<PAGE>
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K/A
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 1995
-----------------
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)
(Registrant's telephone number, including area code) (301) 468-9200
------------------
Securities registered pursuant to Section 12(b) of the Act:
Name of each exchange
Title of each class on which registered
- - --------------------------------- -----------------------------
Beneficial Assignee Certificates American Stock Exchange
Securities registered pursuant to Section 12(g) of the Act:
NONE
- - --------------------------------------------------------------------------
(Title of class)
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 (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.
Yes [X] No[ ]
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [X]
As of April 23, 1996, 2,280,000 (Series I) and 3,238,760 (Series II)
Beneficial Assignee Certificates (BACs) were outstanding and the aggregate
market value of such BACs held by non-affiliates of the registrant on such date
was $29,918,438 and $42,071,380, respectively.
DOCUMENTS INCORPORATED BY REFERENCE
Form 10-K Parts Document
- - ------------------ ---------------------------------------
I, II, III and IV 1995 Annual Report to BAC Holders
<PAGE>
CAPITAL REALTY INVESTORS TAX EXEMPT FUND LIMITED PARTNERSHIP
1995 ANNUAL REPORT ON FORM 10-K
TABLE OF CONTENTS
PART I
------
Page
----
Item 1. Business . . . . . . . . . . . . . . . . . . . . . I-1
Item 2. Properties . . . . . . . . . . . . . . . . . . . . I-1
Item 3. Legal Proceedings . . . . . . . . . . . . . . . . . I-1
Item 4. Submission of Matters to a Vote
of Security Holders . . . . . . . . . . . . . . . I-1
PART II
-------
Item 5. Market for the Registrant's Partnership
Interests and Related Partnership Matters . . . . II-1
Item 6. Selected Financial Data . . . . . . . . . . . . . . II-1
Item 7. Management's Discussion and Analysis
of Financial Condition and Results
of Operations . . . . . . . . . . . . . . . . . . II-1
Item 8. Financial Statements and Supplementary Data . . . . II-2
Item 9. Changes in and Disagreements with Accountants
on Accounting and Financial Disclosure . . . . . II-2
PART III
--------
Item 10. Directors and Executive Officers
of the Registrant . . . . . . . . . . . . . . . . III-1
Item 11. Executive Compensation . . . . . . . . . . . . . . III-2
Item 12. Security Ownership of Certain Beneficial
Owners and Management . . . . . . . . . . . . . . III-3
Item 13. Certain Relationships and Related Transactions . . III-4
PART IV
-------
Item 14. Exhibits, Financial Statement Schedules and
Reports on Form 8-K . . . . . . . . . . . . . . . IV-1
Signatures . . . . . . . . . . . . . . . . . . . . . . . . IV-5
Cross Reference Sheet . . . . . . . . . . . . . . . . . . . . IV-6
Exhibit Index . . . . . . . . . . . . . . . . . . . . . . . . IV-7
<PAGE>
PART I
------
ITEM 1. BUSINESS
--------
Development and Description of Business
---------------------------------------
Information concerning the business of Capital Realty Investors Tax
Exempt Fund Limited Partnership (the Partnership) is contained in the 1995
Annual Report to BAC Holders which contains Management's Discussion and
Analysis of Financial Condition and Results of Operations and Notes 1, 5
and 7 of the notes to financial statements. The Annual Report is contained
in Part IV (filed in response to Item 8 hereof), which is incorporated
herein by reference.
Employees
---------
The Partnership has no employees. Services are performed for the
Partnership by affiliates of the General Partner and agents retained by
them.
ITEM 2. PROPERTIES
----------
The Partnership has invested in ten mortgage revenue bonds for which
underlying first mortgages on ten residential projects have been assigned
to the Partnership as collateral. A description of these projects is
contained in the 1995 Annual Report to BAC Holders which contains
Management's Discussion and Analysis of Financial Condition and Results of
Operations and Note 5 of the notes to financial statements. The Annual
Report is contained in Part IV (filed in response to Item 8 hereof), which
is incorporated herein by reference.
ITEM 3. LEGAL PROCEEDINGS
-----------------
Reference is made to Note 8 of the notes to financial statements on
page 65 of the 1995 Annual Report to BAC Holders, which is incorporated
herein by reference.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
---------------------------------------------------
No matters were submitted to a vote of security holders during the
fourth quarter of 1995.
I-1
<PAGE>
PART II
-------
ITEM 5. MARKET FOR THE REGISTRANT'S PARTNERSHIP INTERESTS AND
-----------------------------------------------------
RELATED PARTNERSHIP MATTERS
---------------------------
(a) Market information.
Reference is made to the Selected Financial Data on pages 1 through 5
of the 1995 Annual Report to BAC Holders, which is incorporated herein by
reference.
(b) Number of Security Holders.
As of December 31, 1995, there were approximately 2,800 and 4,000
registered holders of BACs for Series I and Series II, respectively, in the
Partnership.
(c) Distributions.
Reference is made to the Selected Financial Data on Pages 1 through 5
of the 1995 Annual Report to BAC Holders, which is incorporated herein by
reference.
See Management's Discussion and Analysis of Financial Condition and
Results of Operations contained in the 1995 Annual Report to BAC Holders,
which is incorporated herein by reference, for information regarding the
sources of funds used for cash distributions and for a discussion of
factors which may affect the Partnership's ability to maintain cash
distributions at current levels.
ITEM 6. SELECTED FINANCIAL DATA
-----------------------
Reference is made to Selected Financial Data on pages 1 through 5 of
the 1995 Annual Report to BAC Holders, which is incorporated herein by
reference.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
-------------------------------------------------
CONDITION AND RESULTS OF OPERATIONS
-----------------------------------
Reference is made to Management's Discussion and Analysis of Financial
Condition and Results of Operations on pages 6 through 28 of the 1995
Annual Report to BAC Holders, which is incorporated herein by reference.
II-1
<PAGE>
PART II
-------
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
-------------------------------------------
Reference is made to pages 29 through 36 of the 1995 Annual Report to
BAC Holders for the financial statements of the registrant, which are
incorporated herein by reference. See also Item 14 of this report for
information concerning financial statements and financial statement
schedules.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON
------------------------------------------------
ACCOUNTING AND FINANCIAL DISCLOSURE
-----------------------------------
None.
II-2
<PAGE>
PART III
--------
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
--------------------------------------------------
(a), (b) and
(c) The Partnership has no directors, executive officers or
significant employees of its own.
(a), (b), (c)
and (e) The names, ages and business experience of the directors and
executive officers of C.R.I., Inc. (CRI), the Managing General
Partner of the Partnership, are as follows:
William B. Dockser, 59, has been the Chairman of the Board of CRI and a Director
since 1974. Prior to forming CRI, he served as President of Kaufman and Broad
Asset Management, Inc., an affiliate of Kaufman and Broad, Inc., which managed a
number of publicly held limited partnerships created to invest in low and
moderate income multifamily apartment complexes. For a period of 2-1/2 years
prior to joining Kaufman and Broad, he served in various positions at HUD,
culminating in the post of Deputy FHA Commissioner and Deputy Assistant
Secretary for Housing Production and Mortgage Credit, where he was responsible
for all federally insured housing production programs. Before coming to
Washington, Mr. Dockser was a practicing attorney in Boston and also was a
special Assistant Attorney General for the Commonwealth of Massachusetts. He
holds a Bachelor of Laws degree from Yale University Law School and a Bachelor
of Arts degree, cum laude, from Harvard University. He is also Chairman of the
Board of CRIIMI MAE Inc., CRIIMI, Inc. and CRI Liquidating REIT, Inc.
H. William Willoughby, 49, President, Secretary and a Director of CRI since
January 1990 and Senior Executive Vice President, Secretary and a Director of
CRI from 1974 to 1989. He is principally responsible for the financial
management of CRI and its associated partnerships. Prior to joining CRI in
1974, he was Vice President of Shelter Corporation of America and a number of
its subsidiaries dealing principally with real estate development and equity
financing. Before joining Shelter Corporation, he was a senior tax accountant
with Arthur Andersen & Company. He holds a Juris Doctorate degree, a Master of
Business Administration degree and a Bachelor of Science degree in Business
Administration from the University of South Dakota. He is also a Director and
executive officer of CRIIMI MAE Inc., CRIIMI, Inc. and CRI Liquidating REIT,
Inc.
Richard J. Palmer, 44, Senior Vice President-Chief Financial Officer. Prior to
joining CRI in 1983 as Director of Tax Policy, he was a Tax Manager at Grant
Thornton (formerly Alexander Grant & Company). He also served in the Tax and
Audit Departments of Peat, Marwick, Main and Company (formerly Peat, Marwick,
Mitchell and Company) prior to his seven years at Grant Thornton. He holds a
Bachelor of Business Administration degree from the Florida Atlantic University
and is also a Certified Public Accountant.
III-1
<PAGE>
PART III
--------
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT - continued
--------------------------------------------------
Ronald W. Thompson, 49, Group Executive Vice President-Hotel Asset Management.
Prior to joining CRI in 1985, he was employed at the Hyatt Organization where he
most recently served as the General Manager of the Hyatt Regency in Flint,
Michigan. During his nine year tenure with Hyatt, he held senior management
positions with the Hyatt Regency in Dearborn, Michigan, the Hyatt in Richmond,
Virginia, the Hyatt in Winston-Salem, North Carolina and the Hyatt Regency in
Atlanta, Georgia. Before joining Hyatt, Mr. Thompson worked in London, England
for the English Tourist Board as well as holding management positions in Europe,
Australia, and New Zealand in the hotel industry. Mr. Thompson received his
education in England where he received a business degree in Hotel Administration
from Winston College.
Susan R. Campbell, 37, Senior Vice President-CRI Realty Services. Prior to
joining CRI in March 1985, she was a budget analyst for the B. F. Saul Advisory
Company. She holds a Bachelor of Science degree in General Business from the
University of Maryland.
Melissa Cecil Lackey, 40, Senior Vice President and General Counsel. Prior to
joining CRI in 1990, she was associated with the firms of Zuckerman, Spaeder,
Goldstein, Taylor & Kolker in Washington, D.C. and Hirsch & Westheimer in
Houston, Texas. She holds a Juris Doctorate from the University of Virginia
School of Law and a Bachelor of Arts degree from the College of William & Mary.
(d) There is no family relationship between any of the foregoing directors
and executive officers.
(f) Involvement in certain legal proceedings.
None.
(g) Promoters and control persons.
Not applicable.
ITEM 11. EXECUTIVE COMPENSATION
----------------------
(a), (b), (c) and (d)
The Partnership has no officers or directors. However, in accordance
with the Partnership Agreement and as disclosed in the Partnership's
Registration Statement on Form S-11, as amended, various kinds of
compensation and fees are payable or were paid to the General Partner
and/or its affiliates. Additional information required in these sections
is included in Notes 3 and 4 to the financial statements contained in Part
IV (filed in response to Item 8 hereof), which are incorporated herein by
reference.
(e) Termination of employment and change in control arrangement.
None.
III-2
<PAGE>
PART III
--------
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND
---------------------------------------------------
MANAGEMENT
----------
(a) Security ownership of certain beneficial owners.
No person or "group", as that term is used in Section 13(d)(3) of the
Securities Exchange Act of 1934, is known by the Partnership to be the
beneficial owner of more than 5% of the issued and outstanding BACs as of
December 31, 1995.
(b) Security ownership of management.
The following table sets forth certain information concerning all BACs
beneficially owned, as of April 23, 1996, by each and by all directors and
officers as a group of the managing general partner of the Partnership's
General Partner. The voting and investment powers for the BACs listed are
held solely by the named beneficial owner. The General Partner which
controls the day-to-day operations of the Partnership is a limited
partnership whose managing general partner is CRI. Mr. Dockser and Mr.
Willoughby control CRI.
<TABLE>
<CAPTION>
Name of Amount and Nature % of total
Beneficial Owner of Beneficial Ownership BACs issued
- - ---------------- ----------------------- ------------
<S> <C> <C>
William B. Dockser 500 BACs in Series I 0.02%
2,500 BACs in Series II* 0.08%
H. William Willoughby None 0%
All Directors and Officers
as a Group (6 persons) 500 BACs in Series I 0.02%
2,500 BACs in Series II* 0.05%
</TABLE>
* Includes 1,000 BACs in Series II representing 0.03% of total BACs issued in
Series II, owned by Saundra L. Dockser, William B. Dockser's spouse.
(c) Changes in control.
There exists no arrangement known to the Partnership, the operation of
which may at a subsequent date result in a change in control of the
Partnership, with the exception of the merger agreement with an affiliate
of Capital Apartment Properties, Inc., as discussed in Management's
Discussion and Analysis of Financial Condition and Results of Operations
and Note 7 of the notes to financial statements, which are incorporated
herein by reference. There is a provision in the Limited Partnership
Agreement which allows, under certain circumstances, the ability to change
control.
III-3
<PAGE>
PART III
--------
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
----------------------------------------------
(a) Transactions with management and others.
The Partnership has no directors or officers. In addition, the
Partnership has had no transactions with individual officers or directors
of the managing general partner of the General Partner of the Partnership
other than any indirect interest such officers and directors may have (i)
in the amounts paid to the General Partner or its affiliates by virtue of
their stock ownership in CRI, as disclosed in Part IV, Item 14, in Note 3
of the notes to financial statements, which is incorporated herein by
reference; (ii) as shareholders in corporations that are partners in
partnerships that hold title to properties, subject to the existing
indebtedness as a consequence of foreclosure against, or deeds in lieu of
foreclosure from former borrowers; and/or (iii) in the amounts paid to the
individual officers and directors of the General Partner with respect to
distributions in connection with BACs held by such individuals.
Nine out of the ten loans on properties securing mortgage revenue
bonds held by the Partnership defaulted when they were unable to pay full
base interest on their respective loans. The primary goal of the
Partnership in dealing with the defaults was to attempt to preserve the
tax-exempt nature of interest on the mortgage revenue bonds.
Accordingly, the Partnership never declared a default under a mortgage
revenue bond, only under the associated loan. Entities (Owner
Partnerships) were formed to take title to the defaulted properties
from the unrelated borrowers and assume the existing indebtedness.
These new entities were carefully structured so as not to
cause the Partnerships to be a substantial user of the properties or a
party related to a substantial user. In most cases, when title to the
property was transferred to the Owner Partnership, the related mortgage
revenue bond was not amended. However, the new borrower agreed to pay the
loan to the Partnership on a cash flow basis. The Owner Partnerships also
agreed that the Partnership would accrue interest on any unpaid base
interest at the base interest rate, with deferred base interest and
interest accrued thereon to be payable at the same priority level as base
interest itself under the existing loan agreement. In this way, the
Partnership is able to maintain the same effective yield on the mortgage
revenue bonds. Although distributions by the Partnership are lower than
anticipated in the prospectus because most of the properties are unable to
pay full base interest, the Partnership continues to treat the interest
payments from the net cash flow of the properties as tax-exempt interest
income. Any taxable income of the Partnership consist of de minimus
interest on taxable investments held in the Partnership's reserves. The
Owner Partnerships and the managing general partner of the General Partner
of the Partnership have primarily common ownership (except for Ethan's
Ridge and Ethan's Glen IIB in Series II prior to March 14, 1996) and are
under common control. No compensation or fees were paid by the Partnership
to the Owner Partnerships or their principals in connection with the
transfers of ownership. Item 11 of this report, which contains a
discussion of the fees and other compensation paid or accrued by the Part-
nership to the General Partner or its affiliates, is incorporated herein by
reference.
III-4
<PAGE>
PART III
--------
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS - Continued
----------------------------------------------
SERIES I PROPERTY OWNER PARTNERSHIP
----------------- ----------------------------------------------
Royal Oaks CRICO of Royal Oaks Limited Partnership
---------------------------------------
General Partner: CRICO of Royal Oaks, Inc.
Limited Partner: CRICO Minnesota Holdings, Inc.
Trailway Pond CRICO of Trailway Pond I Limited Partnership
--------------------------------------------
General Partner: CRICO of Trailway Pond I, Inc.
Limited Partner: CRICO Minnesota Holdings, Inc.
Valley Creek CRICO of Valley Creek I Limited Partnership
-------------------------------------------
General Partner: CRICO of Valley Creek I, Inc.
Limited Partner: CRICO Minnesota Holdings, Inc.
White Bear Woods CRICO of White Bear Woods I Limited Partnership
-----------------------------------------------
General Partner: CRICO of White Bear Woods I,Inc.
Limited Partner: CRICO Minnesota Holdings, Inc.
SERIES II PROPERTY OWNER PARTNERSHIP
------------------ ----------------------------------------------
Ethan's Ridge and
Ethan's Glen IIB CRICO of Ethan's I Limited Partnership
--------------------------------------
General Partner: CRICO of Ethan's I, Inc.
Limited Partners: CRICO of Iona, Inc. and three
unrelated parties (the interests of which
unrelated parties were terminated effective
March 14, 1996)
Fountain Place CRICO of Fountain Place Limited Partnership
-------------------------------------------
General Partner: CRICO of Fountain Place, Inc.
Limited Partner: CRICO Minnesota Holdings, Inc.
James Street
Crossing CRICO of James Street Crossing Limited
--------------------------------------
Partnership
-----------
General Partner: CRICO of James Street, Inc.
Limited Partner: CRICO Holdings, Inc.
Trailway Pond II CRICO of Trailway Pond II Limited Partnership
---------------------------------------------
General Partner: CRICO of Trailway Pond II, Inc.
Limited Partner: CRICO Minnesota Holdings, Inc.
(b) Certain business relationships.
III-5
<PAGE>
PART III
--------
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS - Continued
----------------------------------------------
The Partnership response to Item 13(a) is incorporated herein by
reference. In addition, the Partnership has no business relationship with
entities of which the general partners of the General Partner of the
Partnership are officers, directors or equity owners other than as set
forth in the Partnership's response to Item 13(a).
(c) Indebtedness of management.
None.
(d) Transactions with promoters.
Not applicable.
III-6
<PAGE>
PART IV
-------
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS
---------------------------------------------------
ON FORM 8-K
-----------
(a) List of documents filed as part of this report:
----------------------------------------------
(1) Financial Statements Page(s)
-------------------- -------
Reports of Independent Public Accountants 29
Balance Sheets as of December 31, 1995
and 1994 30
Statements of Operations for the years ended
December 31, 1995, 1994 and 1993 31-32
Statements of Changes in Partners' Capital
(Deficit) for the years ended December 31,
1995, 1994 and 1993 33-34
Statements of Cash Flows for the years ended
December 31, 1995, 1994 and 1993 35-36
Notes to Financial Statements which include
the information required to be included
in Schedule XII - Mortgage Loans on Real
Estate (Note 5) and pursuant to Staff
Accounting Bulletin 71(Note 10) 37-74
(2) Financial Statement Schedules
-----------------------------
All financial statement schedules are omitted since they are not
required, are inapplicable, or the required information is included in
the financial statements or notes thereto.
(3) Exhibits (listed according to the number assigned in the table in
Item 601 of Regulation S-K).
Exhibit No. 3 - Articles of incorporation and bylaws
a. Certificate of Limited Partnership of Capital Realty
Investors Tax Exempt Fund Limited Partnership.
(Incorporated by reference from Exhibit 3 to the Regis-
trant's Post-Effective Amendment No. 2, dated August 3,
1987, to the Registration Statement on Form S-11.)
IV-1
<PAGE>
PART IV
-------
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS
---------------------------------------------------
ON FORM 8-K - Continued
-----------
Exhibit No. 4 - Instruments defining the rights of security
holders, including indentures
a. Agreement of Limited Partnership of Capital Realty Investors
Tax Exempt Fund Limited Partnership. (Incorporated by
reference from Exhibit 4 to the Registrant's Post-Effective
Amendment No. 2, dated August 3, 1987, to the Registration
Statement on Form S-11.)
Exhibit No. 10 - Material contracts
a. Beneficial Assignee Certificate. (Incorporated by reference
from Exhibit 10A to the Registrant's Post-Effective
Amendment No. 1, dated January 20, 1987, to the Registration
Statement on Form S-11.)
b. Amended and Restated Agreement and Plan of Merger, dated as
of March 14, 1996. (Incorporated by reference from Appendix
A-1 to the Registrant's Preliminary Proxy Statement Pursuant
to Section 14(a) of the Securities and Exchange Act of 1934
filed March 18, 1996.)
Exhibit No. 13 - Annual report to security holders, Form 10-Q or
quarterly report to security holders
a. 1995 Annual Report to BAC Holders.
Exhibit No. 27 - Financial Data Schedule
Exhibit No. 99 - Additional Exhibits
a. Financial Statements and Independent Auditors' Report of
CRICO of Royal Oaks Limited Partnership December 31, 1995.
(Incorporated by reference from Exhibit 99 to the
Registrants Form 8-K filed March 25, 1996).
b. Financial Statements and Independent Auditors' Report CRICO
of Valley Creek I Limited Partnership December 31, 1995.
(Incorporated by reference from Exhibit 99 to the
Registrants Form 8-K filed March 25, 1996).
c. Financial Statements and Independent Auditors' Report CRICO
of White Bear Woods I Limited Partnership December 31, 1995.
(Incorporated by reference from Exhibit 99 to the
Registrants Form 8-K filed March 25, 1996).
d. CRICO of Ethan's I Limited Partnership (A Missouri Limited
Partnership) Financial Statements As of December 31, 1995
and 1994, Together With Auditors' Report. (Incorporated by
reference from Exhibit 99 to the Registrants Form 8-K filed
March 25, 1996).
IV-2
<PAGE>
PART IV
-------
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS
---------------------------------------------------
ON FORM 8-K - Continued
-----------
e. Financial Statements and Independent Auditors' Report CRICO
of Fountain Place Limited Partnership December 31, 1995.
(Incorporated by reference from Exhibit 99 to the
Registrants Form 8-K filed March 25, 1996).
f. Financial Statements and Independent Auditors' Report CRICO
of James Street Crossing Limited Partnership December 31,
1995. (Incorporated by reference from Exhibit 99 to the
Registrants Form 8-K filed March 25, 1996).
g. Financial Statements and Independent Auditors' Report CRICO
of Royal Oaks Limited Partnership December 31, 1994.
(Incorporated by reference from Exhibit 99 to the
Registrants Form 8-K filed March 25, 1996).
h. Financial Statements and Independent Auditors' Report CRICO
of Valley Creek I Limited Partnership December 31, 1994.
(Incorporated by reference from Exhibit 99 to the
Registrants Form 8-K filed March 25, 1996).
i. Financial Statements and Independent Auditors' Report CRICO
of White Bear Woods I Limited Partnership December 31, 1994.
