<PAGE>
FORM 10-Q
UNITED STATES SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
Quarterly Report Under Section 13 or 15(d)
of the Securities Exchange Act of 1934
For the Quarter Ended June 30, 1996
----------------------
Commission file number 1-9793
----------------------
CAPITAL REALTY INVESTORS TAX EXEMPT FUND LIMITED PARTNERSHIP
-------------------------------------------------------------------------
(Exact name of registrant as specified in its 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 offices) (Zip Code)
(301) 468-9200
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(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 August 5, 1996, 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 JUNE 30, 1996
Page
----
PART I. Financial Information (Unaudited)
Item 1. Financial Statements
Balance Sheets - June 30, 1996
and December 31, 1995 . . . . . . . . . . . . . . . 1
Statements of Income - for the three and six
months ended June 30, 1996 and 1995 . . . . . . . . 2
Statements of Changes in Partners'
Capital (Deficit) - for the six months ended
June 30, 1996 . . . . . . . . . . . . . . . . . . . 4
Statements of Cash Flows - for the six
months ended June 30, 1996 and 1995 . . . . . . . . 5
Notes to Financial Statements . . . . . . . . . . . . 7
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations . . . . . . . 29
PART II. Other Information
Item 1. Legal Proceedings . . . . . . . . . . . . . . . . . . 42
Item 6. Exhibits and Reports on Form 8-K . . . . . . . . . . . 47
Signature . . . . . . . . . . . . . . . . . . . . . . . . . . 48
Exhibit Index . . . . . . . . . . . . . . . . . . . . . . . . . . 49
<PAGE>
PART I. FINANCIAL INFORMATION
---------------------
ITEM 1. FINANCIAL STATEMENTS
---------------------
CAPITAL REALTY INVESTORS TAX EXEMPT FUND LIMITED PARTNERSHIP
BALANCE SHEETS
ASSETS
<TABLE>
<CAPTION>
SERIES I SERIES II
-------------------------------- ------------------------------
As of As of As of As of
June 30, December 31, June 30, December 31,
1996 1995 1996 1995
------------ ------------ ------------ ------------
(Unaudited) (Unaudited)
<S> <C> <C> <C> <C>
Investment in mortgage revenue bonds $ 30,740,285 $ 30,740,285 $ 43,793,252 $ 43,793,252
Cash and cash equivalents 91,841 58,924 70,264 88,986
Marketable securities 1,353,070 1,315,182 1,881,213 1,512,281
Working capital reserves invested in
marketable securities 1,346,956 1,284,670 2,283,667 2,307,385
Receivables and other assets 22,166 21,958 56,744 36,996
------------ ------------ ------------ ------------
Total assets $ 33,554,318 $ 33,421,019 $ 48,085,140 $ 47,738,900
============ ============ ============ ============
LIABILITIES AND PARTNERS' CAPITAL (DEFICIT)
Distributions payable $ 1,301,344 $ 1,243,762 $ 1,897,646 $ 1,766,776
Accounts payable and accrued expenses 299,862 198,413 320,229 224,135
------------ ------------ ------------ ------------
Total liabilities 1,601,206 1,442,175 2,217,875 1,990,911
------------ ------------ ------------ ------------
Partners' capital (deficit):
General Partner (214,343) (214,083) (288,603) (289,808)
Beneficial Assignee Certificates
(BACs) - issued and outstanding,
2,280,000 of Series I BACs and
3,238,760 of Series II BACs 32,167,455 32,192,927 46,155,868 46,037,797
------------ ------------ ------------ ------------
Total partners' capital 31,953,112 31,978,844 45,867,265 45,747,989
------------ ------------ ------------ ------------
Total liabilities and
partners' capital $ 33,554,318 $ 33,421,019 $ 48,085,140 $ 47,738,900
============ ============ ============ ============
</TABLE>
The accompanying notes are an integral part
of these financial statements.
-1-
<PAGE>
PART I. FINANCIAL INFORMATION
---------------------
ITEM 1. FINANCIAL STATEMENTS
---------------------
CAPITAL REALTY INVESTORS TAX EXEMPT FUND LIMITED PARTNERSHIP
STATEMENTS OF INCOME
(Unaudited)
<TABLE>
<CAPTION>
SERIES I
---------------------------------------------------------------
For the three months ended For the six months ended
June 30, June 30,
---------------------------- -----------------------------
1996 1995 1996 1995
------------ ------------ ------------ ------------
<S> <C> <C> <C> <C>
Interest from mortgage revenue bonds $ 746,334 $ 658,558 $ 1,577,436 $ 1,451,754
------------ ------------ ------------ ------------
Other income (expenses):
Other interest income 23,435 21,392 45,281 33,715
Merger-related expenses (158,087) -- (234,126) --
General and administrative (42,962) (42,711) (77,225) (93,337)
Professional fees (13,463) (7,581) (35,754) (18,941)
------------ ------------ ------------ ------------
(191,077) (28,900) (301,824) (78,563)
------------ ------------ ------------ ------------
Net income $ 555,257 $ 629,658 $ 1,275,612 $ 1,373,191
============ ============ ============ ============
Net income allocated to General Partner (1.01%) $ 5,608 $ 6,359 $ 12,884 $ 13,869
============ ============ ============ ============
Net income allocated to BAC Holders (98.99%) $ 549,649 $ 623,299 $ 1,262,728 $ 1,359,322
============ ============ ============ ============
Net income per BAC $ 0.24 $ 0.28 $ 0.55 $ 0.60
============ ============ ============ ============
BACs outstanding 2,280,000 2,280,000 2,280,000 2,280,000
============ ============ ============ ============
</TABLE>
The accompanying notes are an integral part
of these financial statements.
-2-
<PAGE>
PART I. FINANCIAL INFORMATION
---------------------
ITEM 1. FINANCIAL STATEMENTS
---------------------
CAPITAL REALTY INVESTORS TAX EXEMPT FUND LIMITED PARTNERSHIP
STATEMENTS OF INCOME
(Unaudited)
<TABLE>
<CAPTION>
SERIES II
---------------------------------------------------------------
For the three months ended For the six months ended
June 30, June 30,
---------------------------- -----------------------------
1996 1995 1996 1995
------------ ------------ ------------ ------------
<S> <C> <C> <C> <C>
Interest from mortgage revenue bonds $ 1,032,970 $ 1,047,325 $ 2,302,033 $ 2,097,833
------------ ------------ ------------ ------------
Other income (expenses):
Other interest income 41,287 42,848 82,320 65,880
Merger-related expenses (157,772) -- (233,811) --
General and administrative (46,679) (49,600) (85,631) (110,562)
Professional fees (17,456) (12,128) (47,989) (26,223)
------------ ------------ ------------ ------------
(180,620) (18,880) (285,111) (70,905)
------------ ------------ ------------ ------------
Net income $ 852,350 $ 1,028,445 $ 2,016,922 $ 2,026,928
============ ============ ============ ============
Net income allocated to General Partner (1.01%) $ 8,609 $ 10,387 $ 20,371 $ 20,472
============ ============ ============ ============
Net income allocated to BAC Holders (98.99%) $ 843,741 $ 1,018,058 $ 1,996,551 $ 2,006,456
============ ============ ============ ============
Net income per BAC $ 0.26 $ 0.31 $ 0.62 $ 0.62
============ ============ ============ ============
BACs outstanding 3,238,760 3,238,760 3,238,760 3,238,760
============ ============ ============ ============
</TABLE>
The accompanying notes are an integral part
of these financial statements.
-3-
<PAGE>
PART I. FINANCIAL INFORMATION
---------------------
ITEM 1. FINANCIAL STATEMENTS
---------------------
CAPITAL REALTY INVESTORS TAX EXEMPT FUND LIMITED PARTNERSHIP
STATEMENTS OF CHANGES IN PARTNERS' CAPITAL (DEFICIT)
For the six months ended June 30, 1996
(Unaudited)
<TABLE>
<CAPTION>
SERIES I
----------------------------------------------
Beneficial
Assignee
Certificate General
Holders Partner Total
------------ ----------- ------------
<S> <C> <C> <C>
Balance, December 31, 1995 $ 32,192,927 $ (214,083) $ 31,978,844
Net income 1,262,728 12,884 1,275,612
Distributions paid or accrued of $0.565 per BAC
(including return of capital of $0.01 per BAC) (1,288,200) (13,144) (1,301,344)
------------ ----------- ------------
Balance, June 30, 1996 $ 32,167,455 $ (214,343) $ 31,953,112
============ =========== ============
SERIES II
----------------------------------------------
Beneficial
Assignee
Certificate General
Holders Partner Total
------------ ----------- ------------
<S> <C> <C> <C>
Balance, December 31, 1995 $ 46,037,797 $ (289,808) $ 45,747,989
Net income 1,996,551 20,371 2,016,922
Distributions paid or accrued of $0.58 per BAC
(none of which is return on capital) (1,878,480) (19,166) (1,897,646)
------------ ----------- ------------
Balance, June 30, 1996 $ 46,155,868 $ (288,603) $ 45,867,265
============ =========== ============
</TABLE>
The accompanying notes are an integral part
of these financial statements.
-4-
<PAGE>
PART I. FINANCIAL INFORMATION
---------------------
ITEM 1. FINANCIAL STATEMENTS
---------------------
CAPITAL REALTY INVESTORS TAX EXEMPT FUND LIMITED PARTNERSHIP
STATEMENTS OF CASH FLOWS
(Unaudited)
<TABLE>
<CAPTION>
SERIES I
------------------------------
For the six months ended
June 30,
------------------------------
1996 1995
------------ ------------
<S> <C> <C>
Cash flows from operating activities:
Net income $ 1,275,612 $ 1,373,191
Adjustments to reconcile net income to net cash provided by
operating activities:
(Increase) decrease in receivables and other assets (208) 4,868
Increase (decrease) in accounts payable and accrued expenses 101,449 (25,748)
------------ ------------
Net cash provided by operating activities 1,376,853 1,352,311
------------ ------------
Cash flows from investing activities:
Sale of marketable securities 962,286 1,211,451
Purchase of marketable securities (1,000,174) (1,376,371)
Deposits to working capital reserves invested in marketable
securities (62,286) (124,544)
------------ ------------
Net cash used in investing activities (100,174) (289,464)
------------ ------------
Cash flows from financing activities:
Distributions to BAC Holders and General Partner (1,243,762) (1,151,631)
------------ ------------
Net increase (decrease) in cash and cash equivalents 32,917 (88,784)
Cash and cash equivalents, beginning of period 58,924 103,864
------------ ------------
Cash and cash equivalents, end of period $ 91,841 $ 15,080
============ ============
</TABLE>
The accompanying notes are an integral part
of these financial statements.
-5-
<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 six months ended
June 30,
------------------------------
1996 1995
------------ ------------
<S> <C> <C>
Cash flows from operating activities:
Net income $ 2,016,922 $ 2,026,928
Adjustments to reconcile net income to net cash provided by
operating activities:
Increase in receivables and other assets (19,748) (41,356)
Increase (decrease) in accounts payable and accrued expenses 96,094 (15,698)
------------ ------------
Net cash provided by operating activities 2,093,268 1,969,874
------------ ------------
Cash flows from investing activities:
Sale of marketable securities 2,417,379 3,522,098
Purchase of marketable securities (2,786,311) (3,646,595)
Withdrawals from (deposits to) working capital reserves
invested in marketable securities 23,718 (299,056)
------------ ------------
Net cash used in investing activities (345,214) (423,553)
------------ ------------
Cash flows from financing activities:
Distributions to BAC Holders and General Partner (1,766,776) (1,635,903)
------------ ------------
Net decrease in cash and cash equivalents (18,722) (89,582)
Cash and cash equivalents, beginning of period 88,986 101,283
------------ ------------
Cash and cash equivalents, end of period $ 70,264 $ 11,701
============ ============
</TABLE>
The accompanying notes are an integral part
of these financial statements.
-6-
<PAGE>
CAPITAL REALTY INVESTORS TAX EXEMPT FUND LIMITED PARTNERSHIP
NOTES TO FINANCIAL STATEMENTS
(Unaudited)
1. BASIS OF PRESENTATION
In the opinion of CRITEF Associates Limited Partnership (the General
Partner), the accompanying unaudited 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 financial position as of June 30, 1996 and December 31, 1995, and
the results of its operations for the three and six months ended June 30, 1996
and 1995 and its cash flows for the six months ended June 30, 1996 and 1995.
These unaudited financial statements have been prepared pursuant to the
rules and regulations of the Securities and Exchange Commission. Certain
information and note disclosures normally included in financial statements
prepared in accordance with generally accepted accounting principles have been
condensed or omitted. While the General Partner believes that the disclosures
presented are adequate to make the information not misleading, it is suggested
that these financial statements be read in conjunction with the amended and
restated financial statements and notes included in the Partnership's Annual
Report filed on Form 10-K/A on May 17, 1996 for the year ended December 31,
1995.
The financial statements for the three and six months ended June 30, 1995
have been restated to conform to 1996 presentation, as well as to conform with
the restated 1995 financial statements as discussed in
Note 3.
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.
On that date, another CAPREIT affiliate entered into a merger agreement with
Capital Realty Investors Tax Exempt Fund III Limited Partnership (CRITEF III), a
similar tax exempt bond fund sponsored by CRI. The two merger agreements are
independent of one another, but the closing of each merger is conditioned on
closing of the other, at CARPEIT's election. Another 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. All nine
properties managed by the CAPREIT affiliate had defaulted with respect to their
mortgage loans held by the Partnership. 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 agreement for the proposed merger has been modified to improve
the terms of the original proposal. Under the original proposal, the redemption
amount per BAC was to be $13.761 and $13.313 for Series I and Series II,
respectively. Under the most recent modification, the Third Amended and
Restated Agreement and Plan of Merger (Restated Merger Agreement), all of the
BACs will be redeemed for cash at a redemption price of $14.28 per BAC, net to
the holder, without interest, subject to upward adjustment based on Available
Cash (as defined in the Restated Merger Agreement) to not greater than $14.49
per BAC for Series I, and $14.07 per BAC, net to the holder, without interest,
subject to upward adjustment based on Available Cash to not greater than $14.28
per BAC for Series II. In arriving at the base redemption price, the
consideration to be paid to BAC holders in the mergers has been reduced by the
fees and expenses payable to counsel for the plaintiffs in certain class action
litigation, as discussed in Note 6. If there is any upward adjustment to the
base redemption price based on Available Cash, plaintiffs' counsel shall be
-7-
<PAGE>
CAPITAL REALTY INVESTORS TAX EXEMPT FUND LIMITED PARTNERSHIP
NOTES TO FINANCIAL STATEMENTS
(Unaudited)
2. MERGER PROPOSAL - Continued
entitled to an additional amount equal to 20% of the increased amount, up to a
maximum of $75,000.
