mortgage loans of both Series I and Series II by
paying the discounted amount of $2,929,035.
Consummation of the merger is contingent upon the approval of a majority of
combined Series I and Series II BAC Holders, voting together as one class. The
proposed merger is also contingent upon receiving a favorable opinion regarding
the fairness of the redemption price to BAC Holders from a financial point of
view. A proxy statement is expected to be issued to BAC Holders after it is
filed with and reviewed by the Securities and Exchange Commission. This proxy
statement will include a full description of the proposed merger and the
independent fairness opinion.
SERIES I
--------
Series I invested in five federally tax-exempt mortgage revenue bonds with
a current aggregate principal amount of $44,155,000. As discussed in the
Partnership's Annual Report filed on Form 10-K for the year ended December 31,
1994, all five properties collateralizing the bonds have been transferred by
foreclosure or deed in lieu of foreclosure to nominees of the Partnership
(Observatory II was subsequently sold to an unaffiliated third party and the
related bond modified). As a result, the Partnership accounts for four of the
five investments as real estate for financial statement purposes. Accordingly,
the consolidated balance sheets reflect the investments in real estate in the
amounts of $29,744,637 and $30,844,339 as of September 30, 1995 and December 31,
1994, respectively, net of accumulated depreciation, based on the lower of cost
or fair value at the date of deed transfer or in-substance foreclosure (ISF).
The Partnership continues to evaluate these investments on a lower of cost or
net realizable basis, taking into consideration the Partnership's intention to
hold these properties for the long term if necessary, and with investor consent,
in order to recover its recorded investment. The financial statement
presentation is independent of the characterization of the bonds as loans for
federal income tax purposes and the tax-exempt nature of the mortgage revenue
bond interest. Additionally, the Partnership accounts for the investment in the
Observatory II mortgage revenue bond as a loan with a carrying value of
$1,600,000 as of both September 30, 1995 and December 31, 1994.
-29-
<PAGE>
PART I. FINANCIAL INFORMATION
---------------------
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
-------------------------------------------------
CONDITION AND RESULTS OF OPERATIONS - Continued
-----------------------------------
No significant events have occurred during the nine months ended September
30, 1995 in connection with the Series I properties.
SERIES II
---------
Series II invested in five federally tax-exempt mortgage revenue bonds with
an aggregate principal amount of $62,608,001. As discussed in the Partnership's
Annual Report filed on Form 10-K for the year ended December 31, 1994, all five
properties collateralizing the bonds have been transferred by deed in lieu of
foreclosure to nominees of the Partnership. As a result, the Partnership
accounts for these investments as real estate for financial statement purposes.
Accordingly, the consolidated balance sheets reflect the investments in real
estate in the amounts of $45,404,407 and $46,900,416 as of September 30, 1995
and December 31, 1994, respectively, net of accumulated depreciation, based on
the lower of cost or fair value at the date of deed transfer or ISF. The
Partnership continues to evaluate these investments on a lower of cost or net
realizable basis, taking into consideration the Partnership's intention to hold
these properties for the long term if necessary, and with investor consent, in
order to recover its recorded investment. The financial statement presentation
is independent of the characterization of the bonds as loans for federal income
tax purposes and the tax-exempt nature of the mortgage revenue bond interest.
The following is an update of significant events affecting the Series II
properties during the nine months ended September 30, 1995:
Ethan's Ridge and Ethan's Glen IIB
- ----------------------------------
In April 1995, Ethan's Ridge and Ethan's Glen IIB suffered damage to
certain roofs due to a severe hail storm. The cost to repair the damaged roofs
was paid by the properties' insurance carrier, less a minimal deductible.
Financial Condition and Liquidity
---------------------------------
The primary sources of the Partnership's future cash flows are expected to
be from receipts of base interest on the mortgage loans, which are dependent
upon the net operating income of the properties. Therefore, the Partnership's
investment in the mortgage revenue bonds is subject to the general risks
inherent to the ownership of real property. These risks include reduction in
rental income due to an inability to maintain occupancy levels, adverse changes
in general economic conditions, and adverse changes in local conditions. The
General Partner expects that the properties transferred to nominees of the
Partnership will continue to generate sufficient cash flow to pay all operating
expenses, meet escrow deposit requirements and pay some, but not all, of the
base interest due to the Partnership. The Partnership has no material
commitments for capital expenditures. However, the nominee owner of James
Street Crossing (Series II) may be required to fund approximately $100,000 to
$150,000 for environmental mitigation if such an obligation is determined to run
with the land at the property. If required, such funding could be provided from
the property's cash flow or from existing replacement reserves. Because the
nominee owner of James Street Crossing believes that the obligation does not run
with the land at the property, the financial statements do not include an
adjustment for this obligation.
