<PAGE>
FORM 10-Q
UNITED STATES SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
Quarterly Report Under Section 13 or 15(d)
of the Securities Exchange Act of 1934
For the Quarter Ended September 30, 1996
----------------------
Commission file number 1-9793
----------------------
CAPITAL REALTY INVESTORS TAX EXEMPT FUND LIMITED PARTNERSHIP
-------------------------------------------------------------------------
(Exact name of registrant as specified in its charter)
Delaware 52-1483643
- ----------------------------------------- ------------------------
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
11200 Rockville Pike, Rockville, Maryland 20852
- ----------------------------------------- ------------------------
(Address of principal executive offices) (Zip Code)
(301) 468-9200
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(Registrant's telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months and (2) has been subject to such filing
requirements for the past 90 days.
Yes [X] No [ ]
As of November 11, 1996, 2,280,000 Series I and 3,238,760 Series II
Beneficial Assignee Certificates were outstanding.
<PAGE>
CAPITAL REALTY INVESTORS TAX EXEMPT FUND LIMITED PARTNERSHIP
INDEX TO FORM 10-Q
FOR THE QUARTER ENDED SEPTEMBER 30, 1996
Page
----
PART I. Financial Information (Unaudited)
Item 1. Financial Statements
Balance Sheets - September 30, 1996
and December 31, 1995 . . . . . . . . . . . . . . . 1
Statements of Income - for the three and nine
months ended September 30, 1996 and 1995 . . . . . . 2
Statements of Changes in Partners'
Capital (Deficit) - for the nine months ended
September 30, 1996 . . . . . . . . . . . . . . . . . 4
Statements of Cash Flows - for the nine
months ended September 30, 1996 and 1995 . . . . . . 5
Notes to Financial Statements . . . . . . . . . . . . 7
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations . . . . . . . 36
PART II. Other Information
Item 1. Legal Proceedings . . . . . . . . . . . . . . . . . . 54
Item 4. Submission of Matters to a Vote of Security Holders . 60
Item 6. Exhibits and Reports on Form 8-K . . . . . . . . . . . 62
Signature . . . . . . . . . . . . . . . . . . . . . . . . . . 64
Exhibit Index . . . . . . . . . . . . . . . . . . . . . . . . . . 65
<PAGE>
PART I. FINANCIAL INFORMATION
---------------------
ITEM 1. FINANCIAL STATEMENTS
---------------------
CAPITAL REALTY INVESTORS TAX EXEMPT FUND LIMITED PARTNERSHIP
BALANCE SHEETS
ASSETS
<TABLE>
<CAPTION>
SERIES I SERIES II
-------------------------------- ------------------------------
As of As of As of As of
September 30, December 31, September 30, December 31,
1996 1995 1996 1995
------------ ------------ ------------ ------------
(Unaudited) (Unaudited)
<S> <C> <C> <C> <C>
Investment in mortgage revenue bonds $ 30,740,285 $ 30,740,285 $ 43,793,252 $ 43,793,252
Cash and cash equivalents 82,027 58,924 14,979 88,986
Marketable securities 680,690 1,315,182 923,428 1,512,281
Working capital reserves invested in
marketable securities 1,419,310 1,284,670 2,307,489 2,307,385
Receivables and other assets 16,488 21,958 16,008 36,996
------------ ------------ ------------ ------------
Total assets $ 32,938,800 $ 33,421,019 $ 47,055,156 $ 47,738,900
============ ============ ============ ============
LIABILITIES AND PARTNERS' CAPITAL (DEFICIT)
Distributions payable $ 650,672 $ 1,243,762 $ 948,823 $ 1,766,776
Accounts payable and accrued expenses 234,210 198,413 237,889 224,135
------------ ------------ ------------ ------------
Total liabilities 884,882 1,442,175 1,186,712 1,990,911
------------ ------------ ------------ ------------
Partners' capital (deficit):
General Partner (213,325) (214,083) (288,591) (289,808)
Beneficial Assignee Certificates
(BACs) - issued and outstanding,
2,280,000 of Series I BACs and
3,238,760 of Series II BACs 32,267,243 32,192,927 46,157,035 46,037,797
------------ ------------ ------------ ------------
Total partners' capital 32,053,918 31,978,844 45,868,444 45,747,989
------------ ------------ ------------ ------------
Total liabilities and
partners' capital $ 32,938,800 $ 33,421,019 $ 47,055,156 $ 47,738,900
============ ============ ============ ============
</TABLE>
The accompanying notes are an integral part
of these financial statements.
-1-
<PAGE>
PART I. FINANCIAL INFORMATION
---------------------
ITEM 1. FINANCIAL STATEMENTS
---------------------
CAPITAL REALTY INVESTORS TAX EXEMPT FUND LIMITED PARTNERSHIP
STATEMENTS OF INCOME
(Unaudited)
<TABLE>
<CAPTION>
SERIES I
---------------------------------------------------------------
For the three months ended For the nine months ended
September 30, September 30,
---------------------------- -----------------------------
1996 1995 1996 1995
------------ ------------ ------------ ------------
<S> <C> <C> <C> <C>
Interest from mortgage revenue bonds $ 808,984 $ 795,213 $ 2,386,420 $ 2,246,967
------------ ------------ ------------ ------------
Other income (expenses):
Other interest income 25,250 19,927 70,531 53,642
Merger-related expenses (33,669) (143,162) (267,795) (143,162)
General and administrative (30,796) (33,972) (108,021) (127,309)
Professional fees (18,291) (10,299) (54,045) (29,240)
------------ ------------ ------------ ------------
(57,506) (167,506) (359,330) (246,069)
------------ ------------ ------------ ------------
Net income $ 751,478 $ 627,707 $ 2,027,090 $ 2,000,898
============ ============ ============ ============
Net income allocated to General Partner (1.01%) $ 7,590 $ 6,340 $ 20,474 $ 20,209
============ ============ ============ ============
Net income allocated to BAC Holders (98.99%) $ 743,888 $ 621,367 $ 2,006,616 $ 1,980,689
============ ============ ============ ============
Net income per BAC $ 0.33 $ 0.27 $ 0.88 $ 0.87
============ ============ ============ ============
BACs outstanding 2,280,000 2,280,000 2,280,000 2,280,000
============ ============ ============ ============
</TABLE>
The accompanying notes are an integral part
of these financial statements.
-2-
<PAGE>
PART I. FINANCIAL INFORMATION
---------------------
ITEM 1. FINANCIAL STATEMENTS
---------------------
CAPITAL REALTY INVESTORS TAX EXEMPT FUND LIMITED PARTNERSHIP
STATEMENTS OF INCOME
(Unaudited)
<TABLE>
<CAPTION>
SERIES II
---------------------------------------------------------------
For the three months ended For the nine months ended
September 30, September 30,
---------------------------- -----------------------------
1996 1995 1996 1995
------------ ------------ ------------ ------------
<S> <C> <C> <C> <C>
Interest from mortgage revenue bonds $ 1,022,894 $ 1,070,774 $ 3,324,927 $ 3,168,607
------------ ------------ ------------ ------------
Other income (expenses):
Other interest income 22,854 29,780 105,174 95,660
Merger-related expenses (33,669) (143,215) (267,480) (143,215)
General and administrative (39,144) (41,619) (124,775) (152,181)
Professional fees (22,933) (12,967) (70,922) (39,190)
------------ ------------ ------------ ------------
(72,892) (168,021) (358,003) (238,926)
------------ ------------ ------------ ------------
Net income $ 950,002 $ 902,753 $ 2,966,924 $ 2,929,681
============ ============ ============ ============
Net income allocated to General Partner (1.01%) $ 9,595 $ 9,118 $ 29,966 $ 29,590
============ ============ ============ ============
Net income allocated to BAC Holders (98.99%) $ 940,407 $ 893,635 $ 2,936,958 $ 2,900,091
============ ============ ============ ============
Net income per BAC $ 0.29 $ 0.28 $ 0.91 $ 0.90
============ ============ ============ ============
BACs outstanding 3,238,760 3,238,760 3,238,760 3,238,760
============ ============ ============ ============
</TABLE>
The accompanying notes are an integral part
of these financial statements.
-3-
<PAGE>
PART I. FINANCIAL INFORMATION
---------------------
ITEM 1. FINANCIAL STATEMENTS
---------------------
CAPITAL REALTY INVESTORS TAX EXEMPT FUND LIMITED PARTNERSHIP
STATEMENTS OF CHANGES IN PARTNERS' CAPITAL (DEFICIT)
For the nine months ended September 30, 1996
(Unaudited)
<TABLE>
<CAPTION>
SERIES I
----------------------------------------------
Beneficial
Assignee
Certificate General
Holders Partner Total
------------ ----------- ------------
<S> <C> <C> <C>
Balance, December 31, 1995 $ 32,192,927 $ (214,083) $ 31,978,844
Net income 2,006,616 20,474 2,027,090
Distributions paid or accrued of $0.8475 per BAC (1,932,300) (19,716) (1,952,016)
(none of which is return on capital)
------------ ----------- ------------
Balance, September 30, 1996 $ 32,267,243 $ (213,325) $ 32,053,918
============ =========== ============
SERIES II
----------------------------------------------
Beneficial
Assignee
Certificate General
Holders Partner Total
------------ ----------- ------------
<S> <C> <C> <C>
Balance, December 31, 1995 $ 46,037,797 $ (289,808) $ 45,747,989
Net income 2,936,958 29,966 2,966,924
Distributions paid or accrued of $.870 per BAC
(none of which is return on capital) (2,817,720) (28,749) (2,846,469)
------------ ----------- ------------
Balance, September 30, 1996 $ 46,157,035 $ (288,591) $ 45,868,444
============ =========== ============
</TABLE>
The accompanying notes are an integral part
of these financial statements.
-4-
<PAGE>
PART I. FINANCIAL INFORMATION
---------------------
ITEM 1. FINANCIAL STATEMENTS
---------------------
CAPITAL REALTY INVESTORS TAX EXEMPT FUND LIMITED PARTNERSHIP
STATEMENTS OF CASH FLOWS
(Unaudited)
<TABLE>
<CAPTION>
SERIES I
------------------------------
For the nine months ended
September 30,
------------------------------
1996 1995
------------ ------------
<S> <C> <C>
Cash flows from operating activities:
Net income $ 2,027,090 $ 2,000,898
Adjustments to reconcile net income to net cash provided by
operating activities:
Decrease in receivables and other assets 5,470 9,792
Increase in accounts payable and accrued expenses 35,797 105,817
------------ ------------
Net cash provided by operating activities 2,068,357 2,116,507
------------ ------------
Cash flows from investing activities:
Sale of marketable securities 2,534,666 2,502,352
Purchase of marketable securities (1,900,174) (2,100,915)
Deposits to working capital reserves invested in marketable
securities (134,640) (189,838)
------------ ------------
Net cash provided by investing activities 499,852 211,599
------------ ------------
Cash flows from financing activities:
Distributions to BAC Holders and General Partner (2,545,106) (2,395,393)
------------ ------------
Net increase (decrease) in cash and cash equivalents 23,103 (67,287)
Cash and cash equivalents, beginning of period 58,924 103,864
------------ ------------
Cash and cash equivalents, end of period $ 82,027 $ 36,577
============ ============
</TABLE>
The accompanying notes are an integral part
of these financial statements.
-5-
<PAGE>
PART I. FINANCIAL INFORMATION
---------------------
ITEM 1. FINANCIAL STATEMENTS
---------------------
CAPITAL REALTY INVESTORS TAX EXEMPT FUND LIMITED PARTNERSHIP
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
<TABLE>
<CAPTION>
SERIES II
------------------------------
For the nine months ended
September 30,
------------------------------
1996 1995
------------ ------------
<S> <C> <C>
Cash flows from operating activities:
Net income $ 2,966,924 $ 2,929,681
Adjustments to reconcile net income to net cash provided by
operating activities:
Decrease in receivables and other assets 20,988 3,113
Increase in accounts payable and accrued expenses 13,754 104,279
------------ ------------
Net cash provided by operating activities 3,001,666 3,037,073
------------ ------------
Cash flows from investing activities:
Sale of marketable securities 5,651,445 7,209,383
Purchase of marketable securities (5,062,592) (6,553,290)
Deposits to working capital reserves
invested in marketable securities (104) (345,804)
------------ ------------
Net cash provided by investing activities 588,749 310,289
------------ ------------
Cash flows from financing activities:
Distributions to BAC Holders and General Partner (3,664,422) (3,402,677)
------------ ------------
Net decrease in cash and cash equivalents (74,007) (55,315)
Cash and cash equivalents, beginning of period 88,986 101,283
------------ ------------
Cash and cash equivalents, end of period $ 14,979 $ 45,968
============ ============
</TABLE>
The accompanying notes are an integral part
of these financial statements.