The BAC Holders will also vote upon the sale of the Partnership's General
Partner's interest to an affiliate of CAPREIT immediately prior to consummation
of the proposed merger. CAPREIT has agreed to pay the General Partner $500,000
in consideration for its 1.01% general partner interest in the Partnership.
CAPREIT and/or its designee will also acquire accounts receivables held by
CRI and CRIIMI MAE Services Limited Partnership (CRIIMI), for the accrued
mortgage servicing and administration fees on certain property mortgage loans of
both Series I and Series II. The general partner of CRIIMI is a subsidiary of
CRIIMI MAE Inc., a publicly-traded company affiliated with the General Partners.
Under the Restated Merger Agreement, CAPREIT will pay the discounted amount of
$511,680 and $770,835 to CRI for the fees of Series I and Series II,
respectively, accrued through June 30, 1995. The amounts to be paid to CRI
represent approximately 42% of the total accrued fees owed to CRI. Also,
CAPREIT will pay $265,968 and $391,296 to CRIIMI for the fees of Series I and
Series II, respectively, accrued from July 1, 1995 through June 30, 1996, which
represents 100% of the fees which are expected to be owed to CRIIMI for that
period. From July 1, 1996 to the closing of the proposed merger, the amounts to
be paid by CAPREIT to CRIIMI will increase, to reflect additional amounts
currently being accrued for mortgage servicing and administration fees, at a
rate of $22,164 and $32,608 per month for Series I and Series II, respectively.
Each of the affiliates of the Partnership formed to take title to
properties and assume the existing indebtedness when the original unaffiliated
borrowers defaulted (Owner Partnerships) has agreed to either (a) sell, assign
and transfer the partnership interests in, or the real property and other assets
of, such Owner Partnerships to CAPREIT or its designee for no additional
consideration or (b) admit CAPREIT or its designee as the managing general
partner, whereupon the general partner interests of the current general partners
will be converted into limited partner interests, and CAPREIT will have the
option to acquire all of the limited partner interests at any time within five
years from the closing date of the merger at the then fair market value thereof
(based on the fair market value of the property as encumbered by the mortgage
loans). Although such interests currently have nominal value, if the fair
market value of the partnership properties increases substantially prior to the
time CAPREIT exercises its option, such increase in value may benefit the owners
of the Owner Partnerships. This feature was required by CAPREIT as a material
business term of the merger.
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 amount to BAC Holders from a financial point of
view. Favorable opinions from an independent investment banking firm were
issued on March 14, 1996. As of August 5, 1996, the independent investment
banking firm is updating their analysis regarding the fairness of the redemption
amount 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 clearance is
received by the SEC. A preliminary proxy statement has been filed with the SEC,
and the Partnership is awaiting the SEC's clearance. The definitive proxy
materials include a full description of the proposed merger and the independent
fairness opinions.
-8-
<PAGE>
CAPITAL REALTY INVESTORS TAX EXEMPT FUND LIMITED PARTNERSHIP
NOTES TO FINANCIAL STATEMENTS
(Unaudited)
2. MERGER PROPOSAL - Continued
In accordance with the Restated Merger Agreement, CAPREIT is to pay the
legal costs incurred by the Partnership associated with the proposed merger,
upon consummation of the proposed merger. As the Partnership is not responsible
for payment of these costs, they have not been reflected in the accompanying
financial statements. However, in the event that the proposed merger is not
consummated with CAPREIT, the Partnership will be responsible for these costs,
as discussed below. As of August 5, 1996, the Partnership had incurred legal
costs of approximately $45,000 for Series I and II, respectively, related to the
proposed merger. There is no reasonable estimate of remaining legal costs to be
incurred by the Partnership related to the proposed merger.
In the event the Restated Merger Agreement is terminated or abandoned under
the specified circumstances, the Partnership may be liable for the payment of a
fee equal of $2,250,000 with respect to such terminated or abandoned Restated
Merger Agreement if there is a Fiduciary Out Termination (as defined in the
Restated Merger Agreement), a Triggering Event (as defined in the Restated
Merger Agreement) or the Partnership consummates an alternative transaction
within 270 days of the date of termination or abandonment of such Restated
Merger Agreement.
In addition, if the Restated Merger Agreement is terminated or abandoned
due to (i) a Fiduciary Out Termination, (ii) a willful and material breach by
the Partnership or any applicable Owner Partnership (other than a breach of the
representations and warranties), (iii) the failure by the Partnership or any of
such Owner Partnerships to perform in all material respects its obligations and
duties thereunder, or (iv) a termination of such Restated Merger Agreement by
such CAPREIT affiliate because the Partnership shall have settled designated
actions for an amount in excess of an agreed upon amount or such settlement or
compromise contains terms to which such CAPREIT affiliate reasonably objects,
then the Partnership shall bear all of its own expenses, as mentioned above, and
reimburse such CAPREIT affiliate and its affiliates for reasonable out-of-pocket
expenses (including, without limitation, all fees and expenses of counsel, and
its financing sources and consultants to the CAPREIT affiliate and its
affiliates) in connection with such merger and related transactions and the
proxy statement. In no event, however, shall the amount paid to reimburse
expenses under the Restated Merger Agreement exceed $2,500,000.
During February 1996, the General Partner received an inquiry concerning
the possible acquisition of the funds from a group of investors led by Mr. Terry
McNellis and Mr. Gary Petrucci, of Piper Jaffrey Inc., and Mr. David Brierton
and Mr. Jack Safar, of Dominium Management Services Inc. (collectively, the
Dominium Group). The Dominium Group executed confidentiality and non-
circumvention agreements, and by the beginning of April 1996, the Partnership
had provided the Dominium Group with all of the due diligence materials they had
requested. Thereafter, the General Partner did not hear from any representative
of the Dominium Group again until June 28, 1996, just days prior to the
initially scheduled date for the fairness hearing to be held on the Stipulation
of Settlement in the Zakin and Wingard putative class actions (the Zakin and
Wingard Actions), as discussed in Note 6.
On June 28, 1996, counsel to the plaintiffs in the Zakin and Wingard
Actions and the Partnership received a letter from Dominium Tax Exempt Fund
L.L.P. (Dominium), which was signed by Mr. Safar of the Dominium Group,
indicating an interest in entering into merger agreements with the Partnership
having similar terms as the merger agreement and purportedly offering the BAC
-9-
<PAGE>
CAPITAL REALTY INVESTORS TAX EXEMPT FUND LIMITED PARTNERSHIP
NOTES TO FINANCIAL STATEMENTS
(Unaudited)
2. MERGER PROPOSAL - Continued
Holders of the Partnership and CRITEF III an aggregate merger consideration of
approximately $168,230,000. After reviewing the Dominium letter, the General
Partner determined that Dominium had not demonstrated any firm financing
ability. Notwithstanding such determination, the General Partner, in a letter
dated July 3, 1996, notified Dominium that they would make documents available
to Dominium for its due diligence. The General Partner, however, also cautioned
Dominium that they would not jeopardize the merger agreements with CAPREIT by an
unwarranted delay while Dominium and its potential lenders continued to study
the Partnership and the mortgage revenue bonds and complete their due diligence.
On July 12, 1996, the Partnership received copies of correspondence from
Dominium to counsel for the plaintiffs in the Zakin and Wingard Actions,
indicating that Dominium had received a purported financing commitment, subject
to payment of a fee and satisfactory results of a 21 business day due diligence
period. Representatives of Dominium came to the General Partners' offices on
July 11, 12, 26, 29 and 30, 1996 to conduct such review.
3. INVESTMENTS
In May 1993, the Financial Accounting Standards Board (FASB) issued
Statement on Financial Accounting Standards No. 115 "Accounting for Certain
Investments in Debt and Equity Securities" (SFAS 115). This statement requires
that most investments in securities be classified into one of the following
investment categories based upon circumstances under which securities might be
sold: held to maturity, available for sale, and trading. Generally,
investments in securities for which an enterprise has both the ability and the
intent to hold to maturity should be accounted for using the amortized cost
method and all other securities must be recorded at their fair values. The
Partnership implemented SFAS 115 in 1994 for its marketable securities.
Following such adoption, the Partnership (as did others in the industry)
continued to account for its investments in mortgage revenue bonds, except
Observatory II, as investments in real estate based on consolidation of the
Owner Partnerships in accordance with the Securities and Exchange Commission
(SEC) rules.
In conjunction with the review of the Partnership's 1995 financial
statements by the SEC staff, the Partnership agreed to account for all of its
investments in mortgage revenue bonds as debt securities under the provisions of
SFAS 115 effective January 1, 1994, and restate its 1995 and 1994 financial
statements to reflect this change. Accordingly, effective January 1, 1994, all
investments in mortgage revenue bonds are classified and accounted for as held
to maturity securities and carried at amortized cost because of the
Partnership's ability and intent to hold these investments to maturity. In
accordance with SFAS 115's provisions for held to maturity securities, the
Partnership evaluates the fair value of its mortgage revenue bonds to determine
if impairment exists. If a decline in fair value is determined to be other-
than-temporary, the security is written down to its fair value. The Partnership
did not recognize any impairment losses during the three or six months ended
June 30, 1996 or 1995. Since all of the underlying mortgage loans, except
Observatory II, are in default, base interest and contingent interest on the
mortgage revenue bonds is recognized as revenue when collected.
The restatement of the 1995 financial statements resulted in increases of
$374,989 and $792,315 in the previously reported net income for the three and
six months ended June 30, 1995, respectively, for Series I, and increases of
-10-
<PAGE>
CAPITAL REALTY INVESTORS TAX EXEMPT FUND LIMITED PARTNERSHIP
NOTES TO FINANCIAL STATEMENTS
(Unaudited)
3. INVESTMENTS - Continued
$410,106 and $983,047 in the previously reported net income for the three and
six months ended June 30, 1995, respectively, for Series II. The restatement of
the 1995 financial statements also resulted in increases of $0.17 and $0.35 in
the previously reported net income per BAC for the three and six months ended
June 30, 1995, respectively, for Series I, and increases of $0.12 and $0.30 in
the previously reported net income per BAC for the three and six months ended
June 30, 1995, respectively, for Series II. Net income per BAC as previously
reported was $.11 and $.25 for the three and six months ended June 30, 1995,
respectively, for Series I, and $.19 and $.32 for the three and six months ended
June 30, 1995, respectively, for Series II.
SERIES I
--------
The five original Series I mortgage loans securing the mortgage revenue
bonds, with current aggregate principal and carrying amounts of $44,155,000 and
$30,740,285, respectively, went into default, resulting in title transfer by
actual foreclosure(one) or deeds in lieu of foreclosure (four) to Owner
Partnerships which assumed the existing indebtedness. In connection with the
transfers of properties to Owner Partnerships, the Partnership obtained an
opinion from its former independent accounting firm in July of 1991 that the
reduction in pay rate and compounding of unpaid base interest at the original
base interest rate would not cause a reissuance of the bonds under Section 103
of the Internal Revenue Code of 1986, as amended (the Code) (which would cause
the bonds to lose their tax-exempt status). The Partnership also obtained
opinions from bond counsel that certain transfers of the properties to Owner
Partnerships would not cause the Partnership to become a substantial user of the
projects or a related party to a substantial user pursuant to Section 103 of the
Code (which also could have caused the bonds to lose their tax-exempt status).
The bond counsel opinions were obtained in connection with the Observatory II,
Royal Oaks, Trailway Pond and Valley Creek transfers.
In conjunction with the transfer of the Royal Oaks deed to an Owner
Partnership, the Royal Oaks mortgage revenue bond was modified. The Part-
nership, based on information and advice from outside counsel, believes that the
modification does not adversely affect the tax-exempt nature of the Royal Oaks
bond interest. The modification complied with IRS guidelines in effect at that
time. The IRS has since issued Final Regulations Section 1.1001-3, which
applies only to modifications made on or after September 24, 1996. The General
Partner believes that the modification to the Royal Oaks mortgage revenue bond
was consistent with the relevant tax authority which existed at the time of the
modification and has, therefore, not jeopardized the tax-exempt status of the
Royal Oaks mortgage revenue bond. However, there can be no assurance as to the
tax-exempt status of the Royal Oaks mortgage revenue bond at present.
Presented below is a summary of base interest payments for the six months
ended June 30, 1996 and 1995 that are due to Series I from the borrowers:
-11-
<PAGE>
CAPITAL REALTY INVESTORS TAX EXEMPT FUND LIMITED PARTNERSHIP
NOTES TO FINANCIAL STATEMENTS
(Unaudited)
3. INVESTMENTS - Continued
<TABLE>
<CAPTION>
For the six months ended June 30, 1996
------------------------------------------------------------------------
Base Interest Cumulative
Paid From Current Base Unpaid
Current Base Properties' Interest Full Base
Interest Due(1) Operations Not Paid Interest
--------------- ------------- ------------ -----------
<S> <C> <C> <C> <C>
Observatory II $ 64,000 $ 64,000 $ -- $ --
Royal Oaks 534,648 449,712 84,936 1,678,180
Trailway Pond 230,244 120,264 109,980 962,452
Valley Creek 663,176 471,557 191,619 2,942,800
White Bear Woods 655,463 471,903 183,560 2,184,311
------------ ------------ ----------- -----------
$ 2,147,531 $ 1,577,436 $ 570,095 $ 7,767,743
============ ============ =========== ===========
</TABLE>
<TABLE>
<CAPTION>
For the six months ended June 30, 1995
------------------------------------------------------------------------
Base Interest Cumulative
Paid From Current Base Unpaid
Current Base Properties' Interest Full Base
Interest Due(1) Operations Not Paid Interest
--------------- ------------- ------------ -----------
<S> <C> <C> <C> <C>
Observatory II $ 64,000 $ 64,000 $ -- $ --
Royal Oaks 534,648 391,387 143,261 1,505,734
Trailway Pond 230,244 124,374 105,870 742,702
Valley Creek 663,176 446,584 216,592 2,585,899
White Bear Woods 655,463 425,409 230,054 1,867,811
--------------- ------------ ----------- -----------
$ 2,147,531 $ 1,451,754 $ 695,777 $ 6,702,146
============= ============ =========== ===========
</TABLE>
(1) The Partnership charges the borrowers interest on unpaid base
interest, which totalled $464,087 and $366,455 for the six months
ended June 30, 1996 and 1995, respectively.