-30-
<PAGE>
PART I. FINANCIAL INFORMATION
---------------------
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
-------------------------------------------------
CONDITION AND RESULTS OF OPERATIONS - Continued
-----------------------------------
In 1991, the U. S. Supreme Court decided a case, Cottage Savings
Association v. Commissioner (Cottage Savings), that could be interpreted to
compromise the tax-exempt status of mortgage revenue bonds which have been
modified. In response to this decision, in December 1992, the Internal Revenue
Service (IRS) issued proposed regulations in connection with the modification of
debt instruments. If the regulations are adopted in their present form, they
would alter existing authority and curtail the type and extent of modifications
that could be made by a bond owner/lender without adversely affecting the tax-
exempt status of bonds. It is not clear at this time what effect the Cottage
Savings decision or the proposed regulations may have on the Partnership with
respect to the bonds secured by loans on properties currently held by nominees.
The General Partner continues to believe that these bonds remain tax-exempt.
The General Partner will continue its efforts to protect the tax-exempt status
of the bonds and the interest thereon. However, in light of the Cottage Savings
decision and the proposed regulations, there can be no assurance that the
General Partner will be successful in its efforts.
The General Partner's ongoing strategy has been for the nominees to
continue holding the properties acquired upon the defaults of the original
borrowers until the loan maturity dates. If the merger proposal is approved,
the interests of the BAC Holders would be redeemed at closing. If the merger
proposal is not approved, in order to maximize the overall yield, the General
Partner may recommend for investor approval extension of certain loan maturity
dates and, if approved, arrange for related adjustments of the pertinent
mortgage revenue bonds as needed.
The Partnership expects to continue to make distributions to BAC Holders on
a semi-annual basis. The merger agreement stipulates that current year
distributions cannot exceed nine cents per BAC per month for Series I and nine
cents per BAC per month for Series II. The agreement also stipulates that
distributions during 1996 cannot exceed 95% of Cash Flow as defined in the
Partnership Agreement. There are no other legal restrictions on the
Partnership's present or future ability to make cash distributions. However,
property level reserves are depleted and estimated cash flow from the
properties' operations are insufficient to pay full monthly base interest
(except for Observatory II in Series I), therefore, the distributions to BAC
Holders may fluctuate from current levels. The Partnership seeks to optimize
cash flow from the properties owned by nominees. Despite these efforts, the
amounts paid to the Partnership from the properties' operations may be expected
to fluctuate from period to period due to changes in occupancy rates, rental
rates, operating expenses and other variables. Based upon the current
operations of the Partnership, the General Partner expects the 1995 distribution
for both Series I and Series II to approximate $1.08 per BAC.
SERIES I
--------
The following distributions were paid or accrued to BAC Holders of record
during the nine months ended September 30, 1995 and 1994:
-31-
<PAGE>
PART I. FINANCIAL INFORMATION
---------------------
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
-------------------------------------------------
CONDITION AND RESULTS OF OPERATIONS - Continued
-----------------------------------
<TABLE>
<CAPTION>
1995 1994
Distributions to Distributions to
BAC Holders BAC Holders
--------------------- ---------------------
Quarter Ended Total Per BAC Total Per BAC
- ------------- ----------- ------- ----------- -------
<S> <C> <C> <C> <C>
March 31, $ 615,600 $ 0.27 $ 570,000 $ 0.25
June 30, 615,600 0.27 570,000 0.25
September 30, 615,600 0.27 570,000 0.25
----------- ------- ----------- -------
Total $ 1,846,800 $ 0.81 $ 1,710,000 $ 0.75
=========== ======= =========== =======
</TABLE>
Distributions to BAC Holders for the three and nine months ended September
30, 1995 and 1994 were funded as follows:
<TABLE>
<CAPTION>
For the three months ended
September 30,
---------------------------
1995 1994
------------ ------------
<S> <C> <C>
Cash Available for Distribution:
Cash flow (1) $ 687,175 $ 611,246
Net deposits to working capital reserves (65,294) (35,430)
------------ ------------
Total cash available for distribution $ 621,881 $ 575,816
============ ============
Distributions to:
General partner (1.01%) $ 6,281 $ 5,816
============ ============
BAC Holders (98.99%) $ 615,600 $ 570,000
============ ============
</TABLE>
-32-
<PAGE>
PART I. FINANCIAL INFORMATION
---------------------
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
-------------------------------------------------
CONDITION AND RESULTS OF OPERATIONS - Continued
-----------------------------------
<TABLE>
<CAPTION>
For the nine months ended
September 30,
--------------------------
1995 1994
------------ ------------
<S> <C> <C>
Cash Available for Distribution:
Cash flow (1) $ 2,055,481 $ 1,921,050
Net deposits to working capital reserves (189,838) (193,603)
------------ ------------
Total cash available for distribution $ 1,865,643 $ 1,727,447
============ ============
Distributions to:
General partner (1.01%) $ 18,843 $ 17,447
============ ============
BAC Holders (98.99%) $ 1,846,800 $ 1,710,000
============ ============
</TABLE>
(1) As defined in the Partnership Agreement.