-6-
<PAGE>
CAPITAL REALTY INVESTORS TAX EXEMPT FUND LIMITED PARTNERSHIP
NOTES TO FINANCIAL STATEMENTS
(Unaudited)
1. BASIS OF PRESENTATION
In the opinion of CRITEF Associates Limited Partnership (the General
Partner), the accompanying unaudited financial statements of Capital Realty
Investors Tax Exempt Fund Limited Partnership (the Partnership) contain all
adjustments of a normal recurring nature necessary to present fairly the
Partnership's financial position as of September 30, 1996 and December 31, 1995,
and the results of its operations for the three and nine months ended September
30, 1996 and 1995 and its cash flows for the nine months ended September 30,
1996 and 1995.
These unaudited financial statements have been prepared pursuant to the
rules and regulations of the Securities and Exchange Commission. Certain
information and note disclosures normally included in financial statements
prepared in accordance with generally accepted accounting principles have been
condensed or omitted. While the General Partner believes that the disclosures
presented are adequate to make the information not misleading, it is suggested
that these financial statements be read in conjunction with the amended and
restated financial statements and notes included in the Partnership's Annual
Report filed on Form 10-K/A on May 17, 1996 for the year ended December 31,
1995.
The financial statements for the three and nine months ended September 30,
1995 have been restated to conform to 1996 presentation, as well as to conform
with the restated 1995 financial statements as discussed in Note 3.
2. MERGER PROPOSAL
On September 11, 1995, the Partnership and its General Partner entered into
a merger agreement, subject to BAC Holder approval, with an affiliate of Capital
Apartment Properties, Inc. (CAPREIT), a private real estate investment trust.
On that date, another CAPREIT affiliate entered into a merger agreement with
Capital Realty Investors Tax Exempt Fund III Limited Partnership (CRITEF III), a
similar tax exempt bond fund sponsored by CRI. The two merger agreements are
independent of one another, but the closing of each merger is conditioned on
closing of the other, at CAPREIT's election. Another affiliate of CAPREIT is
the property manager for four of the five properties securing the bonds held by
Series I, and all five properties securing the bonds in Series II. All nine
properties managed by the CAPREIT affiliate had defaulted with respect to their
mortgage loans held by the Partnership. If the merger proposal is approved by a
majority vote of BAC Holders, all of the BACs in both Series I and Series II
will be redeemed for cash and the interests represented by such BACs will be
canceled. The agreement for the proposed merger has been modified to improve
the terms of the original proposal. Under the original proposal and under the
Fourth Amended and Restated Agreement and Plan of Merger (the Fourth Amended
Agreement), the redemption amount per BAC was to be $13.761 and $14.82,
respectively, for Series I, and $13.313 and $14.50 for Series II, respectively.
Under the most recent modification, Amendment No. 1 to the Fourth Amended and
Restated Agreement and Plan of Merger (the Restated Merger Agreement), all of
the BACs will be redeemed for cash at a redemption price of $15.42 per BAC, net
to the holder, without interest, subject to upward adjustment based on Available
Cash (as defined in the Restated Merger Agreement) to not greater than $15.629
per BAC for Series I, and $15.11 per BAC, net to the holder, without interest,
subject to upward adjustment based on Available Cash to not greater than $15.319
per BAC for Series II. In arriving at the base redemption price, the
consideration to be paid to BAC holders in the mergers has been reduced by the
fees and expenses payable to counsel for the plaintiffs in certain class action
-7-
<PAGE>
CAPITAL REALTY INVESTORS TAX EXEMPT FUND LIMITED PARTNERSHIP
NOTES TO FINANCIAL STATEMENTS
(Unaudited)
2. MERGER PROPOSAL - Continued
litigation, as discussed in Note 6, of $2 million in the aggregate, assuming
both the Partnership and CRITEF III (collectively, the Partnerships) consummate
the mergers.
The BAC Holders will also vote upon the sale of the Partnership's General
Partner's interest to an affiliate of CAPREIT immediately prior to consummation
of the proposed merger. CAPREIT has agreed to pay the General Partner $400,000
in consideration for its 1.01% general partner interest in the Partnership.
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.
After postponing the special meeting originally scheduled for October 29, 1996,
the General Partner established November 27, 1996 as the special meeting date
for BAC Holders of record as of November 12, 1996 to consider and vote upon the
proposed mergers.
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 Partner.
Under the Restated Merger Agreement, CAPREIT will pay the discounted amount of
$432,960 and $652,245 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 35% of the total accrued fees owed to CRI. Also,
CAPREIT will pay $332,460 and $489,120 to CRIIMI for the fees of Series I and
Series II, respectively, accrued from July 1, 1995 through September 30, 1996,
which represents 100% of the fees which are owed to CRIIMI for that period.
From October 1, 1996 to the closing of the proposed merger, the amounts to be
paid by CAPREIT to CRIIMI will increase, to reflect additional amounts currently
being accrued for mortgage servicing and administration fees, at a rate of
$22,164 and $32,608 per month (or portion thereof) for Series I and Series II,
respectively.
Each of the entities formed to take title to properties and assume the
existing indebtedness when the original unaffiliated borrowers defaulted (Owner
Partnerships), which are affiliates of the Partnership, has agreed to either (a)
sell, assign and transfer the partnership interests in, or the real property and
other assets of, such Owner Partnerships to CAPREIT or its designee for no
additional consideration or (b) admit CAPREIT or its designee as the managing
general partner, whereupon the general partner interests of the current general
partners will be converted into limited partner interests, and CAPREIT will have
the option to acquire all of the limited partner interests at any time within
five years from the closing date of the merger at the then fair market value
thereof (based on the fair market value of the property as encumbered by the
mortgage loans). Although such interests currently have nominal value, if the
fair market value of the partnership properties increases substantially prior to
the time CAPREIT exercises its option, such increase in value may benefit the
owners of the Owner Partnerships. This feature was required by CAPREIT as a
material business term of the merger.
In accordance with the Restated Merger Agreement, CAPREIT is to pay the
legal costs incurred by the Partnership associated with the proposed merger,
upon consummation of the proposed merger. As the Partnership is not responsible
for payment of these costs, they have not been reflected in the accompanying
-8-
<PAGE>
CAPITAL REALTY INVESTORS TAX EXEMPT FUND LIMITED PARTNERSHIP
NOTES TO FINANCIAL STATEMENTS
(Unaudited)
2. MERGER PROPOSAL - Continued
financial statements. However, in the event that the proposed merger is not
consummated with CAPREIT, the Partnership will be responsible for these costs,
as discussed below. As of November 11, 1996, the Partnership had incurred legal
costs of approximately $69,000 each for Series I and II related to the proposed
merger. There is no reasonable estimate of remaining legal costs to be incurred
by the Partnership related to the proposed merger.
In the event the Restated Merger Agreement is terminated or abandoned under
certain specified circumstances, the Partnership may be liable for the payment
of a fee equal of $2,250,000 with respect to such terminated or abandoned
Restated Merger Agreement if there is a Fiduciary Out Termination (as defined in
the Restated Merger Agreement), a Triggering Event (as defined in the Restated
Merger Agreement) or the Partnership consummates an alternative transaction
within 270 days of the date of termination or abandonment of such Restated
Merger Agreement.
In addition, if the Restated Merger Agreement is terminated or abandoned
due to (i) a Fiduciary Out Termination, (ii) a willful and material breach by
the Partnership or any applicable Owner Partnership (other than a breach of the
representations and warranties), (iii) the failure by the Partnership or any of
such Owner Partnerships to perform in all material respects its obligations and
duties thereunder, or (iv) a termination of such Restated Merger Agreement by
such CAPREIT affiliate because the Partnership shall have settled designated
actions for an amount in excess of an agreed upon amount or such settlement or
compromise contains terms to which such CAPREIT affiliate reasonably objects,
then the Partnership shall bear all of its own expenses, as mentioned above, and
reimburse such CAPREIT affiliate and its affiliates for reasonable out-of-pocket
expenses (including, without limitation, all fees and expenses of counsel, and
its financing sources and consultants to the CAPREIT affiliate and its
affiliates) in connection with such merger and related transactions and the
proxy statement. In no event, however, shall the amount paid to reimburse
expenses under the Restated Merger Agreement exceed $2,600,000.
During February 1996, the General Partner and CRITEF III Associates LP
(CRITEF III LP) (collectively, the General Partners) received an inquiry
concerning the possible acquisition of the Partnerships from a group of
investors led by Mr. Terry McNellis and Mr. Gary Petrucci, of Piper Jaffray
Inc., and Mr. David Brierton and Mr. Jack Safar, of Dominium Management Services
Inc. (collectively, the Dominium Group). The Dominium Group executed
confidentiality and non-circumvention agreements, and by the beginning of April
1996, the Partnerships had provided the Dominium Group with all of the due
diligence materials they had requested. Thereafter, the General Partner did not
hear from any representative of the Dominium Group again until June 28, 1996,
just days prior to the initially scheduled date for the fairness hearing to be
held on the Stipulation of Settlement in the Zakin and Wingard putative class
actions (the Zakin and Wingard Actions), as discussed in Note 6.
On June 28, 1996, counsel to the plaintiffs in the Zakin and Wingard
Actions, and the Partnerships, received a letter from Dominium Tax Exempt Fund
L.L.P. (Dominium) indicating an interest in entering into merger agreements with
the Partnerships having similar terms as the CAPREIT merger agreement and
purportedly offering the BAC Holders of the Partnerships an aggregate merger
consideration of approximately $168,230,000. After reviewing the Dominium
letter, the General Partners determined that Dominium had not demonstrated any
firm financing ability. Notwithstanding such determination, the General
-9-
<PAGE>
CAPITAL REALTY INVESTORS TAX EXEMPT FUND LIMITED PARTNERSHIP
NOTES TO FINANCIAL STATEMENTS
(Unaudited)
2. MERGER PROPOSAL - Continued
Partners, in a letter dated July 3, 1996, notified Dominium that it would make
documents available to Dominium for its due diligence. The General Partners,
however, also cautioned Dominium that it would not jeopardize the merger
agreement with CAPREIT by an unwarranted delay while Dominium and its potential
lenders continued to study the Partnerships and the mortgage revenue bonds and
complete their due diligence.
During the weeks of July 8, July 22 and July 29, representatives of
Dominium visited the principal offices of the Partnerships to continue their due
diligence review. During that period, the General Partners also responded to
numerous requests for copies of specific documents and coordinated site visits
to the properties by Dominium, its two proposed potential lenders, and its
engineering and environmental consultants. On July 12, 1996, the Partnerships
received copies of correspondence from Dominium to counsel for the plaintiffs in
the Zakin and Wingard Actions, indicating that Dominion had received purported
financing commitments, subject to its potential lenders' satisfactory completion
of their due diligence during the succeeding 21 days and the payment by Dominium
of an expense deposit of $75,000, a processing fee of $100,000 on July 23, 1999,
and a commitment fee of in excess of $3,000,000 of which $500,000 was due at the
end of the 21-day due diligence period. According to Dominium's letter, the net
amount payable to BAC Holders in the Partnerships under its adjusted proposal
would be at least $165,305,000. By letter dated July 18, 1996, the General
Partners requested that Dominium supply evidence that it had the financial
capability to cover the costs of the transaction it proposed and to provide the
equity that its potential lenders would require. The General Partners never
received any evidence that the $500,000 portion of the loan commitment fee or
the $100,000 processing fee was paid. The July 18 letter also requested that
Dominium's counsel submit their suggested revisions to the existing Merger
Agreement with CAPREIT to reflect the terms desired by Dominium. That request
was reiterated by letter dated July 24, 1996. Copies of the existing Merger
Agreement marked to reflect Dominium's proposed changes thereto were received on
July 29, 1996. By letter dated July 31, 1996, the General Partners requested
clarification of seven issues relating to Dominium's mark-up, but never received
a response.