(Incorporated by reference from Exhibit 99 to the
Registrants Form 8-K filed March 25, 1996).
j. Financial Statements and Independent Auditors' Report CRICO
of Fountain Place Limited Partnership December 31, 1994.
(Incorporated by reference from Exhibit 99 to the
Registrants Form 8-K filed March 25, 1996).
k. Financial Statements and Independent Auditors' Report CRICO
of James Street Crossing Limited Partnership December 31,
1994. (Incorporated by reference from Exhibit 99 to the
Registrants Form 8-K filed March 25, 1996).
(b) Report on Form 8-K
------------------
No Reports on Form 8-K were filed with the Commission during the
quarter ended December 31, 1995.
IV-3
<PAGE>
PART IV
-------
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS
---------------------------------------------------
ON FORM 8-K - Continued
-----------
(c) Exhibits
--------
This list of Exhibits required by Item 601 of Regulation S-K is
included in Item (a)(3) above.
(d) Financial Statement Schedules
-----------------------------
See (a)(1) and (2) above.
IV-4
<PAGE>
SIGNATURES
----------
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
May 17, 1996 /s/ William B. Dockser
- - ------------------- ------------------------------------
DATE William B. Dockser, Director
Chairman of the Board,
Treasurer and Principal
Executive Officer
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
Registrant and in the capacities and on the dates indicated:
May 17, 1996 /s/ H. William Willoughby
- - ------------------- ------------------------------------
DATE H. William Willoughby
Director, President and Secretary
May 17, 1996 /s/ Richard J. Palmer
- - ------------------- ------------------------------------
DATE Richard J. Palmer
Senior Vice President,
Chief Financial Officer,
Principal Financial and
Principal Accounting Officer
IV-5
<PAGE>
CROSS REFERENCE SHEET
The item numbers and captions in Parts I, II, III and IV hereof and the
page and/or pages in the referenced materials where the corresponding
information appears are as follows:
Item Reference Materials Page
- - ---- ------------------- -------------
3. Legal Proceedings 1995 Annual Report 65 through 69
5. Market for the Registrant's 1995 Annual Report 1 through 5
Partnership Interests and
Related Partnership Matters
6. Selected Financial Data 1995 Annual Report 1 through 5
7. Management's Discussion and 1995 Annual Report 6 through 28
Analysis of Financial
Condition and Results of
Operations
8. Financial Statements and 1995 Annual Report 29 through 36
Supplementary Data
14. Exhibits, Financial Statement 1995 Annual Report 29 through 74
Schedules, and Reports on
Form 8-K
IV-6
<PAGE>
EXHIBIT INDEX
Exhibit Page
- - ------- ----------------------------
(13) Annual Report to BAC Holders 1 through 74
(27) Financial Data Schedule Filed herewith electronically
IV-7
<PAGE>
CAPITAL REALTY INVESTORS TAX EXEMPT FUND LIMITED PARTNERSHIP
SERIES I AND II
1995 ANNUAL REPORT TO BAC HOLDERS
<PAGE>
CAPITAL REALTY INVESTORS TAX EXEMPT FUND LIMITED PARTNERSHIP
SELECTED FINANCIAL DATA
- - -----------------------
Restated Financial Data Schedule
- - --------------------------------
<TABLE>
<CAPTION>
SERIES I
------------------------------------------------------------------------------
For the years ended December 31,
1995 1994 1993 1992 1991
------------ ------------ ------------ ------------ ------------
<S> <C> <C> <C> <C> <C>
Interest from mortgage revenue bonds $ 3,103,783 $ 2,829,665 $ 128,000 $ 157,288 $ --
Net rental income (1) -- -- 512,569 326,545 595,498
Other expenses (291,067) (170,934) (189,188) (200,956) (369,287)
Valuation adjustment on investment
in real estate (1)(2) -- -- -- -- (405,071)
------------ ------------ ------------ ------------ ------------
Income before cumulative effect of
accounting change 2,812,716 2,658,731 451,381 282,877 (178,860)
Cumulative effect of change in
accounting for mortgage revenue
bonds (1) -- (2,475,448) -- -- --
------------ ------------ ------------ ------------ ------------
Net income (loss) $ 2,812,716 $ 183,283 $ 451,381 $ 282,877 $ (178,860)
============ ============ ============ ============ ============
Net income (loss) allocated to
BAC Holders (98.99%) $ 2,784,308 $ 181,432 $ 446,822 $ 280,020 $ (177,054)
============ ============ ============ ============ ============
Net income (loss) per
BAC outstanding $ 1.22 $ 0.08 $ 0.20 $ 0.12 $ (0.08)
============ ============ ============ ============ ============
Cumulative effect of change in
accounting for mortgage revenue
bonds per BAC outstanding $ -- $ (1.07) $ -- $ -- $ --
============ ============ ============ ============ ============
Total cash distribution per
BAC outstanding $ 1.08 $ 1.00 $ 1.00 $ 1.16 $ 1.37
============ ============ ============ ============ ============
Number of BACs outstanding 2,280,000 2,280,000 2,280,000 2,280,000 2,280,000
============ ============ ============ ============ ============
Investment in mortgage revenue
bonds (1)(2) $ 30,740,285 $ 30,740,285 $ 1,600,000 $ 1,600,000 $ --
============ ============ ============ ============ ============
Investment in real estate, before
accumulated depreciation(1) $ -- $ -- $ 37,721,666 $ 37,721,666 $ 37,721,666
============ ============ ============ ============ ============
Investment in real estate, before
accumulated depreciation, per
BAC outstanding $ -- $ -- $ 16.38 $ 16.38 $ 16.38
============ ============ ============ ============ ============
</TABLE>
-1-
<PAGE>
CAPITAL REALTY INVESTORS TAX EXEMPT FUND LIMITED PARTNERSHIP
SELECTED FINANCIAL DATA - Continued
- - -----------------------
Restated Financial Data Schedule
- - --------------------------------
<TABLE>
<CAPTION>
SERIES I
------------------------------------------------------------------------------
For the years ended December 31,
1995 1994 1993 1992 1991
------------ ------------ ------------ ------------ ------------
<S> <C> <C> <C> <C> <C>
Asset held for sale (2) $ -- $ -- $ -- $ -- $ 2,050,000
============ ============ ============ ============ ============
Total assets $ 33,421,019 $ 32,882,518 $ 37,124,695 $ 38,826,296 $ 40,943,991
============ ============ ============ ============ ============
Total assets per BAC outstanding $ 14.51 $ 14.28 $ 16.12 $ 16.86 $ 17.78
============ ============ ============ ============ ============
Net assets $ 31,978,844 $ 31,653,652 $ 33,773,632 $ 35,625,514 $ 38,011,429
============ ============ ============ ============ ============
Net assets per BAC outstanding $ 13.88 $ 13.74 $ 14.66 $ 15.47 $ 16.50
============ ============ ============ ============ ============
</TABLE>
-2-
<PAGE>
CAPITAL REALTY INVESTORS TAX EXEMPT FUND LIMITED PARTNERSHIP
SELECTED FINANCIAL DATA - Continued
- - -----------------------
Restated Financial Data Schedule
- - --------------------------------
<TABLE>
<CAPTION>
SERIES II
------------------------------------------------------------------------------
For the years ended December 31,
1995 1994 1993 1992 1991
------------ ------------ ------------ ------------ ------------
<S> <C> <C> <C> <C> <C>
Interest from mortgage revenue bonds $ 4,276,936 $ 3,824,910 $ -- $ -- $ --
Net rental income (1) -- -- 1,511,870 428,325 737,795
Other expenses (292,014) (170,583) (281,593) (127,970) (186,200)
------------ ------------ ------------ ------------ ------------
Income before extraordinary item and
cumulative effect of accounting
change 3,984,922 3,654,327 1,230,277 300,355 551,595
Extraordinary gain (3) -- -- 416,432 -- --
Cumulative effect of change in
accounting for mortgage revenue
bonds (1) -- (4,600,720) -- -- --
------------ ------------ ------------ ------------ ------------
Net income (loss) $ 3,984,922 $ (946,393) $ 1,646,709 $ 300,355 $ 551,595
============ ============ ============ ============ ============
Net income (loss) allocated to
BAC Holders (98.99%) $ 3,944,674 $ (936,834) $ 1,630,077 $ 297,321 $ 546,024
============ ============ ============ ============ ============
Net income (loss) per BAC
outstanding $ 1.22 $ (0.29) $ 0.50 $ 0.09 $ 0.17
============ ============ ============ ============ ============
Cumulative effect of change in
accounting for mortgage revenue
bonds per BAC outstanding $ -- $ (1.41) $ -- $ -- $ --
============ ============ ============ ============ ============
Total cash distribution per
BAC outstanding $ 1.08 $ 1.00 $ 1.00 $ 1.00 $ 1.37
============ ============ ============ ============ ============
Number of BACs outstanding 3,238,760 3,238,760 3,238,760 3,238,760 3,238,760
============ ============ ============ ============ ============
Investment in mortgage revenue bonds (1) $ 43,793,252 $ 43,793,252 $ -- $ -- $ --
============ ============ ============ ============ ============
Investment in real estate, before
accumulated depreciation(1) $ -- $ -- $ 56,382,005 $ 56,382,005 $ 56,382,005
============ ============ ============ ============ ============
Investment in real estate, before
accumulated depreciation, per
BAC outstanding $ -- $ -- $ 17.23 $ 17.23 $ 17.23
============ ============ ============ ============ ============
</TABLE>
-3-
<PAGE>
CAPITAL REALTY INVESTORS TAX EXEMPT FUND LIMITED PARTNERSHIP
SELECTED FINANCIAL DATA - Continued
- - -----------------------
Restated Financial Data Schedule
- - --------------------------------
<TABLE>
<CAPTION>
SERIES II
------------------------------------------------------------------------------
For the years ended December 31,
1995 1994 1993 1992 1991
------------ ------------ ------------ ------------ ------------
<S> <C> <C> <C> <C> <C>
Total assets $ 47,738,900 $ 47,031,996 $ 53,638,123 $ 55,477,180 $ 57,453,236
============ ============ ============ ============ ============
Total assets per BAC outstanding $ 14.59 $ 14.37 $ 16.39 $ 16.96 $ 17.56
============ ============ ============ ============ ============
Net assets $ 45,747,989 $ 45,296,618 $ 49,514,816 $ 51,139,913 $ 54,111,366
============ ============ ============ ============ ============
Net assets per BAC outstanding $ 13.98 $ 13.84 $ 15.13 $ 15.63 $ 16.54
============ ============ ============ ============ ============
</TABLE>
(1) All properties collateralizing the mortgage revenue bonds have been
transferred by foreclosure or deed in lieu of foreclosure to affiliates of
the Partnership (Owner Partnerships) subject to existing indebtedness
(Observatory II in Series I was subsequently sold, as discussed below). As
a result, through December 31, 1993 the Partnership accounted for these as
investments in real estate for financial statement purposes. The Part-
nership recorded valuation adjustments representing the lower of (a) the
carrying value of the mortgage revenue bond and related accrued interest or
(b) the estimated fair value of the property and other net assets of the
property acquired in settlement of loans or in-substance foreclosure (ISF)
at the earlier of transfer of the deed or ISF.
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
SEC rules.
In conjunction with the review of the Partnership's 1995 financial
statements by the Securities and Exchange Commission (SEC) Staff the
Partnership agreed that it would account for all of its investments in
mortgage revenue bonds as debt securities under the provisions of SFAS 115
-4-
<PAGE>
CAPITAL REALTY INVESTORS TAX EXEMPT FUND LIMITED PARTNERSHIP
SELECTED FINANCIAL DATA - Continued
- - -----------------------
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.
The effect of adopting SFAS 115 on net income previously reported for 1995
and 1994 is $1,648,217 and $(830,356), respectively for Series I and
$2,189,007 and $(2,321,946), respectively for Series II. Income per BAC as
previously reported was $0.51 and $0.44 for 1995 and 1994, respectively for
Series I and $0.55 and $0.42 for 1995 and 1994, respectively for Series II.
Income(loss) per BAC as previously reported has been revised to $1.22 and
$0.08 per BAC for 1995 and 1994, respectively for Series I and $1.22 and
$(0.29) per BAC for 1995 and 1994, respectively for Series II. The impact
on partners capital of adopting SFAS 115 for 1995 and 1994 is $817,861 and
$830,356, respectively for Series I and $132,939 and $2,321,946,
respectively for Series II.
(2) The Observatory II mortgage revenue bond (Series I) was classified as an
asset held for sale as of December 31, 1991 pursuant to a signed letter of
intent from CRICO of Greenhaven, Inc., an Owner Partnership, to sell the
property underlying the mortgage loan which secured the bond to an
unrelated third party for $2,050,000, with the Partnership providing tax-
exempt mortgage revenue bond financing for $1,600,000. The valuation
adjustment of $405,071 for the sale of the asset was recorded in the
statement of operations for 1991. Subsequent to the sale of the property,
which occurred on March 31, 1992, the $1,600,000 financing was classified
as an investment in mortgage revenue bond.
(3) In the fourth quarter of 1992, the Partnership was planning to take a deed-
in-lieu of foreclosure (which occurred in March 1993) on James Street
Crossing, therefore the Partnership evaluated the liabilities of the
property. As such the Partnership believed that the Owner Partnership was
obligated for a $416,000 liability to the former general partner of James
Street Crossing. This obligation was recorded at December 31, 1992. After
the Owner Partnership took possession of the property in the first quarter
of 1993 through a deed-in-lieu of foreclosure, and sorting through the
liabilities related to the real estate the Partnership concluded that the
Owner Partnership would not be required to assume this liability.
Therefore it was treated as a debt extinguishment under SFAS No. 4,
"Reporting Gains and Losses for Extinguishment of Debt."
Market Data
- - -----------
On July 1, 1993, the General Partner listed the BACs on the American Stock
Exchange (AMEX) with a trading symbol of CRA for Series I and CRB for Series II.
As of December 31, 1995, there were 2,280,000 and 3,238,760 BACs issued and
outstanding for Series I and Series II, respectively. The following table sets
forth the high and low closing sales price and the distributions per BAC for
Series I and Series II during the periods indicated:
-5-
<PAGE>
CAPITAL REALTY INVESTORS TAX EXEMPT FUND LIMITED PARTNERSHIP
SELECTED FINANCIAL DATA - Continued
- - -----------------------
<TABLE>
<CAPTION>
SERIES I
--------
Sales Price
--------------------- Distributions
1995 Quarter Ended High Low per BAC
- - ------------------ ------- ------- -------------
<S> <C> <C> <C>
March 31 $12 3/8 $10 $ 0.27
June 30 12 3/8 11 1/2 0.27
September 30 13 1/8 11 1/4 0.27
December 31 13 1/2 12 5/8 0.27
---------
$ 1.08
=========
</TABLE>
<TABLE>
<CAPTION>
Sales Price
--------------------- Distributions
1994 Quarter Ended High Low per BAC
- - ------------------ ------- ------- -------------
<S> <C> <C> <C>
March 31 $12 3/4 $11 3/8 $ 0.25
June 30 12 1/2 11 1/4 0.25
September 30 12 10 7/8 0.25
December 31 11 1/4 9 3/8 0.25
---------
$ 1.00
=========
</TABLE>
<TABLE>
<CAPTION>
Sales Price
--------------------- Distributions
1993 Quarter Ended High Low per BAC (1)
- - ------------------ ------- ------- -------------
<S> <C> <C> <C>
March 31 N/A N/A $ 0.25
June 30 N/A N/A 0.25
September 30 $13 1/4 $11 0.25
December 31 13 1/4 11 5/8 0.25
---------
$ 1.00
=========
</TABLE>
-6-
<PAGE>
CAPITAL REALTY INVESTORS TAX EXEMPT FUND LIMITED PARTNERSHIP
SELECTED FINANCIAL DATA - Continued
- - -----------------------
<TABLE>
<CAPTION>
SERIES II
---------
Sales Price
--------------------- Distributions
1995 Quarter Ended High Low per BAC
- - ------------------ ------- ------- -------------
<S> <C> <C> <C>
March 31 $11 3/8 $ 9 3/4 $ 0.27
June 30 11 1/2 11 0.27
September 30 13 10 7/8 0.27
December 31 12 7/8 12 1/8 0.27
---------
$ 1.08
=========
</TABLE>
<TABLE>
<CAPTION>
Sales Price
--------------------- Distributions
1994 Quarter Ended High Low per BAC
- - ------------------ ------- ------- -------------
<S> <C> <C> <C>
March 31 $12 3/8 $11 3/8 $ 0.25
June 30 12 1/8 11 0.25
September 30 11 1/2 10 0.25
December 31 10 3/8 9 1/8 0.25
---------
$ 1.00
=========
</TABLE>
<TABLE>
<CAPTION>
Sales Price
--------------------- Distributions
1993 Quarter Ended High Low per BAC (1)
- - ------------------ ------- ------- -------------
<S> <C> <C> <C>
March 31 N/A N/A $ 0.25
June 30 N/A N/A 0.25
September 30 $12 3/4 $ 9 1/2 0.25
December 31 12 5/8 10 3/8 0.25
---------
$ 1.00
=========
</TABLE>
(1) Prior to the AMEX listing, distributions were declared on a semi-annual
basis, payable to BAC Holders of record as of the last day in each month.
-7-
<PAGE>
CAPITAL REALTY INVESTORS TAX EXEMPT FUND LIMITED PARTNERSHIP
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
- - -----------------------------------------------------------
AND RESULTS OF OPERATIONS
-------------------------
Business
--------
Capital Realty Investors Tax Exempt Fund Limited Partnership (the
Partnership) was organized on August 1, 1986 under the Delaware Revised Uniform
Limited Partnership Act and will continue until December 31, 2016, unless
dissolved earlier in accordance with its Agreement of Limited Partnership. The
Partnership was formed to acquire a portfolio of tax-exempt mortgage revenue
bonds issued by various state or local governments or their agencies or
authorities and collateralized by nonrecourse participating first mortgage loans
on multifamily residential developments (the Observatory II bond, as modified in
1992, no longer has a participating loan feature).
The Partnership commenced a public offering of Beneficial Assignee
Certificates (BACs) representing assignment of limited partnership interests in
October 1986 and completed the offering in October 1987. As provided in the
original offering, the Partnership issued BACs in two series.
On July 1, 1993, the General Partner listed the BACs on the American Stock
Exchange (AMEX) with a trading symbol of CRA for Series I and CRB for Series II.
The General Partner believes that the benefits to the BAC Holders from listing
the BACs on AMEX include increased liquidity and reduced transaction costs.
However, a publicly traded partnership is treated as a corporation for income
tax purposes unless it meets certain exceptions. To qualify under these
exceptions, the General Partner annually invests in de minimus taxable
investments for both Series I and Series II. In 1995, 1994 and 1993, Series I
and Series II met the exceptions, and the Partnership was not taxed as a
corporation.
The Partnership accounts for each Series of BACs separately as though it
held a separate and distinct pool of mortgage revenue bonds secured by real
estate and, if applicable, certain balances in the Partnership's interest
reserves. Organization and offering costs, the Partnership's working capital
reserves and certain general and administrative expenses of the Partnership have
been allocated, unless specifically attributed to a Series, pro rata among the
Series, based on the gross offering proceeds raised by each Series (except for
costs relating to the proposed merger, discussed below, which are allocated
evenly between Series I and Series II). Deposits to the Partnership's interest
reserves and subsequent distributions from the interest reserves to BAC Holders
are accounted for by mortgage revenue bond investment by Series. The amounts and
distributions of cash flow, residual proceeds, liquidation proceeds, profits and
losses and all other priorities and allocations are separately determined for
each Series of BACs.
The Partnership's objectives have been to: (1) provide semi-annual cash
distributions that will be exempt from regular federal income tax; (2) provide
additional cash distributions that will be exempt from regular federal income
tax from payments of contingent interest on the mortgage revenue bonds which
will be determined (a) on the basis of the cash flow of the mortgaged
properties, or (b) to the extent that cash flow is not sufficient to provide for
the current payment of the maximum amount of contingent interest, on the basis
of either (i) the net proceeds resulting from the sale of the mortgaged
properties or repayment on the redemption or remarketing of the applicable
mortgage revenue bond or (ii) the appraised value of the mortgaged properties
upon repayment of the mortgage loans or remarketing of the mortgage revenue
bonds; and (3) preserve and protect the Partnership's capital. All of the
-8-
<PAGE>
CAPITAL REALTY INVESTORS TAX EXEMPT FUND LIMITED PARTNERSHIP
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
- - -----------------------------------------------------------
AND RESULTS OF OPERATIONS - Continued
-------------------------
properties securing the loans (except Observatory II in Series I, as discussed
herein) have been taken control of by affiliates of the General Partner (Owner
Partnerships) through foreclosure or deed in lieu of foreclosure, subject to
existing indebtedness, which resulted in significant valuation adjustments to
the carrying values of these investments, primarily during 1990. Although the
Partnership will use diligent efforts to recover its investment, it is probable
that the full amount of BAC Holder invested capital, based on the original
offering price of $25 per BAC, may not be recoverable on
most of the bonds through net sale or refinancing proceeds as originally
anticipated at the time of the BAC offerings. Consequently, in the absence of
the proposed merger it may be advisable, with BAC Holder consent, to extend the
maturity dates of the mortgage loans, which currently mature from 1998-1999.
Due to proposed Internal Revenue Service (IRS) regulations, the General Partner
cannot be sure at this time how long the mortgage loans could be extended
without triggering a deemed reissuance of the mortgage revenue bonds for federal
income tax purposes. If an extension of the mortgage loan maturity dates is a
deemed reissuance, it would most likely result in the loss of the tax-exempt
status of the mortgage revenue bonds.
Base interest income on the mortgage loans is funded from property
operations and reserves, if any, established at the time of closing on the
acquisition of the mortgage revenue bonds. Since base interest could not be
paid in full, the General Partner evaluated various courses of action, including
sale, recapitalization, loan modification, deed in lieu of foreclosure, or
foreclosure.
The General Partner pursued the option of conversion of certain Minnesota
properties to cooperatives owned by the existing residents of the properties in
order to qualify for favorable homestead property tax treatment. The General
Partner submitted a ruling request for the first such proposed transaction in
1991 to the IRS to ensure that the proposed transaction would not affect the
tax-exempt nature of the mortgage revenue bond interest. The IRS did not
respond to this ruling request and the ruling request was withdrawn in February
1996, and the General Partner has abandoned pursuit of this option.