The General Partner expects the distribution for the six months ending
December 31, 1995 to total approximately $0.54 per BAC, payable on February 29,
1996, or possibly earlier depending on the merger closing date, payable to
Series I BAC Holders of record as of the last day in each month during this
period.
As of September 30, 1995, Series I had cash and cash equivalents of
$36,577, unrestricted marketable securities of $688,085, restricted cash and
cash equivalents of $1,660,008, and working capital reserves invested in
marketable securities of $1,111,767. Marketable securities consist of
tax-exempt municipal bonds which generally contain a seven-day put option with
established banks or brokerage houses, and are stated at cost, which generally
represents par value and approximates market value. The Partnership has
classified these investments as Available for Sale in accordance with SFAS 115.
Realized gains and losses on the sale of marketable securities were determined
on a specific identification basis. There were no net unrealized holding gains
or losses recognized during the three and nine months ended September 30, 1995
as there was no material difference between the cost for the tax-exempt
municipal bonds and fair value throughout the first three quarters of 1995.
The Partnership closely monitors its cash flow and liquidity position for
Series I in an effort to ensure that sufficient cash is available for operating
requirements and distributions to BAC Holders. Series I's net cash provided by
operating activities, which consists primarily of receipts of base interest on
mortgage loans, for the nine months ended September 30, 1995, was adequate to
support operating requirements and declared distributions to BAC Holders and the
General Partner. For the nine months ended September 30, 1995, cash and cash
equivalents decreased due to the timing of distribution payments. The
Partnership estimates that future cash flows from receipt of base interest on
mortgage loans, in the aggregate, will be sufficient to pay operating expenses
and make distributions to BAC Holders.
-33-
<PAGE>
PART I. FINANCIAL INFORMATION
---------------------
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
-------------------------------------------------
CONDITION AND RESULTS OF OPERATIONS - Continued
-----------------------------------
SERIES II
---------
The following distributions were paid or accrued to BAC Holders of record
during the nine months ended September 30, 1995 and 1994:
<TABLE>
<CAPTION>
1995 1994
Distributions to Distributions to
BAC Holders BAC Holders
--------------------- ---------------------
Quarter Ended Total Per BAC Total Per BAC
- ------------- ----------- ------- ----------- -------
<S> <C> <C> <C> <C>
March 31, $ 874,465 $ 0.27 $ 809,690 $ 0.25
June 30, 874,465 0.27 809,690 0.25
September 30, 874,465 0.27 809,690 0.25
----------- ------- ----------- -------
Total $ 2,623,395 $ 0.81 $ 2,429,070 $ 0.75
=========== ======= =========== =======
</TABLE>
Distributions to BAC Holders for the three and nine months ended September
30, 1995 and 1994 were funded as follows:
<TABLE>
<CAPTION>
For the three months ended
September 30,
--------------------------
1995 1994
------------ ------------
<S> <C> <C>
Cash Available for Distribution:
Cash flow (1) $ 930,135 $ 1,003,964
Net deposits to working capital reserves (46,748) (186,014)
------------ ------------
Total cash available for distribution $ 883,387 $ 817,950
============ ============
Distributions to:
General partner (1.01%) $ 8,922 $ 8,260
============ ============
BAC Holders (98.99%) $ 874,465 $ 809,690
============ ============
</TABLE>
-34-
<PAGE>
PART I. FINANCIAL INFORMATION
---------------------
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
-------------------------------------------------
CONDITION AND RESULTS OF OPERATIONS - Continued
-----------------------------------
<TABLE>
<CAPTION>
For the nine months ended
September 30,
-------------------------
1995 1994
------------ ------------
<S> <C> <C>
Cash Available for Distribution:
Cash flow (1) $ 2,995,965 $ 2,731,389
Net deposits to working capital reserves (345,804) (277,536)
------------ ------------
Total cash available for distribution $ 2,650,161 $ 2,453,853
============ ============
Distributions to:
General partner (1.01%) $ 26,766 $ 24,783
============ ============
BAC Holders (98.99%) $ 2,623,395 $ 2,429,070
============ ============
</TABLE>
(1) As defined in the Partnership Agreement.