The Partnership has been advised that, on August 2, 1996, representatives
of CAPREIT met with representatives of Dominium in New York City in an attempt
to assess the credibility of Dominium's proposal and to discern its motivations
with respect to the Partnerships, in view of CAPREIT's belief that Dominium's
proposal, as described in its letters to the Funds, was not financeable and
could not be accomplished as proposed. At that meeting and in a few subsequent
phone conversations between a representative of CAPREIT and a representative of
Dominium, certain aspects of CAPREIT's and Dominium's respective proposals were
discussed. No agreements or understandings were reached between CAPREIT and
Dominium as a result of the meeting or in any subsequent communications. The
General Partners learned only recently that Dominium had proposed that CAPREIT
enter into a management contract that would have given Dominium $3.5 million in
termination fees upon approval of the mergers.
Dominium had previously indicated to counsel for the plaintiffs in the
Zakin and Wingard Actions that it would complete its due diligence and submit
firm financing commitments for its proposal in order to satisfy such counsel's
concerns about Dominium's ability to secure financing for a transaction with the
Partnerships by August 5, 1996. No such commitment was submitted on August 5,
1996 or at any time thereafter.
-10-
<PAGE>
CAPITAL REALTY INVESTORS TAX EXEMPT FUND LIMITED PARTNERSHIP
NOTES TO FINANCIAL STATEMENTS
(Unaudited)
2. MERGER PROPOSAL - Continued
During the period of time while the Partnerships and counsel to the
plaintiffs in the Zakin and Wingard Actions continued to pursue a possible
transaction with Dominium, the fairness hearing in the Zakin and Wingard
Actions, initially scheduled to be held on June 19, 1996 and postponed by the
parties until July 2, 1996, was further postponed on three occasions in order to
accommodate Dominium's request for additional time to finalize its proposal.
The hearing was ultimately scheduled to be held on August 14, 1996.
On August 7, 1996, after not having received any word from Dominium by
August 5, 1996, the date Dominium itself had selected as the deadline for the
delivery of its definitive proposal and firm commitments for the financing
thereof, counsel for the plaintiffs in the Zakin and Wingard Actions wrote to
Dominium establishing a deadline of 12:00 noon, August 12, 1996 for their
receipt from Dominium of a documented "firm offer economically superior to" the
CAPREIT Mergers. No offer was received from Dominium by the August 12, 1996
deadline. CAPREIT, in order to bring finality to the process and to induce
plaintiff's counsel to proceed with the August 14, 1996 hearing date on the
Stipulation of Settlement as scheduled rather than postponing it for the fifth
time, agreed with plaintiffs' counsel to increase the consideration being
offered by it to the BAC Holders in the Partnerships by $2 million in the
aggregate. Plaintiffs' counsel advised Dominium's counsel, by letter of August
12, 1996, that in light of Dominium's repeated failure to respond to their
inquiries and to provide a firm offer for the acquisition of the Partnerships
with financing commitments therefore, and in light of the agreement of CAPREIT
to increase the aggregate consideration being offered by it in the Mergers by $2
million, such counsel intended to support the Stipulation of Settlement at the
hearing to be held on August 14, 1996.
Dominium responded to the Partnerships and plaintiffs' counsel in letters
received on August 13, 1996, that it was not in a position to provide evidence
of its ability to finance or to finalize its proposals. Dominium alleged that
with more time and "disinterested general partners" it would be able to make a
proposal superior to CAPREIT's. In light of the fact that Dominium had not been
able to put together a firm offer in nearly six months since their initial
expression of interest in February, 1996, the General Partners did not believe
it to be in the best interests of the BAC Holders to delay any further
proceeding with the merger with CAPREIT.
On August 13, 1996, the parties in the Zakin and Wingard Actions entered
into an Amendment to the Stipulation of Settlement which reflected CAPREIT's
agreement to increase the consideration to be paid by it in the Mergers and
plaintiffs' counsels' agreement to support the Stipulation of Settlement, as
improved, notwithstanding any actions Dominium had taken or would take in the
future. The proposed Settlement, as amended, was presented to the Court for
final hearing and approval on August 14, 1996.
On August 14, 1996, at the fairness hearing on the Stipulation of
Settlement, as amended, in the Zakin and Wingard Actions, the Delaware Court of
Chancery certified the class of BAC Holders, found that the proposed settlement
was fair, reasonable, adequate and in the best interests of the BAC Holders,
approved the Stipulation of Settlement, awarded to plaintiff's counsel fees in
the amount of $2 million, and entered a final judgment dismissing the actions.
The 30-day period to appeal the final judgment ended with no appeal being taken.
-11-
<PAGE>
CAPITAL REALTY INVESTORS TAX EXEMPT FUND LIMITED PARTNERSHIP
NOTES TO FINANCIAL STATEMENTS
(Unaudited)
2. MERGER PROPOSAL - Continued
Subsequent to the fairness hearing, the General Partners, based upon the
performance of the properties underlying the Mortgage Revenue Bonds during the
period since the Second Amended and Restated Merger Agreement was signed, sought
to obtain CAPREIT's agreement to a further increase in the aggregate merger
consideration in addition to the $2 million increase agreed to in connection
with the fairness hearing. In light of the delays in pursuing the merger and
the fairness hearing occasioned by the efforts of the General Partners and
plaintiffs' counsel to obtain an offer from Dominium, CAPREIT sought to extend
the termination date and to increase the amount of expenses for which the
CAPREIT affiliate may be reimbursed pursuant to the proposed merger. On August
21, 1996, as set forth in the Fourth Amended Agreement, CAPREIT agreed to
increase the aggregate amount of merger consideration by an additional $1.5
million, approximately, in consideration for the extension of the termination
date from November 30, 1996 to December 31, 1996 and an increase from $2,500,000
to $2,600,000 per merger agreement of the maximum amount of expenses for which
the CAPREIT affiliate may be reimbursed under certain circumstances if a merger
agreement is terminated.
By letter dated August 28, 1996, Dominium demanded that the Partnerships
provide it with a current list of the BAC Holders, information from nominees
containing the identity of brokerage and financial institutions holding BACS,
and a list of Non-Objecting Beneficial Owners. The General Partners notified
Dominium, by letter dated September 5, 1996, that it believed that, under
applicable law, Dominium's demand was legally deficient in a number of respects
and, accordingly, it could not make any decisions with respect to the request.
After various communications, Dominium cured the deficiencies in its
request. The Partnerships notified Dominium, on September 19, 1996, that it
would provide Dominium with a current list of BAC Holders and related
information.
On September 20, 1996, Oppenheimer delivered its Fairness Opinions to the
Partnership to the effect that, as of such date and subject to the assumptions
and limitations therein, the Redemption Prices as set forth in the Fourth
Amended Agreement of $14.82 per BAC with respect to Series I and $14.50 per BAC
with respect to Series II, net to the holders in cash, respectively, are fair to
such BAC Holders from a financial point of view.
On September 20, 1996, the Partnership filed its Joint Proxy Statement (the
Proxy) with the SEC in connection with the solicitation of BAC Holder approval
for the proposed mergers based on the merger terms as set forth in the Fourth
Amended Agreement. The Proxy announced a special meeting to be held on October
29, 1996 to consider and vote upon the proposed merger terms as set forth in the
Fourth Amended Agreement. On September 23, 1996, the Partnership commenced
mailing the Proxy and related proxy materials to BAC Holders on record as of
September 19, 1996.
On September 27, 1996, Dominium sent a letter to all BAC Holders voicing
its opposition to the proposed mergers. On the same day, Dominium initiated
litigation against the Partnership and others, as discussed in Note 6. The
Partnership and others responded in other lawsuits, also described in Note 6.
Thereafter, on September 30, and October 1, 1996, Dominium filed its preliminary
proxy materials with the SEC and publicly announced that it would be soliciting
proxies against the proposed mergers.
-12-
<PAGE>
CAPITAL REALTY INVESTORS TAX EXEMPT FUND LIMITED PARTNERSHIP
NOTES TO FINANCIAL STATEMENTS
(Unaudited)
2. MERGER PROPOSAL - Continued
On October 16, 1996, Dominium mailed its definitive proxy materials to BAC
Holders. Dominium's proxy materials confirmed that Dominium was not making, and
had no current plans to make, a superior proposal, or indeed any proposal, for
an acquisition of the Partnerships. In its proxy materials, Dominium stated that
it was soliciting proxies in opposition to the proposed mergers because, among
other things, it believed that the consideration then being offered to the BAC
Holders in the proposed mergers did not maximize BAC Holder values and that it
believed there might be alternatives to the proposed mergers in which BAC
Holders might realize higher values.
On October 28, 1996, the General Partner postponed the special meeting,
which had been scheduled to be held on October 29, 1996, until November 8, 1996,
in an effort to afford BAC Holders the opportunity to resolve any confusion
resulting from the competing claims of the General Partners and Dominium and to
provide additional time for BAC Holders to vote their BACs. As of the close of
business on November 6, 1996, the day prior to the Partnerships' public
announcement of the increase in the merger consideration, the Partnership had
received proxies from the holders of approximately 62% of the outstanding BACs
in the Partnership eligible to vote, approximately 69.7% of which proxies
(representing approximately 43% of the outstanding BACs) had been voted in favor
of the proposed merger.
Following the postponement of the special meeting to be held on October 29,
1996, CAPREIT and the General Partners discussed the possibility of CAPREIT's
increasing the consideration that it was offering to BAC Holders in the proposed
mergers. At this time, CAPREIT also approached Dominium in an attempt to settle
its differences with Dominium and the outstanding litigations between them, as
discussed in Note 6, and to solicit Dominium's support for the improved proposed
merger terms it was considering. Over the course of several days, CAPREIT
negotiated with the General Partners and Dominium in an effort to reach an
agreement on improved proposed merger terms and on November 6, 1996, CAPREIT
agreed with the General Partners to increase the aggregate consideration that it
was offering BAC Holders in the proposed mergers by approximately $6.5 million
(or approximately $0.60 per BAC) and the General Partners and CRI agreed to
reduce by an aggregate of $500,000 the amounts to be paid the General Partners
and CRI upon consummation of the proposed mergers. Dominium advised CAPREIT
that, in its view, the agreed upon merger consideration maximized BAC Holder
values, and that it would endorse and support the proposed mergers if the merger
agreements were amended to incorporate these terms.
In connection with CAPREIT's agreement to increase its merger offer and the
execution of the Restated Merger Agreement, on November 6, 1996, CAPREIT and
Dominium entered into a settlement agreement pursuant to which, among other
things, (i) each of the parties and certain of their affiliates and the
partnerships agreed to settle the various lawsuits between them and to release
all claims against the other arising from or relating to such actions, the
proposed mergers and the related transactions and their respective proxy
solicitation efforts; (ii) CAPREIT agreed to pay Dominium $500,000 upon signing
of the Restated Merger Agreement and to pay $2.5 million into escrow to be held
in escrow for a period of up to two years and to be paid to Dominium upon BAC
Holder approval of the proposed mergers or if CAPREIT otherwise acquires control
of the Partnerships, in consideration for Dominium's efforts in negotiating an
increase in the consideration being offered by CAPREIT in the proposed mergers
and the costs Dominium incurred in attempting to make a superior offer and
soliciting proxies in opposition to the proposed mergers; and (iii) Dominium
-13-
<PAGE>
CAPITAL REALTY INVESTORS TAX EXEMPT FUND LIMITED PARTNERSHIP
NOTES TO FINANCIAL STATEMENTS
(Unaudited)
2. MERGER PROPOSAL - Continued
agreed to support the proposed mergers and related transactions, cease its
solicitation of proxies in opposition to the proposed mergers, and assist
CAPREIT and the Partnerships in soliciting proxies in favor of the proposed
mergers.