-9-
<PAGE>
CAPITAL REALTY INVESTORS TAX EXEMPT FUND LIMITED PARTNERSHIP
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
- - -----------------------------------------------------------
AND RESULTS OF OPERATIONS - Continued
-------------------------
A description of the mortgage revenue bonds held by the Partnership is
as follows:
SERIES I
--------
<TABLE>
<CAPTION>
Loan Loan Carrying
Mortgaged Property No. of Origination Face Amount Maturity Value
Name and Location Rental Units Date (000's) Date (000's)
- - -------------------- ------------ ------------ ----------- --------- -----------
<S> <C> <C> <C> <C> <C>
OBSERVATORY II
BURNSVILLE, MN 75 3/31/92 $ 1,600 2/11/98 $ 1,600
ROYAL OAKS
EAGAN, MN 231 12/05/86 12,580 2/22/98 8,019
TRAILWAY POND
BURNSVILLE, MN 75 8/07/87 4,675 5/01/99 2,717
VALLEY CREEK
WOODBURY, MN 225 3/23/87 12,815 2/01/99 9,487
WHITE BEAR WOODS
WHITE BEAR LAKE, MN 225 3/31/87 12,485 1/31/99 8,917
--- ------- -------
831 $44,155 $30,740
=== ======= =======
</TABLE>
SERIES II
---------
<TABLE>
<CAPTION>
Loan Loan Carrying
Mortgaged Property No. of Origination Face Amount Maturity Value
Name and Location Rental Units Date (000's) Date (000's)
- - -------------------- ------------ ------------ ----------- -------- -----------
<S> <C> <C> <C> <C> <C>
ETHAN'S RIDGE AND
ETHAN'S GLEN IIB 5/29/87 $15,500 4/01/98 $12,612
KANSAS CITY, MO 364 10/26/88 2,300 12/15/99
FOUNTAIN PLACE
EDEN PRAIRIE, MN 332 12/23/87 20,900 7/01/99 13,643
JAMES STREET CROSSING
KENT, WA 300 3/31/88 13,878 12/31/99 11,703
TRAILWAY POND II
BURNSVILLE, MN 165 8/07/87 10,030 5/01/99 5,835
----- ------- -------
1,161 $62,608 $43,793
===== ======= =======
</TABLE>
-10-
<PAGE>
CAPITAL REALTY INVESTORS TAX EXEMPT FUND LIMITED PARTNERSHIP
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
- - -----------------------------------------------------------
AND RESULTS OF OPERATIONS - Continued
-------------------------
Prior to January 1, 1994, investments in mortgage revenue bonds were
accounted for as real estate on the earlier of the date of foreclosure, deed in
lieu of foreclosure, or in-substance foreclosure, and were recorded as real
estate at the lower of (a) the carrying value of the mortgage revenue bonds and
related accrued interest or (b) the estimated fair value of the property,
including other net assets of the property. The estimated fair values of the
properties were the amounts the owners of the properties could reasonably expect
to receive in an as-is sale between a willing buyer and a willing seller. The
General Partner determined the estimated fair values of the properties acquired
based upon information obtained from independent real estate appraisers and/or
its own market analyses. To the extent fair value was less than the carrying
value, direct write-downs were recorded to establish a new cost basis for these
assets.
Subsequent to recording its investments as real estate, the Partnership
evaluated its recorded investment in the properties on a lower of cost or net
realizable value basis, under the guidance of the American Institute of
Certified Public Accountants (AICPA) Statement of Position 92-3 "Accounting for
Foreclosed Assets". The Partnership's net realizable value determination took
into account the Partnership's intention to hold these properties for the long
term, if necessary, to recover its recorded investment. If the Partnership
determined that its estimated net realizable value was less than the recorded
investment in the property, an additional valuation adjustment was recorded if
the decline in value was considered permanent.
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 SEC rules.
In conjunction with the review of the Partnership's 1995 financial
statements by the Securities and Exchange Commission (SEC) Staff the
Partnership agreed that it would 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. The effect of adopting SFAS
115 on net income previously reported for 1995 and 1994 is $1,648,217 and
$(830,356), respectively for Series I and $2,189,007 and $(2,321,946),
respectively for Series II. Income per BAC as previously reported was $0.51 and
$0.44 for 1995 and 1994, respectively for Series I and $0.55 and $0.42 for 1995
and 1994, respectively for Series II. Income(loss) per BAC as previously
reported has been revised to $1.22 and $0.08 per BAC for 1995 and 1994,
respectively for Series I and $1.22 and $(0.29) per BAC for 1995 and 1994,
-11-
<PAGE>
CAPITAL REALTY INVESTORS TAX EXEMPT FUND LIMITED PARTNERSHIP
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
- - -----------------------------------------------------------
AND RESULTS OF OPERATIONS - Continued
-------------------------
respectively for Series II. The impact on partners capital of adopting SFAS 115
for 1995 and 1994 is $817,861 and $830,356, respectively for Series I and
$132,939 and $2,321,946, respectively for Series II.
As discussed above, the Partnership accounted for its investment in
mortgage revenue bonds as real estate, until January 1, 1994, when the financial
statements were restated to reflect implementation of SFAS 115. Net realizable
value, prior to implementation of SFAS 115, was based on holding the assets for
long-term income production - as such net realizable value only considered the
recovery of the Partnership's investments over time based on the properties'
ability to generate sufficient cash flow to recover the Partnership's investment
over the long term. Based on the SEC's requirement that the Partnership account
for its mortgage revenue bonds as debt securities, the implementation of SFAS
115 has a different accounting framework for evaluating realizability. 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. Since these
most of bonds are in default, the Partnership has concluded that permanent
impairment has occurred. As such, the amount of permanent impairment is
measured by the Partnership's estimate of the mortgage revenue bonds' fair value
at January 1, 1994. The Partnership has measured fair value as discussed below.
This effect of adopting SFAS 115 is reflected as a cumulative effect of change
in accounting for mortgage revenue bonds in the statements of operations. On an
ongoing basis, the Partnership evaluates permanent impairment; however,
subsequent to January 1, 1994, the Partnership did not recognize any impairment
losses.
Since all of the mortgage revenue bonds, except Observatory II, are in
default, base interest and contingent interest on the mortgage revenue bonds is
recognized as revenue when collected.
SERIES I
--------
As of February 12, 1987, 2,280,000 BACs had been sold, representing capital
contributions of $57,000,000 and the completion of the offering of Series I.
The five original Series I mortgage loans securing the mortgage revenue
bonds, with a current aggregate principal amount of $44,155,000, went into
default, resulting in title transfer by actual foreclosures or deeds in lieu of
foreclosure to Owner Partnerships subject to 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 certain 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.
-12-
<PAGE>
CAPITAL REALTY INVESTORS TAX EXEMPT FUND LIMITED PARTNERSHIP
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
- - -----------------------------------------------------------
AND RESULTS OF OPERATIONS - Continued
-------------------------
In conjunction with the transfer of the Royal Oaks deed to an Owner
Partnership, the Royal Oaks mortgage revenue bond was modified. The
Partnership, 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 proposed regulations which could be
interpreted as adversely affecting the tax-exempt nature of the modified
mortgage revenue bond. However, the IRS has stated that the regulations will
apply only to modifications made on or after 30 days from the final publication
of the regulations in the Federal Register. As of April 23, 1996, the
regulations have not been finalized and no changes to these positions have been
announced by the IRS. The Partnership believes the interest on the Royal Oaks
bond should continue to be tax-exempt. However, there can be no assurance that
interest from the Royal Oaks bond will remain tax-exempt.
SERIES II
---------
As of October 29, 1987, 3,238,760 BACs had been sold, representing capital
contributions of $80,969,000 and the completion of the offering of Series II.
The five original Series II mortgage loans securing the mortgage revenue
bonds with an aggregate principal amount of $62,608,001 went into default,
resulting in deeds in lieu of foreclosure, subject to the existing indebtedness,
to Ownership Partnerships. 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 certain 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 in December 1992 the Internal Revenue Service
issued Proposed Regulation Section 1.1001-3 which specifically address the tax
consequences of modifications of debt instruments. Among other things, these
proposed regulations, if they become effective in their current form, would
provide that certain modifications of the current interest payments or 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 of this treatment,
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
-13-
<PAGE>
CAPITAL REALTY INVESTORS TAX EXEMPT FUND LIMITED PARTNERSHIP
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
- - -----------------------------------------------------------
AND RESULTS OF OPERATIONS - Continued
-------------------------
would not impose additional requirements that would have an adverse impact on
the properties.
Even if issuer consent were obtained, if the modifications are considered
material, the debt would have to be re-examined to determine whether it would
still be considered debt for tax purposes. This could result in a write-down of
principal, would most likely result in a write-off of all accrued and unpaid
past due interest and could change the contingent interest feature of the
existing mortgage loans. The write down of principal 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.
Proposed Regulation Section 1.001-3 will become effective only with respect
to modifications made on or after the date that is 30 days after the publication
of final regulations in the Federal Register. It is uncertain at this time when
this proposed regulation will be finalized and whether it will be finalized in
its current form. It is also unclear at this time what effect the Cottage
Savings decision may have on modifications that have been made to mortgage loans
which secure the mortgage revenue bonds or on modifications that might be
appropriate in the future. The General Partner believes that the modifications
which have been made were consistent with the relevant tax authority which
existed at the time of those modifications and have not jeopardized the tax-
exempt status of the mortgage revenue bonds. However, these can be no assurance
as to the tax-exempt status of the mortgage revenue bonds.
The General Partner's ongoing strategy has been to continue holding the
mortgage revenue bonds until the loan maturity dates. If the merger proposal,
as discussed below, 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 of the 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.
An affiliate of CAPREIT is the property manager for four of the five properties
securing the bonds held by Series I, and all five properties securing the bonds
in Series II. All nine properties managed by an affiliate of CAPREIT are
presently in default 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. On January
31, 1996, the agreement for the proposed merger was modified for the first time
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 first modified agreement, the redemption amount per
BAC for Series I was to be $14.4096, subject to adjustment but not less than
$14.2713 or greater than $14.5479. The modified redemption amount per BAC for
Series II was to be $14.1597, subject to adjustment but not less than $14.0152
-14-
<PAGE>
CAPITAL REALTY INVESTORS TAX EXEMPT FUND LIMITED PARTNERSHIP
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
- - -----------------------------------------------------------
AND RESULTS OF OPERATIONS - Continued
-------------------------
or greater than $14.3042. On March 14, 1996, the merger agreement was modified
for the second time to round the expected redemption amount per BAC for Series I
from $14.4096 to $14.41. The redemption amount per BAC for Series I is subject
to adjustment for available cash as defined in the amended merger agreement, but
not less than $14.27 or greater than $14.55. The merger agreement was also
modified to improve the redemption amount per BAC for Series II from $14.1597 to
$14.24, subject to adjustment for available cash, but not less than $14.10 or
greater than $14.38. In addition, the redemption amounts for Series I and
Series II will be reduced by the amount of court approved legal fees and
expenses awarded to counsel of the plaintiffs in the putative class action suits
naming the Partnership and others, as described below. Such legal fees and
expenses are not expected to exceed $0.16 and $0.20 per BAC for Series I and
Series II, respectively.
The BAC Holders will also vote upon the removal of the Partnership's
General Partner immediately prior to consummation of the proposed merger and the
election in its stead of a newly-formed wholly-owned subsidiary of CAPREIT.
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 second modified 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. If the closing of the proposed merger does not occur by June 30, 1996,
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 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
(defined as the proportionate interest of such limited partner in the fair
market value of the partnership property as encumbered by the mortgage loans).
Although such interests currently have nominal value, if the fair market value
of the partnership properties increases prior to the time CAPREIT exercises its
option, such increase in value may benefit the owners of the Owner Partnership.
This feature is required by CAPREIT as a condition 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 favorable opinions regarding
-15-
<PAGE>
CAPITAL REALTY INVESTORS TAX EXEMPT FUND LIMITED PARTNERSHIP
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
- - -----------------------------------------------------------
AND RESULTS OF OPERATIONS - Continued
-------------------------
the fairness of the redemption amounts to BAC Holders from a financial point of
view. Favorable opinions from an independent investment banking firm were
issued on March 14, 1996. A proxy statement is expected to be issued to BAC
Holders after it is filed with and clearance is received from the SEC. A
preliminary proxy statement was filed with the SEC on March 18, 1996. The
definitive proxy materials include a full description of the proposed merger and
the independent fairness opinions.
Litigation
- - ----------
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, Capital Realty Investors Tax Exempt Fund III
Limited Partnership, 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 amount offered to the BAC
Holders in the proposed merger 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 merger. 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 Chancery Court has been made by the plaintiffs
in both lawsuits to consolidate the two actions.
On January 31, 1996, the Defendants and the plaintiffs and their respective
attorneys reached a tentative settlement of the putative class actions which is
memorialized in a Memorandum of Understanding (the Memorandum), dated as of such
date. The proposed settlement must be approved by the Chancery Court. The
Memorandum 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
parties to the Memorandum will use their best efforts to execute an appropriate
Stipulation of Settlement (the Stipulation) and such other documents as may be
required in order to obtain approval by the Chancery Court of the settlement.
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. The Defendants have entered into the Memorandum solely because
the proposed settlement would eliminate the burden and expense of further
litigation and would facilitate the consummation of the proposed merger, which
the General Partner believes to be in the best interest of the BAC Holders.
In accordance with the Memorandum, the agreements for the proposed merger
were amended to provide for the revised merger terms, as discussed above.
Pursuant to the Memorandum, the plaintiffs' counsel will be entitled to apply to
the Chancery Court for an award of reasonable attorneys' fees and expenses.
-16-
<PAGE>
CAPITAL REALTY INVESTORS TAX EXEMPT FUND LIMITED PARTNERSHIP
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
- - -----------------------------------------------------------
AND RESULTS OF OPERATIONS - Continued
-------------------------
Such expenses are not expected to exceed $0.16 and $0.20 per BAC for Series I
and Series II, respectively. These fees will reduce the redemption amounts 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 have reviewed certain documents relating to the
proposed mergers, and will have the opportunity to review and take depositions
of representatives of the General Partner and CAPREIT. After such review,
counsel for the plaintiffs shall have the right to terminate the settlement
contemplated in the Memorandum, based on material information not presently
available to them.
After the Stipulation is executed, the parties will seek preliminary
approval of the settlement by the Chancery Court and will then mail notice of
the proposed settlement to members of the putative class. As soon as
practicable following completion of the discovery described in the preceding
paragraph and after class members have had a period of time to review the notice
of proposed settlement, the parties will use their best efforts to obtain final
Chancery Court approval of the settlement and the dismissal of the class actions
as to all of the claims.
On November 9, 1995, CRI filed a complaint against Capital Management
Strategies, Inc. (CMS), a company controlled by Martin C. Schwartzberg, to
determine the proper amount of fees to be paid in 1996 under an asset management
agreement. CMS answered on January 10, 1996, but asserted no counterclaims.
Thereafter, Mr. Schwartzberg launched a hostile consent solicitation to be
designated as managing general partner of approximately 125 private partnerships
sponsored by CRI. Mr. Schwartzberg is a former shareholder and executive
officer of CRI who decided to leave the company as of January 1, 1990. In
connection with his departure, he relinquished his general partner duties for
all CRI-sponsored partnerships, including those of the General Partner. On
March 28, 1996, Mr. Schwartzberg filed a preliminary proxy statement with the
SEC opposing the proposed merger.
On January 18, 1996, Mr. Schwartzberg and CMS filed a complaint in the
Circuit Court of Montgomery County, Maryland (the Circuit Court), against CRI
and Messrs. Dockser and Willoughby alleging, among other things, (i) that CRI
and Messrs. Dockser and Willoughby have breached an asset management agreement
pursuant to which Mr. Schwartzberg's company, CMS, agreed to perform limited
functions related to property-level issues for a portion of CRI's subsidized
housing portfolio (but not properties securing the mortgage revenue bonds) by
reducing the proposed budget for 1996, (ii) 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,
and (iii) that the actions in connection with the merger of CRIIMI MAE Inc. in
June, 1995 involved self-interest and led in part to the proposed reduction of
the asset management agreement budget. Neither the Partnership nor the General
Partner was named as a defendant in this action, and Mr. Schwartzberg does not
allege that he is a BAC Holder. Messrs. Dockser and Willoughby have entered an
answer denying all of Mr. Schwartzberg's claims and moving to strike the
allegations concerning the Partnership and CRIIMI MAE Inc. and dismiss the
related counts for failure to state a claim upon which relief can be granted.
Messrs. Dockser and Willoughby have publicly responded that Mr. Schwartzberg's
-17-
<PAGE>
CAPITAL REALTY INVESTORS TAX EXEMPT FUND LIMITED PARTNERSHIP
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
- - -----------------------------------------------------------
AND RESULTS OF OPERATIONS - Continued
-------------------------
suit is motivated by his budget dispute with CRI and personal animosity.
On February 12, 1996, the Circuit Court issued a memorandum opinion and
order enjoining CMS and Mr. Schwartzberg from disclosing information made
confidential under the asset management agreement.
On February 15, 1996, Mr. Schwartzberg filed suit in the Chancery Court
against the General Partner and CRITEF III Associates Limited Partnership (No.
14837). He alleges that he has made demands upon the General Partner and CRITEF
III Associates Limited Partnership, in his capacity as a general and limited
partner of the General Partner and as a limited partner of CRITEF III Associates
Limited Partnership, to inspect and obtain copies of a current list of the BAC
holders and other documents. He further alleges that his demands were rejected.
On February 23, 1996, the General Partner and CRITEF III Associates Limited
Partnership answered the complaint, admitting that his demands have 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. A hearing was held on
March 6 and 7, 1996 and it is expected that the Chancery Court will render a
decision following submission of briefs by the parties.
On February 16, 1996, the Partnership, together with the General Partner,
Capital Realty Investors Tax Exempt Fund III Limited Partnership and its general
partner, CRI, and CAPREIT (collectively, the Plaintiffs) filed suit against Mr.
Schwartzberg in the United States District Court for the Southern District of
New York (the District Court), No. 96 Civ. 1186 (LAK) (the New York Action).
The complaint alleges that Mr. Schwartzberg is engaged in an unlawful
solicitation of proxies of the BAC Holders through two press releases he issued
in violation of the federal securities laws and rules promulgated by the SEC
requiring definitive proxy materials to be filed with the SEC and delivered to
the BAC Holders. The complaint also alleges that Mr. Schwartzberg has made
false and misleading statements in the solicitations concerning the terms of the
proposed merger and the availability of certain financial information, and has
falsely imputed base motives to the principals of the General Partner. On
February 23, 1996, the District Court, without making a finding of fact, issued
a temporary restraining order barring Mr. Schwartzberg from making any
solicitation of the BAC Holders without first complying with the SEC rules
pending a hearing on a proposed preliminary injunction. The District Court held
a hearing on March 5, 1996, on the motion of preliminary injunction, and,
pending a decision, continued the temporary restraining order.
On March 18, 1996, the District Court issued its Opinion enjoining Mr.
Schwartzberg from (1) making any further solicitation of BAC Holders without
complying with the provisions of Regulation 14A under the Securities Exchange
Act of 1934, and (2) committing any violation of Rule 14a-9 (regarding false or
misleading statements) in connection with any solicitation relating to the
Partnerships. The injunction was based on the District Court's findings of fact
and conclusions of law, in which it stated that the Plaintiffs (including the
Partnership) have established a strong likelihood of success on their claim that
the press releases constitute a proxy solicitation in violation of securities
laws and that the Plaintiffs are likely to establish that Mr. Schwartzberg acted
with the requisite culpability with respect to at least some of the false
statements made in his press releases. Also on March 18, 1996, Mr. Schwartzberg
filed his answer to the complaint in the New York Action, coupled with
counterclaims against the General Partner alleging that three press releases
issued by the General Partner of the Partnership constituted solicitations in
-18-
<PAGE>
CAPITAL REALTY INVESTORS TAX EXEMPT FUND LIMITED PARTNERSHIP
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
- - -----------------------------------------------------------
AND RESULTS OF OPERATIONS - Continued
-------------------------
violation of the same provisions of the Securities Exchange Act and that they
were false and misleading. The counter-defendants deny the allegations. The
counterclaims sought a temporary restraining order against the General Partners
regarding further alleged solicitations and false and misleading statements.
The District Court denied the injunction request by order on April 23, 1996. On
April 16, 1996, Mr. Schwartzberg also filed a Notice of Appeal with respect to
the injunction against him with the U. S. Court of Appeals for the Second
Circuit.
The Partnership Agreement provides for the indemnification of the General
Partners and its affiliates for acts or omissions by the General Partner in good
faith and in the best interest of the Partnership. Such indemnification does
not extend to a finding of liability for conduct which constitutes fraud, bad
faith, misconduct, breach of fiduciary duties, or violation of state or federal
securities laws. At this time, there is no estimate as to the timing or amount,
if any, of the outcome of the New York Action, but the General Partners do not
anticipate that the litigation will have a material adverse affect on the
Partnership.
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.
SERIES I
--------
Series I expects to continue to make distributions to BAC Holders on a
semi-annual basis. The amended merger agreement stipulates that 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 amended 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 distribution 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
$1.13 per BAC, the maximum amount stipulated in the amended merger agreement.
The following distributions were paid or accrued to Series I BAC Holders of
record during 1995, 1994 and 1993:
-19-
<PAGE>
CAPITAL REALTY INVESTORS TAX EXEMPT FUND LIMITED PARTNERSHIP
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
- - -----------------------------------------------------------
AND RESULTS OF OPERATIONS - Continued
-------------------------
<TABLE>
<CAPTION>
1995 1994 1993
Distributions to Distributions to Distributions to
BAC Holders BAC Holders BAC Holders
------------------------ ------------------------ ------------------------
Six-Month Period Ended Total Per BAC Total Per BAC Total Per BAC
- - ---------------------- ----------- ------- ----------- ------- ----------- -------
<S> <C> <C> <C> <C> <C> <C>
June 30 $ 1,231,200 $ 0.54 $ 1,140,000 $ 0.50 $ 1,140,000 $ 0.50
December 31 1,231,200 0.54 1,140,000 0.50 1,140,000 0.50
----------- ------- ----------- ------- ----------- -------
Total $ 2,462,400 $ 1.08 $ 2,280,000 $ 1.00 $ 2,280,000 $ 1.00
=========== ======= =========== ======= =========== =======
</TABLE>
Distributions to Series I BAC Holders for the years ended December 31,
1995, 1994 and 1993 were funded as follows:
<TABLE>
<CAPTION>
For the years ended
December 31,
------------------------------------------------
1995 1994 1993
------------ ------------ ------------
<S> <C> <C> <C>
Cash Flow (1) $ 2,850,265 $ 2,654,529 $ 2,382,906
Net deposits to working capital reserves (362,741) (351,266) (79,643)
------------ ------------ ------------
Total cash available for distribution $ 2,487,524 $ 2,303,263 $ 2,303,263
============ ============ ============
Distributions to:
General Partner (1.01%) $ 25,124 $ 23,263 $ 23,263
============ ============ ============
BAC Holders (98.99%) $ 2,462,400 $ 2,280,000 $ 2,280,000
============ ============ ============
</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
to be construed as an alternative to operating income in accordance with
generally accepted accounting principles (GAAP) as an indication of the
-20-
<PAGE>
CAPITAL REALTY INVESTORS TAX EXEMPT FUND LIMITED PARTNERSHIP
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
- - -----------------------------------------------------------
AND RESULTS OF OPERATIONS - Continued
-------------------------
Partnership's operating performance.