Contingent interest is recognized as revenue when collected. No contingent
interest was received or accrued by Series I during the three or six months
ended June 30, 1996 or 1995. Contingent interest due for Series I as of June
30, 1996 and December 31, 1995 amounted to $21,404,029 and $20,083,162,
respectively.
As of June 30, 1996, Series I had cash and cash equivalents of $91,841,
unrestricted marketable securities of $1,353,070 and working capital reserves
invested in marketable securities of $1,346,956. Marketable securities consist
of tax-exempt municipal bonds which generally contain a seven-day put option
with established banks or brokerage houses. The Partnership has classified its
-12-
<PAGE>
CAPITAL REALTY INVESTORS TAX EXEMPT FUND LIMITED PARTNERSHIP
NOTES TO FINANCIAL STATEMENTS
(Unaudited)
3. INVESTMENTS - Continued
investments in marketable securities into the available for sale category under
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 or six months ended June 30,
1996 or 1995 for Series I as the cost for the tax-exempt municipal bonds
approximated market value throughout the respective periods.
SERIES II
---------
The five original Series II mortgage loans securing the mortgage revenue
bonds with aggregate principal and carrying amounts of $62,608,001 and
$43,793,252, respectively, went into default, resulting in deeds in lieu of
foreclosure to Ownership Partnerships which assumed the existing indebtedness.
In connection with the transfers of properties to Owner Partnerships, the
Partnership obtained an opinion from its former independent accounting firm in
July of 1991 that the reduction in pay rate and compounding of unpaid base
interest at the original base interest rate would not cause a reissuance of the
bonds under Section 103 of the Code (which would cause the bonds to lose their
tax-exempt status). The Partnership also obtained opinions from bond counsel
that certain transfers of the properties to Owner Partnerships would not cause
the Partnership to become a substantial user of the projects or a related party
to a substantial user pursuant to Section 103 of the Code (which also could have
caused the bonds to lose their tax exempt status.) The bond counsel opinions
were obtained in connection with the Ethan's Ridge and Ethan's Glen IIB,
Fountain Place and Trailway Pond II transfers.
Presented below is a summary of base interest payments for the six months
ended June 30, 1996 and 1995 that are due to Series II from the borrowers:
-13-
<PAGE>
CAPITAL REALTY INVESTORS TAX EXEMPT FUND LIMITED PARTNERSHIP
NOTES TO FINANCIAL STATEMENTS
(Unaudited)
3. INVESTMENTS - Continued
<TABLE>
<CAPTION>
For the six months ended June 30, 1996
-------------------------------------------------------------------------
Base Interest Cumulative
Paid From Current Base Unpaid
Current Base Properties' Interest Full Base
Interest Due(1) Operations(2) Not Paid Interest
--------------- ------------- ------------ -----------
<S> <C> <C> <C> <C>
Ethan's Ridge and
Ethan's Glen IIB $ 759,375 $ 758,194 $ 1,181 $ 2,003,374
Fountain Place 992,750 806,373 186,377 5,249,875
James Street
Crossing 667,879 470,000 197,879 1,893,050
Trailway Pond II 501,500 267,465 234,035 2,802,741
--------------- ------------- ------------ -----------
$ 2,921,504 $ 2,302,032 $ 619,472 $11,949,040
============== ============= ============ ===========
</TABLE>
<TABLE>
<CAPTION>
For the six months ended June 30, 1995
-------------------------------------------------------------------------
Base Interest Cumulative
Paid From Current Base Unpaid
Current Base Properties' Interest Full Base
Interest Due(1) Operations Not Paid Interest
--------------- ------------- ------------- ------------
<S> <C> <C> <C> <C>
Ethan's Ridge and
Ethan's Glen IIB $ 759,375 $ 612,239 $ 147,136 $ 1,845,660
Fountain Place 992,750 681,787 310,963 4,805,330
James Street
Crossing 667,879 520,548 147,331 1,577,060
Trailway Pond II 501,500 283,259 218,241 2,359,117
--------------- ------------ ------------ ------------
$ 2,921,504 $ 2,097,833 $ 823,671 $ 10,587,167
=============== ============= ============ ============
</TABLE>
(1) The Partnership charges the borrowers interest on unpaid base interest,
which totalled $690,400 and $567,098 for the six months ended June 30, 1996
and 1995, respectively.
(2) Includes amounts received by the Partnership in January 1996 from the
release of excess tax and insurance reserves relating to 1995. Such
amounts received from Ethan's Ridge and Ethan's Glen IIB, Fountain Place
and James Street Crossing totalled $107,000, $25,700 and $7,800,
respectively.
Contingent interest is recognized as revenue when collected. No contingent
interest was received or accrued by Series II during the three or six months
-14-
<PAGE>
CAPITAL REALTY INVESTORS TAX EXEMPT FUND LIMITED PARTNERSHIP
NOTES TO FINANCIAL STATEMENTS
(Unaudited)
3. INVESTMENTS - Continued
ended June 30, 1996 or 1995. Contingent interest due for Series II as of June
30, 1996 and December 31, 1995 amounted to $29,984,679 and $27,897,543,
respectively.
As of June 30, 1996, Series II had cash and cash equivalents of $70,264,
unrestricted marketable securities of $1,881,213, and working capital reserves
invested in marketable securities of $2,283,667. Marketable securities consist
of tax-exempt municipal bonds which generally contain a seven-day put option
with established banks or brokerage houses. The Partnership has classified its
investments in marketable securities into the available for sale category under
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 or six months ended June 30,
1996 or 1995 for Series II as the cost for the tax-exempt municipal bonds
approximated market value throughout these periods.
SERIES I and II
---------------
In April 1991, the U.S. Supreme Court decided a case, Cottage Savings
Association V. Commissioner (Cottage Savings) that could be interpreted to
impact then existing authority addressing the modification of debt instruments.
In response to this decision, on June 26, 1996, the IRS issued Final Regulations
Section 1.1001-3 which specifically address the tax consequences of
modifications of debt instruments. Among other things, these regulations
provide that certain modifications of the current interest payments or the
maturity date of a debt instrument will be treated as a taxable exchange of the
original instrument for the modified debt instrument. As a result, certain
future modifications of the mortgage loans which secure the mortgage revenue
bonds could be treated as a deemed reissuance of the mortgage revenue bonds for
federal income tax purposes. Any reissuance without the cooperation of the
mortgage revenue bond issuers would result in the loss of the tax-exempt status
of the mortgage revenue bonds. Such issuers might cooperate and consent to the
reissuance; however, there can be no assurance that such issuers would do so or
would not impose additional requirements that could have an adverse impact on
the mortgage revenue bonds. Even if issuer consent were obtained, all accrued
and unpaid interest of the existing mortgage loans would have to be written off.
The write-off of accrued and unpaid interest would not be recoverable upon
ultimate disposition or payoff of the mortgage revenue bond and would instead
accrue to the benefit of the Owner Partnership to the extent realized.
Final Regulations Section 1.1001-3 will become effective only with respect
to modifications made on or after September 24, 1996. It is unclear at this
time what effect the Cottage Savings decision may have on modifications that
have already been made to mortgage loans which secure the mortgage revenue
bonds. The General Partner believes that the modifications which have already
been made were consistent with the relevant tax authority that existed at the
time of those modifications and have not jeopardized the tax-exempt status of
the mortgage revenue bonds. However, there can be no assurance as to the tax-
exempt status of the mortgage revenue bonds at present.
The General Partner's ongoing strategy had been to continue holding the
mortgage revenue bonds until the loan maturity dates. If the merger proposal,
discussed in Note 2, is approved, the interests of the BAC Holders will be
redeemed for cash. If the merger proposal is not approved, in order to maximize
-15-
<PAGE>
CAPITAL REALTY INVESTORS TAX EXEMPT FUND LIMITED PARTNERSHIP
NOTES TO FINANCIAL STATEMENTS
(Unaudited)
3. INVESTMENTS - Continued
the overall yield, the General Partner may recommend, subject to satisfactory
resolution of any issues relating to the tax-exempt status of the mortgage
revenue bonds, for investor approval extension of certain loan maturity dates
and, if approved, arrange any necessary related amendments to the pertinent
mortgage revenue bonds.
4. DISTRIBUTIONS TO BAC HOLDERS
The Partnership expects to continue to make distributions to BAC Holders on
a semi-annual basis. The Restated Merger Agreement stipulates that 1996
distributions cannot exceed $0.09417 and $0.09667 per BAC per month for Series I
and Series II, respectively. There are no other legal restrictions on the
Partnership's present or future ability to make cash distributions other than as
set forth in the Restated Merger Agreement. However, property level reserves
are depleted and estimated cash flows 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 General Partner seeks to optimize cash flow from the
properties owned by the Owner Partnerships. Despite these efforts, the amounts
paid to the Partnership from the borrowers may be expected to fluctuate from
period to period due to changes in occupancy rates, rental rates, operating
expenses and other variables.
SERIES I
--------
The following distributions were paid or accrued to BAC Holders of record
during the six months ended June 30, 1996 and 1995:
-16-
<PAGE>
CAPITAL REALTY INVESTORS TAX EXEMPT FUND LIMITED PARTNERSHIP
NOTES TO FINANCIAL STATEMENTS
(Unaudited)
4. DISTRIBUTIONS TO BAC HOLDERS - Continued
<TABLE>
<CAPTION>
1996 1995
Distributions to Distributions to
BAC Holders BAC Holders
----------------------------- -----------------------------
Quarter Ended Total Per BAC Total Per BAC
- ------------- ---------- ------- ---------- -------
<S> <C> <C> <C> <C>
March 31, $ 644,100 $0.2825 $ 615,600 $0.2700
June 30, 644,100 0.2825 615,600 0.2700
---------- ------- ---------- -------
$1,288,200 $0.5650 $1,231,200 $0.5400
========== ======= ========== =======
</TABLE>
Distributions to BAC Holders for the three and six months ended June 30,
1996 and 1995 were funded as follows:
<TABLE>
<CAPTION>
For the three months ended For the six months ended
June 30, June 30,
---------------------------- -----------------------------
1996 1995 1996 1995
------------ ------------ ------------ ------------
<S> <C> <C> <C> <C>
Cash Available for Distribution:
Cash flow (1) $ 679,348 $ 630,894 $ 1,363,630 $ 1,368,306
Net deposits to working capital reserves (28,676) (9,013) (62,286) (124,544)
------------ ------------ ------------ ------------
Total cash available for distribution $ 650,672 $ 621,881 $ 1,301,344 $ 1,243,762
============ ============ ============ ============
Distributions to:
General partner (1.01%) $ 6,572 $ 6,281 $ 13,144 $ 12,562
============ ============ ============ ============
BAC Holders (98.99%) $ 644,100 $ 615,600 $ 1,288,200 $ 1,231,200
============ ============ ============ ============
</TABLE>
(1) Defined in the Limited Partnership Agreement as (a) all revenues received
by the Partnership during such period, plus (b) any amounts which the
Managing General Partner releases from the Working Capital Reserve as being
no longer necessary to hold as part of the Working Capital Reserve, plus
(c) any amounts released to the Partnership from the Interest Reserve
Account with respect to a mortgaged property after completion of
construction of such mortgaged property, less (i) operating expenses of the
Partnership paid from reserves during the period, including any expenses
paid to the General Partner, but not including such amounts paid from the
Working Capital Reserve, (ii) all cash payments made from Revenues during
such period to discharge Partnership indebtedness, and (iii) all amounts
from revenues, if any, added to the Working Capital Reserve during such
period. Cash flow as defined in the Limited Partnership Agreement is not
-17-
<PAGE>
CAPITAL REALTY INVESTORS TAX EXEMPT FUND LIMITED PARTNERSHIP
NOTES TO FINANCIAL STATEMENTS
(Unaudited)
4. DISTRIBUTIONS TO BAC HOLDERS - Continued
to be construed as an alternative to operating income in accordance with
generally accepted accounting principles (GAAP) as an indication of the
Partnership's operating performance.
SERIES II
---------
The following distributions were paid or accrued to BAC Holders of record
during the six months ended June 30, 1996 and 1995:
-18-
<PAGE>
CAPITAL REALTY INVESTORS TAX EXEMPT FUND LIMITED PARTNERSHIP
NOTES TO FINANCIAL STATEMENTS
(Unaudited)
4. DISTRIBUTIONS TO BAC HOLDERS - Continued
<TABLE>
<CAPTION>
1996 1995
Distributions to Distributions to
BAC Holders BAC Holders
----------------------------- -----------------------------
Quarter Ended Total Per BAC Total Per BAC
- ------------- ---------- ------- ---------- -------
<S> <C> <C> <C> <C>
March 31, $ 939,240 $0.2900 $ 874,465 $0.2700
June 30, 939,240 0.2900 874,465 0.2700
---------- ------- ---------- -------
$1,878,480 $0.5800 $1,748,930 $0.5400
========== ======= ========== =======
</TABLE>
Distributions to BAC Holders for the three and six months ended June 30,
1996 and 1995 were funded as follows:
<TABLE>
<CAPTION>
For the three months ended For the six months ended
June 30, June 30,
---------------------------- -----------------------------
1996 1995 1996 1995
------------ ------------ ------------ ------------
<S> <C> <C> <C> <C>
Cash Available for Distribution:
Cash flow (1) $ 958,579 $ 1,149,834 $ 1,873,928 $ 2,065,830
Net (deposits to) withdrawals from working
capital reserves (9,756) (266,447) 23,718 (299,056)
------------ ------------ ------------ ------------
Total cash available for distribution $ 948,823 $ 883,387 $ 1,897,646 $ 1,766,774
============ ============ ============ ============
Distributions to:
General partner (1.01%) $ 9,583 $ 8,922 $ 19,166 $ 17,844
============ ============ ============ ============
BAC Holders (98.99%) $ 939,240 $ 874,465 $ 1,878,480 $ 1,748,930
============ ============ ============ ============
</TABLE>
(1) Defined in the Limited Partnership Agreement as (a) all revenues received
by the Partnership during such period, plus (b) any amounts which the
Managing General Partner releases from the Working Capital Reserve as being
no longer necessary to hold as part of the Working Capital Reserve, plus
(c) any amounts released to the Partnership from the Interest Reserve
Account with respect to a mortgaged property after completion of
construction of such mortgaged property, less (i) operating expenses of the
Partnership paid from reserves during the period, including any expenses
paid to the General Partner, but not including such amounts paid from the
Working Capital Reserve, (ii) all cash payments made from Revenues during
such period to discharge Partnership indebtedness, and (iii) all amounts
-19-
<PAGE>
CAPITAL REALTY INVESTORS TAX EXEMPT FUND LIMITED PARTNERSHIP
NOTES TO FINANCIAL STATEMENTS
(Unaudited)
4. DISTRIBUTIONS TO BAC HOLDERS - Continued
from revenues, if any, added to the Working Capital Reserve during such
period. Cash flow as defined in the Limited Partnership Agreement is not
to be construed as an alternative to operating income in accordance with
GAAP as an indication of the Partnership's operating performance.