On November 8, 1996, the Partnership filed a Supplement to the Joint Proxy
Statement (the Proxy Supplement) with the SEC and announced improved merger
terms as set forth in the Restated Merger Agreement in connection with the
solicitation of BAC Holder approval for the proposed mergers. Additionally, the
Partnership announced the postponement of the November 8, 1996 meeting date
until November 27, 1996 for BAC Holders of record as of November 12, 1996.
Financing
---------
The amount required to pay the increase in the Redemption Prices and
related additional costs and expenses, less the $500,000 deduction in amounts to
be paid to the General Partners and CRI, is expected to be approximately $9
million. The funds required to pay such amount, as well as the amounts to be
paid to Dominium pursuant to its settlement agreement with CAPREIT, will be
provided by an additional equity contribution by CAPREIT.
3. INVESTMENTS
In May 1993, the Financial Accounting Standards Board (FASB) issued
Statement on Financial Accounting Standards No. 115 "Accounting for Certain
Investments in Debt and Equity Securities" (SFAS 115). This statement requires
that most investments in securities be classified into one of the following
investment categories based upon circumstances under which securities might be
sold: held to maturity, available for sale, or trading. Generally, investments
in securities for which an enterprise has both the ability and the intent to
hold to maturity should be accounted for using the amortized cost method and all
other securities must be recorded at their fair values. The Partnership
implemented SFAS 115 in 1994 for its marketable securities. Following such
adoption, the Partnership (as did others in the industry) continued to account
for its investments in mortgage revenue bonds, except Observatory II, as
investments in real estate based on consolidation of the Owner Partnerships in
accordance with the Securities and Exchange Commission (SEC) rules.
In conjunction with the review of the Partnership's 1995 financial
statements by the SEC staff, the Partnership agreed to account for all of its
investments in mortgage revenue bonds as debt securities under the provisions of
SFAS 115 effective January 1, 1994, and restate its 1995 and 1994 financial
statements to reflect this change. Accordingly, effective January 1, 1994, all
investments in mortgage revenue bonds are classified and accounted for as held
to maturity securities and carried at amortized cost because of the
Partnership's ability and intent to hold these investments to maturity. In
accordance with SFAS 115's provisions for held to maturity securities, the
Partnership evaluates the fair value of its mortgage revenue bonds to determine
if impairment exists. If a decline in fair value is determined to be other-
than-temporary, the security is written down to its fair value. The Partnership
did not recognize any impairment losses during the three or nine months ended
September 30, 1996 or 1995. Since all of the underlying mortgage loans, except
-14-
<PAGE>
CAPITAL REALTY INVESTORS TAX EXEMPT FUND LIMITED PARTNERSHIP
NOTES TO FINANCIAL STATEMENTS
(Unaudited)
3. INVESTMENTS - Continued
Observatory II, are in default, base interest and contingent interest on the
mortgage revenue bonds is recognized as revenue when collected.
The restatement of the 1995 financial statements resulted in increases of
$432,444 and $1,224,759 in the previously reported net income for the three and
nine months ended September 30, 1995, respectively, for Series I, and increases
of $520,391 and $1,503,438 in the previously reported net income for the three
and nine months ended September 30, 1995, respectively, for Series II. The
restatement of the 1995 financial statements also resulted in increases of $0.18
and $0.53 in the previously reported net income per BAC for the three and nine
months ended September 30, 1995, respectively, for Series I, and increases of
$0.16 and $0.46 in the previously reported net income per BAC for the three and
nine months ended September 30, 1995, respectively, for Series II. Net income
per BAC as previously reported was $0.09 and $0.34 for the three and nine months
ended September 30, 1995, respectively, for Series I, and $0.12 and $0.44 for
the three and nine months ended September 30, 1995, respectively, for Series II.
SERIES I
--------
The five original Series I mortgage loans securing the mortgage revenue
bonds, with current aggregate principal and carrying amounts of $44,155,000 and
$30,740,285, respectively, went into default, resulting in title transfer by
actual foreclosure (one) or deeds in lieu of foreclosure (four) to Owner
Partnerships which assumed the existing indebtedness. In connection with the
transfers of properties to Owner Partnerships, the Partnership obtained an
opinion from its former independent accounting firm in July of 1991 that the
reduction in pay rate and compounding of unpaid base interest at the original
base interest rate would not cause a reissuance of the bonds under Section 103
of the Internal Revenue Code of 1986, as amended (the Code) (which would cause
the bonds to lose their tax-exempt status). The Partnership also obtained
opinions from bond counsel that certain transfers of the properties to Owner
Partnerships would not cause the Partnership to become a substantial user of the
projects or a related party to a substantial user pursuant to Section 103 of the
Code (which also could have caused the bonds to lose their tax-exempt status).
The bond counsel opinions were obtained in connection with the Observatory II,
Royal Oaks, Trailway Pond and Valley Creek transfers.
In conjunction with the transfer of the Royal Oaks deed to an Owner
Partnership, the Royal Oaks mortgage revenue bond was modified. The Part-
nership, based on information and advice from outside counsel, believes that the
modification does not adversely affect the tax-exempt nature of the Royal Oaks
bond interest. The modification complied with IRS guidelines in effect at that
time. The IRS has since issued Final Regulations Section 1.1001-3, which
applies only to modifications made on or after September 24, 1996. The General
Partners believes that the modification to the Royal Oaks mortgage revenue bond
was consistent with the relevant tax authority which existed at the time of the
modification and has, therefore, not jeopardized the tax-exempt status of the
Royal Oaks mortgage revenue bond. However, there can be no assurance as to the
tax-exempt status of the Royal Oaks mortgage revenue bond at present.
Presented below is a summary of base interest payments for the nine months
ended September 30, 1996 and 1995 that are due to Series I from the borrowers:
-15-
<PAGE>
CAPITAL REALTY INVESTORS TAX EXEMPT FUND LIMITED PARTNERSHIP
NOTES TO FINANCIAL STATEMENTS
(Unaudited)
3. INVESTMENTS - Continued
<TABLE>
<CAPTION>
For the nine months ended September 30, 1996
------------------------------------------------------------------------
Base Interest Cumulative
Paid From Current Base Unpaid
Current Base Properties' Interest Full Base
Interest Due(1) Operations Not Paid Interest
--------------- ------------- ------------ -----------
<S> <C> <C> <C> <C>
Observatory II $ 96,000 $ 96,000 $ -- $ --
Royal Oaks 801,972 691,417 110,555 1,703,799
Trailway Pond 345,366 178,874 166,492 1,018,964
Valley Creek 994,764 714,047 280,717 3,031,898
White Bear Woods 983,194 706,082 277,112 2,277,863
------------ ------------- ------------ -----------
$ 3,221,296 $ 2,386,420 $ 834,876 $ 8,032,524
============ ============= ============ ===========
</TABLE>
<TABLE>
<CAPTION>
For the nine months ended September 30, 1995
------------------------------------------------------------------------
Base Interest Cumulative
Paid From Current Base Unpaid
Current Base Properties' Interest Full Base
Interest Due(1) Operations Not Paid Interest
--------------- ------------- ------------ -----------
<S> <C> <C> <C> <C>
Observatory II $ 96,000 $ 96,000 $ -- $ --
Royal Oaks 801,972 602,387 199,585 1,562,058
Trailway Pond 345,366 182,636 162,730 799,562
Valley Creek 994,764 677,430 317,334 2,686,641
White Bear Woods 983,194 688,514 294,680 1,932,437
------------- ------------- ------------ -----------
$ 3,221,296 $ 2,246,967 $ 974,329 $ 6,980,698
============= ============= ============ ===========
</TABLE>
(1) The Partnership charges the borrowers interest on unpaid base
interest, which totalled $714,230 and $569,902 for the nine months
ended September 30, 1996 and 1995, respectively.
Contingent interest is recognized as revenue when collected. No contingent
interest was received or accrued by Series I during the three or nine months
ended September 30, 1996 or 1995. Contingent interest due for Series I as of
September 30, 1996 and December 31, 1995 amounted to $22,064,463 and
$20,083,162, respectively.
As of September 30, 1996, Series I had cash and cash equivalents of
$82,027, unrestricted marketable securities of $680,690 and working capital
reserves invested in marketable securities of $1,419,310. 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
-16-
<PAGE>
CAPITAL REALTY INVESTORS TAX EXEMPT FUND LIMITED PARTNERSHIP
NOTES TO FINANCIAL STATEMENTS
(Unaudited)
3. INVESTMENTS - Continued
classified its investments in marketable securities into the available for sale
category under SFAS 115. Realized gains and losses on the sale of marketable
securities were determined on a specific identification basis. There were no
net unrealized holding gains or losses recognized during the three or nine
months ended September 30, 1996 or 1995 for Series I as the cost for the tax-
exempt municipal bonds approximated market value throughout the respective
periods.
SERIES II
---------
The five original Series II mortgage loans securing the mortgage revenue
bonds with aggregate principal and carrying amounts of $62,608,001 and
$43,793,252, respectively, went into default, resulting in deeds in lieu of
foreclosure to Ownership Partnerships which assumed the existing indebtedness.
In connection with the transfers of properties to Owner Partnerships, the
Partnership obtained an opinion from its former independent accounting firm in
July of 1991 that the reduction in pay rate and compounding of unpaid base
interest at the original base interest rate would not cause a reissuance of the
bonds under Section 103 of the Code (which would cause the bonds to lose their
tax-exempt status). The Partnership also obtained opinions from bond counsel
that certain transfers of the properties to Owner Partnerships would not cause
the Partnership to become a substantial user of the projects or a related party
to a substantial user pursuant to Section 103 of the Code (which also could have
caused the bonds to lose their tax exempt status.) The bond counsel opinions
were obtained in connection with the Ethan's Ridge and Ethan's Glen IIB,
Fountain Place and Trailway Pond II transfers.
Presented below is a summary of base interest payments for the nine months
ended September 30, 1996 and 1995 that are due to Series II from the borrowers:
-17-
<PAGE>
CAPITAL REALTY INVESTORS TAX EXEMPT FUND LIMITED PARTNERSHIP
NOTES TO FINANCIAL STATEMENTS
(Unaudited)
3. INVESTMENTS - Continued
<TABLE>
<CAPTION>
For the nine months ended September 30, 1996
-------------------------------------------------------------------------
Base Interest Cumulative
Paid From Current Base Unpaid
Current Base Properties' Interest Full Base
Interest Due(1) Operations(2) Not Paid Interest
--------------- ------------- ------------ -----------
<S> <C> <C> <C> <C>
Ethan's Ridge and
Ethan's Glen IIB $ 1,139,062 $ 1,056,372 $ 82,690 $ 2,084,883
Fountain Place 1,489,125 1,093,548 395,577 5,459,075
James Street
Crossing 1,001,818 776,850 224,968 1,920,139
Trailway Pond II 752,250 398,157 354,093 2,922,799
------------ ------------ ------------ -----------
$ 4,382,255 $ 3,324,927 $ 1,057,328 $12,386,896
============ ============ ============ ===========
</TABLE>
<TABLE>
<CAPTION>
For the nine months ended September 30, 1995
-------------------------------------------------------------------------
Base Interest Cumulative
Paid From Current Base Unpaid
Current Base Properties' Interest Full Base
Interest Due(1) Operations Not Paid Interest
--------------- ------------- ------------- ------------
<S> <C> <C> <C> <C>
Ethan's Ridge and
Ethan's Glen IIB $ 1,139,062 $ 871,763 $ 267,299 $ 1,965,823
Fountain Place 1,489,125 1,090,395 398,730 4,893,097
James Street
Crossing 1,001,818 794,261 207,557 1,637,286
Trailway Pond II 752,250 412,188 340,062 2,480,937
------------ ------------ ------------ ------------
$ 4,382,255 $ 3,168,607 $ 1,213,648 $ 10,977,143
============ ============ ============ ============
</TABLE>
(1) The Partnership charges the borrowers interest on unpaid base interest,
which totalled $1,061,535 and $874,077 for the nine months ended September
30, 1996 and 1995, respectively.
(2) Includes amounts received by the Partnership in January 1996 from the
release of excess tax and insurance reserves relating to 1995. Such
amounts received from Ethan's Ridge and Ethan's Glen IIB, Fountain Place
and James Street Crossing totalled $107,000, $25,700 and $7,800,
respectively.