Although distributions are paid on a semi-annual basis, in July 1993, the
Partnership began declaring distributions on a monthly basis as a result of
listing the BACs on AMEX. Distributions to BAC Holders totalling $858,808 or
$0.37667 per BAC were declared payable for the four
months ending April 30, 1996 to BAC Holders of record as of the last day of each
month.
As of December 31, 1995, Series I had cash and cash equivalents of $58,924,
unrestricted marketable securities of $1,315,182 and working capital reserves
invested in marketable securities of $1,284,670. 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 1995 and 1994 for Series I as the cost
for the tax-exempt municipal bonds approximated fair value throughout 1995 and
1994.
As of December 31, 1995, Series I had aggregate investments in marketable
securities with the following maturities:
Amount Maturity
----------- --------
$ 99,852 Within one year
100,000 Between one and five years
2,400,000 After ten years
-----------
$ 2,599,852
===========
In December 1991, the FASB issued Statement of Financial Accounting
Standards No. 107 "Disclosures about Fair Value of Financial Instruments" (SFAS
107). This statement requires the disclosure of fair value information about
financial instruments for which it is practicable to estimate that value. The
Partnership implemented SFAS 107 in 1995. The Partnership has determined that
the carrying value of its cash and cash equivalents approximates fair value.
The estimated fair value of marketable securities and working capital reserves
invested in marketable securities are based on the quoted market prices of these
instruments at December 31, 1995. The estimated fair value of the mortgage
revenue bonds is based upon the redemption amount relating to the mortgage
revenue bonds under the amended merger agreement.
The following table presents information on Series I's financial
instruments:
-21-
<PAGE>
CAPITAL REALTY INVESTORS TAX EXEMPT FUND LIMITED PARTNERSHIP
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
- - -----------------------------------------------------------
AND RESULTS OF OPERATIONS - Continued
-------------------------
<TABLE>
<CAPTION>
Carrying Estimated Fair
Value at Value at
December 31, 1995 December 31, 1995
000's 000's
----------------- -----------------
<S> <C> <C>
Cash and cash equivalents $ 59 $ 59
Marketable securities 1,315 1,315
Working capital reserves
invested in marketable
securities 1,285 1,285
Mortgage revenue bonds 30,740 30,248
</TABLE>
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 for 1995 and 1994, which consists primarily of receipt of
base interest on mortgage loans, was adequate to support operating, investing
and financing requirements and the declared distributions to BAC Holders and the
General Partner. Cash and cash equivalents decreased in 1995 primarily as a
result of deposits to the working capital reserves. 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 amended 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 amended 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 distribution 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 amended merger agreement.
The following distributions were paid or accrued to Series II BAC Holders
of record during 1995, 1994 and 1993:
-22-
<PAGE>
CAPITAL REALTY INVESTORS TAX EXEMPT FUND LIMITED PARTNERSHIP
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
- - -----------------------------------------------------------
AND RESULTS OF OPERATIONS - Continued
-------------------------
<TABLE>
<CAPTION>
1995 1994 1993
Distributions to Distributions to Distributions to
BAC Holders BAC Holders BAC Holders
------------------------ ------------------------ ------------------------
Six-Month Period Ended Total Per BAC Total Per BAC Total Per BAC
- - ---------------------- ----------- ------- ----------- ------- ----------- -------
<S> <C> <C> <C> <C> <C> <C>
June 30 $ 1,748,930 $ 0.54 $ 1,619,380 $ 0.50 $ 1,619,380 $ 0.50
December 31 1,748,932 0.54 1,619,380 0.50 1,619,380 0.50
----------- ------- ----------- ------- ----------- -------
Total $ 3,497,862 $ 1.08 $ 3,238,760 $ 1.00 $ 3,238,760 $ 1.00
=========== ======= =========== ======= =========== =======
</TABLE>
Distributions to Series II BAC Holders for the years ended December 31,
1995, 1994 and 1993 were funded as follows:
<TABLE>
<CAPTION>
For the years ended
December 31,
------------------------------------------------
1995 1994 1993
------------ ------------ ------------
<S> <C> <C> <C>
Cash Flow (1) $ 4,194,190 $ 3,731,519 $ 3,310,726
Net deposits to working capital/interest reserves (660,639) (459,714) (38,920)
------------ ------------ ------------
Total cash available for distribution $ 3,533,551 $ 3,271,805 $ 3,271,806
============ ============ ============
Distributions to:
General Partner (1.01%) $ 35,689 $ 33,045 $ 33,046
============ ============ ============
BAC Holders (98.99%) $ 3,497,862 $ 3,238,760 $ 3,238,760
============ ============ ============
</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
to be construed as an alternative to operating income in accordance with
-23-
<PAGE>
CAPITAL REALTY INVESTORS TAX EXEMPT FUND LIMITED PARTNERSHIP
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
- - -----------------------------------------------------------
AND RESULTS OF OPERATIONS - Continued
-------------------------
GAAP as an indication of the Partnership's operating performance.
Although distributions are paid on a semi-annual basis, in July 1993, the
Partnership began declaring distributions on a monthly basis as a result of
listing the BACs on AMEX. Distributions to BAC Holders totalling $1,252,331 or
$0.38667 per BAC were declared payable for the four months ending April 30, 1996
to BAC Holders of record as of the last day of each month.
As of December 31, 1995, Series II had cash and cash equivalents of
$88,986, unrestricted marketable securities of $1,512,281, and working capital
reserves invested in marketable securities of $2,307,385. 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 1995 and 1994 for
Series II as the cost for the tax-exempt municipal bonds approximated fair value
throughout 1995 and 1994.
As of December 31, 1995, Series II had aggregate investments in marketable
securities with the following maturities:
Amount Maturity
----------- --------
$ 417,379 Within one year
630,917 Between one and five years
200,000 Between five and ten years
2,571,370 After ten years
-----------
$ 3,819,666
===========
The Partnership implemented SFAS 107 in 1995. The Partnership has
determined that the carrying value of its cash and cash equivalents approximates
fair value. The estimated fair value of marketable securities and working
capital reserves invested in marketable securities are based on the quoted
market prices of these instruments at December 31, 1995. The estimated fair
value of the mortgage revenue bonds is based upon the redemption amount relating
to the mortgage revenue bonds under the amended merger agreement.
The following table presents information on Series II's financial
instruments:
-24-
<PAGE>
CAPITAL REALTY INVESTORS TAX EXEMPT FUND LIMITED PARTNERSHIP
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
- - -----------------------------------------------------------
AND RESULTS OF OPERATIONS - Continued
-------------------------
<TABLE>
<CAPTION>
Carrying Estimated Fair
Value at Value at
December 31, 1995 December 31, 1995
000's 000's
----------------- -----------------
<S> <C> <C>
Cash and cash equivalents $ 89 $ 89
Marketable securities 1,512 1,508
Working capital reserves
invested in marketable
securities 2,307 2,301
Mortgage revenue bonds 43,793 42,251
</TABLE>
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 1995 and 1994, which consists primarily of receipt of
base interest on mortgage loans, was adequate to support operating, investing
and financing requirements and the payment of declared distributions to BAC
Holders and the General Partner. Cash and cash equivalents decreased in 1995
primarily due to deposits to the working capital reserves. 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 1995 increased $2.6 million from
1994 primarily due to the cumulative effect of change in accounting for mortgage
revenue bonds of $2.5 million in 1994, as discussed above. Contributing to the
increase in net income was an increase in interest from mortgage revenue bonds
of approximately $274,000 resulting principally from an increase in occupancy
and rental rates at all of the underlying properties. Also contributing to the
increase in net income was an increase of approximately $29,000 in interest and
other income as a result of larger investment balances and higher yields on
investments. Partially offsetting the increase in net income were 1995 merger
related expenses of approximately $169,000, including fees incurred by the
Partnership for an independent fairness opinion in connection with the
consideration to be received by BAC Holders in the proposed merger, as
previously discussed. There were no material increases or decreases in Series
I's remaining income or expenses.
-25-
<PAGE>
CAPITAL REALTY INVESTORS TAX EXEMPT FUND LIMITED PARTNERSHIP
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
- - -----------------------------------------------------------
AND RESULTS OF OPERATIONS - Continued
-------------------------
The Partnership's Series I net income for 1994 decreased approximately
$268,000 from 1993 primarily due to the cumulative effect of change in
accounting for mortgage revenue bonds of $2.5 million in 1994, as discussed
above. Partially offsetting the decrease in net income was an increase in
income from investments of $2.2 million due to the reclassification of all of
its mortgage revenue bonds from real estate to securities, as discussed above.
The 1993 income from investments, except Observatory II, was limited to the
underlying properties' net rental income. Actual interest received by Series I
from the borrowers increased approximately $292,000 in 1994 from 1993 primarily
due to an increase in rental rates at the underlying properties. There were no
material increases or decreases in Series I's remaining income or expenses.
SERIES II
---------
The Partnership's Series II net income for 1995 increased $4.9 million from
1994 primarily due to the cumulative effect of change in accounting for mortgage
revenue bonds of $4.6 million 1994, as discussed above. Contributing to the
increase in net income was an increase in interest from mortgage revenue bonds
of approximately $452,000 resulting principally from an increase in occupancy
and rental rates at all of the underlying properties. Also contributing to the
increase in net income was an increase of approximately $34,000 in interest and
other income as a result of larger investment balances and higher yields on
investments. Partially offsetting the increase in net income were 1995 merger
related expenses of approximately $169,000, including fees incurred by the
Partnership for an independent fairness opinion in connection with the
consideration to be received by BAC Holders in the proposed merger, as
previously discussed. There were no material increases or decreases in Series
II's remaining income or expenses.
The Partnership's Series II net loss for 1994 increased $2.6 million from
1993 primarily due to the cumulative effect of change in accounting for mortgage
revenue bonds of $4.6 million in 1994, as discussed above. Contributing to the
increase in net loss was an extraordinary gain on debt reduction of
approximately $416,000 recognized in 1993, as discussed below. Partially
offsetting the increase in net loss was an increase in income from investments
of $2.3 million due to the reclassification of all of its mortgage revenue bonds
from real estate to securities, as discussed above. The 1993 income from
investments was limited to the underlying properties' net rental income. Actual
interest received by Series II from the borrowers increased approximately
$190,000 in 1994 from 1993 primarily due to an increase in rental rates at the
underlying properties. Also offsetting the increase in net loss was a decrease
in general and administrative expenses of approximately $86,000 due to the 1993
transfer of the deed of James Street Crossing to an Owner Partnership. There
were no material increases or decreases in Series II's remaining income or
expenses.
In the fourth quarter of 1992, the Partnership was planning to take a deed-
in-lieu of foreclosure (which occurred in March 1993) on James Street Crossing,
therefore the Partnership evaluated the liabilities of the property. As such
the Partnership believed that the Owner Partnership was obligated for a $416,000
liability to the former general partner of James Street Crossing. This
obligation was recorded at December 31, 1992. After the Owner Partnership took
possession of the property in the first quarter of 1993 through a deed-in-lieu
of foreclosure, and sorting through the liabilities related to the real estate
the Partnership concluded that the Owner Partnership would not be required to
-26-
<PAGE>
CAPITAL REALTY INVESTORS TAX EXEMPT FUND LIMITED PARTNERSHIP
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
- - -----------------------------------------------------------
AND RESULTS OF OPERATIONS - Continued
-------------------------
assume this liability. Therefore it was treated as a debt extinguishment under
SFAS No. 4, "Reporting Gains and Losses for Extinguishment of Debt."
Presented below is a summary of base interest payments for the years ended
December 31, 1995, 1994 and 1993 that are due to the Partnership from the
borrowers.
-27-
<PAGE>
CAPITAL REALTY INVESTORS TAX EXEMPT FUND LIMITED PARTNERSHIP
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
- - -----------------------------------------------------------
AND RESULTS OF OPERATIONS - Continued
-------------------------
SERIES I
---------
<TABLE>
<CAPTION>
For the year ended December 31, 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 $ 128,000 $ 128,000 $ -- $ --
Royal Oaks 1,069,296 838,525 230,771 1,593,244
Trailway Pond 460,488 244,848 215,640 852,472
Valley Creek 1,326,353 944,479 381,874 2,751,181
White Bear Woods 1,310,925 947,931 362,994 2,000,751
----------- ----------- ---------- -----------
$ 4,295,062 $ 3,103,783 $1,191,279 $ 7,197,648
=========== =========== ========== ===========
</TABLE>
<TABLE>
<CAPTION>
For the year ended December 31, 1994
---------------------------------------------------------------
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 $ 128,000 $ 128,000 $ -- $ --
Royal Oaks 1,069,296 754,518 314,778 1,362,473
Trailway Pond 460,488 252,168 208,320 636,832
Valley Creek 1,326,353 821,503 504,850 2,369,307
White Bear Woods 1,310,925 873,476 437,449 1,637,757
----------- ----------- ---------- -----------
$ 4,295,062 $ 2,829,665 $1,465,397 $ 6,006,369
=========== =========== ========== ===========
</TABLE>
-28-
<PAGE>
CAPITAL REALTY INVESTORS TAX EXEMPT FUND LIMITED PARTNERSHIP
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
- - -----------------------------------------------------------
AND RESULTS OF OPERATIONS - Continued
-------------------------
<TABLE>
<CAPTION>
For the year ended December 31, 1993
---------------------------------------------------------------
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 $ 128,000 $ 128,000 $ -- $ --
Royal Oaks 1,069,296 679,224 390,072 1,047,695
Trailway Pond 460,488 210,360 250,128 428,512
Valley Creek 1,326,353 728,818 597,535 1,864,457
White Bear Woods 1,310,925 791,512 519,413 1,200,308
----------- ----------- ---------- -----------
$ 4,295,062 $ 2,537,914 $1,757,148 $ 4,540,972
=========== =========== ========== ===========
</TABLE>
(1) The Partnership charges the borrowers interest on unpaid base
interest, which totalled $783,685, $584,856 and $370,558 for 1995,
1994 and 1993, respectively.
-29-
<PAGE>
CAPITAL REALTY INVESTORS TAX EXEMPT FUND LIMITED PARTNERSHIP
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
- - -----------------------------------------------------------
AND RESULTS OF OPERATIONS - Continued
-------------------------
SERIES II
---------
<TABLE>
<CAPTION>
For the year ended December 31, 1995
---------------------------------------------------------------------------------
Base Interest Base Interest Cumulative
Paid From Paid From Current Base Unpaid
Current Base Properties' Non-Operating Interest Full Base
Interest Due(1) Operations(3) Sources(2) Not Paid Interest
--------------- ------------- ------------- -----------------------
<S> <C> <C> <C> <C><C>
Ethan's Ridge and
Ethan's Glen IIB $ 1,518,750 $ 1,215,081 $ -- $ 303,669$ 2,002,193
Fountain Place 1,985,500 1,416,369 -- 569,131 5,063,498
James Street
Crossing 1,335,758 1,070,316 -- 265,442 1,695,171
Trailway Pond II 1,003,000 575,170 -- 427,830 2,568,706
----------- ----------- ----------- ---------------------
$ 5,843,008 $ 4,276,936 $ -- $1,566,072$11,329,568
=========== =========== =========== =====================
</TABLE>
<TABLE>
<CAPTION>
For the year ended December 31, 1994
---------------------------------------------------------------------------------
Base Interest Base Interest Cumulative
Paid From Paid From Current Base Unpaid
Current Base Properties' Non-Operating Interest Full Base
Interest Due(1) Operations Sources(2) Not Paid Interest
--------------- ------------- ------------- -----------------------
<S> <C> <C> <C> <C><C>
Ethan's Ridge and
Ethan's Glen IIB $ 1,518,750 $ 1,185,957 $ 27,500 $ 305,293$ 1,698,524
Fountain Place 1,985,500 1,271,575 -- 713,925 4,494,367
James Street
Crossing 1,335,758 879,491 -- 456,267 1,429,729
Trailway Pond II 1,003,000 460,387 -- 542,613 2,140,876
----------- ----------- ----------- ----------------------
$ 5,843,008 $ 3,797,410 $ 27,500 $ 2,018,098$ 9,763,496
=========== =========== =========== ======================
</TABLE>
-30-
<PAGE>
CAPITAL REALTY INVESTORS TAX EXEMPT FUND LIMITED PARTNERSHIP
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
- - -----------------------------------------------------------
AND RESULTS OF OPERATIONS - Continued
-------------------------
<TABLE>
<CAPTION>
For the year ended December 31, 1993
---------------------------------------------------------------------------------
Base Interest Base Interest Cumulative
Paid From Paid From Current Base Unpaid
Current Base Properties' Non-Operating Interest Full Base
Interest Due(1) Operations Sources(2) Not Paid Interest
--------------- ------------- ------------- -----------------------
<S> <C> <C> <C> <C><C>
Ethan's Ridge and
Ethan's Glen IIB $ 1,518,750 $ 1,051,763 $ -- $ 466,987$ 1,393,231
Fountain Place 1,985,500 1,343,102 -- 642,398 3,780,442
James Street
Crossing 1,335,758 767,321 23,288 545,149 973,462
Trailway Pond II 1,003,000 449,564 -- 553,436 1,598,263
----------- ----------- ----------- ----------------------
$ 5,843,008 $ 3,611,750 $ 23,288 $ 2,207,970$ 7,745,398
=========== =========== =========== ======================
</TABLE>
(1) The Partnership charges the borrowers interest on unpaid base interest,
which, not including current base interest due, totaled $1,197,825,
$932,242 and $582,804 for 1995, 1994 and 1993, respectively.
(2) Amounts were funded from reserves provided for from the mortgage loan
proceeds and/or from the general partners of the borrowers.
(3) Excludes 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.
-31-
<PAGE>
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
----------------------------------------
To the Series I and Series II Partners and Beneficial Assignee
Certificate Holders of Capital Realty Investors Tax
Exempt Fund Limited Partnership:
We have audited the accompanying balance sheets of Series I and Series II
of Capital Realty Investors Tax Exempt Fund Limited Partnership (the
Partnership, a Delaware limited partnership) as of December 31, 1995 and 1994,
the related statements of operations, changes in partners' capital (deficit) and
cash flows for the years ended December 31, 1995 and 1994 and the related
consolidated statements of operations, changes in partners' capital (deficit)
and cash flows for the year ended December 31, 1993. These financial statements
are the responsibility of the Partnership's management. Our responsibility is
to express an opinion on these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
As discussed in Note 2 to the financial statements, the Partnership's 1994
and 1995 financial statements have been restated to account for its investments
in mortgage revenue bonds as debt securities.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of Series I and Series II of
Capital Realty Investors Tax Exempt Fund Limited Partnership as of December 31,
1995 and 1994, and the results of operations and cash flows of Series I and
Series II for the years ended December 31, 1995, 1994 and 1993, in conformity
with generally accepted accounting principles.
Arthur Andersen LLP
Washington, D.C.
May 8, 1996
-32-
<PAGE>
CAPITAL REALTY INVESTORS TAX EXEMPT FUND LIMITED PARTNERSHIP
BALANCE SHEETS
ASSETS
<TABLE>
<CAPTION>
SERIES I SERIES II
-------------------------------- ------------------------------
As of December 31, As of December 31,
1995 1994 1995 1994
----------- ----------- ----------- -----------
<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 58,924 103,864 88,986 101,283
Marketable securities 1,315,182 1,089,522 1,512,281 1,447,843
Working capital reserves invested in
marketable securities 1,284,670 921,929 2,307,385 1,646,746
Receivables and other assets 21,958 26,918 36,996 42,872
----------- ----------- ----------- -----------
Total assets $33,421,019 $32,882,518 $47,738,900 $47,031,996
=========== =========== =========== ===========
LIABILITIES AND PARTNERS' CAPITAL (DEFICIT)
Distributions payable $ 1,243,762 $ 1,151,631 $ 1,766,776 $ 1,635,903
Accounts payable and accrued expenses 198,413 77,235 224,135 99,475
----------- ----------- ----------- -----------
Total liabilities 1,442,175 1,228,866 1,990,911 1,735,378
----------- ----------- ----------- -----------
Partners' capital (deficit):
General Partner (214,083) (217,367) (289,808) (294,367)
Beneficial Assignee Certificates
(BACs) - issued and outstanding,
2,280,000 of Series I BACs and
3,238,760 of Series II BACs 32,192,927 31,871,019 46,037,797 45,590,985
----------- ----------- ----------- -----------
Total partners' capital 31,978,844 31,653,652 45,747,989 45,296,618
----------- ----------- ----------- -----------
Total liabilities and
partners' capital $33,421,019 $32,882,518 $47,738,900 $47,031,996
=========== =========== =========== ===========
</TABLE>
The accompanying notes are an integral part
of these financial statements.