The General Partner expects the distribution for the six months ending
December 31, 1995 to total approximately $0.54 per BAC, payable on February 29,
1996, or possibly earlier depending on the merger closing date, payable to
Series II BAC Holders of record as of the last day in each month during this
period.
As of September 30, 1995, Series II had cash and cash equivalents of
$45,968, unrestricted marketable securities of $791,750, restricted cash and
cash equivalents of $2,026,600, and working capital reserves invested in
marketable securities of $1,992,550. Marketable securities consist of
tax-exempt municipal bonds which generally contain a seven-day put option with
established banks or brokerage houses, and are stated at cost, which generally
represents par value and approximates market value. The Partnership has
classified these investments as Available for Sale in accordance with SFAS 115.
Realized gains and losses on the sale of marketable securities were determined
on a specific identification basis. There were no net unrealized holding gains
or losses recognized during the three and nine months ended September 30, 1995
as there was no material difference between the cost for the tax-exempt
municipal bonds and fair value throughout the first three quarters of 1995.
The Partnership closely monitors its cash flow and liquidity position for
Series II in an effort to ensure that sufficient cash is available for operating
requirements and distributions to BAC Holders. Series II's net cash provided by
operating activities, which consists primarily of receipts of base interest on
mortgage loans, for the nine months ended September 30, 1995, was adequate to
support operating requirements and declared distributions to BAC Holders and the
General Partner. For the nine months ended September 30, 1995, cash and cash
equivalents decreased due to the timing of distribution payments. The
Partnership estimates that future cash flows from receipt of base interest on
mortgage loans, in the aggregate, will be sufficient to pay operating expenses
and make distributions to BAC Holders.
-35-
<PAGE>
PART I. FINANCIAL INFORMATION
---------------------
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
-------------------------------------------------
CONDITION AND RESULTS OF OPERATIONS - Continued
-----------------------------------
Results of Operations
---------------------
SERIES I
--------
Series I's net income for the three months ended September 30, 1995
decreased from the corresponding period in 1994 primarily due to fees incurred
by the Partnership for an independent fairness opinion in connection with the
consideration to be received by BAC Holders in the proposed merger, as
previously discussed. Contributing to the decrease in net income was an
increase in rental expenses primarily due to an increase in non-recurring
repairs and maintenance costs at certain properties. Partially offsetting the
decrease in net income was an increase in rental revenue, resulting from an
increase in rental rates and occupancy levels at all properties, as well as a
decrease in depreciation expense as a result of the use of an accelerated method
for personal property. Also partially offsetting the decrease in net income was
an increase in interest and other income as a result of higher yields on
investments.
Series I's net income for the nine months ended September 30, 1995
increased from the corresponding period in 1994 primarily due to an increase in
rental revenue, a decrease in depreciation expense, and an increase in interest
and other income, as discussed above. Partially offsetting the increase in net
income was an increase in rental expenses and merger-related expenses, as
discussed above.
SERIES II
---------
Series II's net income for the three and nine months ended September 30,
1995 increased from the corresponding periods in 1994 primarily due to an
increase in rental revenue resulting from an increase in rental rates and
occupancy levels at certain properties. Contributing to the increase in net
income was a decrease in rental expenses primarily due to a reduction in non-
recurring repairs and maintenance costs and general and administrative expenses
at certain properties, as well as a decrease in depreciation expense as a result
of the use of an accelerated method for personal property. Also contributing to
the increase in net income was an increase in interest and other income
resulting from higher yields on investments. Partially offsetting the increase
in net income were fees incurred by the Partnership for an independent fairness
opinion in connection with the consideration to be received by BAC Holders in
the proposed merger, as previously discussed.