Contingent interest is recognized as revenue when collected. No contingent
interest was received or accrued by Series II during the three or nine months
ended September 30, 1996 or 1995. Contingent interest due for Series II as of
-18-
<PAGE>
CAPITAL REALTY INVESTORS TAX EXEMPT FUND LIMITED PARTNERSHIP
NOTES TO FINANCIAL STATEMENTS
(Unaudited)
3. INVESTMENTS - Continued
September 30, 1996 and December 31, 1995 amounted to $31,028,247 and
$27,897,543, respectively.
As of September 30, 1996, Series II had cash and cash equivalents of
$14,979, unrestricted marketable securities of $923,428, and working capital
reserves invested in marketable securities of $2,307,489. Marketable securities
consist of tax-exempt municipal bonds which generally contain a seven-day put
option with established banks or brokerage houses. The Partnership has
classified its investments in marketable securities into the available for sale
category under SFAS 115. Realized gains and losses on the sale of marketable
securities were determined on a specific identification basis. There were no
net unrealized holding gains or losses recognized during the three or nine
months ended September 30, 1996 or 1995 for Series II as the cost for the tax-
exempt municipal bonds approximated market value throughout these periods.
SERIES I and II
---------------
In April 1991, the U.S. Supreme Court decided a case, Cottage Savings
Association V. Commissioner (Cottage Savings), that could be interpreted to
impact then existing authority addressing the modification of debt instruments.
In response to this decision, in June 1996, the IRS issued Final Regulations
Section 1.1001-3 which specifically address the tax consequences of
modifications of debt instruments. Among other things, these regulations
provide that certain modifications of the current interest payments or the
maturity date of a debt instrument will be treated as a taxable exchange of the
original instrument for the modified debt instrument. As a result, certain
future modifications of the mortgage loans which secure the mortgage revenue
bonds could be treated as a deemed reissuance of the mortgage revenue bonds for
federal income tax purposes. Any reissuance without the cooperation of the
mortgage revenue bond issuers would result in the loss of the tax-exempt status
of the mortgage revenue bonds. Such issuers might cooperate and consent to the
reissuance; however, there can be no assurance that such issuers would do so or
would not impose additional requirements that could have an adverse impact on
the mortgage revenue bonds. Even if issuer consent were obtained, all accrued
and unpaid interest of the existing mortgage loans would have to be written off.
The write-off of accrued and unpaid interest would not be recoverable upon
ultimate disposition or payoff of the mortgage revenue bond and would instead
accrue to the benefit of the Owner Partnerships to the extent realized.
Final Regulations Section 1.1001-3 only affect modifications made on or
after September 24, 1996. The General Partner believes that the modifications
which have already been made were consistent with the relevant tax authority
that existed at the time of those modifications and have not jeopardized the
tax-exempt status of the mortgage revenue bonds.
The General Partner's ongoing strategy had been to continue holding the
mortgage revenue bonds until the loan maturity dates. If the merger proposal,
discussed in Note 2, is approved, the interests of the BAC Holders will be
redeemed for cash. If the merger proposal is not approved, in order to maximize
the overall yield, the General Partner may recommend, subject to satisfactory
resolution of any issues relating to the tax-exempt status of the mortgage
revenue bonds, for investor approval extension of certain loan maturity dates
and, if approved, arrange any necessary related amendments to the pertinent
mortgage revenue bonds.
-19-
<PAGE>
CAPITAL REALTY INVESTORS TAX EXEMPT FUND LIMITED PARTNERSHIP
NOTES TO FINANCIAL STATEMENTS
(Unaudited)
4. DISTRIBUTIONS TO BAC HOLDERS
The Partnership expects to continue to make distributions to BAC Holders on
a semi-annual basis. The Restated Merger Agreement stipulates that 1996
distributions cannot exceed $0.09417 and $0.09667 per BAC per month for Series I
and Series II, respectively. There are no other legal restrictions on the
Partnership's present or future ability to make cash distributions other than as
set forth in the Restated Merger Agreement. However, property level reserves
are depleted and estimated cash flows from the properties' operations are
insufficient to pay full monthly base interest (except for Observatory II in
Series I), therefore, the distributions to BAC Holders may fluctuate from
current levels. The General Partner seeks to optimize cash flow from the
properties owned by the Owner Partnerships. Despite these efforts, the amounts
paid to the Partnership from the borrowers may be expected to fluctuate from
period to period due to changes in occupancy rates, rental rates, operating
expenses and other variables.
SERIES I
--------
The following distributions were paid or accrued to BAC Holders of record
during the nine months ended September 30, 1996 and 1995:
-20-
<PAGE>
CAPITAL REALTY INVESTORS TAX EXEMPT FUND LIMITED PARTNERSHIP
NOTES TO FINANCIAL STATEMENTS
(Unaudited)
4. DISTRIBUTIONS TO BAC HOLDERS - Continued
<TABLE>
<CAPTION>
1996 1995
Distributions to Distributions to
BAC Holders BAC Holders
----------------------------- -----------------------------
Quarter Ended Total Per BAC Total Per BAC
- ------------- ---------- ------- ---------- -------
<S> <C> <C> <C> <C>
March 31, $ 644,100 $0.2825 $ 615,600 $0.2700
June 30, 644,100 0.2825 615,600 0.2700
September 30, 644,100 0.2825 615,600 0.2700
---------- ------- ---------- -------
$1,932,300 $0.8475 $1,846,800 $0.8100
========== ======= ========== =======
</TABLE>
Distributions to BAC Holders for the three and nine months ended
September 30, 1996 and 1995 were funded as follows:
<TABLE>
<CAPTION>
For the three months ended For the nine months ended
September 30, September 30,
---------------------------- -----------------------------
1996 1995 1996 1995
------------ ------------ ------------ ------------
<S> <C> <C> <C> <C>
Cash Available for Distribution:
Cash flow (1) $ 723,026 $ 687,175 $ 2,086,656 $ 2,055,481
Net deposits to working capital reserves (72,354) (65,294) (134,640) (189,838)
------------ ------------ ------------ ------------
Total cash available for distribution $ 650,672 $ 621,881 $ 1,952,016 $ 1,865,643
============ ============ ============ ============
Distributions to:
General partner (1.01%) $ 6,572 $ 6,281 $ 19,716 $ 18,843
============ ============ ============ ============
BAC Holders (98.99%) $ 644,100 $ 615,600 $ 1,932,300 $ 1,846,800
============ ============ ============ ============
</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
-21-
<PAGE>
CAPITAL REALTY INVESTORS TAX EXEMPT FUND LIMITED PARTNERSHIP
NOTES TO FINANCIAL STATEMENTS
(Unaudited)
4. DISTRIBUTIONS TO BAC HOLDERS - Continued
to be construed as an alternative to operating income in accordance with
generally accepted accounting principles (GAAP) as an indication of the
Partnership's operating performance.
SERIES II
---------
The following distributions were paid or accrued to BAC Holders of record
during the nine months ended September 30, 1996 and 1995:
-22-
<PAGE>
CAPITAL REALTY INVESTORS TAX EXEMPT FUND LIMITED PARTNERSHIP
NOTES TO FINANCIAL STATEMENTS
(Unaudited)
4. DISTRIBUTIONS TO BAC HOLDERS - Continued
<TABLE>
<CAPTION>
1996 1995
Distributions to Distributions to
BAC Holders BAC Holders
----------------------------- -----------------------------
Quarter Ended Total Per BAC Total Per BAC
- ------------- ---------- ------- ---------- -------
<S> <C> <C> <C> <C>
March 31, $ 939,240 $0.2900 $ 874,465 $0.2700
June 30, 939,240 0.2900 874,465 0.2700
September 30, 939,240 0.2900 874,465 0.2700
---------- ------- ---------- -------
$2,817,720 $0.8700 $2,623,395 $0.8100
========== ======= ========== =======
</TABLE>
Distributions to BAC Holders for the three and nine months ended
September 30, 1996 and 1995 were funded as follows:
<TABLE>
<CAPTION>
For the three months ended For the nine months ended
September 30, September 30,
---------------------------- -----------------------------
1996 1995 1996 1995
------------ ------------ ------------ ------------
<S> <C> <C> <C> <C>
Cash Available for Distribution:
Cash flow (1) $ 972,645 $ 930,135 $ 2,846,573 $ 2,995,965
Net withdrawals from (deposits to) working
capital reserves (23,822) (46,748) (104) (345,804)
------------ ------------ ------------ ------------
Total cash available for distribution $ 948,823 $ 883,387 $ 2,846,469 $ 2,650,161
============ ============ ============ ============
Distributions to:
General partner (1.01%) $ 9,583 $ 8,922 $ 28,749 $ 26,766
============ ============ ============ ============
BAC Holders (98.99%) $ 939,240 $ 874,465 $ 2,817,720 $ 2,623,395
============ ============ ============ ============
</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
-23-
<PAGE>
CAPITAL REALTY INVESTORS TAX EXEMPT FUND LIMITED PARTNERSHIP
NOTES TO FINANCIAL STATEMENTS
(Unaudited)
4. DISTRIBUTIONS TO BAC HOLDERS - Continued
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
GAAP as an indication of the Partnership's operating performance.
5. INCOME TAXES
For income tax purposes, base interest income is accrued when earned. The
accrual of base interest is discontinued when, at the time of accrual, ultimate
collectibility of the base interest due is considered unlikely. Once a loan has
been placed in a non-accrual status, income is recorded only as cash payments
are received from the borrower until such time as the uncertainty of collection
of unpaid base interest is eliminated. All loans except Observatory II were on
non-accrual status throughout the nine months ended September 30, 1996 and 1995;
therefore, for income tax purposes, income was recognized to the extent of cash
received. Contingent interest from the investment is recognized as revenue when
collected. No contingent interest was recognized for the three and nine months
ended September 30, 1996 or 1995.
For federal income tax purposes, the investments in all of the mortgage
revenue bonds are treated as loans, interest on which is exempt from regular
federal income tax. A reconciliation of the primary differences between the
financial statement net income and municipal income for tax purposes is as
follows:
-24-
<PAGE>
CAPITAL REALTY INVESTORS TAX EXEMPT FUND LIMITED PARTNERSHIP
NOTES TO FINANCIAL STATEMENTS
(Unaudited)
5. INCOME TAXES - Continued
SERIES I
--------
<TABLE>
<CAPTION>
For the three months ended For the nine months ended
September 30, September 30,
---------------------------- -----------------------------
1996 1995 1996 1995
------------ ------------ ------------ ------------
<S> <C> <C> <C> <C>
Financial statement net income $ 751,478 $ 627,707 $ 2,027,090 $ 2,000,898
Adjustment for timing of municipal income
recognition (28,836) 59,470 59,565 54,583
------------ ------------ ------------ ------------
Municipal income, net for tax purposes $ 722,642 $ 687,177 $ 2,086,655 $ 2,055,481
============ ============ ============ ============
Municipal income per BAC outstanding $ 0.31 $ 0.30 $ 0.91 $ 0.90
============ ============ ============ ============
</TABLE>
SERIES II
---------
<TABLE>
<CAPTION>
For the three months ended For the nine months ended
September 30, September 30,
---------------------------- -----------------------------
1996 1995 1996 1995
------------ ------------ ------------ ------------
<S> <C> <C> <C> <C>
Financial statement net income $ 950,002 $ 902,753 $ 2,966,924 $ 2,929,681
Adjustment for timing of municipal income
recognition 15,723 27,382 (112,457) 66,283
------------ ------------ ------------ ------------
Municipal income, net for tax purposes $ 965,725 $ 930,135 $ 2,854,467 $ 2,995,964
============ ============ ============ ============
Municipal income per BAC outstanding $ 0.30 $ 0.29 $ 0.87 $ 0.92
============ ============ ============ ============
</TABLE>
A publicly traded partnership is treated as a corporation for income tax
purposes unless it meets certain exceptions. To qualify under these exceptions,
the General Partner annually invests in de minimis taxable investments for both
Series I and Series II.