-33-
<PAGE>
CAPITAL REALTY INVESTORS TAX EXEMPT FUND LIMITED PARTNERSHIP
STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
SERIES I
-------------------------------------------------
For the years ended December 31,
1995 1994 1993
----------- ----------- ------------
<S> <C> <C> <C>
Interest from mortgage revenue bonds $ 3,103,783 $ 2,829,665 $ 128,000
----------- ----------- ------------
Income from investments in real estate:
Rental revenues -- -- 5,612,280
Rental expenses -- -- (3,358,479)
Depreciation -- -- (1,741,232)
----------- ----------- -----------
Net rental income -- -- 512,569
----------- ----------- -----------
3,103,783 2,829,665 640,569
----------- ----------- -----------
Other income (expenses):
Other interest income 75,750 46,713 47,738
Merger-related expenses (169,157) -- --
General and administrative (155,396) (169,257) (185,885)
Professional fees (42,264) (48,390) (34,063)
AMEX Listing -- -- (16,978)
----------- ----------- -----------
(291,067) (170,934) (189,188)
----------- ----------- -----------
Income before before cumulative effect of
accounting change 2,812,716 2,658,731 451,381
Cumulative effect of change in accounting for
mortgage revenue bonds -- (2,475,448) --
----------- ----------- -----------
Net income $ 2,812,716 $ 183,283 $ 451,381
=========== =========== ===========
Net income allocated to General Partner (1.01%) $ 28,408 $ 1,851 $ 4,559
=========== =========== ===========
Net income allocated to BAC Holders (98.99%) $ 2,784,308 $ 181,432 $ 446,822
=========== =========== ===========
Per BAC data:
Income before before cumulative effect of
accounting change $ 1.22 $ 1.15 $ 0.20
Cumulative effect of change in accounting for
mortgage revenue bonds -- (1.07) --
----------- ----------- -----------
Net income per BAC $ 1.22 $ 0.08 $ 0.20
=========== =========== ===========
BACs outstanding 2,280,000 2,280,000 2,280,000
=========== =========== ===========
</TABLE>
The accompanying notes are an integral part
of these financial statements.
-34-
<PAGE>
CAPITAL REALTY INVESTORS TAX EXEMPT FUND LIMITED PARTNERSHIP
STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
SERIES II
-------------------------------------------------
For the years ended December 31,
1995 1994 1993
----------- ----------- ------------
<S> <C> <C> <C>
Interest from mortgage revenue bonds $ 4,276,936 $ 3,824,910 $ --
----------- ----------- ------------
Income from investments in real estate:
Rental revenues -- -- 7,950,088
Rental expenses -- -- (4,291,557)
Depreciation -- -- (2,146,661)
----------- ----------- -----------
Net rental income -- -- 1,511,870
----------- ----------- -----------
4,276,936 3,824,910 1,511,870
----------- ----------- ------------
Other income (expenses):
Other interest income 126,506 92,536 73,571
Merger-related expenses (169,462) -- --
General and administrative (191,711) (203,936) (290,178)
Professional fees (57,347) (59,183) (43,402)
AMEX listing -- -- (21,584)
----------- ----------- -----------
(292,014) (170,583) (281,593)
----------- ----------- -----------
Income before extraordinary item and cumulative
effect of accounting change 3,984,922 3,654,327 1,230,277
Extraordinary item - gain on debt reduction -- -- 416,432
Cumulative effect of change in accounting for
mortgage revenue bonds -- (4,600,720) --
----------- ----------- -----------
Net income (loss) $ 3,984,922 $ (946,393) $ 1,646,709
=========== =========== ===========
Net income (loss) allocated to General Partner (1.01%) $ 40,248 $ (9,559) $ 16,632
=========== =========== ===========
Net income (loss) allocated to BAC Holders (98.99%) $ 3,944,674 $ (936,834) $ 1,630,077
=========== =========== ===========
Per BAC data:
Income before extraordinary item and cumulative
effect of accounting change $ 1.22 $ 1.12 $ 0.37
Extraordinary gain -- -- 0.13
Cumulative effect of change in accounting for
mortgage revenue bonds -- (1.41) --
----------- ----------- -----------
Net income (loss) per BAC $ 1.22 $ (0.29) $ 0.50
=========== =========== ===========
BACs outstanding 3,238,760 3,238,760 3,238,760
=========== =========== ===========
</TABLE>
The accompanying notes are an integral part
of these financial statements.
-35-
<PAGE>
CAPITAL REALTY INVESTORS TAX EXEMPT FUND LIMITED PARTNERSHIP
STATEMENTS OF CHANGES IN PARTNERS' CAPITAL (DEFICIT)
For the years ended December 31, 1995, 1994 and 1993
<TABLE>
<CAPTION>
SERIES I
------------------------------------------------
Beneficial
Assignee
Certificate General
Holders Partner Total
----------- ----------- -----------
<S> <C> <C> <C>
Balance, December 31, 1992 $35,802,765 $ (177,251) $35,625,514
Net income 446,822 4,559 451,381
Distributions of $1.00 per BAC (including return
of capital of $0.80 per BAC) (2,280,000) (23,263) (2,303,263)
----------- ----------- -----------
Balance, December 31, 1993 33,969,587 (195,955) 33,773,632
Net income 181,432 1,851 183,283
Distributions of $1.00 per BAC (including return
of capital of $0.92 per BAC) (2,280,000) (23,263) (2,303,263)
----------- ----------- -----------
Balance, December 31, 1994 31,871,019 (217,367) 31,653,652
Net income 2,784,308 28,408 2,812,716
Distributions of $1.08 per BAC (none of which is
return of capital) (2,462,400) (25,124) (2,487,524)
----------- ----------- -----------
Balance, December 31, 1995 $32,192,927 $ (214,083) $31,978,844
=========== =========== ===========
</TABLE>
The accompanying notes are an integral part
of these financial statements.
-36-
<PAGE>
CAPITAL REALTY INVESTORS TAX EXEMPT FUND LIMITED PARTNERSHIP
STATEMENTS OF CHANGES IN PARTNERS' CAPITAL (DEFICIT)
For the years ended December 31, 1995, 1994 and 1993
<TABLE>
<CAPTION>
SERIES II
------------------------------------------------
Beneficial
Assignee
Certificate General
Holders Partner Total
----------- ----------- -----------
<S> <C> <C> <C>
Balance, December 31, 1992 $51,375,262 $ (235,349) $51,139,913
Net income 1,630,077 16,632 1,646,709
Distributions of $1.00 per BAC (including return
of capital of $0.50 per BAC) (3,238,760) (33,046) (3,271,806)
----------- ----------- -----------
Balance, December 31, 1993 49,766,579 (251,763) 49,514,816
Net loss (936,834) (9,559) (946,393)
Distributions of $1.00 per BAC (all of which is return
of capital) (3,238,760) (33,045) (3,271,805)
----------- ----------- -----------
Balance, December 31, 1994 45,590,985 (294,367) 45,296,618
Net income 3,944,674 40,248 3,984,922
Distributions of $1.08 per BAC (none of which is
return of capital) (3,497,862) (35,689) (3,533,551)
----------- ----------- -----------
Balance, December 31, 1995 $46,037,797 $ (289,808) $45,747,989
=========== =========== ===========
</TABLE>
The accompanying notes are an integral part
of these financial statements.
-37-
<PAGE>
CAPITAL REALTY INVESTORS TAX EXEMPT FUND LIMITED PARTNERSHIP
STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
SERIES I
----------------------------------------------
For the years ended December 31,
1995 1994 1993
----------- ----------- -----------
<S> <C> <C> <C>
Cash flows from operating activities:
Net income $ 2,812,716 $ 183,283 $ 451,381
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation -- -- 1,741,232
Cumulative effect of accounting change -- 2,475,448 --
Changes in assets and liabilities:
Increase in restricted cash and cash equivalents -- -- (9,584)
Decrease (increase) in receivables and other assets 4,960 6,938 (2,424)
Increase in accrued mortgage administration and
servicing fees due to related parties -- -- 265,968
Decrease in other liabilities related to
real estate operations -- -- (96,940)
Increase (decrease) in accounts payable and
accrued expenses 121,178 (6,922) (12,528)
----------- ----------- -----------
Net cash provided by operating activities 2,938,854 2,658,747 2,337,105
----------- ----------- -----------
Cash flows from investing activities:
Sale of marketable securities 2,612,435 3,177,612 2,966,087
Purchase of marketable securities (2,838,095) (3,111,515) (2,883,255)
Deposits to working capital reserves invested in
marketable securities (362,741) (351,266) (79,643)
----------- ----------- -----------
Net cash (used in) provided by investing activities (588,401) (285,169) 3,189
----------- ----------- -----------
Cash flows from financing activities:
Distributions to BAC Holders and General Partner (2,395,393) (2,303,263) (2,309,482)
----------- ----------- -----------
Net (decrease) increase in cash and cash equivalents (44,940) 70,315 30,812
Cash and cash equivalents, beginning of year 103,864 33,549 2,737
----------- ----------- -----------
Cash and cash equivalents, end of year $ 58,924 $ 103,864 $ 33,549
=========== =========== ===========
</TABLE>
The accompanying notes are an integral part
of these financial statements.
-38-
<PAGE>
CAPITAL REALTY INVESTORS TAX EXEMPT FUND LIMITED PARTNERSHIP
STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
SERIES II
----------------------------------------------
For the years ended December 31,
1995 1994 1993
----------- ----------- -----------
<S> <C> <C> <C>
Cash flows from operating activities:
Net income (loss) $ 3,984,922 $ (946,393) $ 1,646,709
Adjustments to reconcile net income
to net cash provided by operating activities:
Depreciation -- -- 2,146,661
Cumulative effect of accounting change -- 4,600,720 --
Changes in assets and liabilities:
Increase in restricted cash and cash equivalents -- -- (312,337)
Decrease (increase) in receivables and other assets 5,876 (6,253) 68,391
Increase in accrued mortgage administration and
servicing fees due to related parties -- -- 391,297
Decrease in other liabilities related to real
estate operations -- -- (587,414)
Increase (decrease) in accounts payable and accrued
expenses 124,660 (6,100) (9,007)
----------- ----------- -----------
Net cash provided by operating activities 4,115,458 3,641,974 3,344,300
----------- ----------- -----------
Cash flows from investing activities:
Sale of marketable securities 7,528,134 5,874,674 6,590,743
Purchase of marketable securities (7,592,572) (5,886,656) (6,459,193)
Deposits to working capital reserves invested in marketable
securities (660,639) (459,714) (75,409)
Withdrawals from interest reserves invested in
marketable securities -- -- 16,939
Withdrawals from working capital reserves invested in
marketable securities -- -- 19,550
----------- ----------- -----------
Net cash (used in) provided by investing activities (725,077) (471,696) 92,630
----------- ----------- -----------
Cash flows from financing activities:
Distributions to BAC Holders and General Partner (3,402,678) (3,271,805) (3,280,642)
----------- ----------- -----------
Net (decrease) increase in cash and cash equivalents (12,297) (101,527) 156,288
Cash and cash equivalents, beginning of year 101,283 202,810 46,522
----------- ----------- -----------
Cash and cash equivalents, end of year $ 88,986 $ 101,283 $ 202,810
=========== =========== ===========
</TABLE>
The accompanying notes are an integral part
of these financial statements.
-39-
<PAGE>
CAPITAL REALTY INVESTORS TAX EXEMPT FUND LIMITED PARTNERSHIP
NOTES TO FINANCIAL STATEMENTS
1. Organization
Capital Realty Investors Tax Exempt Fund Limited Partnership (the
Partnership) was organized on August 1, 1986 under the Delaware Revised Uniform
Limited Partnership Act and will continue until December 31, 2016, unless
dissolved earlier in accordance with its Agreement of Limited Partnership. The
Partnership was formed to acquire a portfolio of tax-exempt mortgage revenue
bonds issued by various state or local governments or their agencies or
authorities and collateralized by nonrecourse participating first mortgage loans
on multifamily residential developments (the Observatory II bond, as modified in
1992, no longer has a participating loan feature).
The Partnership received initial capital contributions from the General
Partner and the Assignor Limited Partner. The General Partner is CRITEF
Associates Limited Partnership (CRITEF Associates) whose general partners
include C.R.I., Inc. (CRI) and the shareholders of CRI. The limited partners of
CRITEF Associates are the shareholders of CRI, a general partnership consisting
of certain current and former employees of CRI and others. The Assignor Limited
Partner is CRITEF, Inc., whose outstanding shares of stock are owned by the
shareholders of CRI.
The Assignor Limited Partner has assigned certain of the ownership
attributes of its limited partnership interests (including rights to a
percentage of the income, gains, losses, deductions and distributions of the
Partnership) to the purchasers of Beneficial Assignee Certificates (BACs) on the
basis of one unit of limited partnership interest for one BAC.
A Form S-11 Registration Statement was filed with the Securities and
Exchange Commission (SEC) and became effective October 29, 1986 for a maximum
offering of 12,000,000 BACs at $25 per BAC (the public offering). The
Registration Statement provided, as was allowed for in the Limited Partnership
Agreement, that the BACs could be issued in series at the discretion of the
General Partner. On February 12, 1987, the Partnership completed offering BACs
in Series I after raising $57,000,000 from the sale of 2,280,000 BACs, and on
October 29, 1987, the Partnership completed offering BACs in Series II after
raising $80,969,000 from the sale of 3,238,760 BACs. The public offering
terminated on October 29, 1987.
On July 1, 1993, the General Partner listed the BACs on the American Stock
Exchange (AMEX) with a trading symbol of CRA for Series I and CRB for Series II.
The General Partner believes that the benefits from listing the BACs on AMEX
include increased liquidity and reduced transaction costs. However, a publicly
traded partnership is treated as a corporation for income tax purposes unless it
meets certain exceptions. To qualify under these exceptions,the General Partner
annually invests in de minimus taxable investments for both Series I and
Series II. In 1995, 1994 and 1993 Series I and Series II met the exceptions,
and the Partnership was not taxed as a corporation.
The Partnership accounts for each Series of BACs separately as though it
held a separate and distinct pool of mortgage revenue bonds secured by real
estate and, if applicable, certain balances in the Partnership's interest
reserves. Organization and offering costs, the Partnership's working capital
reserves and certain general and administrative expenses of the Partnership have
been allocated, unless specifically attributed to a Series, pro rata among the
Series, based on the gross offering proceeds raised by each Series (except for
costs relating to the proposed merger, discussed in Note 7, which are allocated
evenly between Series I and Series II.) Deposits to the Partnership's interest
reserves and subsequent distributions from the interest reserves to BAC Holders
-40-
<PAGE>
CAPITAL REALTY INVESTORS TAX EXEMPT FUND LIMITED PARTNERSHIP
NOTES TO FINANCIAL STATEMENTS
1. Organization - continued
are accounted for by mortgage revenue bond investment by Series. The amounts and
distributions of cash flow, residual proceeds, liquidation proceeds, profits and
losses and all other priorities and allocations are separately determined for
each Series of BACs.
2. Summary of significant accounting policies
a. Method of accounting
--------------------
The financial statements of each Series of the Partnership are
prepared in accordance with generally accepted accounting principles
(GAAP).
b. Use of estimates
----------------
In preparing financial statements in conformity with GAAP, the
Partnership is required to make estimates and assumptions that affect the
reported amounts of assets and liabilities and the disclosure of contingent
assets and liabilities at the date of the financial statements and revenues
and expenses during the reporting period. Actual results could differ from
those estimates.
c. Investment in mortgage revenue bonds
------------------------------------
Prior to January 1, 1994, investments in mortgage revenue bonds were
accounted for as real estate on the earlier of the date of foreclosure,
deed in lieu of foreclosure, or in-substance foreclosure, and were recorded
as real estate at the lower of (a) the carrying value of the mortgage
revenue bonds and related accrued interest or (b) the estimated fair value
of the property, including other net assets of the property. The estimated
fair values of the properties were the amounts the owners of the properties
could reasonably expect to receive in an as-is sale between a willing buyer
and a willing seller. The General Partner determined the estimated fair
values of the properties acquired based upon information obtained from
independent real estate appraisers and/or its own market analyses. To the
extent fair value was less than the carrying value, direct write-downs were
recorded to establish a new cost basis for these assets.
Subsequent to recording its investments as real estate, the
Partnership evaluated its recorded investment in the properties on a lower
of cost or net realizable value basis, under the guidance of the American
Institute of Certified Public Accountants (AICPA) Statement of Position 92-
3 "Accounting for Foreclosed Assets". The Partnership's net realizable
value determination took into account the Partnership's intention to hold
these properties for the long term, if necessary, to recover its recorded
investment. If the Partnership determined that its estimated net
realizable value was less than the recorded investment in the property, an
additional valuation adjustment was recorded if the decline in value was
considered permanent.
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
-41-
<PAGE>
CAPITAL REALTY INVESTORS TAX EXEMPT FUND LIMITED PARTNERSHIP
NOTES TO FINANCIAL STATEMENTS
2. Summary of significant accounting policies - continued
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 affiliates of the Partnership formed
to take title to the properties (Owner Partnerships) in accordance with the
SEC rules.
In conjunction with the review of the Partnership's 1995 financial
statements by the Securities and Exchange Commission (SEC) Staff the
Partnership agreed that it would 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.
The effect of adopting SFAS 115 on net income previously reported for 1995
and 1994 is $1,648,217 and $(830,356), respectively for Series I and
$2,189,007 and $(2,321,946), respectively for Series II. Income per BAC as
previously reported was $0.51 and $0.44 for 1995 and 1994, respectively for
Series I and $0.55 and $0.42 for 1995 and 1994, respectively for Series II.
Income(loss) per BAC as previously reported has been revised to $1.22 and
$0.08 per BAC for 1995 and 1994, respectively for Series I and $1.22 and
$(0.29) per BAC for 1995 and 1994, respectively for Series II. The impact
on partners capital of adopting SFAS 115 for 1995 and 1994 is $817,861 and
$830,356, respectively for Series I and $132,939 and $2,321,946,
respectively for Series II.
As discussed above, the Partnership accounted for its investment in
mortgage revenue bonds as real estate, until January 1, 1994, when the
financial statements were restated to reflect implementation of SFAS 115.
Net realizable value, prior to implementation of SFAS 115, was based on
holding the assets for long-term income production - as such net realizable
value only considered the recovery of the Partnership's investments over
time based on the properties' ability to generate sufficient cash flow to
recover the Partnership's investment over the long term. Based on the
SEC's requirement that the Partnership account for its mortgage revenue
bonds as debt securities, the implementation of SFAS 115 has a different
accounting framework for evaluating realizability. 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. Since most of
these bonds are in default, the Partnership has concluded that permanent
impairment has occurred. As such, the amount of permanent impairment is
measured by the Partnership's estimate of the mortgage revenue bonds' fair
value at January 1, 1994. The Partnership has measured fair value as
discussed below. This effect of adopting SFAS 115 is reflected as a
cumulative effect of change in accounting for mortgage revenue bonds in the
statements of operations. On an ongoing basis, the Partnership evaluates
-42-
<PAGE>
CAPITAL REALTY INVESTORS TAX EXEMPT FUND LIMITED PARTNERSHIP
NOTES TO FINANCIAL STATEMENTS
2. Summary of significant accounting policies - continued
permanent impairment; however, subsequent to January 1, 1994, the
Partnership did not recognize any impairment losses.
Interest Income Recognition
---------------------------
Since all of the mortgage revenue bonds, except Observatory II, are in
default, base interest and contingent interest on the mortgage revenue
bonds is recognized as revenue when collected.
d. Depreciation
------------
Through December 31, 1993, depreciation of real estate was based on
the estimated useful lives of the properties, which consist of 27.5 years
for buildings and 7 years for personal property. The straight-line method
was used for buildings, and the double declining-balance method was used
for personal property.
e. Cash and cash equivalents
-------------------------
Cash and cash equivalents consist of tax-exempt money market funds
with original maturities of three months or less.
f. Marketable securities
---------------------
Marketable securities, consisting of tax-exempt municipal bonds with
carrying amounts as of December 31, 1995 and 1994 of $1,315,182 and
$1,089,522, respectively, for Series I, and $1,512,281 and $1,447,843,
respectively, for Series II, are stated at their approximate market value.
The Partnership has the option to resell certain bonds to the seller on
seven days' notice at the bonds' par value. Proceeds from the sale of
marketable securities totalled $2,612,435, $3,177,612 and $2,966,087 for
the years ended December 31, 1995, 1994 and 1993, respectively, for Series
I. Proceeds from the sale of marketable securities totalled $7,528,134,
$5,874,674 and $6,590,743 for the years ended December 31, 1995, 1994 and
1993, respectively, for Series II. Realized gains and losses on these
sales were determined on a specific identification basis. The interest
rate on the bonds is generally adjusted weekly.
The Partnership has classified its investments in marketable
securities into the Available for Sale category under SFAS 115. There were
no net unrealized holding gains or losses recognized during 1995 and 1994
for Series I or Series II as the cost for the tax-exempt municipal bonds
approximated fair value throughout 1995 and 1994.
As of December 31, 1995, the Partnership had aggregate investments in
marketable securities (including those held in working capital reserves, as
discussed below) with the following maturities:
-43-
<PAGE>
CAPITAL REALTY INVESTORS TAX EXEMPT FUND LIMITED PARTNERSHIP
NOTES TO FINANCIAL STATEMENTS
2. Summary of significant accounting policies - continued
SERIES I
--------
Amount Maturity
----------- --------
$ 99,852 Within one year
100,000 Between one and five years
2,400,000 After ten years
-----------
$ 2,599,852
===========
SERIES II
---------
Amount Maturity
----------- --------
$ 417,379 Within one year
630,917 Between one and five years
200,000 Between five and ten years
2,571,370 After ten years
-----------
$ 3,819,666
===========
g. Working capital reserves
------------------------
The Partnership established working capital reserves for each Series
from the offering proceeds. The working capital reserves may be increased
or reduced by the General Partner as it deems advisable under the
circumstances. The funds held in the working capital reserves are invested
in tax-exempt municipal bonds with terms similar to the Partnership's
marketable securities and are stated at cost, which generally represents
par value and approximates market value. The reserves are available for the
payment of ongoing costs of operating and administering the Partnership's
business, for supplementing distributions to BAC Holders and for making
working capital loans to borrowers.
SERIES I
--------
Working capital reserves were $1,284,670 and $921,929 as of December
31, 1995 and 1994, respectively. None of the distributions made to BAC
Holders during 1995, 1994 and 1993 were funded from the working capital
reserves. During 1995, 1994 and 1993, working capital reserves were
increased by $362,741, $351,266 and $79,643, respectively, from surplus
operating cash.
SERIES II
---------
Working capital reserves were $2,307,385 and $1,646,746 as of December
31, 1995 and 1994, respectively. None of the distributions made to BAC
Holders during 1995, 1994 and 1993 were funded from the working capital
reserves. During 1995, 1994 and 1993, $660,639, $459,714 and $55,859,
-44-
<PAGE>
CAPITAL REALTY INVESTORS TAX EXEMPT FUND LIMITED PARTNERSHIP
NOTES TO FINANCIAL STATEMENTS
2. Summary of significant accounting policies - continued
respectively, were added to the working capital reserves from the interest
reserves or surplus operating cash.
h. Interest reserves
-----------------
The Partnership established interest reserves for each Series which
represented the General Partner's estimate of the total base interest on
the mortgage revenue bonds to be deferred during the deferral period
(generally the project construction period) for the loans of that Series,
as defined by the respective loan agreements. The interest reserves also
included debt service reserves established by the Partnership for three
mortgage loans. The interest reserves have been used to supplement
distributions to BAC Holders in an amount sufficient to achieve an
equivalent gross base interest rate as if the full amount of base interest
had been paid during the deferral period.