5. INCOME TAXES
For income tax purposes, base interest income is accrued when earned. The
accrual of base interest is discontinued when, at the time of accrual, ultimate
collectibility of the base interest due is considered unlikely. Once a loan has
been placed in a non-accrual status, income is recorded only as cash payments
are received from the borrower until such time as the uncertainty of collection
of unpaid base interest is eliminated. All loans except Observatory II were on
non-accrual status throughout the six months ended June 30, 1996 and 1995;
therefore, for income tax purposes, income was 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 three and six months
ended June 30, 1996 or 1995.
For federal income tax purposes, the investments in all of the mortgage
revenue bonds are treated as loans, interest on which is exempt from regular
federal income tax. A reconciliation of the primary differences between the
financial statement net income and municipal income for tax purposes is as
follows:
-20-
<PAGE>
CAPITAL REALTY INVESTORS TAX EXEMPT FUND LIMITED PARTNERSHIP
NOTES TO FINANCIAL STATEMENTS
(Unaudited)
5. INCOME TAXES - Continued
SERIES I
--------
<TABLE>
<CAPTION>
For the three months ended For the six months ended
June 30, June 30,
---------------------------- -----------------------------
1996 1995 1996 1995
------------ ------------ ------------ ------------
<S> <C> <C> <C> <C>
Financial statement net income $ 555,257 $ 629,658 $ 1,275,612 $ 1,373,191
Adjustment for timing of municipal income
recognition 124,476 1,233 88,401 (4,887)
------------ ------------ ------------ ------------
Municipal income, net for tax purposes $ 679,733 $ 630,891 $ 1,364,013 $ 1,368,304
============ ============ ============ ============
Municipal income per BAC outstanding $ 0.30 $ 0.27 $ 0.60 $ 0.59
============ ============ ============ ============
</TABLE>
SERIES II
---------
<TABLE>
<CAPTION>
For the three months ended For the six months ended
June 30, June 30,
---------------------------- -----------------------------
1996 1995 1996 1995
------------ ------------ ------------ ------------
<S> <C> <C> <C> <C>
Financial statement net income $ 852,350 $ 1,028,445 $ 2,016,922 $ 2,026,928
Adjustment for timing of municipal income
recognition 121,046 121,390 (128,180) 38,901
------------ ------------ ------------ ------------
Municipal income, net for tax purposes $ 973,396 $ 1,149,835 $ 1,888,742 $ 2,065,829
============ ============ ============ ============
Municipal income per BAC outstanding $ 0.30 $ 0.35 $ 0.58 $ 0.63
============ ============ ============ ============
</TABLE>
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 minimis taxable investments for both
Series I and Series II.
6. LITIGATION
On September 22, 1995, Irving Zakin commenced a putative class action (the
Zakin Action) against the Partnership, its general partner (CRITEF Associates
-21-
<PAGE>
CAPITAL REALTY INVESTORS TAX EXEMPT FUND LIMITED PARTNERSHIP
NOTES TO FINANCIAL STATEMENTS
(Unaudited)
6. LITIGATION - Continued
Limited Partnership), its Assignor Limited Partner (CRITEF, Inc.), CRI, William
B. Dockser, H. William Willoughby, CRITEF III, CRITEF III Associates Limited
Partnership, CRITEF III, Inc., and CAPREIT (collectively, the Defendants) in the
court of Chancery of the State of Delaware in New Castle County (the Chancery
Court) (C.A. No. 14558). The complaint alleges, among other things, that the
price offered to the BAC Holders in the Mergers at the time the complaint was
filed was inadequate, and that the Defendants breached their fiduciary duty to
the BAC Holders, or aided and abetted such a breach, engaged in self-dealing and
misled BAC Holders, in connection with the proposed Mergers. The suit seeks to
enjoin the proposed merger, to obtain damages in an unspecified amount for the
BAC Holders, and to compel the Defendants to maximize the amount paid to the BAC
Holders and consider unspecified alternatives to the proposed merger.
On October 5, 1995, David and Johanna Wingard (the Wingard Action)
commenced a second putative class action against the Defendants in the Chancery
Court (C.A. No 14604). The complaint in the Wingard Action contains virtually
the identical allegations and seeks virtually the identical relief as in the
Zakin Action. A request to the Court has been made by the plaintiffs in both
lawsuits to consolidate the two actions.
The Defendants have denied, and continue to deny, that any of them have
committed or threatened to commit any violations of law or breaches of duty to
the BAC Holders.
On January 31, 1996, the Defendants and the plaintiffs and their respective
attorneys reached a tentative settlement of the Zakin and Wingard Actions
memorialized in a Memorandum of Understanding (the Memorandum), dated as of such
date. In accordance with the Memorandum, the merger agreements were amended on
January 31, 1996, to provide that (a) the aggregate cash consideration to be
paid to the BAC Holders of the Partnership and CRITEF III was increased by $8.5
million from $150.0 million to $158.5 million (subject to the adjustment up or
down based upon available cash), and (b) the aggregate amount payable in
consideration for the Accrued Fees payable to CRI for the Partnership and CRITEF
III was reduced to no more than $2,000,000 (subsequently reduced to $1,950,000)
as compared with $4,023,000 provided for in the original merger agreement. The
Defendants also agreed that they would not object to an application for
attorneys' fees and reimbursement of out-of-pocket expenses of plaintiffs'
counsel for up to 20% of the improved Merger consideration negotiated by them
with such fees and expenses as are awarded by the Court to plaintiffs' counsel
to be paid from the improved Merger consideration negotiated by them.
Subsequently, the parties agreed that the maximum amount of fees and expenses
for the Partnership and CRITEF III, assuming the merger is consummated, shall be
$1,700,000, plus an amount equal to 20% (up to a maximum of $75,000) of any
adjustment amount at closing. These fees will reduce the cash paid to BAC
Holders in connection with the proposed merger, as discussed. In the event that
the proposed merger is not consummated, these fees will not be borne by the
Partnership. As such, the Partnership's financial statements do not include any
adjustment for these fees. Counsel for the plaintiffs and experts retained by
them have reviewed voluminous documents relating to the proposed merger, and
have taken depositions of representatives of the General Partner and CAPREIT and
Oppenheimer and Co., Inc. the fairness opinion provider.
On May 16, 1996, the defendants and the plaintiffs filed the Stipulation
and Agreement of Settlement with the Chancery Court, and sought preliminary
approval of the putative classes (the Class) and approval of a form of notice to
-22-
<PAGE>
CAPITAL REALTY INVESTORS TAX EXEMPT FUND LIMITED PARTNERSHIP
NOTES TO FINANCIAL STATEMENTS
(Unaudited)
6. LITIGATION - Continued
the Class of the proposed Settlement. The Stipulation of Settlement
contemplates the complete discharge, settlement and release of all claims that
have been, could have been, or in the future might be asserted in any action or
any other proceeding in connection with the proposed merger.
The Stipulation of Settlement also permits plaintiffs to terminate the
proposed settlement if, in their opinion, a superior financial offer is
presented for the Partnership. It is expected that a hearing to determine
whether the settlement is fair, reasonable and in the best interest of the Class
will be held in early August, 1996.
Martin C. Schwartzberg, formerly a general partner of the General Partner,
is a former shareholder and executive officer of CRI who retired from CRI as of
January 1, 1990. In connection therewith, he relinquished his general partner
duties for all CRI-sponsored partnerships, including those of the General
Partner. In February 1996, Mr. Schwartzberg publicly stated that he would
oppose the proposed merger until the Partnership made its financial statements
and the financial statements of the Owner Partnerships publicly available. The
financial statements of the Partnership are included in this Form 10-Q and have
been filed quarterly. The financial statements of the Owner Partnerships were
filed as exhibits to Current Reports on Form 8-K, filed with the SEC by the
Partnership on March 25, 1996. As discussed below, Mr. Schwartzberg has since
reviewed the requested information and has determined to support the merger.
On November 9, 1995, CRI filed a complaint seeking declaratory relief in
the Circuit Court for Montgomery County, Maryland (the Montgomery Circuit Court)
against Capital Management Strategies, Inc. (CMS), a company controlled by Mr.
Schwartzberg, to determine the proper amount of fees to be paid in 1996 under an
asset management agreement. CMS answered the complaint on January 10, 1996, but
asserted no counterclaims. Thereafter, Mr. Schwartzberg launched a hostile
consent solicitation to be designated as managing general partner of 125
private partnerships sponsored by CRI.
On January 18, 1996, Mr. Schwartzberg and CMS filed a complaint in the
Montgomery County, Maryland Circuit Court, against CRI and Messrs. Dockser and
Willoughby alleging, among other things, that the actions of CRI and Messrs.
Dockser and Willoughby in connection with the proposed merger involve self-
dealing and constitute a breach of their fiduciary duties to Mr. Schwartzberg.
Neither the Partnership nor the General Partner was named as a defendant in this
action, and Mr. Schwartzberg did not allege that he was a BAC Holder. Messrs.
Dockser and Willoughby entered an answer denying all of Mr. Schwartzberg's
claims and moved to dismiss or strike the allegations concerning the Partnership
and CRIIMI MAE Inc. Messrs. Dockser and Willoughby publicly responded that Mr.
Schwartzberg's suit is motivated by his budget dispute with CRI and personal
animosity.
On February 12, 1996, the Montgomery Circuit Court issued a memorandum
opinion and order enjoining CMS and Mr. Schwartzberg from using or disclosing
information made confidential under the asset management agreement.
On February 15, 1996, Mr. Schwartzberg filed suit in the New Castle County,
Delaware Chancery Court (the Chancery Court) against the General Partner and
CRITEF III Associates Limited Partnership (CRITEF III LP) (collectively, the
General Partners) alleging that he had made demands upon the General Partners,
in his capacity as a general and limited partner of the General Partner and a
-23-
<PAGE>
CAPITAL REALTY INVESTORS TAX EXEMPT FUND LIMITED PARTNERSHIP
NOTES TO FINANCIAL STATEMENTS
(Unaudited)
6. LITIGATION - Continued
limited partner of CRITEF III LP, to inspect and obtain copies of the BAC Holder
lists and other documents and that his demands were rejected. On February 23,
1996, the General Partners answered the complaint, admitting that his demands
had been rejected and denying that Mr. Schwartzberg is entitled to the materials
requested because, among other things, he lacks standing and proper purpose to
inspect and obtain copies of the requested materials. Following a hearing on
March 6 and 7, 1996, on June 7, 1996, the Chancery Court denied Mr.
Schwartzberg's request for relief, holding that Mr. Schwartzberg's request was
for an "improper purpose" under Delaware law.
On February 16, 1996, the Partnership and CRITEF III (collectively, the
Partnerships), together with the General Partners, CRI, and CAPREIT, filed suit
against Mr. Schwartzberg in the United States District Court for the Southern
District of New York, (LAK) (the New York Action). The complaint alleged that
Mr. Schwartzberg was engaged in an unlawful solicitation of proxies of the BAC
Holders through two press releases he issued. On March 18, 1996, the District
Court enjoined Mr. Schwartzberg from (1) making any further solicitation of BAC
Holders within the meaning of Section 14(a) of the Securities Exchange Act of
1934 without complying with SEC regulations, and (2) committing any violation of
Rule 14a-9 promulgated under the Securities Exchange Act (regarding false or
misleading statements) in connection with any solicitation relating to the
Partnerships.
On March 18, 1996, Mr. Schwartzberg filed a counterclaim against the
General Partners alleging that three press releases issued by the General
Partners and the Partnerships constituted solicitations in violation of the
Securities Exchange Act and that they were false and misleading. The counter-
defendants denied the allegations. On April 23, 1996, the District Court denied
Mr. Schwartzberg's motion for an injunction. The District Court held that an
injunction was unwarranted, given the scope and extent of Mr. Schwartzberg's
prospects for succeeding on the merits, and the fact that he could show neither
a sufficient threat of irreparable injury nor a balance in his favor of the
hardships associated with granting or denying an injunction.
On June 12, 1996, Mr. Schwartzberg withdrew as a general partner of the
General Partner of the Partnership, converting his interest to that of a special
limited partner.
On June 13, 1996, pursuant to a resolution of disputes with Mr.
Schwartzberg, the parties to the actions in the District Court filed with the
District Court a Stipulation of Dismissal with Prejudice.
After extensive review of the merger agreements, the Partnerships'
financial statements and other materials and pursuant to the terms of the
agreement between CAPREIT and Mr. Schwartzberg and CMS (the CAPREIT Agreement),
Mr. Schwartzberg has advised CAPREIT, the General Partners and the Partnerships
that he and his family members and entities under his control (the Schwartzberg
Entities) will vote their BACs in favor of the proposed merger and in accordance
with the recommendations of the General Partners. In connection therewith, the
Schwartzberg Entities have agreed to grant to CAPREIT an irrevocable proxy to
vote their interests in the Partnerships.
The Schwartzberg Entities have agreed not to attempt to (i) dispose of or
acquire any interest in the Partnerships or join or participate with any group
seeking to do the same, (ii) solicit proxies or participate in a solicitation in
-24-
<PAGE>
CAPITAL REALTY INVESTORS TAX EXEMPT FUND LIMITED PARTNERSHIP
NOTES TO FINANCIAL STATEMENTS
(Unaudited)
6. LITIGATION - Continued
opposition to the proposed merger, in opposition to the recommendations of the
General Partners with respect to the proposed merger, or to remove the General
Partners or seek to have himself or his designee become a general partner of the
Partnerships, (iii) make any public statements in opposition to the proposed
merger, (iv) make any public statements with respect to, or offer, solicit, or
submit a proposal relating to consolidation or combination with the
Partnerships, or the admission of new general partners into the Partnerships.
In addition, Mr. Schwartzberg disclosed that he has had discussions with
Lenner Corp. regarding the terms of the offer and the submission of a competing
bid. Lenner Corp. declined to submit a competing offer to the Partnership and
has entered into a confidentiality and standstill agreement with CAPREIT
regarding the proposed merger and the Partnerships.
Provided that the Schwartzberg Entities comply with the terms of the
CAPREIT Agreement, CAPREIT is obligated to cause to be paid into escrow the
aggregate amount of $867,000 in four installments over a three year period.