6. LITIGATION
On September 22, 1995, Irving Zakin commenced a putative class action (the
Zakin Action) against the Partnership, its general partner (CRITEF Associates
-25-
<PAGE>
CAPITAL REALTY INVESTORS TAX EXEMPT FUND LIMITED PARTNERSHIP
NOTES TO FINANCIAL STATEMENTS
(Unaudited)
6. LITIGATION - Continued
Limited Partnership), its Assignor Limited Partner (CRITEF, Inc.), CRI, William
B. Dockser, H. William Willoughby, CRITEF III, CRITEF III Associates Limited
Partnership, CRITEF III, Inc., and CAPREIT (collectively, the Defendants) in the
court of Chancery of the State of Delaware in New Castle County (the Chancery
Court) (C.A. No. 14558). The complaint alleged, among other things, that the
price offered to the BAC Holders in the proposed mergers at the time the
complaint was filed was inadequate, and that the Defendants breached their
fiduciary duty to the BAC Holders, or aided and abetted such a breach, engaged
in self-dealing and misled BAC Holders, in connection with the proposed mergers.
The suit sought 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 commenced a second putative
class action (the Wingard Action) against the Defendants in the Chancery Court
(C.A. No 14604). The complaint in the Wingard Action contained virtually the
identical allegations and sought virtually the identical relief as in the Zakin
Action. The Court consolidated the two actions.
The Defendants denied that any of them committed or threatened to commit
any violations of law or breaches of duty to the BAC Holders.
On January 31, 1996, the Defendants and the plaintiffs and their respective
attorneys reached a tentative settlement of the Zakin and Wingard Actions
memorialized in a Memorandum of Understanding (the Memorandum), dated as of such
date. In accordance with the Memorandum, the merger agreements were amended on
January 31, 1996, to provide that (a) the aggregate cash consideration to be
paid to the BAC Holders of the Partnerships was increased by $8.5 million from
$150.0 million to $158.5 million (subject to the adjustment up or down based
upon Available Cash, as defined in the Restated Merger Agreement), and (b) the
aggregate amount payable in consideration for the Accrued Fees payable to CRI
for the Partnerships was reduced to no more than $2,000,000 (subsequently
reduced to $1,950,000) as compared with $4,023,000 provided for in the original
merger agreement. The Defendants also agreed that they would not object to an
application for attorneys' fees and reimbursement of out-of-pocket expenses of
plaintiffs' counsel for up to 20% of the improved merger consideration
negotiated by them with such fees and expenses as are awarded by the Court to
plaintiffs' counsel to be paid from the improved merger consideration negotiated
by them. Subsequently, the parties agreed that the maximum amount of fees and
expenses for the Partnerships, assuming the merger is consummated, shall be
$1,700,000, plus an amount equal to 20% (up to a maximum of $75,000) of any
adjustment amount at closing. These fees will reduce the cash paid to BAC
Holders in connection with the proposed merger, as discussed. In the event that
the proposed merger is not consummated, these fees will not be borne by the
Partnership. As such, the Partnership's financial statements do not include any
adjustment for these fees. Counsel for the plaintiffs and experts retained by
them reviewed voluminous documents relating to the proposed merger, and took
depositions of representatives of the General Partners and CAPREIT and
Oppenheimer and Co., Inc., the fairness opinion provider.
On May 16, 1996, the Defendants and the plaintiffs filed a Stipulation and
Agreement of Settlement with the Chancery Court, and sought preliminary approval
of the putative class (the Class) and approval of a form of notice to the Class
of the proposed Settlement. The Stipulation of Settlement contemplates the
-26-
<PAGE>
CAPITAL REALTY INVESTORS TAX EXEMPT FUND LIMITED PARTNERSHIP
NOTES TO FINANCIAL STATEMENTS
(Unaudited)
6. LITIGATION - Continued
complete discharge, settlement and release of all claims that have been, could
have been, or in the future might be asserted in any action or any other
proceeding in connection with the proposed merger. The Stipulation of
Settlement also permits plaintiffs to terminate the proposed settlement if, in
their opinion, a superior financial offer is presented for the Partnership.
On August 13, 1996, following further negotiations between counsel for the
plaintiffs and the Defendants and the failure of Dominium to come forward with a
firmly committed acquisition proposal superior to CAPREIT's by the date
specified by Dominium itself for delivery of an offer, CAPREIT agreed with
plaintiffs' counsel to increase the aggregate Redemption Prices being offered by
it to the BAC Holders by $2,000,000 and the parties entered into an amendment to
the Stipulation of Settlement pursuant to which CAPREIT agreed to so increase
the Redemption Prices and plaintiffs' counsel agreed to support the Stipulation
of Settlement, as improved by the amendment, notwithstanding any actions
Dominium has taken or in the future may take.
On August 14, 1996, at the fairness hearing on the Stipulation of
Settlement, as amended, in the Zakin and Wingard Actions, the Delaware Court of
Chancery certified the class of BAC Holders, found that the proposed settlement
was fair, reasonable, adequate and in the best interests of the BAC Holders,
approved the Stipulation of Settlement, awarded to plaintiffs' counsel fees in
the amount of $2 million and entered a final judgment dismissing the actions.
The 30-day period to appeal the final judgment expired with no appeal being
taken.
In response to Dominium's September 27 letter to BAC Holders voicing its
opposition to the proposed mergers, as discussed in Note 2, on October 3, 1996,
the General Partner, CRI, the Partnership, CRITEF III, CRITEF III LP and CAPREIT
filed an action against Dominium and its principals in the United States
District Court for the Southern District of New York (Civ. Action No. 96 CIV
7684) alleging, among other things, that Dominium and its principals, in order
to disrupt the proposed mergers, were engaged in improper proxy solicitations
and had made false and misleading statements in violation of Federal securities
laws. The plaintiffs sought, among other things, an order barring the
defendants from soliciting BAC Holders prior to providing them with a proxy
statement and requiring Dominium to issue corrective disclosure with respect to,
among other things, its implication that it was intending to propose an
alternative offer to the BAC Holders. On October 11, 1996, the U.S. District
Court conducted a hearing on plaintiffs' motion for a preliminary injunction,
and on October 15, 1996, issued its opinion denying the plaintiffs' motion on
the grounds that it found no irreparable harm.
On September 27, 1996, the same day it mailed its first letter to BAC
Holders, Dominium filed an action in Federal District Court for the District of
Minnesota (Civ. Action No. 4-96 CIV 956) against Messrs. Dockser, Willoughby,
CRI, the Partnership, CRITEF III and the General Partners alleging that the
Proxy Statement was false and misleading in violation of Federal securities
laws. Dominium also moved for expedited discovery and a briefing order for a
preliminary injunction motion (which it never made). The defendants in the
Minnesota action denied the allegations and asserted various defenses,
including, among others, that Dominium's claims were barred by the settlement of
the Zakin and Wingard class action litigations relating to the proposed mergers.
The defendants also moved to disqualify Faegre & Benson, Dominium's principal
law firm, on the grounds that Faegre & Benson had a conflict of interest by
-27-
<PAGE>
CAPITAL REALTY INVESTORS TAX EXEMPT FUND LIMITED PARTNERSHIP
NOTES TO FINANCIAL STATEMENTS
(Unaudited)
6. LITIGATION - Continued
virtue of its concurrent representation of Dominium and various entities which
are participants in the financing for proposed mergers.
On October 8, 1996, the defendants in the Minnesota action filed with the
Delaware Court of Chancery an Emergency Motion to enforce the Court's Final
Order to enjoin Dominium from violating the Final Order entered in the Zakin and
Wingard Actions and for civil contempt on the grounds that Dominium was a class
member in the Zakin and Wingard Actions and had not opposed or opted out of the
proposed class settlement and was therefore bound by the settlement of those
actions.
On October 17, 1996, the Minnesota court issued a decision denying
Dominium's motion for expedited discovery, finding, among other things, that
Dominium already had virtually all of the information it sought and that
Dominium was unlikely to prevail in its argument that its claims were not barred
by the settlement reached in the Zakin and Wingard Actions.
On October 17, 1996, counsel for CAPREIT advised the Delaware court that,
in light of the ruling in Minnesota, it no longer sought any relief from the
Delaware court.
Following the postponement of the special meeting to be held on October 29,
1996, as discussed in Note 2, CAPREIT and the General Partners discussed the
possibility of CAPREIT's increasing the consideration that it was offering to
BAC Holders in the proposed mergers, as set forth in the Fourth Amended
Agreement. At this time, CAPREIT also approached Dominium in an attempt to
settle its differences with Dominium and the outstanding litigations between
them and to solicit Dominium's support for the improved proposed merger terms it
was considering. Over the course of several days, CAPREIT negotiated with the
General Partners and Dominium in an effort to reach an agreement on improved
proposed merger terms and on November 6, 1996, CAPREIT agreed with the General
Partners to increase the aggregate consideration that it was offering BAC
Holders in the proposed mergers by approximately $6.5 million (or approximately
$0.60 per BAC) and the General Partners and CRI agreed to reduce by an aggregate
of $500,000 the amounts to be paid the General Partners and CRI upon
consummation of the proposed mergers. Dominium advised CAPREIT that, in its
view, the agreed upon merger consideration maximized BAC Holder values, and that
it would endorse and support the proposed mergers if the merger agreements were
amended to incorporate these terms.
In connection with CAPREIT's agreement to increase its merger offer and the
execution of the Restated Merger Agreement, on November 6, 1996, CAPREIT and
Dominium entered into a settlement agreement pursuant to which, among other
things, (i) each of the parties and certain of their affiliates and the
partnerships agreed to settle the various lawsuits between them and to release
all claims against the other arising from or relating to such actions, the
proposed mergers and the related transactions and their respective proxy
solicitation efforts; (ii) CAPREIT agreed to pay Dominium $500,000 upon signing
of the Restated Merger Agreement and to pay $2.5 million into escrow to be held
in escrow for a period of up to two years and to be paid to Dominium upon BAC
Holder approval of the proposed mergers or if CAPREIT otherwise acquires control
of the Partnerships, in consideration for Dominium's efforts in negotiating an
increase in the consideration being offered by CAPREIT in the proposed mergers
and the costs Dominium incurred in attempting to make a superior offer and
soliciting proxies in opposition to the proposed mergers; and (iii) Dominium
-28-
<PAGE>
CAPITAL REALTY INVESTORS TAX EXEMPT FUND LIMITED PARTNERSHIP
NOTES TO FINANCIAL STATEMENTS
(Unaudited)
6. LITIGATION - Continued
agreed to support the proposed mergers and related transactions, cease its
solicitation of proxies in opposition to the proposed mergers, and assist
CAPREIT and the Partnerships in soliciting proxies in favor of the proposed
mergers.
Martin C. Schwartzberg, formerly a general partner of the General Partner,
is a former shareholder and executive officer of CRI who retired from CRI as of
January 1, 1990. In connection therewith, he relinquished his general partner
duties for all CRI-sponsored partnerships, including those of the General
Partner. In February 1996, Mr. Schwartzberg publicly stated that he would
oppose the proposed merger until the Partnership made its financial statements
and the financial statements of the Owner Partnerships publicly available. The
financial statements of the Partnership are included in this Form 10-Q and have
been filed quarterly. The financial statements of the Owner Partnerships were
filed as exhibits to Current Reports on Form 8-K, filed with the SEC by the
Partnership on March 25, 1996. As discussed below, Mr. Schwartzberg has since
reviewed the requested information and has determined to support the merger.
On November 9, 1995, CRI filed a complaint seeking declaratory relief in
the Circuit Court for Montgomery County, Maryland (the Montgomery Circuit Court)
against Capital Management Strategies, Inc. (CMS), a company controlled by Mr.
Schwartzberg, to determine the proper amount of fees to be paid in 1996 under an
asset management agreement. CMS answered the complaint on January 10, 1996, but
asserted no counterclaims. Thereafter, Mr. Schwartzberg launched a hostile
consent solicitation to be designated as managing general partner of 125
private partnerships sponsored by CRI.
On January 18, 1996, Mr. Schwartzberg and CMS filed a complaint in the
Montgomery County, Maryland Circuit Court, against CRI and Messrs. Dockser and
Willoughby alleging, among other things, that the actions of CRI and Messrs.
Dockser and Willoughby in connection with the proposed merger involved self-
dealing and constituted a breach of their fiduciary duties to Mr. Schwartzberg.