SERIES I
--------
Interest reserves were depleted during 1990.
SERIES II
---------
Interest reserves were depleted during 1993. Of the total
distributions made to BAC Holders during 1995, 1994 and 1993, $0, $0 and
$16,939, respectively, were funded from the interest reserves.
i. Fair value of financial instruments
-----------------------------------
In December 1991, the FASB issued Statement of Financial Accounting
Standards No. 107 "Disclosures about Fair Value of Financial Instruments"
(SFAS 107). This statement requires the disclosure of fair value
information about financial instruments for which it is practicable to
estimate that value. The Partnership implemented SFAS 107 in 1995. The
Partnership has determined that the carrying value of its cash and cash
equivalents approximates fair value. The estimated fair value of
marketable securities and working capital reserves invested in marketable
securities are based on the quoted market prices of these instruments at
December 31, 1995. The estimated fair value of the mortgage revenue bonds
is based upon the redemption amount relating to the mortgage revenue bonds
under the amended merger agreement.
The following tables present information on the Partnership's
financial instruments:
-45-
<PAGE>
CAPITAL REALTY INVESTORS TAX EXEMPT FUND LIMITED PARTNERSHIP
NOTES TO FINANCIAL STATEMENTS
2. Summary of significant accounting policies - continued
SERIES I
--------
<TABLE>
<CAPTION>
Carrying Estimated Fair
Value at Value at
December 31, 1995 December 31, 1995
000's 000's
----------------- -----------------
<S> <C> <C>
Cash and cash equivalents $ 59 $ 59
Marketable securities 1,315 1,315
Working capital reserves
invested in marketable
securities 1,285 1,285
Mortgage revenue bonds 30,740 30,248
</TABLE>
SERIES II
---------
<TABLE>
<CAPTION>
Carrying Estimated Fair
Value at Value at
December 31, 1995 December 31, 1995
000's 000's
----------------- -----------------
<S> <C> <C>
Cash and cash equivalents $ 89 $ 89
Marketable securities 1,512 1,508
Working capital reserves
invested in marketable
securities 2,307 2,301
Mortgage revenue bonds 43,793 42,251
</TABLE>
j. Statements of Cash Flows
------------------------
The statements of cash flows are intended to reflect only cash receipt
and cash payment activity; therefore, the statements do not reflect non-
cash investing and financing activities that affect the balance sheets.
k. Income taxes
------------
No provision has been made for federal, state or local income taxes in
the financial statements for each Series of the Partnership since the
General Partner and the BAC Holders are required to report on their
individual tax returns their allocable share of taxable income, gains,
losses, deductions and credits of the Partnership. For federal income tax
purposes, the Partnership's investment in mortgage revenue bonds is carried
at cost in the aggregate amount of $44,155,000 for Series I and $62,608,001
for Series II as of both December 31, 1995 and 1994. Interest income from
-46-
<PAGE>
CAPITAL REALTY INVESTORS TAX EXEMPT FUND LIMITED PARTNERSHIP
NOTES TO FINANCIAL STATEMENTS
2. Summary of significant accounting policies - continued
the mortgage revenue bonds is exempt from regular federal income tax, as
discussed in Notes 5 and 6.
l. Net income (loss) and distributions per BAC
-------------------------------------------
Net income (loss) and distributions per BAC represent 98.99% of net
income and distributions declared, respectively, divided by the number of
BACs outstanding during the year.
m. Reclassifications
-----------------
Certain amounts in the financial statements for the year ended
December 31, 1993 and 1994 have been reclassified to conform with the 1995
presentation.
3. 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
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 1995,
1994 and 1993 were $113,124, $118,266 and $108,374, respectively, and are
included in general and administrative expense and merger-related expenses in
the statements of operations.
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 MAE Services Limited Partnership
(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/CRICO Mortgage and CRIIMI from
the borrowers as of December 31, 1995 and 1994:
-47-
<PAGE>
CAPITAL REALTY INVESTORS TAX EXEMPT FUND LIMITED PARTNERSHIP
NOTES TO FINANCIAL STATEMENTS
3. Related-party transactions - continued
<TABLE>
<CAPTION>
As of December 31,
1995 1994
----------- -----------
<S> <C> <C>
CRI/CRICO Mortgage $ 1,225,393 $ 1,093,242
CRIIMI 133,817 --
----------- -----------
Total $ 1,359,210 $ 1,093,242
=========== ===========
</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.
In connection with the amended merger agreement entered into by the
Partnership, as discussed in Note 7, unpaid fees accrued through June 30, 1995
will be purchased by Capital Apartment Properties, Inc. (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. The proposed purchase price for CRIIMI's
portion remains in effect until June 30, 1996. If the proposed merger is not
consummated by such date, the purchase price of CRIIMI's portion of the accrued
servicing fees 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 years
ended December 31, 1995, 1994 and 1993 were as follows:
<TABLE>
<CAPTION>
For the years ended December 31,
1995 1994 1993
----------- ----------- -----------
<S> <C> <C>
CRI/CRICO Mortgage $ 5,000 $ 10,000 $ 10,000
CRIIMI 5,000 - -
----------- ----------- -----------
Total $ 10,000 $ 10,000 $ 10,000
=========== =========== ===========
</TABLE>
CRICO Management Corporation (CRICO), an affiliate of the General Partner,
assumed property management responsibilities for White Bear Woods on October 1,
1991 and for Trailway Pond and Royal Oak on January 1, 1992. The General
Partner engaged CRICO Management of Minnesota , Inc. (CRICO Minnesota), another
affiliate of the General Partner, as management agent for Valley Creek on July
1, 1992. Effective August 1, 1992, CRICO transferred its property management
responsibilities for White Bear Woods, Trailway Pond and Royal Oak to CRICO
Minnesota. Management fees of $16,916 were paid or accrued to this affiliate of
the General Partner by the properties for the month ended January 31, 1994.
-48-
<PAGE>
CAPITAL REALTY INVESTORS TAX EXEMPT FUND LIMITED PARTNERSHIP
NOTES TO FINANCIAL STATEMENTS
3. Related-party transactions - continued
Management fees of $209,057 were paid or accrued during 1993. The amount paid
under each management contract represented a base fee equal to 3.75% of total
gross revenues of the property, plus an additional incentive fee of 0.50%
payable only if certain performance standards were met.
On February 1, 1994, CRICO and CRICO Minnesota contributed their property
management contracts and personnel to CAPREIT Residential Corporation
(Residential). Residential was formed by CRI, but on February 1, 1994,
Residential was sold to A.P. CAPREIT Limited Partnership, which is not currently
owned or controlled by CRI and/or its affiliates, although CRI and several
affiliates held up to an aggregate 22% residual profit interest until June 30,
1995, when the interests were redeemed. This change did not result in any
increase in property management fees.
Owner Partnerships formed to take title to properties, subject to the
existing indebtedness, 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 amended 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 (defined as the proportionate interest of
such limited partner in the fair market value of the partnership 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 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 1995,
1994 and 1993 were $131,437, $134,468 and $130,050, respectively, and are
included in general and administrative expense and merger-related expenses in
the statement of operations.
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
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
-49-
<PAGE>
CAPITAL REALTY INVESTORS TAX EXEMPT FUND LIMITED PARTNERSHIP
NOTES TO FINANCIAL STATEMENTS
3. Related-party transactions - continued
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/CRICO Mortgage and CRIIMI from the
borrowers as of December 31, 1995 and 1994:
<TABLE>
<CAPTION>
As of December 31,
1995 1994
----------- -----------
<S> <C> <C>
CRI/CRICO Mortgage $ 1,847,496 $ 1,670,426
CRIIMI 195,648 --
----------- -----------
Total $ 2,043,144 $ 1,670,426
=========== ===========
</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 years ended December 31,
1995, 1994 and 1993, no fees were paid by the borrowers.
In connection with the amended merger agreement entered into by the
Partnership, as discussed in Note 7, 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. The
proposed purchase price for CRIIMI's portion remains in effect until June 30,
1996. If the proposed merger is not consummated by such date, the purchase
price of CRIIMI's portion will be adjusted upward at a rate of $32,608 per
month.
CRICO Management Corporation (CRICO), an affiliate of the General Partner,
assumed property management responsibilities for Trailway Pond II on January 1,
1992 and for Ethan's Ridge and Ethan's Glen IIB on June 1, 1992. Effective
August 1, 1992, CRICO transferred its property management responsibilities for
these properties to CRICO Management of Minnesota, another affiliate of the
General Partner. CRICO Management Northwest, Inc., another affiliate of the
General Partner, assumed management responsibilities for James Street Crossing
effective May 1, 1993. Management fees of $15,446 were paid or accrued to these
affiliates of the General Partner by the properties for the month ended January
31, 1994. In addition, 1993 incentive management fees of $8,927 and $1,356
relating to Ethan's Ridge and Ethan's Glen IIB, respectively, were paid to CRICO
Minnesota in December 1994. Management fees of $173,849 were paid or accrued
during 1993. The amount paid under each management contract represented a base
fee equal to 3.75% of total gross revenues of the property, plus an additional
incentive fee of 0.50% payable only if certain performance standards were met.
-50-
<PAGE>
CAPITAL REALTY INVESTORS TAX EXEMPT FUND LIMITED PARTNERSHIP
NOTES TO FINANCIAL STATEMENTS
3. Related-party transactions - continued
On February 1, 1994, CRICO and CRICO Minnesota contributed their property
management contracts and personnel to CAPREIT Residential Corporation
(Residential). Residential was formed by CRI, but on February 1, 1994,
Residential was sold to A.P. CAPREIT Limited Partnership, which is not currently
owned or controlled by CRI and/or its affiliates, although CRI and several
affiliates held up to an aggregate 22% residual profit interest until June 30,
1995, when the interests were redeemed. This change did not result in any
increase in property management fees.
Owner Partnerships formed to take title to properties, subject to existing
indebtedness, 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.
In connection with the amended 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 (defined as the proportionate interest of
such limited partner in the fair market value of the partnership 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 prior to the time CAPREIT exercises its option, such increase in value
may benefit the owners of the Owner Partnerships.
4. Profits, losses and cash distributions to Partners
Cash available for distribution (defined below) is distributed within 60
days after the end of each six-month period ending June 30 and December 31 for
both Series I and Series II. Each year, cash available for distribution is
distributed 98.99% to the BAC Holders and 1.01% to the General Partner until the
BAC Holders receive a noncumulative return equal to 10% of their adjusted
capital contribution (adjusted for any return of capital contributions and any
distribution of residual or liquidation proceeds from the sale of a mortgaged
property or the dissolution of the Partnership, described below). Thereafter,
during such year, the balance of all such cash available for distribution will
be distributed 90% to the BAC Holders and 10% to the General Partner.
Cash available for distribution, as defined in the Partnership Agreement,
is as follows:
(1) all revenues received by the Partnership, plus
(2) any amounts released by the General Partner from the working capital
reserves, plus
(3) any amounts released from the interest reserves after completion of
any applicable interest deferral period with respect to the mortgage
loan in connection with such mortgaged property, less:
-51-
<PAGE>
CAPITAL REALTY INVESTORS TAX EXEMPT FUND LIMITED PARTNERSHIP
NOTES TO FINANCIAL STATEMENTS
4. Profits, losses and cash distributions to Partners - continued
(i) payments from revenues of operating expenses and Partnership
indebtedness, and
(ii) any amounts set aside for deposit into the working capital
reserves.
All cash receipts of the Partnership arising from a sale or other
disposition of a mortgaged property or the repayment of the principal and the
payment of interest, if any, payable upon the redemption or remarketing of the
applicable mortgage revenue bond (residual proceeds) will be distributed as
follows:
(1) to pay all debts and obligations of the Partnership and add to the
working capital reserves as the General Partner deems necessary;
(2) to the General Partner and BAC Holders in an amount equal to the
positive balance in their respective capital accounts as of the date
of sale or repayment adjusted for operations and distributions to that
date but prior to any allocation of profit from such sale or
repayment;
(3) to the BAC Holders in the amount of their adjusted capital
contributions;
(4) to the General Partner in the amount of its adjusted capital
contributions;
(5) 98.99% to the BAC Holders and 1.01 % to the General Partners until the
BAC Holders have received any unpaid portion of the preferred cash
flow return (i.e., an annual noncompounded return of 10% on their
adjusted capital contribution); provided, however, that the
distribution to the General Partner pursuant to this subsection will
be deferred until the BAC Holders have received any unpaid portion of
the preferred cash flow return;
(6) to the extent applicable by reason of foreclosure of a mortgage loan,
payment to an affiliate of the General Partner of a disposition fee
not to exceed 2% of the gross sales proceeds from the mortgaged
property; and,
(7) the remainder, 90% to the BAC Holders and 10% to the General Partner.
All cash receipts other than residual proceeds arising from the dissolution
of the Partnership and the liquidation of the Partnership's assets less the
amounts utilized to pay the expenses of such liquidation (liquidation proceeds)
will be allocated in the same order as residual proceeds.
All profits and losses not arising from a sale of a mortgaged property or
repayment of a mortgage loan shall be allocated 98.99% to the BAC Holders and
1.01% to the General Partner until the BAC Holders have received any unpaid
portion of the preferred cash flow return. Thereafter, such profits and losses
shall be allocated 90% to the BAC Holders and 10% to the General Partner.
Gains arising from a sale of a mortgaged property or repayment of a
mortgage loan will be allocated to the General Partner and BAC Holders as
follows: first, in proportion to the negative balances in their capital
accounts, if any, to bring such negative balances in their capital accounts to
zero; and second, in proportion to their share of residual proceeds from steps
(5) and (7) as described above. Losses from such a sale or repayment will be
allocated to the General Partner and BAC Holders as follows: first, in an
amount equal to the amount by which the total of all capital accounts exceeds
the total capital contributions in the ratio that each Partner's and BAC
Holder's excess balance bears to the aggregate excess balances; second, to the
-52-
<PAGE>
CAPITAL REALTY INVESTORS TAX EXEMPT FUND LIMITED PARTNERSHIP
NOTES TO FINANCIAL STATEMENTS
4. Profits, losses and cash distributions to Partners - continued
General Partner and BAC Holders until their capital accounts are reduced to
zero; and third, any remaining losses 1.01% to the General Partner and 98.99% to
the BAC Holders. No proceeds were received in connection with any transfer of
properties to Owner Partnerships.
The Partnership expects to continue to make distributions to BAC Holders on
a semi-annual basis. The amended 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 amended 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 distribution 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.
The following distributions were paid or accrued to BAC Holders of record
during 1995, 1994 and 1993:
-53-
<PAGE>
CAPITAL REALTY INVESTORS TAX EXEMPT FUND LIMITED PARTNERSHIP
NOTES TO FINANCIAL STATEMENTS
4. Profits, losses and cash distributions to Partners - continued
SERIES I
--------
<TABLE>
<CAPTION>
1995 1994 1993
Distributions to Distributions to Distributions to
BAC Holders BAC Holders BAC Holders
------------------------ ------------------------ ------------------------
Six-Month Period Ended Total Per BAC Total Per BAC Total Per BAC
- - ---------------------- ----------- ------- ----------- ------- ----------- -------
<S> <C> <C> <C> <C> <C> <C>
June 30 $ 1,231,200 $ 0.54 $ 1,140,000 $ 0.50 $ 1,140,000 $ 0.50
December 31 1,231,200 0.54 1,140,000 0.50 1,140,000 0.50
----------- ------- ----------- ------- ----------- -------
Total $ 2,462,400 $ 1.08 $ 2,280,000 $ 1.00 $ 2,280,000 $ 1.00
=========== ======= =========== ======= =========== =======
</TABLE>
Distributions to Series I BAC Holders for the years ended December 31,
1995, 1994 and 1993 were funded as follows:
<TABLE>
<CAPTION>
For the years ended
December 31,
-------------------------------------------------
1995 1994 1993
------------ ------------ ------------
<S> <C> <C> <C>
Cash Flow (1) $ 2,850,265 $ 2,654,529 $ 2,382,906
Net deposits to working capital reserves (362,741) (351,266) (79,643)
------------ ------------ ------------
Total cash available for distribution $ 2,487,524 $ 2,303,263 $ 2,303,263
============ ============ ============
Distributions to:
General Partner (1.01%) $ 25,124 $ 23,263 $ 23,263
============ ============ ============
BAC Holders (98.99%) $ 2,462,400 $ 2,280,000 $ 2,280,000
============ ============ ============
</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
-54-
<PAGE>
CAPITAL REALTY INVESTORS TAX EXEMPT FUND LIMITED PARTNERSHIP
NOTES TO FINANCIAL STATEMENTS
4. Profits, losses and cash distributions to Partners - continued
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.
Although distributions are paid on a semi-annual basis, in July 1993, the
Partnership began declaring distributions on a monthly basis as a result of
listing the BACs on AMEX. Distributions to BAC Holders totalling $858,808 or
$0.37667 per BAC were declared payable for the four months ending April 30, 1996
to BAC Holders of record as of the last day of each month.
-55-
<PAGE>
CAPITAL REALTY INVESTORS TAX EXEMPT FUND LIMITED PARTNERSHIP
NOTES TO FINANCIAL STATEMENTS
4. Profits, losses and cash distributions to Partners - continued
SERIES II
---------
<TABLE>
<CAPTION>
1995 1994 1993
Distributions to Distributions to Distributions to
BAC Holders BAC Holders BAC Holders
------------------------ ------------------------ ------------------------
Six-Month Period Ended Total Per BAC Total Per BAC Total Per BAC
- - ---------------------- ----------- ------- ----------- ------- ----------- -------
<S> <C> <C> <C> <C> <C> <C>
June 30 $ 1,748,930 $ 0.54 $ 1,619,380 $ 0.50 $ 1,619,380 $ 0.50
December 31 1,748,932 0.54 1,619,380 0.50 1,619,380 0.50
----------- ------- ----------- ------- ----------- -------
Total $ 3,497,862 $ 1.08 $ 3,238,760 $ 1.00 $ 3,238,760 $ 1.00
=========== ======= =========== ======= =========== =======
</TABLE>
Distributions to Series II BAC Holders for the years ended December 31,
1995, 1994 and 1993 were funded as follows:
<TABLE>
<CAPTION>
For the years ended
December 31,
-------------------------------------------------
1995 1994 1993
------------ ------------ ------------
<S> <C> <C> <C>
Cash Flow (1) $ 4,194,190 $ 3,731,519 $ 3,310,726
Net deposits to working capital/interest reserves (660,639) (459,714) (38,920)
------------ ------------ ------------
Total cash available for distribution $ 3,533,551 $ 3,271,805 $ 3,271,806
============ ============ ============
Distributions to:
General Partner (1.01%) $ 35,689 $ 33,045 $ 33,046
============ ============ ============
BAC Holders (98.99%) $ 3,497,862 $ 3,238,760 $ 3,238,760
============ ============ ============
</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
-56-
<PAGE>
CAPITAL REALTY INVESTORS TAX EXEMPT FUND LIMITED PARTNERSHIP
NOTES TO FINANCIAL STATEMENTS
4. Profits, losses and cash distributions to Partners - 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.
Although distributions are paid on a semi-annual basis, in July 1993, the
Partnership began declaring distributions on a monthly basis as a result of
listing the BACs on AMEX. Distributions to BAC Holders totalling $1,252,331 or
$0.38667 per BAC were declared payable for the four months ending April 30, 1996
to BAC Holders of record as of the last day of each month.
5. Investment in Mortgage Revenue Bonds
Description of the portfolios
- - -----------------------------
The Partnership acquired a portfolio of ten tax-exempt mortgage revenue
bonds issued by various state and local governments or their agencies or
authorities. The proceeds from the mortgage revenue bonds were used by the
issuers to make nonrecourse participating mortgage loans to finance construction
and ownership of multifamily residential developments (the Observatory II loan
in Series I no longer has a participation feature, as discussed previously).
The mortgage revenue bond with respect to each mortgaged property is payable
only from payments made on the corresponding mortgage loan. None of the
mortgage revenue bonds constitutes a general obligation of any state or local
government agency or authority and no such government agency or authority is
liable for the mortgage revenue bonds.
A description of the mortgage revenue bonds held by the Partnership is as
follows:
-57-
<PAGE>
CAPITAL REALTY INVESTORS TAX EXEMPT FUND LIMITED PARTNERSHIP
NOTES TO FINANCIAL STATEMENTS
5. Investment in Mortgage Revenue Bonds - Continued
SERIES I
--------
<TABLE>
<CAPTION>
Loan Loan Carrying
Mortgaged Property No. of Origination Face Amount Maturity Value
Name and Location Rental Units Date (000's) Date (000's)
- - -------------------- ------------ ------------ ----------- --------- -----------
<S> <C> <C> <C> <C> <C>
OBSERVATORY II
BURNSVILLE, MN 75 3/31/92 $ 1,600 2/11/98 $ 1,600
ROYAL OAKS
EAGAN, MN 231 12/05/86 12,580 2/22/98 8,019
TRAILWAY POND
BURNSVILLE, MN 75 8/07/87 4,675 5/01/99 2,717
VALLEY CREEK
WOODBURY, MN 225 3/23/87 12,815 2/01/99 9,487
WHITE BEAR WOODS
WHITE BEAR LAKE, MN 225 3/31/87 12,485 1/31/99 8,917
--- ------- -------
831 $44,155 $30,740
=== ======= =======
</TABLE>
SERIES II
---------
<TABLE>
<CAPTION>
Loan Loan Carrying
Mortgaged Property No. of Origination Face Amount Maturity Value
Name and Location Rental Units Date (000's) Date (000's)
- - -------------------- ------------ ------------ ----------- -------- -----------
<S> <C> <C> <C> <C> <C>
ETHAN'S RIDGE AND
ETHAN'S GLEN IIB 5/29/87 $15,500 4/01/98 $12,612
KANSAS CITY, MO 364 10/26/88 2,300 12/15/99
FOUNTAIN PLACE
EDEN PRAIRIE, MN 332 12/23/87 20,900 7/01/99 13,643
JAMES STREET CROSSING
KENT, WA 300 3/31/88 13,878 12/31/99 11,703
TRAILWAY POND II
BURNSVILLE, MN 165 8/07/87 10,030 5/01/99 5,835
----- ------- -------
1,161 $62,608 $43,793
===== ======= =======
</TABLE>
Collateral
- - ----------
The mortgage revenue bonds are secured by mortgage loans which are
collateralized by first mortgages on the properties and by assignments of
existing and future rents and security agreements with respect to personal
-58-
<PAGE>
CAPITAL REALTY INVESTORS TAX EXEMPT FUND LIMITED PARTNERSHIP
NOTES TO FINANCIAL STATEMENTS
5. Investment in Mortgage Revenue Bonds - Continued
property evidenced by the filing of Uniform Commercial Code (UCC) financing
statements. Additionally, the Partnership required the borrowers to establish
operating reserves, tax and insurance escrows, replacement reserves and debt
service reserves and provide operating deficit guarantees. As a result of
various circumstances, including, but not limited to, slow rent-up of the
properties, unstable operations and depletion of the properties' operating and
debt service reserves, Owner Partnerships had received the title to nine of the
ten properties as of December 31, 1995 through deeds in lieu of foreclosure and
one property via foreclosure (Observatory II, which was ultimately sold to an
independent purchaser subject to a modified mortgage held by the Partnership.)