These funds will be used for the partial payment of Mr. Schwartzberg's counsel
and consultants in connection with their review of the merger agreements, drafts
of the preliminary proxy statement filed with the SEC on July 17, 1996,
financial information of the Partnership, partnership documents, Delaware-
related claims, and other documents. CRI will provide CAPREIT with $400,000 in
respect of CAPREIT's obligations under the CAPREIT Agreement, counsel for the
plaintiffs in the Zakin and Wingard Actions will provide $100,000 in respect of
such payments and Mr. Schwartzberg will provide $33,500 of such payments. No
such payments other than the first installment will be paid into escrow until
the proposed merger has been consummated and each of the payments is contingent
upon there having been no defaults on the part of the Schwartzberg Entities or
under the third party standstill agreement.
The Schwartzberg Entities are personally liable to CAPREIT for any breaches
occasioned by them of the CAPREIT Agreement. Mr. Schwartzberg has covenanted to
CAPREIT that he will maintain a net worth of at least $3.5 million through
December 31, 2002. In the event that the Schwartzberg Entities are in default
under the CAPREIT Agreement as a result of a violation of a third party
standstill agreement, Mr. Schwartzberg shall pay CAPREIT liquidated damages in
accordance with the terms of the CAPREIT Agreement.
An agreement among Mr. Schwartzberg, CMS and CRI (the CRI Agreement), in
addition to providing that Mr. Schwartzberg will not oppose the proposed merger,
also provides for a resolution of all disputes between CRI and Mr. Schwartzberg.
As part of the CRI Agreement, Mr. Schwartzberg and CRI have agreed not to take
any actions which might interfere with each others' business. Mr. Schwartzberg
has also retracted any derogatory statements that he previously made about CRI,
its principals, and the proposed merger, and has promised not to make any
similar statements in the future. Although the CRI Agreement provides that it
is legally binding, that agreement contemplates execution of a more detailed
agreement (referred to as the Definitive Agreement) and the exchange of full
general releases between Mr. Schwartzberg and CRI, and Messrs. Dockser and
Willoughby.
7. RELATED-PARTY TRANSACTIONS
The General Partner has the authority and responsibility for, among other
things, the overall management and control of the Partnership. The General
-25-
<PAGE>
CAPITAL REALTY INVESTORS TAX EXEMPT FUND LIMITED PARTNERSHIP
NOTES TO FINANCIAL STATEMENTS
(Unaudited)
7. RELATED-PARTY TRANSACTIONS - Continued
Partner and its affiliates do not receive any fees from the Partnership for
their services to the Partnership, but are reimbursed by the Partnership for any
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
months and six months ended June 30, 1996, were $39,418 and $60,207,
respectively, and for the three and six months ended June 30, 1995, were $21,741
and $54,785, respectively, and are included in general and administrative
expense and merger-related expenses in the 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 full base interest on the mortgage loans. On June 30, 1995,
CRICO Mortgage merged with and into CRIIMI, an affiliate of CRIIMI MAE Inc., a
publicly traded real estate investment trust (the REIT). The REIT was
originally sponsored by CRI, a general partner of the General Partner, but is
not controlled by CRI, although the CRI stockholders are directors, 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. After June 30, 1995, the mortgage
administration and servicing are being performed by CRIIMI, and mortgage
administration and servicing fees are payable to that entity. The merger did
not result in any increase in fees or changes in the amount of fees which are
currently payable.
The following unpaid fees were due to CRI and CRIIMI from the borrowers as
of June 30, 1996, and December 31, 1995:
<TABLE>
<CAPTION>
As of As of
June 30, December 31,
1996 1995
------------ ------------
<S> <C> <C>
CRI $ 1,225,393 $ 1,225,393
CRIIMI 265,968 132,984
------------ ------------
Total $ 1,491,361 $ 1,358,377
============ ============
</TABLE>
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.
-26-
<PAGE>
CAPITAL REALTY INVESTORS TAX EXEMPT FUND LIMITED PARTNERSHIP
NOTES TO FINANCIAL STATEMENTS
(Unaudited)
7. RELATED-PARTY TRANSACTIONS - Continued
In connection with the Restated Merger Agreement entered into by the
Partnership, as discussed in Note 2, unpaid fees accrued through June 30, 1995
will be purchased by CAPREIT from CRI for the discounted amount of $511,680,
which represents approximately 42% of the total accrued fees owed to CRI. In
addition, unpaid fees accrued from July 1, 1995 through June 30, 1996 will be
purchased by CAPREIT from CRIIMI for $265,968, which represents 100% of the
accrued fees which are expected to be owed to CRIIMI for that period. From July
1, 1996 to the closing of the proposed merger, the purchase price of CRIIMI's
portion will be adjusted upward at a rate of $22,164 per month.
Fees paid by the borrowers to CRI/CRICO Mortgage and CRIIMI for the three
and six months ended June 30, 1996 and 1995 were as follows:
-27-
<PAGE>
CAPITAL REALTY INVESTORS TAX EXEMPT FUND LIMITED PARTNERSHIP
NOTES TO FINANCIAL STATEMENTS
(Unaudited)
7. RELATED-PARTY TRANSACTIONS - Continued
<TABLE>
<CAPTION>
For the three months ended For the six months ended
June 30, June 30,
---------------------------- -----------------------------
1996 1995 1996 1995
------------ ------------ ------------ ------------
<S> <C> <C> <C> <C>
CRI/CRICO Mortgage $ -- $ 2,500 $ -- $ 5,000
CRIIMI 2,500 -- 5,000 --
------------ ------------ ------------ ------------
Total $ 2,500 $ 2,500 $ 5,000 $ 5,000
============ ============ ============ ============
</TABLE>
Owner Partnerships formed to take title to properties are structured as
limited partnerships. The Owner Partnerships and the managing general partner
of the General Partner have primarily common ownership and are under common
control. The Owner Partnerships, rather than the Partnership, became holders of
title to the properties in an effort to maintain the tax-exempt nature of
interest on the mortgage revenue bonds and to hold the properties until their
ultimate disposition. No compensation or fees were paid by the Partnership to
the Owner Partnerships or their principals in connection with the transfers of
ownership.
In connection with the Restated Merger Agreement, each of the Owner
Partnerships has agreed to either (a) sell, assign and transfer the partnership
interests in, or the real property and other assets of, such Owner Partnerships
to CAPREIT or its designee for no additional consideration or (b) admit CAPREIT
or its designee as the managing general partner, whereupon the general partner
interests of the current general partners will be converted into limited partner
interests, and CAPREIT will have the option to acquire all of the limited
partner interests at any time within five years from the closing date of the
merger at the then fair market value based on the fair market value of the
property as encumbered by the mortgage loans) thereof. Although such interests
currently have nominal value, if the fair market value of the partnership
properties increases substantially prior to the time CAPREIT exercises its
option, such increase in value may benefit the owners of the Owner Partnerships.
SERIES II
---------
Expense reimbursements to an affiliate of the General Partner for the three
and six months ended June 30, 1996 were $40,921 and $64,948, respectively, and
for the three and six months ended June 30, 1995 were $24,955 and $62,568,
respectively, and are included in general and administrative expense and merger-
related expenses in the 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 full base interest
on the mortgage loans. On June 30, 1995, CRICO Mortgage merged with and into
CRIIMI, an affiliate of the REIT. The REIT was originally sponsored by CRI, but
-28-
<PAGE>
CAPITAL REALTY INVESTORS TAX EXEMPT FUND LIMITED PARTNERSHIP
NOTES TO FINANCIAL STATEMENTS
(Unaudited)
7. RELATED-PARTY TRANSACTIONS - Continued
is not controlled by CRI, although the CRI stockholders are directors, 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. After June 30, 1995, the mortgage
administration and servicing are being performed by CRIIMI and mortgage
administration and servicing fees are payable to that entity. This merger did
not result in any increase in fees or changes in the amount of fees which are
currently payable.
The following unpaid fees were due CRI and CRIIMI from the borrowers as of
June 30, 1996 and December 31, 1995:
<TABLE>
<CAPTION>
As of As of
June 30, December 31,
1996 1995
------------ ------------
<S> <C> <C>
CRI $ 1,847,496 $ 1,847,496
CRIIMI 391,296 195,648
------------ ------------
Total $ 2,238,792 $ 2,043,144
============ ============
</TABLE>
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,
1996 and 1995, no fees were paid by the borrowers.
In connection with the Restated Merger Agreement entered into by the
Partnership, as discussed in Note 2, the unpaid fees accrued through June 30,
1995 will be purchased from CRI for the discounted amount of $770,835, which
represents approximately 42% of the total accrued fees owed to CRI. In
addition, unpaid fees accrued from July 1, 1995 through June 30, 1996 will be
purchased by CAPREIT from CRIIMI for $391,296, which represents 100% of the
accrued fees which are expected to be owed to CRIIMI for that period. From July
1, 1996 to the closing of the proposed merger, the purchase price of CRIIMI's
portion will be adjusted upward at a rate of $32,608 per month.
Owner Partnerships formed to take title to properties are structured as
limited partnerships. The Owner Partnerships and the managing general partner
of the General Partner have primarily common ownership (except for Ethan's Ridge
and Ethan's Glen IIB prior to March 14, 1996, as discussed below) and are under
common control. The Owner Partnerships, rather than the Partnership, became
holders of title to the properties in an effort to maintain the tax-exempt
nature of interest on the mortgage revenue bonds and to hold the properties
until their ultimate disposition. No compensation or fees were paid by the
Partnership to the Owner Partnerships in connection with the transfers of
ownership.
-29-
<PAGE>
CAPITAL REALTY INVESTORS TAX EXEMPT FUND LIMITED PARTNERSHIP
NOTES TO FINANCIAL STATEMENTS
(Unaudited)
7. RELATED-PARTY TRANSACTIONS - Continued
In connection with the Restated Merger Agreement, each of the Owner
Partnerships has agreed to either (a) sell, assign and transfer the partnership
interests in, or the real property and other assets of, such Owner Partnerships
to CAPREIT or its designee for no additional consideration or (b) admit CAPREIT
or its designee as the managing general partner, whereupon the general partner
interests of the current general partners will be converted into limited partner
interests, and CAPREIT will have the option to acquire all of the limited
partner interests at any time within five years from the closing date of the
merger at the then fair market value based on the fair market value of the
property as encumbered by the mortgage loans) thereof. Although such interests
currently have nominal value, if the fair market value of the partnership
properties increases substantially prior to the time CAPREIT exercises its
option, such increase in value may benefit the owners of the Owner Partnerships.
-30-
<PAGE>
PART I. FINANCIAL INFORMATION
---------------------
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
-------------------------------------------------
CONDITION AND RESULTS OF OPERATIONS
-----------------------------------
Business
--------
The Partnership's Management's Discussion and Analysis of Financial
Condition and Results of Operations contains information that may be considered
forward looking. This information contains a number of risks and uncertainties,
as discussed herein and in the Partnership's Annual Report filed on Form 10-K/A,
that could cause actual results to differ materially.
In May 1993, the Financial Accounting Standards Board (FASB) issued
Statement on Financial Accounting Standards No. 115 "Accounting for Certain
Investments in Debt and Equity Securities" (SFAS 115). This statement requires
that most investments in securities be classified into one of the following
investment categories based upon circumstances under which securities might be
sold: held to maturity, available for sale, and trading. Generally,
investments in securities for which an enterprise has both the ability and the
intent to hold to maturity should be accounted for using the amortized cost
method and all other securities must be recorded at their fair values. The
Partnership implemented SFAS 115 in 1994 for its marketable securities.
Following such adoption, the Partnership (as did others in the industry)
continued to account for its investments in mortgage revenue bonds, except
Observatory II, as investments in real estate based on consolidation of the
Owner Partnerships in accordance with the Securities and Exchange Commission
(SEC) rules.
In conjunction with the review of the Partnership's 1995 financial
statements by the SEC staff, the Partnership agreed to account for all of its
investments in mortgage revenue bonds as debt securities under the provisions of
SFAS 115 effective January 1, 1994, and restate its 1995 and 1994 financial
statements to reflect this change. Accordingly, effective January 1, 1994, all
investments in mortgage revenue bonds are classified and accounted for as held
to maturity securities and carried at amortized cost because of the
Partnership's ability and intent to hold these investments to maturity. In
accordance with SFAS 115's provisions for held to maturity securities, the
Partnership evaluates the fair value of its mortgage revenue bonds to determine
if impairment exists. If a decline in fair value is determined to be other-
than-temporary, the security is written down to its fair value. The Partnership
did not recognize any impairment losses during the three or six months ended
June 30, 1996 or 1995. Since all of the underlying mortgage loans, except
Observatory II, are in default, base interest and contingent interest on the
mortgage revenue bonds is recognized as revenue when collected.
SERIES I
--------
The five original Series I mortgage loans securing the mortgage revenue
bonds, with current aggregate principal and carrying amounts of $44,155,000 and
$30,740,285, respectively, went into default, resulting in title transfer by
actual foreclosure(one) or deeds in lieu of foreclosure (four) to Owner
Partnerships which assumed the existing indebtedness. In connection with the
transfers of properties to Owner Partnerships, the Partnership obtained an
opinion from its former independent accounting firm in July of 1991 that the
reduction in pay rate and compounding of unpaid base interest at the original
base interest rate would not cause a reissuance of the bonds under Section 103
of the Internal Revenue Code of 1986, as amended (the Code) (which would cause
the bonds to lose their tax-exempt status). The Partnership also obtained
-31-
<PAGE>
PART I. FINANCIAL INFORMATION
---------------------
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
-------------------------------------------------
CONDITION AND RESULTS OF OPERATIONS - Continued
-----------------------------------
opinions from bond counsel that certain transfers of the properties to Owner
Partnerships would not cause the Partnership to become a substantial user of the
projects or a related party to a substantial user pursuant to Section 103 of the
Code (which also could have caused the bonds to lose their tax-exempt status).
The bond counsel opinions were obtained in connection with the Observatory II,
Royal Oaks, Trailway Pond and Valley Creek transfers.
In conjunction with the transfer of the Royal Oaks deed to an Owner
Partnership, the Royal Oaks mortgage revenue bond was modified. The Part-
nership, based on information and advice from outside counsel, believes that the
modification does not adversely affect the tax-exempt nature of the Royal Oaks
bond interest. The modification complied with IRS guidelines in effect at that
time. The IRS has since issued Final Regulations Section 1.1001-3, which
applies only to modifications made on or after September 24, 1996. The General
Partner believes that the modification to the Royal Oaks mortgage revenue bond
was consistent with the relevant tax authority which existed at the time of the
modification and has, therefore, not jeopardized the tax-exempt status of the
Royal Oaks mortgage revenue bond. However, there can be no assurance as to the
tax-exempt status of the Royal Oaks mortgage revenue bond at present.