Neither the Partnership nor the General Partner was named as a defendant in this
action, and Mr. Schwartzberg did not allege that he was a BAC Holder. Messrs.
Dockser and Willoughby entered an answer denying all of Mr. Schwartzberg's
claims and moved to dismiss or strike the allegations concerning the Partnership
and CRIIMI MAE Inc. Messrs. Dockser and Willoughby publicly responded that Mr.
Schwartzberg's suit was motivated by his budget dispute with CRI and personal
animosity.
On February 15, 1996, Mr. Schwartzberg filed suit in the New Castle County,
Delaware Chancery Court (the Chancery Court) against the General Partners
alleging that he had made demands upon the General Partners, in his capacity as
a general and limited partner of the General Partner and a limited partner of
CRITEF III LP, to inspect and obtain copies of the BAC Holder lists and other
documents and that his demands were rejected. On February 23, 1996, the General
Partners answered the complaint, admitting that his demands had been rejected
and denying that Mr. Schwartzberg was entitled to the materials requested
because, among other things, he lacked standing and proper purpose to inspect
and obtain copies of the requested materials. Following a hearing on March 6
and 7, 1996, on June 7, 1996, the Chancery Court denied Mr. Schwartzberg's
request for relief, holding that Mr. Schwartzberg's request was for an "improper
purpose" under Delaware law.
-29-
<PAGE>
CAPITAL REALTY INVESTORS TAX EXEMPT FUND LIMITED PARTNERSHIP
NOTES TO FINANCIAL STATEMENTS
(Unaudited)
6. LITIGATION - Continued
On February 16, 1996, the Partnerships, together with the General Partners,
CRI, and CAPREIT, filed suit against Mr. Schwartzberg in the United States
District Court for the Southern District of New York (the New York Action). The
complaint alleged that Mr. Schwartzberg was engaged in an unlawful solicitation
of proxies of the BAC Holders through two press releases he issued. On March
18, 1996, the District Court enjoined Mr. Schwartzberg from (1) making any
further solicitation of BAC Holders within the meaning of Section 14(a) of the
Securities Exchange Act of 1934 without complying with SEC regulations, and (2)
committing any violation of Rule 14a-9 promulgated under the Securities Exchange
Act (regarding false or misleading statements) in connection with any
solicitation relating to the Partnerships.
On March 18, 1996, Mr. Schwartzberg filed a counterclaim against the
General Partners alleging that three press releases issued by the General
Partners and the Partnerships constituted solicitations in violation of the
Securities Exchange Act and that they were false and misleading. The counter-
defendants denied the allegations. On April 23, 1996, the District Court denied
Mr. Schwartzberg's motion for an injunction. The District Court held that an
injunction was unwarranted, given the scope and extent of Mr. Schwartzberg's
prospects for succeeding on the merits, and the fact that he could show neither
a sufficient threat of irreparable injury nor a balance in his favor of the
hardships associated with granting or denying an injunction.
On June 12, 1996, Mr. Schwartzberg withdrew as a general partner of the
General Partner of the Partnership, converting his interest to that of a special
limited partner.
Pursuant to the resolution of the various disputes between Mr.
Schwartzberg, and CRI and its affiliates, the actions in the United States
District Court for the Southern District of New York were dismissed with
prejudice and the injunction against Mr. Schwartzberg was dissolved on August 8,
1996. All other pending litigation between Mr. Schwartzberg and CRI, Mr.
Dockser, and Mr. Willoughby is to be dismissed.
After extensive review of the merger agreements, the Partnerships'
financial statements and other materials and pursuant to the terms of the
agreement between CAPREIT and Mr. Schwartzberg and CMS (the CAPREIT Agreement),
Mr. Schwartzberg has advised CAPREIT, the General Partners and the Partnerships
that he and his family members and entities under his control (the Schwartzberg
Entities) will vote their BACs in favor of the proposed merger and in accordance
with the recommendations of the General Partners. In connection therewith, the
Schwartzberg Entities have agreed to grant to CAPREIT an irrevocable proxy to
vote their interests in the Partnerships.
The Schwartzberg Entities have agreed not to attempt to (i) dispose of or
acquire any interest in the Partnerships or join or participate with any group
seeking to do the same, (ii) solicit proxies or participate in a solicitation in
opposition to the proposed merger, in opposition to the recommendations of the
General Partners with respect to the proposed merger, or to remove the General
Partners or seek to have himself or his designee become a general partner of the
Partnerships, (iii) make any public statements in opposition to the proposed
merger, (iv) make any public statements with respect to, or offer, solicit, or
submit a proposal relating to consolidation or combination with the
Partnerships, or the admission of new general partners into the Partnerships.
-30-
<PAGE>
CAPITAL REALTY INVESTORS TAX EXEMPT FUND LIMITED PARTNERSHIP
NOTES TO FINANCIAL STATEMENTS
(Unaudited)
6. LITIGATION - Continued
In addition, Mr. Schwartzberg disclosed that he had discussions with Lenner
Corp. regarding the terms of the offer and the submission of a competing bid.
Lenner Corp. declined to submit a competing offer to the Partnership and has
entered into a confidentiality and standstill agreement with CAPREIT regarding
the proposed merger and the Partnerships.
Provided that the Schwartzberg Entities comply with the terms of the
CAPREIT Agreement, CAPREIT is obligated to cause to be paid into escrow the
aggregate amount of $867,000 in four installments over a three year period.
These funds will be used for the partial payment of Mr. Schwartzberg's counsel
and consultants in connection with their review of the merger agreements, drafts
of the preliminary and definitive proxy statements filed with the SEC on July
17, 1996 and September 20, 1996, respectively, financial information of the
Partnership, Partnership documents, Delaware-related claims, and other
documents. CRI will provide CAPREIT with $400,000 in respect of CAPREIT's
obligations under the CAPREIT Agreement, counsel for the plaintiffs in the Zakin
and Wingard Actions will provide $100,000 in respect of such payments and Mr.
Schwartzberg will provide $33,500 of such payments. No such payments other than
the first installment will be paid into escrow until the proposed merger has
been consummated and each of the payments is contingent upon there having been
no defaults on the part of the Schwartzberg Entities or under the third party
standstill agreement.
The Schwartzberg Entities are personally liable to CAPREIT for any breaches
occasioned by them of the CAPREIT Agreement. Mr. Schwartzberg has covenanted to
CAPREIT that he will maintain a net worth of at least $3.5 million through
December 31, 2002. In the event that the Schwartzberg Entities are in default
under the CAPREIT Agreement as a result of a violation of a third party
standstill agreement, Mr. Schwartzberg shall pay CAPREIT liquidated damages in
accordance with the terms of the CAPREIT Agreement.
An agreement among Mr. Schwartzberg, CMS and CRI (the CRI Agreement), dated
June 12, 1996, in addition to providing that Mr. Schwartzberg will not oppose
the proposed mergers, also provides for a resolution of all disputes between CRI
and Mr. Schwartzberg. As part of the CRI Agreement, Mr. Schwartzberg and CRI
have all agreed not to take any actions which might interfere with each others'
businesses. Mr. Schwartzberg has also retracted any derogatory statements that
he previously made about CRI, its principals, and the proposed merger, and has
promised not to make any similar statements in the future. Although the CRI
Agreement provides that it is legally binding, that agreement contemplates
execution of a more detailed agreement and the exchange of full general releases
between Mr. Schwartzberg and CRI, and Messrs. Dockser and Willoughby.
7. RELATED-PARTY TRANSACTIONS
The General Partner has the authority and responsibility for, among other
things, the overall management and control of the Partnership. The General
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.
-31-
<PAGE>
CAPITAL REALTY INVESTORS TAX EXEMPT FUND LIMITED PARTNERSHIP
NOTES TO FINANCIAL STATEMENTS
(Unaudited)
7. RELATED-PARTY TRANSACTIONS - Continued
SERIES I
--------
Expense reimbursements to an affiliate of the General Partner for the three
months and nine months ended September 30, 1996, were $46,555 and $106,762,
respectively, and for the three and nine months ended September 30, 1995, were
$21,847 and $76,632, respectively, and are included in general and
administrative expense and merger-related expenses in the statements of income.
CRICO Mortgage Company, Inc. (CRICO Mortgage), a former affiliate of the
General Partner, was entitled to annual mortgage administration and servicing
fees from the borrowers which were payable from operating revenues each month
after payment of full base interest on the mortgage loans. On June 30, 1995,
CRICO Mortgage merged with and into CRIIMI, an affiliate of CRIIMI MAE Inc., a
publicly traded real estate investment trust (the REIT). The REIT was
originally sponsored by CRI, a general partner of the General Partner, but is
not controlled by CRI, although the CRI stockholders are directors, officers and
major stockholders of the REIT. Pursuant to the REIT merger agreement, the
right to receive the accrued and unpaid mortgage administration and servicing
fees as of the date of the REIT merger was distributed by CRICO Mortgage to its
shareholders and contributed by them to CRI. After June 30, 1995, the mortgage
administration and servicing are being performed by CRIIMI, and mortgage
administration and servicing fees are payable to that entity. The merger did
not result in any increase in fees or changes in the amount of fees which are
currently payable.
The following unpaid fees were due to CRI and CRIIMI from the borrowers as
of September 30, 1996, and December 31, 1995:
<TABLE>
<CAPTION>
As of As of
September 30, December 31,
1996 1995
------------ ------------
<S> <C> <C>
CRI $ 1,225,393 $ 1,225,393
CRIIMI 332,460 132,984
------------ ------------
Total $ 1,557,853 $ 1,358,377
============ ============
</TABLE>
The unpaid mortgage servicing 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 Restated Merger Agreement entered into by the
Partnership, as discussed in Note 2, unpaid mortgage servicing fees accrued
through June 30, 1995 will be purchased by CAPREIT from CRI for the discounted
amount of $432,960, which represents approximately 35% of the total accrued fees
owed to CRI. In addition, unpaid fees accrued from July 1, 1995 through
-32-
<PAGE>
CAPITAL REALTY INVESTORS TAX EXEMPT FUND LIMITED PARTNERSHIP
NOTES TO FINANCIAL STATEMENTS
(Unaudited)
7. RELATED-PARTY TRANSACTIONS - Continued
September 30, 1996 will be purchased by CAPREIT from CRIIMI for $332,460, which
represents 100% of the accrued fees which are expected to be owed to CRIIMI for
that period. From October 1, 1996 to the closing of the proposed merger, the
purchase price of CRIIMI's portion will be adjusted upward at a rate of $22,164
per month.
Fees paid by the borrowers to CRI/CRICO Mortgage and CRIIMI for the three
and nine months ended September 30, 1996 and 1995 were as follows:
-33-
<PAGE>
CAPITAL REALTY INVESTORS TAX EXEMPT FUND LIMITED PARTNERSHIP
NOTES TO FINANCIAL STATEMENTS
(Unaudited)
7. RELATED-PARTY TRANSACTIONS - Continued
<TABLE>
<CAPTION>
For the three months ended For the nine months ended
September 30, September 30,
---------------------------- -----------------------------
1996 1995 1996 1995
------------ ------------ ------------ ------------
<S> <C> <C> <C> <C>
CRI/CRICO Mortgage $ -- $ 833 $ -- $ 5,833
CRIIMI 2,500 2,500 7,500 2,500
------------ ------------ ------------ ------------
Total $ 2,500 $ 3,333 $ 7,500 $ 8,333
============ ============ ============ ============
</TABLE>
Owner Partnerships formed to take title to properties are structured as
limited partnerships. The Owner Partnerships and the managing general partner
of the General Partner have primarily common ownership and are under common
control. The Owner Partnerships, rather than the Partnership, became holders of
title to the properties in an effort to maintain the tax-exempt nature of
interest on the mortgage revenue bonds and to hold the properties until their
ultimate disposition. No compensation or fees were paid by the Partnership to
the Owner Partnerships or their principals in connection with the transfers of
ownership.