SERIES I
--------
The five original Series I mortgage loans securing the mortgage revenue
bonds, with a current aggregate principal amount of $44,155,000, went into
default, resulting in title transfer by actual foreclosures or deeds in lieu of
foreclosure to Owner Partnerships subject to 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 certain 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 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 in December 1992 the Internal Revenue Service
issued Proposed Regulation Section 1.1001-3 which specifically address the tax
consequences of modifications of debt instruments. Among other things, these
proposed regulations, if they become effective in their current form, would
provide that certain modifications of the current interest payments or 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 of this treatment,
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 would have an adverse impact on
the properties.
Even if issuer consent were obtained, if the modifications are considered
material, the debt would have to be re-examined to determine whether it would
still be considered debt for tax purposes. This could result in a write-down of
principal, would most likely result in a write-off of all accrued and unpaid
past due interest and could change the contingent interest feature of the
existing mortgage loans. The write down of principal and unpaid interest would
-59-
<PAGE>
CAPITAL REALTY INVESTORS TAX EXEMPT FUND LIMITED PARTNERSHIP
NOTES TO FINANCIAL STATEMENTS
5. Investment in Mortgage Revenue Bonds - Continued
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.
Proposed Regulation Section 1.001-3 will become effective only with respect
to modifications made on or after the date that is 30 days after the publication
of final regulations in the Federal Register. It is uncertain at this time when
this proposed regulation will be finalized and whether it will be finalized in
its current form. It is also unclear at this time what effect the Cottage
Savings decision may have on modifications that have been made to mortgage loans
which secure the mortgage revenue bonds or on modifications that might be
appropriate in the future. The General Partner believes that the modifications
which have been made were consistent with the relevant tax authority which
existed at the time of those modifications and have not jeopardized the tax-
exempt status of the mortgage revenue bonds. However, these can be no assurance
as to the tax-exempt status of the mortgage revenue bonds.
The General Partner's ongoing strategy has been to continue holding the
mortgage revenue bonds until the loan maturity dates. If the merger proposal,
discussed in Note 7, 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 of the extension of certain loan maturity
dates and, if approved, arrange for related amendments to the pertinent mortgage
revenue bonds, as needed.
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 proposed regulations which could be interpreted
as adversely affecting the tax-exempt nature of the modified mortgage revenue
bond. However, the IRS has stated that the regulations will apply only to
modifications made on or after 30 days from the final publication of the
regulations in the Federal Register. As of April 23, 1996, the regulations have
not been finalized and no changes to these positions have been announced by the
IRS. The Partnership believes the interest on the Royal Oaks bond should
continue to be tax-exempt. However, there can be no assurance that interest
from the Royal Oaks bond will remain tax-exempt.
SERIES II
---------
The five original Series II mortgage loans securing the mortgage revenue
bonds with an aggregate principal amount of $62,608,001 went into default,
resulting in deeds in lieu of foreclosure, subject to the existing indebtedness,
to Ownership Partnerships. 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 certain 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
-60-
<PAGE>
CAPITAL REALTY INVESTORS TAX EXEMPT FUND LIMITED PARTNERSHIP
NOTES TO FINANCIAL STATEMENTS
5. Investment in Mortgage Revenue Bonds - Continued
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.
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 in December 1992 the Internal Revenue Service
issued Proposed Regulation Section 1.1001-3 which specifically address the tax
consequences of modifications of debt instruments. Among other things, these
proposed regulations, if they become effective in their current form, would
provide that certain modifications of the current interest payments or 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 of this treatment,
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 would have an adverse impact on
the properties.
Even if issuer consent were obtained, if the modifications are considered
material, the debt would have to be re-examined to determine whether it would
still be considered debt for tax purposes. This could result in a write-down of
principal, would most likely result in a write-off of all accrued and unpaid
past due interest and could change the contingent interest feature of the
existing mortgage loans. The write down of principal 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.
Proposed Regulation Section 1.001-3 will become effective only with respect
to modifications made on or after the date that is 30 days after the publication
of final regulations in the Federal Register. It is uncertain at this time when
this proposed regulation will be finalized and whether it will be finalized in
its current form. It is also unclear at this time what effect the Cottage
Savings decision may have on modifications that have been made to mortgage loans
which secure the mortgage revenue bonds or on modifications that might be
appropriate in the future. The General Partner believes that the modifications
which have been made were consistent with the relevant tax authority which
existed at the time of those modifications and have not jeopardized the tax-
exempt status of the mortgage revenue bonds. However, these can be no assurance
as to the tax-exempt status of the mortgage revenue bonds.
The General Partner's ongoing strategy has been to continue holding the
mortgage revenue bonds until the loan maturity dates. If the merger proposal,
discussed in Note 7, 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.
-61-
<PAGE>
CAPITAL REALTY INVESTORS TAX EXEMPT FUND LIMITED PARTNERSHIP
NOTES TO FINANCIAL STATEMENTS
5. Investment in Mortgage Revenue Bonds - Continued
Interest
- - --------
The mortgage loans, and accordingly the mortgage revenue bonds, bear
interest at a base interest rate and provide for contingent interest, payable as
described below, in an amount equal to the difference between the base mortgage
interest rate and an annual noncompounding rate of return to the Partnership of
16% per annum. The mortgage loans provide for base mortgage interest which is
unconditional and payable monthly, in arrears. However, due to depletion of the
properties' reserves, the payment of base mortgage interest is solely from cash
flow from these properties' operations. The unpaid base mortgage interest bears
interest at the base mortgage interest rate and is to be repaid prior to
contingent interest.
Contingent interest will be equal to the sum of (i) 100% of the project
cash flow for each year up to an amount which provides the Partnership a
noncompounded interest rate between 1.5% and 2.0% over the base mortgage
interest rate in effect, and (ii) 50% to 60% of remaining cash flow (subject to
certain priority payments) to provide the Partnership a total return of 16% per
annum. Contingent interest is payable quarterly on an estimated basis, in
arrears, but only to the extent of available net cash flow, if any. Contingent
interest is recognized as revenue when collected. No contingent interest was
received or accrued by either Series I or Series II during these years.
Contingent interest due for Series I as of December 31, 1995, 1994 and 1993
amounted to $20,083,162, $17,441,428 and $14,799,693, respectively. Contingent
interest due for Series II as of December 31, 1995, 1994 and 1993 amounted to
$27,897,543, $23,723,272 and $19,548,999, respectively.
To the extent that the aggregate of all interest payments, including
contingent interest, for any period after completion of construction does not
equal 16% per annum, the difference will be deferred (without interest on
contingent interest) until the mortgaged property is sold or the mortgage loan
is otherwise repaid and will only be payable if sufficient proceeds exist. The
amount of deferred contingent interest payable in such event will equal the sum
of (i) 100% of the sale or repayment proceeds (after certain priority payments)
up to the amount necessary for the Partnership to achieve a noncompounded return
at a rate 1.5% to 2.0% over the base mortgage interest rate and (ii) 50% to 60%
of any excess sale or repayment proceeds for the Partnership to achieve a total
return of 16% per annum. Consequently, the ability of the Partnership to collect
all contingent interest will be dependent upon the mortgaged property's
operating performance and the sale or repayment proceeds. Because the
Partnership may not be able ultimately to collect contingent interest, the
Partnership has not recorded any contingent interest since inception of the
Partnership.
Presented below is a summary of base interest payments for the years ended
December 31, 1995, 1994 and 1993 that are due to the Partnership from the
borrowers:
-62-
<PAGE>
CAPITAL REALTY INVESTORS TAX EXEMPT FUND LIMITED PARTNERSHIP
NOTES TO FINANCIAL STATEMENTS
5. Investment in Mortgage Revenue Bonds - Continued
SERIES I
--------
<TABLE>
<CAPTION>
For the year ended December 31, 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 $ 128,000 $ 128,000 $ -- $ --
Royal Oaks 1,069,296 838,525 230,771 1,593,244
Trailway Pond 460,488 244,848 215,640 852,472
Valley Creek 1,326,353 944,479 381,874 2,751,181
White Bear Woods 1,310,925 947,931 362,994 2,000,751
----------- ----------- ---------- -----------
$ 4,295,062 $ 3,103,783 $1,191,279 $ 7,197,648
=========== =========== ========== ===========
</TABLE>
<TABLE>
<CAPTION>
For the year ended December 31, 1994
---------------------------------------------------------------
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 $ 128,000 $ 128,000 $ -- $ --
Royal Oaks 1,069,296 754,518 314,778 1,362,473
Trailway Pond 460,488 252,168 208,320 636,832
Valley Creek 1,326,353 821,503 504,850 2,369,307
White Bear Woods 1,310,925 873,476 437,449 1,637,757
----------- ----------- ---------- -----------
$ 4,295,062 $ 2,829,665 $1,465,397 $ 6,006,369
=========== =========== ========== ===========
</TABLE>
-63-
<PAGE>
CAPITAL REALTY INVESTORS TAX EXEMPT FUND LIMITED PARTNERSHIP
NOTES TO FINANCIAL STATEMENTS
5. Investment in Mortgage Revenue Bonds - Continued
<TABLE>
<CAPTION>
For the year ended December 31, 1993
---------------------------------------------------------------
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 $ 128,000 $ 128,000 $ -- $ --
Royal Oaks 1,069,296 679,224 390,072 1,047,695
Trailway Pond 460,488 210,360 250,128 428,512
Valley Creek 1,326,353 728,818 597,535 1,864,457
White Bear Woods 1,310,925 791,512 519,413 1,200,308
----------- ----------- ---------- -----------
$ 4,295,062 $ 2,537,914 $1,757,148 $ 4,540,972
=========== =========== ========== ===========
</TABLE>
(1) The Partnership charges the borrowers interest on unpaid base
interest, which totalled $783,685, $584,856 and $370,558 for 1995,
1994 and 1993, respectively.
-64-
<PAGE>
CAPITAL REALTY INVESTORS TAX EXEMPT FUND LIMITED PARTNERSHIP
NOTES TO FINANCIAL STATEMENTS
5. Investment in Mortgage Revenue Bonds - Continued
SERIES II
---------
<TABLE>
<CAPTION>
For the year ended December 31, 1995
---------------------------------------------------------------------------------
Base Interest Base Interest Cumulative
Paid From Paid From Current Base Unpaid
Current Base Properties' Non-Operating Interest Full Base
Interest Due(1) Operations(3) Sources(2) Not Paid Interest
--------------- ------------- ------------- -----------------------
<S> <C> <C> <C> <C><C>
Ethan's Ridge and
Ethan's Glen IIB $ 1,518,750 $ 1,215,081 $ -- $ 303,669$ 2,002,193
Fountain Place 1,985,500 1,416,369 -- 569,131 5,063,498
James Street
Crossing 1,335,758 1,070,316 -- 265,442 1,695,171
Trailway Pond II 1,003,000 575,170 -- 427,830 2,568,706
----------- ----------- ----------- ---------------------
$ 5,843,008 $ 4,276,936 $ -- $1,566,072$11,329,568
=========== =========== =========== =====================
</TABLE>
<TABLE>
<CAPTION>
For the year ended December 31, 1994
---------------------------------------------------------------------------------
Base Interest Base Interest Cumulative
Paid From Paid From Current Base Unpaid
Current Base Properties' Non-Operating Interest Full Base
Interest Due(1) Operations Sources(2) Not Paid Interest
--------------- ------------- ------------- -----------------------
<S> <C> <C> <C> <C><C>
Ethan's Ridge and
Ethan's Glen IIB $ 1,518,750 $ 1,185,957 $ 27,500 $ 305,293$ 1,698,524
Fountain Place 1,985,500 1,271,575 -- 713,925 4,494,367
James Street
Crossing 1,335,758 879,491 -- 456,267 1,429,729
Trailway Pond II 1,003,000 460,387 -- 542,613 2,140,876
----------- ----------- ----------- ----------------------
$ 5,843,008 $ 3,797,410 $ 27,500 $ 2,018,098$ 9,763,496
=========== =========== =========== ======================
</TABLE>
-65-
<PAGE>
CAPITAL REALTY INVESTORS TAX EXEMPT FUND LIMITED PARTNERSHIP
NOTES TO FINANCIAL STATEMENTS
5. Investment in Mortgage Revenue Bonds - Continued
<TABLE>
<CAPTION>
For the year ended December 31, 1993
---------------------------------------------------------------------------------
Base Interest Base Interest Cumulative
Paid From Paid From Current Base Unpaid
Current Base Properties' Non-Operating Interest Full Base
Interest Due(1) Operations Sources(2) Not Paid Interest
--------------- ------------- ------------- -----------------------
<S> <C> <C> <C> <C><C>
Ethan's Ridge and
Ethan's Glen IIB $ 1,518,750 $ 1,051,763 $ -- $ 466,987$ 1,393,231
Fountain Place 1,985,500 1,343,102 -- 642,398 3,780,442
James Street
Crossing 1,335,758 767,321 23,288 545,149 973,462
Trailway Pond II 1,003,000 449,564 -- 553,436 1,598,263
----------- ----------- ----------- ----------------------
$ 5,843,008 $ 3,611,750 $ 23,288 $ 2,207,970$ 7,745,398
=========== =========== =========== ======================
</TABLE>
(1) The Partnership charges the borrowers interest on unpaid base interest,
which, not including current base interest due, totaled $1,197,825,
$932,242 and $582,804 for 1995, 1994 and 1993, respectively.
(2) Amounts were funded from reserves provided for from the mortgage loan
proceeds and/or from the general partners of the borrowers.
(3) Excludes 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.
Terms
- - -----
In general, the terms of the mortgage loans extend for 10 years after the
completion of construction. The corresponding bonds contain provisions
requiring payment or redemption of the bonds upon maturity of the related loan.
The Partnership may seek authority from investors and the issuers of the
mortgage revenue bonds to hold the mortgage loans with respect to the mortgaged
properties through longer periods within the mortgage revenue bond terms, as
described above, if necessary, in an effort to maximize overall yields and
residual proceeds upon the sale or refinancing of the underlying properties.
There can be no assurance that the investors or the issuers will consent to such
extensions.
The principal of the mortgage revenue bonds will not be amortized during
the term of the bond and will be required to be repaid in a lump-sum balloon
payment at the expiration of the loan term or at such earlier time as the loan
may require. Each mortgage loan is non-assumable and due on sale of the
mortgaged property. Prepayment and sale of the mortgaged property is prohibited
during the first seven years of the mortgage loan following the completion of
construction. Thereafter, prepayment in full is permitted under the mortgage
loan subject to the payment to the Partnership of:
-66-
<PAGE>
CAPITAL REALTY INVESTORS TAX EXEMPT FUND LIMITED PARTNERSHIP
NOTES TO FINANCIAL STATEMENTS
5. Investment in Mortgage Revenue Bonds - Continued
(1) the contingent interest payable from 100% of project cash flow accrued
to the date of prepayment; and
(2) additional interest in an amount equal to the highest total amount of
contingent interest paid in any of the three years preceding the date
of prepayment, compounded at the base mortgage interest rate then in
effect.
The Partnership may require prepayment upon the occurrence of an "event of
taxability" which would include, among others, any act or event which presents
significant risk that interest on the mortgage revenue bonds would be subjected
to federal taxation. As of December 31, 1995, the Partnership is aware of no
"event of taxability" which has occurred.
6. 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 1995, 1994 and 1993; 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 years ended December 31, 1995, 1994
or 1993.
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 (loss) and municipal income for tax purposes is
as follows:
-67-
<PAGE>
CAPITAL REALTY INVESTORS TAX EXEMPT FUND LIMITED PARTNERSHIP
NOTES TO FINANCIAL STATEMENTS
6. Income taxes - continued
SERIES I
--------
<TABLE>
<CAPTION>
For the years ended
December 31,
-----------------------------------------------
1995 1994 1993
------------ ------------ ------------
<S> <C> <C> <C>
Financial statement net income $ 2,812,716 $ 183,283 $ 451,381
Municipal interest income not recognized (1) -- -- 2,444,174
Rental income, net (2) -- -- (512,569)
Expenses not allowed for tax purposes 757 2,703 633
Adjustment for timing of municipal income recognition 37,550 (4,202) --
Cumulative effect of accounting change -- 2,475,448 --
------------ ------------ ------------
Municipal income, net for tax purposes $ 2,851,023 $ 2,657,232 $ 2,383,619
============ ============ ============
Municipal income per BAC outstanding $ 1.24 $ 1.15 $ 1.03
============ ============ ============
</TABLE>
(1) Represents the adjustment for interest income received or receivable during
the period, which was previously eliminated from net income for financial
statement purposes.
(2) Represents net income from investments accounted for as real estate.
-68-
<PAGE>
CAPITAL REALTY INVESTORS TAX EXEMPT FUND LIMITED PARTNERSHIP
NOTES TO FINANCIAL STATEMENTS
6. Income taxes - continued
SERIES II
---------
<TABLE>
<CAPTION>
For the years ended
December 31,
-----------------------------------------------
1995 1994 1993
------------ ------------ ------------
<S> <C> <C> <C>
Financial statement net income (loss) $ 3,984,922 $ (946,393) $ 1,646,709
Municipal interest income not recognized (1) 3,657,305
Rental income, net (2) -- -- (1,511,870)
Expenses not allowed for tax purposes 1,279 3,401 863
Adjustment for timing of municipal income recognition 209,264 77,192 --
Cumulative effect of accounting change -- 4,600,720 (416,432)
------------ ------------ ------------
Municipal income, net for tax purposes $ 4,195,465 $ 3,734,920 $ 3,376,575
============ ============ ============
Municipal income per BAC outstanding $ 1.28 $ 1.14 $ 1.03
============ ============ ============
</TABLE>
(1) Represents the adjustment for interest income received during the period,
which was previously eliminated from net income for financial statement
purposes.
(2) Represents net income from investments accounted for as real estate.
7. 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
CAPREIT, a private real estate investment trust. An affiliate of CAPREIT is the
property manager for four of the five properties securing the bonds held by
Series I, and all five properties securing the bonds in Series II. All nine
properties managed by an affiliate of CAPREIT are presently in default 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. On January 31, 1996, the agreement for the proposed
merger was modified for the first time 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 first
modified agreement, the redemption amount per BAC for Series I was to be
$14.4096, subject to adjustment but not less than $14.2713 or greater than
$14.5479. The modified redemption amount per BAC for Series II was to be
$14.1597, subject to adjustment but not less than $14.0152 or greater than
$14.3042. On March 14, 1996, the merger agreement was modified for the second
time to round the expected redemption amount per BAC for Series I from $14.4096
to $14.41. The redemption amount per BAC for Series I is subject to adjustment
for available cash as defined in the amended merger agreement, but not less than
$14.27 or greater than $14.55. The merger agreement was also modified to
improve the redemption amount per BAC for Series II from $14.1597 to $14.24,
subject to adjustment for available cash, but not less than $14.10 or greater
than $14.38. In addition, the redemption amounts for Series I and Series II
-69-
<PAGE>
CAPITAL REALTY INVESTORS TAX EXEMPT FUND LIMITED PARTNERSHIP
NOTES TO FINANCIAL STATEMENTS
7. Merger Proposal - Continued
will be reduced by the amount of court approved legal fees and expenses awarded
to counsel of the plaintiffs in the putative class action suits naming the
Partnership and others, as described below. Such legal fees and expenses are
not expected to exceed $0.16 and $0.20 per BAC for Series I and Series II,
respectively.
The BAC Holders will also vote upon the removal of the Partnership's
General Partner immediately prior to consummation of the proposed merger and the
election in its stead of a newly-formed wholly-owned subsidiary of CAPREIT.
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, 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 second modified 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, 1996.
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. If the closing of the proposed merger does not
occur by June 30, 1996, 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 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
(defined as the proportionate interest of such limited partner in the fair
market value of the partnership property as encumbered by the mortgage loans).
Although such interests currently have nominal value, if the fair market value
of the partnership properties increases prior to the time CAPREIT exercises its
option, such increase in value may benefit the owners of the Owner Partnership.
This feature is required by CAPREIT as a condition of their 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. 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 was filed with the SEC on March 18, 1996. The
definitive proxy materials include a full description of the proposed merger and
the independent fairness opinion.
-70-
<PAGE>
CAPITAL REALTY INVESTORS TAX EXEMPT FUND LIMITED PARTNERSHIP
NOTES TO FINANCIAL STATEMENTS
8. Litigation
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, Capital Realty Investors Tax Exempt Fund III
Limited Partnership, 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 amount offered to the BAC
Holders in the proposed merger 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 merger. 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 Chancery Court has been made by the plaintiffs
in both lawsuits to consolidate the two actions.
On January 31, 1996, the Defendants and the plaintiffs and their respective
attorneys reached a tentative settlement of the purported class actions which is
memorialized in a Memorandum of Understanding (the Memorandum), dated as of such
date. The proposed settlement must be approved by the Chancery Court. The
Memorandum 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
parties to the Memorandum will use their best efforts to execute an appropriate
Stipulation of Settlement (the Stipulation) and such other documents as may be
required in order to obtain approval by the Chancery Court of the settlement.
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. The Defendants have entered into the Memorandum solely because
the proposed settlement would eliminate the burden and expense of further
litigation and would facilitate the consummation of the proposed merger, which
the General Partner believes to be in the best interest of the BAC Holders.