SERIES II
---------
The five original Series II mortgage loans securing the mortgage revenue
bonds with aggregate principal and carrying amounts of $62,608,001 and
$43,793,252, respectively, went into default, resulting in deeds in lieu of
foreclosure to Ownership Partnerships which assumed the existing indebtedness.
In connection with the transfers of properties to Owner Partnerships, the
Partnership obtained an opinion from its former independent accounting firm in
July of 1991 that the reduction in pay rate and compounding of unpaid base
interest at the original base interest rate would not cause a reissuance of the
bonds under Section 103 of the Code (which would cause the bonds to lose their
tax-exempt status). The Partnership also obtained opinions from bond counsel
that certain transfers of the properties to Owner Partnerships would not cause
the Partnership to become a substantial user of the projects or a related party
to a substantial user pursuant to Section 103 of the Code (which also could have
caused the bonds to lose their tax exempt status.) The bond counsel opinions
were obtained in connection with the Ethan's Ridge and Ethan's Glen IIB,
Fountain Place and Trailway Pond II transfers.
SERIES I and II
---------------
In April 1991, the U.S. Supreme Court decided a case, Cottage Savings
Association V. Commissioner (Cottage Savings) that could be interpreted to
impact then existing authority addressing the modification of debt instruments.
In response to this decision, on June 26, 1996, the IRS issued Final Regulations
Section 1.1001-3 which specifically address the tax consequences of
modifications of debt instruments. Among other things, these regulations
provide that certain modifications of the current interest payments or the
maturity date of a debt instrument will be treated as a taxable exchange of the
original instrument for the modified debt instrument. As a result, certain
future modifications of the mortgage loans which secure the mortgage revenue
bonds could be treated as a deemed reissuance of the mortgage revenue bonds for
federal income tax purposes. Any reissuance without the cooperation of the
mortgage revenue bond issuers would result in the loss of the tax-exempt status
-32-
<PAGE>
PART I. FINANCIAL INFORMATION
---------------------
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
-------------------------------------------------
CONDITION AND RESULTS OF OPERATIONS - Continued
-----------------------------------
of the mortgage revenue bonds. Such issuers might cooperate and consent to the
reissuance; however, there can be no assurance that such issuers would do so or
would not impose additional requirements that could have an adverse impact on
the mortgage revenue bonds. Even if issuer consent were obtained, all accrued
and unpaid interest of the existing mortgage loans would have to be written off.
The write-off of accrued and unpaid interest would not be recoverable upon
ultimate disposition or payoff of the mortgage revenue bond and would instead
accrue to the benefit of the Owner Partnership to the extent realized.
Final Regulations Section 1.1001-3 will become effective only with respect
to modifications made on or after September 24, 1996. It is unclear at this
time what effect the Cottage Savings decision may have on modifications that
have already been made to mortgage loans which secure the mortgage revenue
bonds. The General Partner believes that the modifications which have already
been made were consistent with the relevant tax authority that existed at the
time of those modifications and have not jeopardized the tax-exempt status of
the mortgage revenue bonds. However, there can be no assurance as to the tax-
exempt status of the mortgage revenue bonds at present.
The General Partner's ongoing strategy had been to continue holding the
mortgage revenue bonds until the loan maturity dates. If the merger proposal,
discussed in Note 2, is approved, the interests of the BAC Holders will be
redeemed for cash. If the merger proposal is not approved, in order to maximize
the overall yield the General Partner may recommend, subject to satisfactory
resolution of any issues relating to the tax-exempt status of the mortgage
revenue bonds, for investor approval extension of certain loan maturity dates
and, if approved, arrange any necessary related amendments to the pertinent
mortgage revenue bonds.
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.
On that date, another CAPREIT affiliate entered into a merger agreement with
Capital Realty Investors Tax Exempt Fund III Limited Partnership (CRITEF III), a
similar tax exempt bond fund sponsored by CRI. The two merger agreements are
independent of one another, but the closing of each merger is conditioned on
closing of the other, at CARPEIT's election. Another 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. All nine
properties managed by the CAPREIT affiliate had defaulted with respect to their
mortgage loans held by the Partnership. 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 agreement for the proposed merger has been modified to improve
the terms of the original proposal. Under the original proposal, the redemption
amount per BAC was to be $13.761 and $13.313 for Series I and Series II,
respectively. Under the most recent modification, the Third Amended and
Restated Agreement and Plan of Merger (Restated Merger Agreement), all of the
BACs will be redeemed for cash at a redemption price of $14.28 per BAC, net to
the holder, without interest, subject to upward adjustment based on Available
Cash (as defined in the Restated Merger Agreement) to not greater than $14.49
per BAC for Series I, and $14.07 per BAC, net to the holder, without interest,
subject to upward adjustment based on Available Cash to not greater than $14.28
-33-
<PAGE>
PART I. FINANCIAL INFORMATION
---------------------
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
-------------------------------------------------
CONDITION AND RESULTS OF OPERATIONS - Continued
-----------------------------------
per BAC for Series II. In arriving at the base redemption price, the
consideration to be paid to BAC holders in the merger has been reduced by the
fees and expenses payable to counsel for the plaintiffs in certain class action
litigation, as discussed in Note 6. If there is any upward adjustment to the
base redemption price based on Available Cash, plaintiffs' counsel shall be
entitled to an additional amount equal to 20% of the increased amount, up to a
maximum of $75,000.
The BAC Holders will also vote upon the sale of the Partnership's General
Partner's interest to an affiliate of CAPREIT immediately prior to consummation
of the proposed merger. CAPREIT has agreed to pay the General Partner $500,000
in consideration for its 1.01% general partner interest in the Partnership.
CAPREIT and/or its designee will also acquire accounts receivables held by
CRI and CRIIMI MAE Services Limited Partnership (CRIIMI), for the accrued
mortgage servicing and administration fees on certain property mortgage loans of
both Series I and Series II. The general partner of CRIIMI is a subsidiary of
CRIIMI MAE Inc., a publicly-traded company affiliated with the General Partners.
Under the Restated Merger Agreement, CAPREIT will pay the discounted amount of
$511,680 and $770,835 to CRI for the fees of Series I and Series II,
respectively, accrued through June 30, 1995. The amounts to be paid to CRI
represent approximately 42% of the total accrued fees owed to CRI. Also,
CAPREIT will pay $265,968 and $391,296 to CRIIMI for the fees of Series I and
Series II, respectively, accrued from July 1, 1995 through June 30, 1996 which
represents 100% of the fees which are expected to be owed to CRIIMI for that
period. From July 1, 1996 to the closing of the proposed merger, the amounts to
be paid by CAPREIT to CRIIMI will increase, to reflect additional amounts
currently being accrued for mortgage servicing and administration fees, at a
rate of $22,164 and $32,608 per month for Series I and Series II, respectively.
Each of the affiliates of the Partnership formed to take title to
properties and assume the existing indebtedness when the original unaffiliated
borrowers defaulted (Owner Partnerships) has agreed to either (a) sell, assign
and transfer the partnership interests in, or the real property and other assets
of, such Owner Partnerships to CAPREIT or its designee for no additional
consideration or (b) admit CAPREIT or its designee as the managing general
partner, whereupon the general partner interests of the current general partners
will be converted into limited partner interests, and CAPREIT will have the
option to acquire all of the limited partner interests at any time within five
years from the closing date of the merger at the then fair market value thereof
(based on the fair market value of the property as encumbered by the mortgage
loans). Although such interests currently have nominal value, if the fair
market value of the partnership properties increases substantially prior to the
time CAPREIT exercises its option, such increase in value may benefit the owners
of the Owner Partnerships. This feature was required by CAPREIT as a material
business term of the merger.
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 amount to BAC Holders from a financial point of
view. Favorable opinions from an independent investment banking firm were
issued on March 14, 1996. As of August 5, 1996, the independent investment
banking firm is updating their analysis regarding the fairness of the redemption
amount 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 clearance is
-34-
<PAGE>
PART I. FINANCIAL INFORMATION
---------------------
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
-------------------------------------------------
CONDITION AND RESULTS OF OPERATIONS - Continued
-----------------------------------
received by the SEC. A preliminary proxy statement has been filed with the SEC,
and the Partnership is awaiting the SEC's clearance. The definitive proxy
materials include a full description of the proposed merger and the independent
fairness opinions.
In accordance with the Restated Merger Agreement, CAPREIT is to pay the
legal costs incurred by the Partnership associated with the proposed merger,
upon consummation of the proposed merger. As the Partnership is not responsible
for payment of these costs, they have not been reflected in the accompanying
financial statements. However, in the event that the proposed merger is not
consummated with CAPREIT, the Partnership will be responsible for these costs,
as discussed below. As of August 5, 1996, the Partnership had incurred legal
costs of approximately $45,000 for Series I and II, respectively, related to the
proposed merger. There is no reasonable estimate of remaining legal costs to be
incurred by the Partnership related to the proposed merger.
In the event the Restated Merger Agreement is terminated or abandoned under
the specified circumstances, the Partnership may be liable for the payment of a
fee equal of $2,250,000 with respect to such terminated or abandoned Restated
Merger Agreement if there is a Fiduciary Out Termination (as defined in the
Restated Merger Agreement), a Triggering Event (as defined in the Restated
Merger Agreement) or the Partnership consummates an alternative transaction
within 270 days of the date of termination or abandonment of such Restated
Merger Agreement.
In addition, if the Restated Merger Agreement is terminated or abandoned
due to (1) a Fiduciary Out Termination, (ii) a willful and material breach by
the Partnership or any applicable Owner Partnership (other than a breach of the
representations and warranties), (iii) the failure by the Partnership or any of
such Owner Partnerships to perform in all material respects its obligations and
duties thereunder, or (iv) a termination of such Restated Merger Agreement by
such CAPREIT affiliate because the Partnership shall have settled designated
actions for an amount in excess of an agreed upon amount or such settlement or
compromise contains terms to which such CAPREIT affiliate reasonably objects,
then the Partnership shall bear all of its own expenses, as mentioned above, and
reimburse such CAPREIT affiliate and its affiliates for reasonable out-of-pocket
expenses (including, without limitation, all fees and expenses of counsel, and
its financing sources and consultants to the CAPREIT affiliate and its
affiliates) in connection with such merger and related transactions and the
proxy statement. In no event, however, shall the amount paid to reimburse
expenses under the Restated Merger Agreement exceed $2,500,000.
During February 1996, the General Partner received an inquiry concerning
the possible acquisition of the funds from a group of investors led by Mr. Terry
McNellis and Mr. Gary Petrucci, of Piper Jaffrey Inc., and Mr. David Brierton
and Mr. Jack Safar, of Dominium Management Services Inc. (collectively, the
Dominium Group). The Dominium Group executed confidentiality and non-
circumvention agreements, and by the beginning of April 1996, the Partnership
had provided the Dominium Group with all of the due diligence materials they had
requested. Thereafter, the General Partner did not hear from any representative
of the Dominium Group again until June 28, 1996, just days prior to the
initially scheduled date for the fairness hearing to be held on the Stipulation
of Settlement in the Zakin and Wingard putative class actions (the Zakin and
Wingard Actions).
-35-
<PAGE>
PART I. FINANCIAL INFORMATION
---------------------
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
-------------------------------------------------
CONDITION AND RESULTS OF OPERATIONS - Continued
-----------------------------------
On June 28, 1996, counsel to the plaintiffs in the Zakin and Wingard
Actions and the Partnership received a letter from Dominium Tax Exempt Fund
L.L.P. (Dominium), which was signed by Mr. Safar of the Dominium Group,
indicating an interest in entering into merger agreements with the Partnership
having similar terms as the merger agreement and purportedly offering the BAC
Holders of the Partnership and CRITEF III an aggregate merger consideration of
approximately $168,230,000. After reviewing the Dominium letter, the General
Partner determined that Dominium had not demonstrated any firm financing
ability. Notwithstanding such determination, the General Partner, in a letter
dated July 3, 1996, notified Dominium that they would make documents available
to Dominium for its due diligence. The General Partner, however, also cautioned
Dominium that they would not jeopardize the merger agreements with CAPREIT by an
unwarranted delay while Dominium and its potential lenders continued to study
the Partnership and the mortgage revenue bonds and complete their due diligence.
On July 12, 1996, the Partnership received copies of correspondence from
Dominium to counsel for the plaintiffs in the Zakin and Wingard Actions,
indicating that Dominium had received a purported financing commitment, subject
to payment of a fee and satisfactory results of a 21 business day due diligence
period. Representatives of Dominium came to the General Partners' offices on
July 11, 12, 26, 29 and 30, 1996 to conduct such review.
Financial Condition and Liquidity
---------------------------------
The primary sources of the Partnership's future cash flows are expected to
be from receipts of base interest on 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 Owner Partnerships
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, in the event the Restated Merger Agreement is terminated
or abandoned under certain circumstances, the Partnership will be liable for
certain fees and expenses, as discussed above.
SERIES I
--------
Series I expects to continue to make distributions to BAC Holders on a
semi-annual basis. The Restated Merger Agreement stipulates that the 1996
distributions cannot exceed $0.09417 per BAC per month. There are no other
legal restrictions on Series I's present or future ability to make cash
distributions other than as set forth in the Restated Merger Agreement.
However, property level reserves are depleted and estimated cash flows from the
properties' operations are insufficient to pay full monthly base interest
(except for Observatory II), therefore, the distributions to BAC Holders may
fluctuate from current levels. The General Partner seeks to optimize cash flow
from the properties owned by Owner Partnerships. Despite these efforts, the
amounts paid to the Partnership from the borrowers 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
-36-
<PAGE>
PART I. FINANCIAL INFORMATION
---------------------
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
-------------------------------------------------
CONDITION AND RESULTS OF OPERATIONS - Continued
-----------------------------------
Partnership, the General Partner expects the 1996 distribution to approximate
$1.13 per BAC, the maximum amount stipulated in the Restated Merger Agreement.