Presented below is a summary of the rental operations for the three and
nine months ended September 30, 1995 and 1994 of each of the properties
accounted for as Investments in Real Estate in which Series I and II have
invested.
-36-
<PAGE>
PART I. FINANCIAL INFORMATION
---------------------
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
-------------------------------------------------
CONDITION AND RESULTS OF OPERATIONS - Continued
-----------------------------------
SERIES I
--------
<TABLE>
<CAPTION>
Average Physical
Name of Investment No. of Occupancy
Rental Property Rental for the nine months
and Location Units ended September 30,
- ------------------ ------ --------------------
1995 1994
---- ----
<S> <C> <C> <C>
Observatory II
Burnsville, MN 75 100% 99%
Royal Oaks
Eagan, MN 231 99% 96%
Trailway Pond
Burnsville, MN 75 98% 96%
Valley Creek
Woodbury, MN 225 97% 94%
White Bear Woods
White Bear Lake, MN 225 98% 96%
----- --- ---
831 98% 96%
===== === ===
</TABLE>
<TABLE>
<CAPTION>
SERIES II
---------
Average Physical
Name of Investment No. of Occupancy
Rental Property Rental for the nine months
and Location Units ended September 30,
- ------------------ ------ --------------------
1995 1994
---- ----
<S> <C> <C> <C>
Ethan's Ridge and
Ethan's Glen IIB
Kansas City, MO 364 94% 94%
Fountain Place
Eden Prairie,MN 332 95% 93%
James Street Crossing
Kent, WA 300 97% 91%
Trailway Pond II
Burnsville, MN 165 98% 93%
----- --- ---
1,161 96% 93%
===== === ===
</TABLE>
-37-
<PAGE>
PART I. FINANCIAL INFORMATION
---------------------
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
-------------------------------------------------
CONDITION AND RESULTS OF OPERATIONS - Continued
-----------------------------------
SERIES I
--------
<TABLE>
<CAPTION>
Base Interest Paid from Net Rental Operating
Name of Investment Properties' Operations(1) Income (2) for the
Rental Property for the nine months ended nine months ended
and Location September 30, September 30,
- ------------------ ------------------------- ------------------------
1995 1994 1995 1994
----------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
Observatory II
Burnsville, MN(3) $ -- $ -- $ -- $ --
Royal Oaks
Eagan, MN 602,387 541,320 670,438 617,695
Trailway Pond
Burnsville, MN 182,636 173,983 208,358 183,839
Valley Creek
Woodbury, MN 677,430 564,212 728,317 649,941
White Bear Woods
White Bear Lake, MN 688,514 629,129 626,064 695,155
----------- ----------- ----------- -----------
$ 2,150,967 $ 1,908,644 $ 2,233,177 $ 2,146,630
=========== =========== =========== ===========
</TABLE>
SERIES II
---------
<TABLE>
<CAPTION>
Base Interest Paid from Net Rental Operating
Name of Investment Properties' Operations(1) Income (2) for the
Rental Property for the nine months ended nine months ended
and Location September 30, September 30,
- ------------------ -------------------------- ------------------------
1995 1994 1995 1994
------------ ------------ ----------- -----------
<S> <C> <C> <C> <C>
Ethan's Ridge and
Ethan's Glen IIB
Kansas City, MO $ 871,763 $ 855,849 $ 926,764 $ 719,299
Fountain Place
Eden Prairie, MN 1,090,395 906,407 1,276,007 969,766
James Street Crossing
Kent, WA 794,261 671,759 842,631 795,620
Trailway Pond II
Burnsville, MN 412,189 311,626 470,714 376,511
------------ ------------ ----------- -----------
$ 3,168,608 $ 2,745,641 $ 3,516,116 $ 2,861,196
============ ============ =========== ===========
</TABLE>
(1) Exclusive of amount paid to the Partnership from properties' reserves,
mortgage loan proceeds, partners of the borrowers or other sources. No
such amounts for Series I were paid for the nine months ended September 30,
-38-
<PAGE>
PART I. FINANCIAL INFORMATION
---------------------
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
-------------------------------------------------
CONDITION AND RESULTS OF OPERATIONS - Continued
-----------------------------------
1995 and 1994. Such amounts for Series II were $0 and $27,500 for the nine
months ended September 30, 1995 and 1994, respectively.