In accordance with the Memorandum, the agreements for the proposed merger
were amended to provide for the revised merger terms, as previously discussed
above. Pursuant to the Memorandum, the plaintiffs' counsel will be entitled to
apply to the Chancery Court for an award of reasonable attorneys' fees and
expenses. Such expenses are not expected to exceed $0.16 and $0.20 per BAC for
Series I and Series II, respectively. These fees will reduce the redemption
amounts 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 have reviewed certain documents relating to the
proposed mergers, and will have the opportunity to review and take depositions
of representatives of the General Partner and CAPREIT. After such review,
counsel for the plaintiffs shall have the right to terminate the settlement
-71-
<PAGE>
CAPITAL REALTY INVESTORS TAX EXEMPT FUND LIMITED PARTNERSHIP
NOTES TO FINANCIAL STATEMENTS
8. Litigation - Continued
contemplated in the Memorandum, based on material information not presently
available to them.
After the Stipulation is executed, the parties will seek preliminary
approval of the settlement by the Chancery Court and will then mail notice of
the proposed settlement to members of the putative class. As soon as
practicable following completion of the discovery described in the preceding
paragraph and after class members have had a period of time to review the notice
of proposed settlement, the parties will use their best efforts to obtain final
Chancery Court approval of the settlement and the dismissal of the class actions
as to all of the claims.
On November 9, 1995, CRI filed a complaint against Capital Management
Strategies, Inc. (CMS), a company controlled by Martin C. Schwartzberg, to
determine the proper amount of fees to be paid in 1996 under an asset management
agreement. CMS answered on January 10, 1996, but asserted no counterclaims.
Thereafter, Mr. Schwartzberg launched a hostile consent solicitation to be
designated as managing general partner of approximately 125 private partnerships
sponsored by CRI. Mr. Schwartzberg is a former shareholder and executive
officer of CRI who decided to leave the company as of January 1, 1990. In
connection with his departure, he relinquished his general partner duties for
all CRI-sponsored partnerships, including those of the General Partner. On
March 28, 1996, Mr. Schwartzberg filed a preliminary proxy statement with the
SEC opposing the proposed merger.
On January 18, 1996, Mr. Schwartzberg and CMS filed a complaint in the
Circuit Court of Montgomery County, Maryland (the Circuit Court), against CRI
and Messrs. Dockser and Willoughby alleging, among other things, (i) that CRI
and Messrs. Dockser and Willoughby have breached an asset management agreement
pursuant to which Mr. Schwartzberg's company, CMS, agreed to perform limited
functions related to property-level issues for a portion of CRI's subsidized
housing portfolio (but not properties securing the mortgage revenue bonds) by
reducing the proposed budget for 1996, (ii) 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,
and (iii) that the actions in connection with the merger of CRIIMI MAE Inc. in
June, 1995 involved self-interest and led in part to the proposed reduction of
the asset management agreement budget. Neither of the Partnership nor the
General Partner was named as a defendant in this action, and Mr. Schwartzberg
does not allege that he is a BAC Holder. Messrs. Dockser and Willoughby have
entered an answer denying all of Mr. Schwartzberg's claims and moving to strike
the allegations concerning the Partnership and CRIIMI MAE Inc. and dismiss the
related counts for failure to state a claim upon which relief can be granted.
Messrs. Dockser and Willoughby have publicly responded that Mr. Schwartzberg's
suit is motivated by his budget dispute with CRI and personal animosity.
On February 12, 1996, the County Circuit Court issued a memorandum opinion
and order enjoining CMS and Mr. Schwartzberg from disclosing information made
confidential under the asset management agreement.
On February 15, 1996, Mr. Schwartzberg filed suit in the Chancery Court
against the General Partner and CRITEF III Associates Limited Partnership (No.
14837). He alleges that he has made demands upon the General Partner and CRITEF
III Associates Limited Partnership, in his capacity as a general and limited
partner of the General Partner and as a limited partner of CRITEF III Associates
-72-
<PAGE>
CAPITAL REALTY INVESTORS TAX EXEMPT FUND LIMITED PARTNERSHIP
NOTES TO FINANCIAL STATEMENTS
8. Litigation - Continued
Limited Partnership, to inspect and obtain copies of a current list of the BAC
holders and other documents. He further alleges that his demands were rejected.
On February 23, 1996, the General Partner and CRITEF III Associates Limited
Partnership answered the complaint, admitting that his demands have 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. A hearing was held on
March 6 and 7, 1996 and it is expected that the Chancery Court will render a
decision following submission of briefs by the parties.
On February 16, 1996, the Partnership, together with the General Partner,
Capital Realty Investors Tax Exempt Fund III Limited Partnership and its general
partner, CRI, and CAPREIT (collectively, the Plaintiffs) filed suit against Mr.
Schwartzberg in the United States District Court for the Southern District of
New York (the District Court), No. 96 Civ. 1186 (LAK) (the New York Action).
The complaint alleges that Mr. Schwartzberg is engaged in an unlawful
solicitation of proxies of the BAC Holders through two press releases he issued
in violation of the federal securities laws and rules promulgated by the SEC
requiring definitive proxy materials to be filed with the SEC and delivered to
the BAC Holders. The complaint also alleges that Mr. Schwartzberg has made false
and misleading statements in the solicitations concerning the terms of the
proposed merger and the availability of certain financial information, and has
falsely imputed base motives to the principals of the General Partner. On
February 23, 1996, the District Court, without making a finding of fact, issued
a temporary restraining order barring Mr. Schwartzberg from making any
solicitation of the BAC Holders without first complying with the SEC rules
pending a hearing on a proposed preliminary injunction. The District Court held
a hearing on March 5, 1996, on the motion of preliminary injunction, and,
pending a decision, continued the temporary restraining order.
On March 18, 1996, the District Court issued its Opinion enjoining Mr.
Schwartzberg from (1) making any further solicitation of BAC Holders without
complying with the provisions of Regulation 14A under the Securities Exchange
Act of 1934, and (2) committing any violation of Rule 14a-9 (regarding false or
misleading statements) in connection with any solicitation relating to the
Partnerships. The injunction was based on the District Court's findings of fact
and conclusions of law, in which it stated that the Plaintiffs (including the
Partnership) have established a strong likelihood of success on their claim that
the press releases constitute a proxy solicitation in violation of securities
laws and that the Plaintiffs are likely to establish that Mr. Schwartzberg acted
with the requisite culpability with respect to at least some of the false
statements made in his press releases. Also on March 18, 1996, Mr. Schwartzberg
filed his answer to the complaint in the New York Action, coupled with
counterclaims against the General Partner alleging that three press releases
issued by the General Partner of the Partnership constituted solicitations in
violation of the same provisions of the Securities Exchange Act and that they
were false and misleading. The counter-defendants deny the allegations. The
counterclaims sought a temporary restraining order against the General Partners
regarding further alleged solicitations and false and misleading statements.
The District Court denied the injunction request by order on April 23, 1996. On
April 16, 1996, Mr. Schwartzberg also filed a Notice of Appeal with respect to
the injunction against him with the U. S. Court of Appeals for the Second
Circuit.
The Partnership Agreement provides for the indemnification of the General
Partners and its affiliates for acts or omissions by the General Partner in good
-73-
<PAGE>
CAPITAL REALTY INVESTORS TAX EXEMPT FUND LIMITED PARTNERSHIP
NOTES TO FINANCIAL STATEMENTS
8. Litigation - Continued
faith and in the best interest of the Partnership. Such indemnification does
not extend to a finding of liability for conduct which constitutes fraud, bad
faith, misconduct, breach of fiduciary duties, or violation of state or federal
securities laws. At this time, there is no estimate as to the timing or amount,
if any, of the outcome of the New York Action, but the General Partners do not
anticipate that the litigation will have a material adverse affect on the
Partnership.
9. Summary of Quarterly Results of Operations (Unaudited)
The following is a summary of unaudited quarterly results of operations for
the years ended December 31, 1995, 1994 and 1993:
-74-
<PAGE>
CAPITAL REALTY INVESTORS TAX EXEMPT FUND LIMITED PARTNERSHIP
NOTES TO FINANCIAL STATEMENTS
9. Summary of Quarterly Results of Operations (Unaudited) - Continued
SERIES I
--------
<TABLE>
<CAPTION>
1995
Quarter Ended
March 31 June 30 September 30 December 31
------------ ------------ ------------ ------------
<S> <C> <C> <C> <C>
Income (principally interest from mortgage
revenue bonds) $ 805,519 $ 679,950 $ 815,140 $ 878,924
Net income 743,533 629,658 627,707 811,818
Net income per BAC 0.32 0.28 0.27 0.35
</TABLE>
<TABLE>
<CAPTION>
1994
Quarter Ended
March 31 June 30 September 30 December 31
------------ ------------ ------------ ------------
<S> <C> <C> <C> <C>
Income (principally interest from mortgage
revenue bonds) $ 604,146 $ 750,688 $ 682,547 $ 838,997
Cumulative effect of change in accounting
for mortgage revenue bonds (2,475,448) -- -- --
Net (loss) income (1,927,277) 686,847 641,981 781,732
Cumulative effect of change in accounting
for mortgage revenue bonds per BAC (1.07) -- -- --
Net (loss) income per BAC (0.84) 0.30 0.28 0.34
</TABLE>
<TABLE>
<CAPTION>
1993
Quarter Ended
March 31 June 30 September 30 December 31
------------ ------------ ------------ ------------
<S> <C> <C> <C> <C>
Income (principally rental income) $ 1,425,443 $ 1,463,408 $ 1,438,179 $ 1,460,988
Net income (loss) 73,083 66,601 (58,967) 370,664
Net income (loss) per BAC 0.03 0.03 (0.03) 0.17
</TABLE>
-75-
<PAGE>
CAPITAL REALTY INVESTORS TAX EXEMPT FUND LIMITED PARTNERSHIP
NOTES TO FINANCIAL STATEMENTS
9. Summary of Quarterly Results of Operations (Unaudited) - Continued
SERIES II
---------
<TABLE>
<CAPTION>
1995
Quarter Ended
March 31 June 30 September 30 December 31
------------ ------------ ------------ ------------
<S> <C> <C> <C> <C>
Income (principally interest from mortgage
revenue bonds) $ 1,073,540 $ 1,090,173 $ 1,100,554 $ 1,139,175
Net income 998,483 1,028,445 902,752 1,055,242
Net income per BAC 0.31 0.31 0.28 0.32
</TABLE>
<TABLE>
<CAPTION>
1994
Quarter Ended
March 31 June 30 September 30 December 31
------------ ------------ ------------ ------------
<S> <C> <C> <C> <C>
Income (principally interest from mortgage
revenue bonds) $ 939,700 $ 927,046 $ 969,760 $ 1,080,940
Cumulative effect of change in accounting
for mortgage revenue bonds (4,600,720) -- -- --
Net (loss) income (3,737,817) 839,633 930,506 1,021,285
Cumulative effect of change in accounting
for mortgage revenue bonds per BAC (1.41) -- -- --
Net (loss) income per BAC (1.14) 0.26 0.28 0.31
</TABLE>
<TABLE>
<CAPTION>
1993
Quarter Ended
March 31 June 30 September 30 December 31
------------ ------------ ------------ ------------
<S> <C> <C> <C> <C>
Income (principally rental income) $ 1,895,782 $ 2,035,177 $ 1,972,908 $ 2,119,792
Extraordinary item gain on debt reduction -- 416,432 -- --
Net income 147,276 668,394 2,379 828,660
Net income per BAC 0.05 0.20 -- 0.25
</TABLE>
-76-
<PAGE>
CAPITAL REALTY INVESTORS TAX EXEMPT FUND LIMITED PARTNERSHIP
NOTES TO FINANCIAL STATEMENTS
10. Condensed Financial Information
Condensed combined financial information on a GAAP basis for the years
ended December 31, 1995 and 1994 for all of the borrowers is as follows:
SERIES I
--------
<TABLE>
<CAPTION>
As of December 31, 1995
------------------------------------------------
Investments- Investments-
Less Than 20% Greater Than
Of Total 20% of Total
Assets Assets Total
------------ ------------ ------------
<S> <C> <C> <C>
Rental property, net of accumulated
depreciation $ 4,628,842 $ 26,401,608 $ 31,030,450
Other assets 280,870 1,520,366 1,801,236
------------ ------------ ------------
Total Assets $ 4,909,712 $ 27,921,974 $ 32,831,686
============ ============ ============
Mortgage loans payable $ 6,275,000 $ 37,880,000 $ 44,155,000
Accrued interest payable 1,246,519 6,545,421 7,791,940
Other liabilities 241,100 1,856,082 2,097,182
------------ ------------ ------------
Total liabilities 7,762,619 46,281,503 54,044,122
Partners' capital (2,852,907) (18,359,529) (21,212,436)
------------ ------------ ------------
Total liabilities and partners' capital $ 4,909,712 $ 27,921,974 $ 32,831,686
============ ============ ============
</TABLE>
-77-
<PAGE>
CAPITAL REALTY INVESTORS TAX EXEMPT FUND LIMITED PARTNERSHIP
NOTES TO FINANCIAL STATEMENTS
10. Condensed Financial Information - Continued
<TABLE>
<CAPTION>
As of December 31, 1994
-------------------------------------------------
Investments- Investments-
Less Than 20% Greater Than
Of Total 20% of Total
Assets Assets Total
------------ ------------ ------------
<S> <C> <C> <C>
Rental property, net of accumulated
depreciation $ 4,875,671 $ 27,720,971 $ 32,596,642
Other assets 233,315 1,471,162 1,704,477
------------ ------------ ------------
Total Assets $ 5,108,986 $ 29,192,133 $ 34,301,119
============ ============ ============
Mortgage loans payable $ 6,275,000 $ 37,880,000 $ 44,155,000
Accrued interest payable 1,033,136 5,369,778 6,402,914
Other liabilities 198,003 1,620,989 1,818,992
------------ ------------ ------------
Total liabilities 7,506,139 44,870,767 52,376,906
Partners' capital (2,397,153) (15,678,634) (18,075,787)
------------ ------------ ------------
Total liabilities and partners' capital $ 5,108,986 $ 29,192,133 $ 34,301,119
============ ============ ============
</TABLE>
<TABLE>
<CAPTION>
For the year ended December 31, 1995
-------------------------------------------------
Investments- Investments-
Less Than 20% Greater Than
Of Total 20% of Total
Assets Assets Total
------------ ------------ ------------
<S> <C> <C> <C>
Rental Income $ 1,165,842 $ 5,658,218 $ 6,824,060
Rental Expenses (539,141) (3,113,172) (3,652,313)
Interest Expense (588,488) (3,706,578) (4,295,066)
Depreciation (248,472) (2,150,155) (2,398,627)
------------ ------------ ------------
Net Loss $ (210,259) $ (3,311,687) $ (3,521,946)
============ ============ ============
</TABLE>
-78-
<PAGE>
CAPITAL REALTY INVESTORS TAX EXEMPT FUND LIMITED PARTNERSHIP
NOTES TO FINANCIAL STATEMENTS
10. Condensed Financial Information - Continued
<TABLE>
<CAPTION>
For the year ended December 31, 1994
-------------------------------------------------
Investments- Investments-
Less Than 20% Greater Than
Of Total 20% of Total
Assets Assets Total
------------ ------------ ------------
<S> <C> <C> <C>
Rental Income $ 1,122,732 $ 5,417,697 $ 6,540,429
Rental Expenses (509,819) (2,991,871) (3,501,690)
Interest Expense (593,732) (3,676,167) (4,269,899)
Depreciation (277,071) (2,217,138) (2,494,209)
------------ ------------ ------------
Net Loss $ (257,890) $ (3,467,479) $ (3,725,369)
============ ============ ============
</TABLE>
-79-
<PAGE>
CAPITAL REALTY INVESTORS TAX EXEMPT FUND LIMITED PARTNERSHIP
NOTES TO FINANCIAL STATEMENTS
10. Condensed Financial Information - Continued
SERIES II
---------
<TABLE>
<CAPTION>
As of December 31, 1995
-------------------------------------------------
Investments- Investments-
Less Than 20% Greater Than
Of Total 20% of Total
Assets Assets Total
------------ ------------ ------------
<S> <C> <C> <C>
Rental property, net of accumulated
depreciation $ 6,274,228 $ 38,631,510 $ 44,905,738
Other assets 399,032 1,912,388 2,311,420
------------ ------------ ------------
Total Assets $ 6,673,260 $ 40,543,898 $ 47,217,158
============ ============ ============
Mortgage loans payable $ 10,030,000 $ 52,578,001 $ 62,608,001
Accrued interest payable 3,927,065 9,579,202 13,506,267
Other liabilities 430,970 2,265,812 2,696,782
------------ ------------ ------------
Total liabilities 14,388,035 64,423,015 78,811,050
Partners' capital (7,714,775) (23,879,117) (31,593,892)
------------ ------------ ------------
Total liabilities and partners' capital $ 6,673,260 $ 40,543,898 $ 47,217,158
============ ============ ============
</TABLE>
-80-
<PAGE>
CAPITAL REALTY INVESTORS TAX EXEMPT FUND LIMITED PARTNERSHIP
NOTES TO FINANCIAL STATEMENTS
10. Condensed Financial Information - Continued
<TABLE>
<CAPTION>
As of December 31, 1994
-------------------------------------------------
Investments- Investments-
Less Than 20% Greater Than
Of Total 20% of Total
Assets Assets Total
------------ ------------ ------------
<S> <C> <C> <C>
Rental property, net of accumulated
depreciation $ 6,572,222 $ 40,328,194 $ 46,900,416
Other assets 358,439 1,582,286 1,940,725
------------ ------------ ------------
Total Assets $ 6,930,661 $ 41,910,480 $ 48,841,141
============ ============ ============
Mortgage loans payable $ 10,030,000 $ 52,578,001 $ 62,608,001
Accrued interest payable 3,499,235 8,440,961 11,940,196
Other liabilities 336,193 1,795,565 2,131,758
------------ ------------ ------------
Total liabilities 13,865,428 62,814,527 76,679,955
Partners' capital (6,934,767) (20,904,047) (27,838,814)
------------ ------------ ------------
Total liabilities and partners' capital $ 6,930,661 $ 41,910,480 $ 48,841,141
============ ============ ============
</TABLE>
<TABLE>
<CAPTION>
For the year ended December 31, 1995
-------------------------------------------------
Investments- Investments-
Less Than 20% Greater Than
Of Total 20% of Total
Assets Assets Total
------------ ------------ ------------
<S> <C> <C> <C>
Rental Income $ 1,318,441 $ 7,441,433 $ 8,759,874
Rental Expenses (797,458) (3,887,812) (4,685,270)
Interest Expense (1,003,000) (4,840,007) (5,843,007)
Depreciation (297,994) (1,696,594) (1,994,588)
------------ ------------ ------------
Net Income $ (780,011) $ (2,982,980) $ (3,762,991)
============ ============ ============
</TABLE>
-81-
<PAGE>
CAPITAL REALTY INVESTORS TAX EXEMPT FUND LIMITED PARTNERSHIP
NOTES TO FINANCIAL STATEMENTS
10. Condensed Financial Information - Continued
<TABLE>
<CAPTION>
For the year ended December 31, 1994
-------------------------------------------------
Investments- Investments-
Less Than 20% Greater Than
Of Total 20% Of Total
Assets Assets Total
------------ ------------ ------------
<S> <C> <C> <C>
Rental Income $ 1,239,068 $ 7,021,646 $ 8,260,714
Rental Expenses (793,170) (3,868,054) (4,661,224)
Interest Expense (1,003,000) (4,769,113) (5,772,113)
Depreciation (321,160) (1,722,133) (2,043,293)
------------ ------------ ------------
Net Income $ (878,262) $ (3,337,654) $ (4,215,916)
============ ============ ============
</TABLE>
In accordance with Staff Accounting Bulletin 71, complete financial
statements for all borrowers in which the Partnership investment in mortgage
revenue bond is 20% or more of the total assets of the Partnership at December
31, 1995 and 1994 are included as an exhibit to the Partnership's financial
statements. The borrowers' financial statements are prepared on an income tax
basis, which differs from GAAP. The principal differences between income tax
basis and GAAP are (i) for income tax purposes the apartment properties are not
valued at the lower of cost or net realizable value and a write down to fair
value at deed-in-lieu of foreclosure was not taken, (ii) an intangible asset was
recognized for tax purposes representing the value to the borrower of its
favorable financing when the properties were transferred to Owner Partnerships
and (iii) depreciable life and method.
-82-
WARNING: THE EDGAR SYSTEM ENCOUNTERED ERROR(S) WHILE PROCESSING THIS SCHEDULE.
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION FOR SERIES I
EXTRACTED FROM THE ANNUAL REPORT ON FORM 10-K/A AND IS QUALIFIED IN
ITS ENTIRETY BY REFERENCE TO SUCH ANNUAL REPORT ON FORM 10-K/A.
</LEGEND>
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1995
<PERIOD-START> JAN-01-1995
<PERIOD-END> DEC-31-1995
<CASH> 58,924
<SECURITIES> 2,599,852
<RECEIVABLES> 0
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 0
<PP&E> 0
<DEPRECIATION> 0
<TOTAL-ASSETS> 33,421,019
<CURRENT-LIABILITIES> 0
<BONDS> 0
0
0
<COMMON> 0
<OTHER-SE> 31,978,844
<TOTAL-LIABILITY-AND-EQUITY> 33,421,019
<SALES> 0
<TOTAL-REVENUES> 3,179,533
<CGS> 0
<TOTAL-COSTS> 0
<OTHER-EXPENSES> 366,817
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> 2,812,716
<INCOME-TAX> 0
<INCOME-CONTINUING> 2,812,716
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 2,812,716
<EPS-PRIMARY> 1.22
<EPS-DILUTED> 1.22
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION FOR SERIES II
EXTRACTED FROM THE ANNUAL REPORT ON FORM 10-K/A AND IS QUALIFIED IN
ITS ENTIRETY BY REFERENCE TO SUCH ANNUAL REPORT ON FORM 10-K/A.
</LEGEND>
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1995
<PERIOD-START> JAN-01-1995
<PERIOD-END> DEC-31-1995
<CASH> 88,986
<SECURITIES> 3,819,666
<RECEIVABLES> 0
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 0
<PP&E> 0
<DEPRECIATION> 0
<TOTAL-ASSETS> 47,738,900
<CURRENT-LIABILITIES> 0
<BONDS> 0
0
0
<COMMON> 0
<OTHER-SE> 45,747,989
<TOTAL-LIABILITY-AND-EQUITY> 47,738,900
<SALES> 0
<TOTAL-REVENUES> 4,403,442
<CGS> 0
<TOTAL-COSTS> 0
<OTHER-EXPENSES> 418,520
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> 3,984,922
<INCOME-TAX> 0
<INCOME-CONTINUING> 3,984,922
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 3,984,922
<EPS-PRIMARY> 1.22
<EPS-DILUTED> 1.22
</TABLE>