The following distributions were paid or accrued to BAC Holders of record
during the six months ended June 30, 1996 and 1995:
-37-
<PAGE>
PART I. FINANCIAL INFORMATION
---------------------
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
-------------------------------------------------
CONDITION AND RESULTS OF OPERATIONS - Continued
-----------------------------------
<TABLE>
<CAPTION>
1996 1995
Distributions to Distributions to
BAC Holders BAC Holders
------------------------------ ------------------------------
Quarter Ended Total Per BAC Total Per BAC
- ------------- ----------- ------- ----------- -------
<S> <C> <C> <C> <C>
March 31, $ 644,100 $0.2825 $ 615,600 $0.2700
June 30, 644,100 0.2825 615,600 0.2700
----------- ------- ----------- -------
$ 1,288,200 $0.5650 $ 1,231,200 $0.5400
=========== ======= =========== =======
</TABLE>
Distributions to BAC Holders for the three and six months ended June 30,
1996 and 1995 were funded as follows:
<TABLE>
<CAPTION>
For the three months ended For the six months ended
June 30, June 30,
---------------------------- -----------------------------
1996 1995 1996 1995
------------ ------------ ------------ ------------
<S> <C> <C> <C> <C>
Cash Available for Distribution:
Cash flow (1) $ 679,348 $ 630,894 $ 1,363,630 $ 1,368,306
Net deposits to working capital reserves (28,676) (9,013) (62,286) (124,544)
------------ ------------ ------------ ------------
Total cash available for distribution $ 650,672 $ 621,881 $ 1,301,344 $ 1,243,762
============ ============ ============ ============
Distributions to:
General partner (1.01%) $ 6,572 $ 6,281 $ 13,144 $ 12,562
============ ============ ============ ============
BAC Holders (98.99%) $ 644,100 $ 615,600 $ 1,288,200 $ 1,231,200
============ ============ ============ ============
</TABLE>
(1) Defined in the Limited Partnership Agreement as (a) all revenues received
by the Partnership during such period, plus (b) any amounts which the
Managing General Partner releases from the Working Capital Reserve as being
no longer necessary to hold as part of the Working Capital Reserve, plus
(c) any amounts released to the Partnership from the Interest Reserve
Account with respect to a mortgaged property after completion of
construction of such mortgaged property, less (i) operating expenses of the
Partnership paid from reserves during the period, including any expenses
paid to the General Partner, but not including such amounts paid from the
Working Capital Reserve, (ii) all cash payments made from Revenues during
such period to discharge Partnership indebtedness, and (iii) all amounts
from revenues, if any, added to the Working Capital Reserve during such
period. Cash flow as defined in the Limited Partnership Agreement is not
-38-
<PAGE>
PART I. FINANCIAL INFORMATION
---------------------
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
-------------------------------------------------
CONDITION AND RESULTS OF OPERATIONS - Continued
-----------------------------------
to be construed as an alternative to operating income in accordance with
generally accepted accounting principles (GAAP) as an indication of the
Partnership's operating performance.
The General Partner expects the distribution for the six months ending
December 31, 1996 to total approximately $0.565 per BAC, payable on February 28,
1997, 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 June 30, 1996, Series I had cash and cash equivalents of $91,841,
unrestricted marketable securities of $1,353,070 and working capital reserves
invested in marketable securities of $1,346,956. Marketable securities consist
of tax-exempt municipal bonds which generally contain a seven-day put option
with established banks or brokerage houses. The Partnership has classified its
investments in marketable securities into the available for sale category under
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 or six months ended June 30,
1996 or 1995 for Series I as the cost for the tax-exempt municipal bonds
approximated market value throughout the respective periods.
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 receipt of base interest on
mortgage loans, for the six months ended June 30, 1996 was adequate to support
operating, investing and financing requirements and the declared distributions
to BAC Holders and the General Partner. 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 and the General Partner.
SERIES II
---------
Series II expects to continue to make distributions to BAC Holders on a
semi-annual basis. The Restated Merger Agreement stipulates that 1996
distributions cannot exceed $0.09667 per BAC per month. There are no other
legal restrictions on Series II's present or future ability to make cash
distributions other than as set forth in the Restated Merger Agreement.
However, property level reserves are depleted and estimated cash flows from the
properties' operations are insufficient to pay full monthly base interest,
therefore, the distributions to BAC Holders may fluctuate from current levels.
The General Partner seeks to optimize cash flow from the properties owned by
Owner Partnerships. Despite these efforts, the amounts paid to the Partnership
from the borrowers 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 1996 distribution to approximate $1.16 per BAC, the maximum
amount stipulated in the Restated Merger Agreement.
The following distributions were paid or accrued to BAC Holders of record
during the six months ended June 30, 1996 and 1995:
-39-
<PAGE>
PART I. FINANCIAL INFORMATION
---------------------
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
-------------------------------------------------
CONDITION AND RESULTS OF OPERATIONS - Continued
-----------------------------------
<TABLE>
<CAPTION>
1996 1995
Distributions to Distributions to
BAC Holders BAC Holders
----------------------------- -----------------------------
Quarter Ended Total Per BAC Total Per BAC
- ------------- ----------- ------- ----------- -------
<S> <C> <C> <C> <C>
March 31, $ 939,240 $0.2900 $ 874,465 $0.2700
June 30, 939,240 0.2900 874,465 0.2700
----------- ------- ----------- -------
$ 1,878,480 $0.5800 $ 1,748,930 $0.5400
=========== ======= =========== =======
</TABLE>
Distributions to BAC Holders for the three and six months ended June 30,
1996 and 1995 were funded as follows:
<TABLE>
<CAPTION>
For the three months ended For the six months ended
June 30, June 30,
---------------------------- -----------------------------
1996 1995 1996 1995
------------ ------------ ------------ ------------
<S> <C> <C> <C> <C>
Cash Available for Distribution:
Cash flow (1) $ 958,579 $ 1,149,834 $ 1,873,928 $ 2,065,830
Net withdrawals from (deposits to) working
capital reserves (9,756) (266,447) 23,718 (299,056)
------------ ------------ ------------ ------------
Total cash available for distribution $ 948,823 $ 883,387 $ 1,897,646 $ 1,766,774
============ ============ ============ ============
Distributions to:
General partner (1.01%) $ 9,583 $ 8,922 $ 19,166 $ 17,844
============ ============ ============ ============
BAC Holders (98.99%) $ 939,240 $ 874,465 $ 1,878,480 $ 1,748,930
============ ============ ============ ============
</TABLE>
(1) Defined in the Limited Partnership Agreement as (a) all revenues received
by the Partnership during such period, plus (b) any amounts which the
Managing General Partner releases from the Working Capital Reserve as being
no longer necessary to hold as part of the Working Capital Reserve, plus
(c) any amounts released to the Partnership from the Interest Reserve
Account with respect to a mortgaged property after completion of
construction of such mortgaged property, less (i) operating expenses of the
Partnership paid from reserves during the period, including any expenses
paid to the General Partner, but not including such amounts paid from the
Working Capital Reserve, (ii) all cash payments made from Revenues during
such period to discharge Partnership indebtedness, and (iii) all amounts
-40-
<PAGE>
PART I. FINANCIAL INFORMATION
---------------------
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
-------------------------------------------------
CONDITION AND RESULTS OF OPERATIONS - Continued
-----------------------------------
from revenues, if any, added to the Working Capital Reserve during such
period. Cash flow as defined in the Limited Partnership Agreement is not
to be construed as an alternative to operating income in accordance with
GAAP as an indication of the Partnership's operating performance.
The General Partner expects the distribution for the six months ending
December 31, 1996 to total approximately $0.58 per BAC, payable on February 28,
1997, 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 June 30, 1996, Series II had cash and cash equivalents of $70,264,
unrestricted marketable securities of $1,881,213, and working capital reserves
invested in marketable securities of $2,283,667. Marketable securities consist
of tax-exempt municipal bonds which generally contain a seven-day put option
with established banks or brokerage houses. The Partnership has classified its
investments in marketable securities into the Available for Sale category under
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 six months ended June
30, 1996 or 1995 for Series II as the cost for the tax-exempt municipal bonds
approximated market value throughout these periods.
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 for the six months ended June 30, 1996, which consists
primarily of receipt of base interest on mortgage loans, was supplemented by
withdrawals from the working capital reserves to support operating requirements
and the payment of declared distributions to BAC Holders and the General
Partner. 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 and the General
Partner.
Results of Operations
---------------------
SERIES I
--------
The Partnership's Series I net income for the three and six months ended
June 30, 1996, decreased approximately $74,000 and $98,000, respectively, or 12%
and 7%, respectively, from the corresponding periods in 1995 primarily due to
merger-related expenses of approximately $158,000 and $234,000 incurred during
the three and six months ended June 30, 1996, respectively. Partially
offsetting the decrease in net income was an increase in interest from mortgage
revenue bonds during the three and six months ended June 30, 1996 of
approximately $88,000 and $126,000, respectively, resulting principally from an
increase in rental rates at all of the underlying properties. There were no
material increases or decreases in Series I's remaining income or expenses for
the three and six months ended June 30, 1996.
The restatement of the 1995 financial statements resulted in increases of
$374,989 and $792,315 in the previously reported net income for the three and
six months ended June 30, 1995, respectively. The restatement of the 1995
-41-
<PAGE>
PART I. FINANCIAL INFORMATION
---------------------
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
-------------------------------------------------
CONDITION AND RESULTS OF OPERATIONS - Continued
-----------------------------------
financial statements also resulted in increases of $0.17 and $0.35 in the
previously reported net income per BAC for the three and six months ended June
30, 1995, respectively. Net income per BAC as previously reported for the three
and six months ended June 30, 1995 was $0.11 and $0.25, respectively.
Presented below is a summary of base interest payments for the six months
ended June 30, 1996 and 1995 that are due to Series I from the borrowers:
-42-
<PAGE>
PART I. FINANCIAL INFORMATION
---------------------
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
-------------------------------------------------
CONDITION AND RESULTS OF OPERATIONS - Continued
-----------------------------------
<TABLE>
<CAPTION>
For the six months ended June 30, 1996
------------------------------------------------------------------------
Base Interest Cumulative
Paid From Current Base Unpaid
Current Base Properties' Interest Full Base
Interest Due(1) Operations Not Paid Interest
--------------- ------------- ------------ -----------
<S> <C> <C> <C> <C>
Observatory II $ 64,000 $ 64,000 $ -- $ --
Royal Oaks 534,648 449,712 84,936 1,678,180
Trailway Pond 230,244 120,264 109,980 962,452
Valley Creek 663,176 471,557 191,619 2,942,800
White Bear Woods 655,463 471,903 183,560 2,184,311
--------------- ------------- ----------- -----------
$ 2,147,531 $ 1,577,436 $ 570,095 $ 7,767,743
=============== ============= ============ ===========
</TABLE>
<TABLE>
<CAPTION>
For the six months ended June 30, 1995
------------------------------------------------------------------------
Base Interest Cumulative
Paid From Current Base Unpaid
Current Base Properties' Interest Full Base
Interest Due(1) Operations Not Paid Interest
--------------- ------------- ------------ -----------
<S> <C> <C> <C> <C>
Observatory II $ 64,000 $ 64,000 $ -- $ --
Royal Oaks 534,648 391,387 143,261 1,505,734
Trailway Pond 230,244 124,374 105,870 742,702
Valley Creek 663,176 446,584 216,592 2,585,899
White Bear Woods 655,463 425,409 230,054 1,867,811
--------------- ------------- ----------- -----------
$ 2,147,531 $ 1,451,754 $ 695,777 $ 6,702,146
=============== ============= ============ ===========
</TABLE>
(1) The Partnership charges the borrowers interest on unpaid base
interest, which totalled $464,087 and $366,455 for the three months
ended June 30, 1996 and 1995, respectively.
SERIES II
---------
The Partnership's Series II net income for the three months ended June 30,
1996 decreased by approximately $176,095 or 17% from the corresponding period in
1995 primarily due to merger-related expenses incurred in the second quarter of
1996 of approximately $158,000. There were no material increases or decreases
in Series II's remaining income or expenses for the three months ended June 30,
1996.
-43-
<PAGE>
PART I. FINANCIAL INFORMATION
---------------------
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
-------------------------------------------------
CONDITION AND RESULTS OF OPERATIONS - Continued
-----------------------------------
The Partnership's Series II net income for six months ended June 30, 1996
decreased approximately $10,000 or 0.5% from the corresponding period in 1995
primarily due to merger-related expenses of approximately $234,000 incurred
during 1996. Partially offsetting the decrease in net income was an increase in
interest from mortgage revenue bonds of approximately $204,000 resulting
principally from the release of $140,500 in excess tax and insurance reserves
relating to three of the underlying properties. Contributing to the increase in
interest from mortgage revenue bonds was an increase in rental rates and
occupancy at all of the underlying properties. There were no material increases
or decreases in Series II's remaining income or expenses for the six months
ending June 30, 1996.
The restatement of the 1995 financial statements resulted in increases of
$410,106 and $983,047 in the previously reported net income for the three and
six months ended June 30, 1995, respectively. The restatement of the 1995
financial statements also resulted in increases of $0.12 and $0.30 in the
previously reported net income per BAC for the three and six months ended June
30, 1995, respectively. Net income per BAC as previously reported for the three
and six months ended June 30, 1995 was $0.19 and $0.32, respectively.
Presented below is a summary of base interest payments for the six months
ended June 30, 1996 and 1995 that are due to Series II from the borrowers:
-44-
<PAGE>
PART I. FINANCIAL INFORMATION
---------------------
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
-------------------------------------------------
CONDITION AND RESULTS OF OPERATIONS - Continued
-----------------------------------
<TABLE>
<CAPTION>
For the six months ended June 30, 1996
-------------------------------------------------------------------------
Base Interest Cumulative
Paid From Current Base Unpaid
Current Base Properties' Interest Full Base
Interest Due(1) Operations(2) Not Paid Interest
--------------- ------------- ------------ -----------
<S> <C> <C> <C> <C>
Ethan's Ridge and
Ethan's Glen IIB $ 759,375 $ 758,194 $ 1,181 $ 2,003,374
Fountain Place 992,750 806,373 186,377 5,249,875
James Street
Crossing 667,879 470,000 197,879 1,893,050
Trailway Pond II 501,500 267,465 234,035 2,802,741
--------------- ------------- ------------ -----------
$ 2,921,504 $ 2,302,032 $ 619,472 $11,949,040
=============== ============= ============ ===========
</TABLE>
<TABLE>
<CAPTION>
For the six months ended June 30, 1995
-------------------------------------------------------------------------
Base Interest Cumulative
Paid From Current Base Unpaid
Current Base Properties' Interest Full Base
Interest Due(1) Operations Not Paid Interest
--------------- ------------- ------------- -----------
<S> <C> <C> <C> <C>
Ethan's Ridge and
Ethan's Glen IIB $ 759,375 $ 612,239 $ 147,136 $ 1,845,660
Fountain Place 992,750 681,787 310,963 4,805,330
James Street
Crossing 667,879 520,548 147,331 1,577,060
Trailway Pond II 501,500 283,259 218,241 2,359,117
--------------- ------------- ------------- -----------
$ 2,921,504 $ 2,097,833 $ 823,671 $10,587,167
=============== ============= ============= ===========
</TABLE>
(1) The Partnership charges the borrowers interest on unpaid base interest,
which totalled $690,400 and $567,098 for the three months ended June 30,
1996 and 1995, respectively.