(2) Calculated from the respective properties' financial statements as net loss
adjusted for depreciation, amortization, mortgage loan interest, mortgage
servicing and administration fees and interest income on reserves.
(3) Rental operating information is not provided for the Observatory II
investment because it is accounted for as an investment in mortgage revenue
bond and is paying full base interest.
PART II. OTHER INFORMATION
-----------------
ITEM 1. LEGAL PROCEEDINGS
-----------------
On September 22, 1995, a purported class-action lawsuit (styled Zakin v.
Dockser, et. al.) was filed by Irving Zakin (the Plaintiff), a BAC Holder of the
Partnership against the Partnership, its general partner (CRITEF Associates
Limited Partnership), its Assignor Limited Partner (CRITEF, Inc.), C.R.I., Inc.,
William B. Dockser, H. William Willoughby, Capital Realty Investors Tax Exempt
Fund III Limited Partnership, CRITEF III Associates Limited Partnership, CRITEF
III, Inc., and CAPREIT (collectively, the Defendants) in Chancery Court for the
State of Delaware. The lawsuit alleges, among other matters, that certain
Defendants breached their fiduciary duty to the BAC Holders by failing to fully
disclose their intentions regarding the proposed merger. The lawsuit also
alleges that the Defendants' merger negotiations have not been conducted at
arms-length, resulting in self-dealing among certain of the Defendants. The
lawsuit seeks, among other things, to enjoin the proposed merger, to require
arms-length negotiations purportedly to increase the price to be paid to BAC
Holders, to evaluate alternatives to the proposed merger, and to pay Plaintiff's
costs.
On October 5, 1995, a second purported class-action lawsuit (styled Wingard
v. Dockser, et. al.) was filed by David and Johanna Wingard, BAC Holders of the
Partnership, against the same Defendants, in Chancery Court for the State of
Delaware. The second lawsuit makes the same allegations as the first lawsuit.
A request to the court has been made by the Plaintiffs in both lawsuits to
consolidate the two complaints.
The Partnership Agreement provides that the costs incurred in connection
with any litigation in which the Partnership is involved be borne by the
Partnership itself. At this time, there is no estimate as to the timing or
amount, if any, of the outcome of the lawsuits, therefore, the Partnership's
financial statements do not include any adjustment that might result from the
outcome of the lawsuits. The Defendants believe that the lawsuits are without
merit and intend to defend themselves vigorously against the allegations
contained in both lawsuits.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
--------------------------------
A report on Form 8-K was filed with the Commission on September 13, 1995
regarding the Partnership's acceptance of a cash merger offer from an affiliate
of CAPREIT for redemption of the Partnership's BACs, subject to BAC Holder
approval.
All other items are not applicable.
-39-
<PAGE>
SIGNATURE
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, Registrant has duly caused this report to be signed on its
behalf by the undersigned, thereunto duly authorized.
Capital Realty Investors Tax Exempt
Fund Limited Partnership
By: CRITEF Associates Limited
Partnership
General Partner
By: C.R.I., Inc.
General Partner
November 14, 1995 By: /s/ Richard J. Palmer
- ------------------------ -----------------------------------
Date Richard J. Palmer
Senior Vice President/Finance
Signing on behalf of the Registrant
and as Principal Accounting Officer
-40-
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM
THE THIRD QUARTER 10-Q AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE
TO SUCH 10-Q.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1995
<PERIOD-START> JAN-01-1995
<PERIOD-END> SEP-30-1995
<CASH> 82,545
<SECURITIES> 4,584,152
<RECEIVABLES> 0
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 0
<PP&E> 94,103,671
<DEPRECIATION> 18,954,627
<TOTAL-ASSETS> 85,770,043
<CURRENT-LIABILITIES> 0
<BONDS> 0
<COMMON> 0
0
0
<OTHER-SE> 77,789,150
<TOTAL-LIABILITY-AND-EQUITY> 85,770,043
<SALES> 0
<TOTAL-REVENUES> 11,196,315
<CGS> 0
<TOTAL-COSTS> 8,508,938
<OTHER-EXPENSES> 634,297
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> 2,202,382
<INCOME-TAX> 0
<INCOME-CONTINUING> 2,202,382
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 2,202,382
<EPS-PRIMARY> 0.40
<EPS-DILUTED> 0.40
</TABLE>