(2) Includes amounts received by the Partnership in January 1996 from the
release of excess tax and insurance reserves relating to 1995. Such
amounts received from Ethan's Ridge and Ethan's Glen IIB, Fountain Place
and James Street Crossing totalled $107,000, $25,700 and $7,800,
respectively.
-45-
<PAGE>
PART II. OTHER INFORMATION
-----------------
ITEM 1. LEGAL PROCEEDINGS
-----------------
On September 22, 1995, Irving Zakin commenced a putative class action (the
Zakin Action) against the Partnership, its general partner (CRITEF Associates
Limited Partnership), its Assignor Limited Partner (CRITEF, Inc.), CRI, William
B. Dockser, H. William Willoughby, CRITEF III, CRITEF III Associates Limited
Partnership, CRITEF III, Inc., and CAPREIT (collectively, the Defendants) in the
court of Chancery of the State of Delaware in New Castle County (the Chancery
Court) (C.A. No. 14558). The complaint alleges, among other things, that the
price offered to the BAC Holders in the Mergers at the time the complaint was
filed was inadequate, and that the Defendants breached their fiduciary duty to
the BAC Holders, or aided and abetted such a breach, engaged in self-dealing and
misled BAC Holders, in connection with the proposed Mergers. The suit seeks to
enjoin the proposed merger, to obtain damages in an unspecified amount for the
BAC Holders, and to compel the Defendants to maximize the amount paid to the BAC
Holders and consider unspecified alternatives to the proposed merger.
On October 5, 1995, David and Johanna Wingard (the Wingard Action)
commenced a second putative class action against the Defendants in the Chancery
Court (C.A. No 14604). The complaint in the Wingard Action contains virtually
the identical allegations and seeks virtually the identical relief as in the
Zakin Action. A request to the Court has been made by the plaintiffs in both
lawsuits to consolidate the two actions.
The Defendants have denied, and continue to deny, that any of them have
committed or threatened to commit any violations of law or breaches of duty to
the BAC Holders.
On January 31, 1996, the Defendants and the plaintiffs and their respective
attorneys reached a tentative settlement of the Zakin and Wingard Actions
memorialized in a Memorandum of Understanding (the Memorandum), dated as of such
date. In accordance with the Memorandum, the merger agreements were amended on
January 31, 1996, to provide that (a) the aggregate cash consideration to be
paid to the BAC Holders of the Partnership and CRITEF III was increased by $8.5
million from $150.0 million to $158.5 million (subject to the adjustment up or
down based upon available cash), and (b) the aggregate amount payable in
consideration for the Accrued Fees payable to CRI for the Partnership and CRITEF
III was reduced to no more than $2,000,000 (subsequently reduced to $1,950,000)
as compared with $4,023,000 provided for in the original merger agreement. The
Defendants also agreed that they would not object to an application for
attorneys' fees and reimbursement of out-of-pocket expenses of plaintiffs'
counsel for up to 20% of the improved Merger consideration negotiated by them
with such fees and expenses as are awarded by the Court to plaintiffs' counsel
to be paid from the improved Merger consideration negotiated by them.
Subsequently, the parties agreed that the maximum amount of fees and expenses
for the Partnership and CRITEF III, assuming the merger is consummated, shall be
$1,700,000, plus an amount equal to 20% (up to a maximum of $75,000) of any
adjustment amount at closing. These fees will reduce the cash paid to BAC
Holders in connection with the proposed merger, as discussed. In the event that
the proposed merger is not consummated, these fees will not be borne by the
Partnership. As such, the Partnership's financial statements do not include any
adjustment for these fees. Counsel for the plaintiffs and experts retained by
them have reviewed voluminous documents relating to the proposed merger, and
have taken depositions of representatives of the General Partner and CAPREIT and
Oppenheimer and Co., Inc. the fairness opinion provider.
On May 16, 1996, the defendants and the plaintiffs filed the Stipulation
and Agreement of Settlement with the Chancery Court, and sought preliminary
approval of the putative classes (the Class) and approval of a form of notice to
the Class of the proposed Settlement. The Stipulation of Settlement
-46-
<PAGE>
PART II. OTHER INFORMATION
-----------------
ITEM 1. LEGAL PROCEEDINGS - Continued
-----------------
contemplates the complete discharge, settlement and release of all claims that
have been, could have been, or in the future might be asserted in any action or
any other proceeding in connection with the proposed merger.
The Stipulation of Settlement also permits plaintiffs to terminate the
proposed settlement if, in their opinion, a superior financial offer is
presented for the Partnership. It is expected that a hearing to determine
whether the settlement is fair, reasonable and in the best interest of the Class
will be held in early August 1996.
Martin C. Schwartzberg, formerly a general partner of the General Partner,
is a former shareholder and executive officer of CRI who retired from CRI as of
January 1, 1990. In connection therewith, he relinquished his general partner
duties for all CRI-sponsored partnerships, including those of the General
Partner. In February 1996, Mr. Schwartzberg publicly stated that he would
oppose the proposed merger until the Partnership made its financial statements
and the financial statements of the Owner Partnerships publicly available. The
financial statements of the Partnership are included in the Form 10-Q and have
been filed quarterly. The financial statements of the Owner Partnerships were
filed as exhibits to Current Reports on Form 8-K, filed with the SEC by the
Partnership on March 25, 1996. As discussed below, Mr. Schwartzberg has since
reviewed the requested information and has determined to support the merger.
On November 9, 1995, CRI filed a complaint seeking declaratory relief in
the Circuit Court for Montgomery County, Maryland (the Montgomery Circuit Court)
against Capital Management Strategies, Inc. (CMS), a company controlled by Mr.
Schwartzberg, to determine the proper amount of fees to be paid in 1996 under an
asset management agreement. CMS answered the complaint on January 10, 1996, but
asserted no counterclaims. Thereafter, Mr. Schwartzberg launched a hostile
consent solicitation to be designated as managing general partner of 125
private partnerships sponsored by CRI.
On January 18, 1996, Mr. Schwartzberg and CMS filed a complaint in the
Montgomery County, Maryland Circuit Court, against CRI and Messrs. Dockser and
Willoughby alleging, among other things, that the actions of CRI and Messrs.
Dockser and Willoughby in connection with the proposed merger involve self-
dealing and constitute a breach of their fiduciary duties to Mr. Schwartzberg.
Neither the Partnership nor the General Partner was named as a defendant in this
action, and Mr. Schwartzberg did not allege that he was a BAC Holder. Messrs.
Dockser and Willoughby entered an answer denying all of Mr. Schwartzberg's
claims and moved to dismiss or strike the allegations concerning the Partnership
and CRIIMI MAE Inc. Messrs. Dockser and Willoughby publicly responded that Mr.
Schwartzberg's suit is motivated by his budget dispute with CRI and personal
animosity.
On February 12, 1996, the Montgomery Circuit Court issued a memorandum
opinion and order enjoining CMS and Mr. Schwartzberg from using or disclosing
information made confidential under the asset management agreement.
On February 15, 1996, Mr. Schwartzberg filed suit in the New Castle County,
Delaware Chancery Court (the Chancery Court) against the General Partner and
CRITEF III Associates Limited Partnership (CRITEF III LP) (collectively, the
General Partners) alleging that he had made demands upon the General Partners,
in his capacity as a general and limited partner of the General Partner and a
limited partner of CRITEF III LP, to inspect and obtain copies of the BAC Holder
lists and other documents and that his demands were rejected. On February 23,
1996, the General Partners answered the complaint, admitting that his demands
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<PAGE>
PART II. OTHER INFORMATION
-----------------
ITEM 1. LEGAL PROCEEDINGS - Continued
-----------------
had been rejected and denying that Mr. Schwartzberg is entitled to the materials
requested because, among other things, he lacks standing and proper purpose to
inspect and obtain copies of the requested materials. Following a hearing on
March 6 and 7, 1996, on June 7, 1996, the Chancery Court denied Mr.
Schwartzberg's request for relief, holding that Mr. Schwartzberg's request was
for an "improper purpose" under Delaware law.
On February 16, 1996, the Partnership and CRITEF III (collectively, the
Partnerships), together with the General Partners, CRI, and CAPREIT, filed suit
against Mr. Schwartzberg in the United States District Court for the Southern
District of New York, (LAK) (the New York Action). The complaint alleged that
Mr. Schwartzberg was engaged in an unlawful solicitation of proxies of the BAC
Holders through two press releases he issued. On March 18, 1996, the District
Court enjoined Mr. Schwartzberg from (1) making any further solicitation of BAC
Holders within the meaning of Section 14(a) of the Securities Exchange Act of
1934 without complying with SEC regulations, and (2) committing any violation of
Rule 14a-9 promulgated under the Securities Exchange Act (regarding false or
misleading statements) in connection with any solicitation relating to the
Partnerships.
On March 18, 1996, Mr. Schwartzberg filed a counterclaim against the
General Partners alleging that three press releases issued by the General
Partners and the Partnerships constituted solicitations in violation of the
Securities Exchange Act and that they were false and misleading. The counter-
defendants denied the allegations. On April 23, 1996, the District Court denied
Mr. Schwartzberg's motion for an injunction. The District Court held that an
injunction was unwarranted, given the scope and extent of Mr. Schwartzberg's
prospects for succeeding on the merits, and the fact that he could show neither
a sufficient threat of irreparable injury nor a balance in his favor of the
hardships associated with granting or denying an injunction.
On June 12, 1996, Mr. Schwartzberg withdrew as a general partner of the
General Partner of the Partnership, converting his interest to that of a special
limited partner.
On June 13, 1996, pursuant to a resolution of disputes with Mr.
Schwartzberg, the parties to the actions in the District Court filed with the
District Court a Stipulation of Dismissal with Prejudice.
After extensive review of the merger agreements, the Partnerships'
financial statements and other materials and pursuant to the terms of the
agreement between CAPREIT and Mr. Schwartzberg and CMS (the CAPREIT Agreement),
Mr. Schwartzberg has advised CAPREIT, the General Partners and the Partnerships
that he and his family members and entities under his control (the Schwartzberg
Entities) will vote their BACs in favor of the proposed merger and in accordance
with the recommendations of the General Partners. In connection therewith, the
Schwartzberg Entities have agreed to grant to CAPREIT an irrevocable proxy to
vote their interests in the Partnerships.
The Schwartzberg Entities have agreed not to attempt to (i) dispose of or
acquire any interest in the Partnerships or join or participate with any group
seeking to do the same, (ii) solicit proxies or participate in a solicitation in
opposition to the proposed merger, in opposition to the recommendations of the
General Partners with respect to the proposed merger, or to remove the General
Partners or seek to have himself or his designee become a general partner of the
Partnerships, (iii) make any public statements in opposition to the proposed
merger, (iv) make any public statements with respect to, or offer, solicit, or
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<PAGE>
PART II. OTHER INFORMATION
-----------------
ITEM 1. LEGAL PROCEEDINGS - Continued
-----------------
submit a proposal relating to consolidation or combination with the
Partnerships, or the admission of new general partners into the Partnerships.
In addition, Mr. Schwartzberg disclosed that he has had discussions with
Lenner Corp. regarding the terms of the offer and the submission of a competing
bid. Lenner Corp. declined to submit a competing offer to the Partnership and
has entered into a confidentiality and standstill agreement with CAPREIT
regarding the proposed merger and the Partnerships.
Provided that the Schwartzberg Entities comply with the terms of the
CAPREIT Agreement, CAPREIT is obligated to cause to be paid into escrow the
aggregate amount of $867,000 in four installments over a three year period.
These funds will be used for the partial payment of Mr. Schwartzberg's counsel
and consultants in connection with their review of the merger agreements, drafts
of the preliminary proxy statement filed with the SEC on July 17, 1996,
financial information of the Partnership, partnership documents, Delaware-
related claims, and other documents. CRI will provide CAPREIT with $400,000 in
respect of CAPREIT's obligations under the CAPREIT Agreement, counsel for the
plaintiffs in the Zakin and Wingard Actions will provide $100,000 in respect of
such payments and Mr. Schwartzberg will provide $33,500 of such payments. No
such payments other than the first installment will be paid into escrow until
the proposed merger has been consummated and each of the payments is contingent
upon there having been no defaults on the part of the Schwartzberg Entities or
under the third party standstill agreement.
The Schwartzberg Entities are personally liable to CAPREIT for any breaches
occasioned by them of the CAPREIT Agreement. Mr. Schwartzberg has covenanted to
CAPREIT that he will maintain a net worth of at least $3.5 million through
December 31, 2002. In the event that the Schwartzberg Entities are in default
under the CAPREIT Agreement as a result of a violation of a third party
standstill agreement, Mr. Schwartzberg shall pay CAPREIT liquidated damages in
accordance with the terms of the CAPREIT Agreement.
An agreement among Mr. Schwartzberg, CMS and CRI (the CRI Agreement), in
addition to providing that Mr. Schwartzberg will not oppose the proposed merger,
also provides for a resolution of all disputes between CRI and Mr. Schwartzberg.
As part of the CRI Agreement, Mr. Schwartzberg and CRI have agreed not to take
any actions which might interfere with each others' business. Mr. Schwartzberg
has also retracted any derogatory statements that he previously made about CRI,
its principals, and the proposed merger, and has promised not to make any
similar statements in the future. Although the CRI Agreement provides that it
is legally binding, that agreement contemplates execution of a more detailed
agreement (referred to as the Definitive Agreement) and the exchange of full
general releases between Mr. Schwartzberg and CRI, and Messrs. Dockser and
Willoughby.
PART II. OTHER INFORMATION
-----------------
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
--------------------------------
No reports on Form 8-K were filed with the Commission during the quarter
ended June 30, 1996.
All other items are not applicable.
-49-
<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
August 8, 1996 By: /s/ Deborah K. Browning
- ---------------------- --------------------------------
Date Deborah K. Browning
Vice President/Chief Accounting
Officer
Signing on behalf of the Registrant
and as Principal Accounting Officer
-50-
<PAGE>
EXHIBIT INDEX
-------------
Exhibit Method of Filing
- ------- -----------------------------
27 Financial Data Schedule Filed herewith electronically
-51-
WARNING: THE EDGAR SYSTEM ENCOUNTERED ERROR(S) WHILE PROCESSING THIS SCHEDULE.
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<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-START> JAN-01-1996
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<SECURITIES> 2,700,026
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THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM
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<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-START> JAN-01-1996
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