In connection with the Restated Merger Agreement, each of the Owner
Partnerships has agreed to either (a) sell, assign and transfer the partnership
interests in, or the real property and other assets of, such Owner Partnerships
to CAPREIT or its designee for no additional consideration or (b) admit CAPREIT
or its designee as the managing general partner, whereupon the general partner
interests of the current general partners will be converted into limited partner
interests, and CAPREIT will have the option to acquire all of the limited
partner interests at any time within five years from the closing date of the
merger at the then fair market value based on the fair market value of the
property as encumbered by the mortgage loans) thereof. Although such interests
currently have nominal value, if the fair market value of the partnership
properties increases substantially prior to the time CAPREIT exercises its
option, such increase in value may benefit the owners of the Owner Partnerships.
SERIES II
---------
Expense reimbursements to an affiliate of the General Partner for the three
and nine months ended September 30, 1996 were $47,718 and $112,666,
respectively, and for the three and nine months ended September 30, 1995 were
$27,339 and $89,907, respectively, and are included in general and
administrative expense and merger-related expenses in the statements of income.
CRICO Mortgage, a former affiliate of the General Partner, was entitled to
annual mortgage administration and servicing fees from the borrowers which were
payable from operating revenues each month after payment of full base interest
on the mortgage loans. On June 30, 1995, CRICO Mortgage merged with and into
CRIIMI, an affiliate of the REIT. The REIT was originally sponsored by CRI, but
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<PAGE>
CAPITAL REALTY INVESTORS TAX EXEMPT FUND LIMITED PARTNERSHIP
NOTES TO FINANCIAL STATEMENTS
(Unaudited)
7. RELATED-PARTY TRANSACTIONS - Continued
is not controlled by CRI, although the CRI stockholders are directors, officers
and major stockholders of the REIT. Pursuant to the REIT merger agreement, the
right to receive the accrued and unpaid mortgage administration and servicing
fees as of the date of the REIT merger was distributed by CRICO Mortgage to its
shareholders and contributed by them to CRI. After June 30, 1995, the mortgage
administration and servicing are being performed by CRIIMI and mortgage
administration and servicing fees are payable to that entity. This merger did
not result in any increase in fees or changes in the amount of fees which are
currently payable.
The following unpaid mortgage servicing fees were due CRI and CRIIMI from
the borrowers as of September 30, 1996 and December 31, 1995:
<TABLE>
<CAPTION>
As of As of
September 30, December 31,
1996 1995
------------ ------------
<S> <C> <C>
CRI $ 1,847,496 $ 1,847,496
CRIIMI 489,120 195,648
------------ ------------
Total $ 2,336,616 $ 2,043,144
============ ============
</TABLE>
The unpaid mortgage servicing 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 nine months ended September 30, 1996 and 1995, no fees were paid by the
borrowers.
In connection with the Restated Merger Agreement entered into by the
Partnership, as discussed in Note 2, the unpaid mortgage servicing fees accrued
through June 30, 1995 will be purchased from CRI for the discounted amount of
$652,245, which represents approximately 42% of the total accrued fees owed to
CRI. In addition, unpaid fees accrued from July 1, 1995 through September 30,
1996 will be purchased by CAPREIT from CRIIMI for $489,120, which represents
100% of the accrued fees which are expected to be owed to CRIIMI for that
period. From October 1, 1996 to the closing of the proposed merger, the
purchase price of CRIIMI's portion will be adjusted upward at a rate of $32,608
per month.
Owner Partnerships formed to take title to properties are structured as
limited partnerships. The Owner Partnerships and the managing general partner
of the General Partner have primarily common ownership 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.
-35-
<PAGE>
CAPITAL REALTY INVESTORS TAX EXEMPT FUND LIMITED PARTNERSHIP
NOTES TO FINANCIAL STATEMENTS
(Unaudited)
7. RELATED-PARTY TRANSACTIONS - Continued
In connection with the Restated Merger Agreement, each of the Owner
Partnerships has agreed to either (a) sell, assign and transfer the partnership
interests in, or the real property and other assets of, such Owner Partnerships
to CAPREIT or its designee for no additional consideration or (b) admit CAPREIT
or its designee as the managing general partner, whereupon the general partner
interests of the current general partners will be converted into limited partner
interests, and CAPREIT will have the option to acquire all of the limited
partner interests at any time within five years from the closing date of the
merger at the then fair market value based on the fair market value of the
property as encumbered by the mortgage loans) thereof. Although such interests
currently have nominal value, if the fair market value of the partnership
properties increases substantially prior to the time CAPREIT exercises its
option, such increase in value may benefit the owners of the Owner Partnerships.
-36-
<PAGE>
PART I. FINANCIAL INFORMATION
---------------------
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
-------------------------------------------------
CONDITION AND RESULTS OF OPERATIONS
-----------------------------------
Business
--------
The Partnership's Management's Discussion and Analysis of Financial
Condition and Results of Operations contains information that may be considered
forward looking. This information contains a number of risks and uncertainties,
as discussed herein and in the Partnership's Annual Report filed on Form 10-K/A,
that could cause actual results to differ materially.
In May 1993, the Financial Accounting Standards Board (FASB) issued
Statement on Financial Accounting Standards No. 115 "Accounting for Certain
Investments in Debt and Equity Securities" (SFAS 115). This statement requires
that most investments in securities be classified into one of the following
investment categories based upon circumstances under which securities might be
sold: held to maturity, available for sale, or trading. Generally, investments
in securities for which an enterprise has both the ability and the intent to
hold to maturity should be accounted for using the amortized cost method and all
other securities must be recorded at their fair values. The Partnership
implemented SFAS 115 in 1994 for its marketable securities. Following such
adoption, the Partnership (as did others in the industry) continued to account
for its investments in mortgage revenue bonds, except Observatory II, as
investments in real estate based on consolidation of the Owner Partnerships in
accordance with the Securities and Exchange Commission (SEC) rules.
In conjunction with the review of the Partnership's 1995 financial
statements by the SEC staff, the Partnership agreed to account for all of its
investments in mortgage revenue bonds as debt securities under the provisions of
SFAS 115 effective January 1, 1994, and restate its 1995 and 1994 financial
statements to reflect this change. Accordingly, effective January 1, 1994, all
investments in mortgage revenue bonds are classified and accounted for as held
to maturity securities and carried at amortized cost because of the
Partnership's ability and intent to hold these investments to maturity. In
accordance with SFAS 115's provisions for held to maturity securities, the
Partnership evaluates the fair value of its mortgage revenue bonds to determine
if impairment exists. If a decline in fair value is determined to be other-
than-temporary, the security is written down to its fair value. The Partnership
did not recognize any impairment losses during the three or nine months ended
September 30, 1996 or 1995. Since all of the underlying mortgage loans, except
Observatory II, are in default, base interest and contingent interest on the
mortgage revenue bonds is recognized as revenue when collected.
SERIES I
--------
The five original Series I mortgage loans securing the mortgage revenue
bonds, with current aggregate principal and carrying amounts of $44,155,000 and
$30,740,285, respectively, went into default, resulting in title transfer by
actual foreclosure (one) or deeds in lieu of foreclosure (four) to Owner
Partnerships which assumed the existing indebtedness. In connection with the
transfers of properties to Owner Partnerships, the Partnership obtained an
opinion from its former independent accounting firm in July of 1991 that the
reduction in pay rate and compounding of unpaid base interest at the original
base interest rate would not cause a reissuance of the bonds under Section 103
of the Internal Revenue Code of 1986, as amended (the Code) (which would cause
the bonds to lose their tax-exempt status). The Partnership also obtained
opinions from bond counsel that certain transfers of the properties to Owner
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<PAGE>
PART I. FINANCIAL INFORMATION
---------------------
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
-------------------------------------------------
CONDITION AND RESULTS OF OPERATIONS - Continued
-----------------------------------
Partnerships would not cause the Partnership to become a substantial user of the
projects or a related party to a substantial user pursuant to Section 103 of the
Code (which also could have caused the bonds to lose their tax-exempt status).
The bond counsel opinions were obtained in connection with the Observatory II,
Royal Oaks, Trailway Pond and Valley Creek transfers.
In conjunction with the transfer of the Royal Oaks deed to an Owner
Partnership, the Royal Oaks mortgage revenue bond was modified. The Part-
nership, based on information and advice from outside counsel, believes that the
modification does not adversely affect the tax-exempt nature of the Royal Oaks
bond interest. The modification complied with IRS guidelines in effect at that
time. The IRS has since issued Final Regulations Section 1.1001-3, which
applies only to modifications made on or after September 24, 1996. The General
Partner believes that the modification to the Royal Oaks mortgage revenue bond
was consistent with the relevant tax authority which existed at the time of the
modification and has, therefore, not jeopardized the tax-exempt status of the
Royal Oaks mortgage revenue bond. However, there can be no assurance as to the
tax-exempt status of the Royal Oaks mortgage revenue bond at present.
SERIES II
---------
The five original Series II mortgage loans securing the mortgage revenue
bonds with aggregate principal and carrying amounts of $62,608,001 and
$43,793,252, respectively, went into default, resulting in deeds in lieu of
foreclosure to Ownership Partnerships which assumed the existing indebtedness.
In connection with the transfers of properties to Owner Partnerships, the
Partnership obtained an opinion from its former independent accounting firm in
July of 1991 that the reduction in pay rate and compounding of unpaid base
interest at the original base interest rate would not cause a reissuance of the
bonds under Section 103 of the Code (which would cause the bonds to lose their
tax-exempt status). The Partnership also obtained opinions from bond counsel
that certain transfers of the properties to Owner Partnerships would not cause
the Partnership to become a substantial user of the projects or a related party
to a substantial user pursuant to Section 103 of the Code (which also could have
caused the bonds to lose their tax exempt status.) The bond counsel opinions
were obtained in connection with the Ethan's Ridge and Ethan's Glen IIB,
Fountain Place and Trailway Pond II transfers.
-38-
<PAGE>
PART I. FINANCIAL INFORMATION
---------------------
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
-------------------------------------------------
CONDITION AND RESULTS OF OPERATIONS - Continued
-----------------------------------
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 June 1996, the IRS issued Final Regulations
Section 1.1001-3 which specifically address the tax consequences of
modifications of debt instruments. Among other things, these regulations
provide that certain modifications of the current interest payments or the
maturity date of a debt instrument will be treated as a taxable exchange of the
original instrument for the modified debt instrument. As a result, certain
future modifications of the mortgage loans which secure the mortgage revenue
bonds could be treated as a deemed reissuance of the mortgage revenue bonds for
federal income tax purposes. Any reissuance without the cooperation of the
mortgage revenue bond issuers would result in the loss of the tax-exempt status
of the mortgage revenue bonds. Such issuers might cooperate and consent to the
reissuance; however, there can be no assurance that such issuers would do so or
would not impose additional requirements that could have an adverse impact on
the mortgage revenue bonds. Even if issuer consent were obtained, all accrued
and unpaid interest of the existing mortgage loans would have to be written off.
The write-off of accrued and unpaid interest would not be recoverable upon
ultimate disposition or payoff of the mortgage revenue bond and would instead
accrue to the benefit of the Owner Partnerships to the extent realized.
Final Regulations Section 1.1001-3 only affect modifications made on or
after September 24, 1996. The General Partner believes that the modifications
which have already been made were consistent with the relevant tax authority
that existed at the time of those modifications and have not jeopardized the
tax-exempt status of the mortgage revenue bonds.
The General Partner's ongoing strategy had been to continue holding the
mortgage revenue bonds until the loan maturity dates. If the merger proposal,
discussed 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 extension of certain loan maturity dates
and, if approved, arrange any necessary related amendments to the pertinent
mortgage revenue bonds.
Merger Proposal
- ---------------
On September 11, 1995, the Partnership and its General Partner entered into
a merger agreement, subject to BAC Holder approval, with an affiliate of Capital
Apartment Properties, Inc. (CAPREIT), a private real estate investment trust.
On that date, another CAPREIT affiliate entered into a merger agreement with
Capital Realty Investors Tax Exempt Fund III Limited Partnership (CRITEF III), a
similar tax exempt bond fund sponsored by CRI. The two merger agreements are
independent of one another, but the closing of each merger is conditioned on
closing of the other, at CAPREIT's election. Another affiliate of CAPREIT is
the property manager for four of the five properties securing the bonds held by
Series I, and all five properties securing the bonds in Series II. All nine
properties managed by the CAPREIT affiliate had defaulted with respect to their
mortgage loans held by the Partnership. If the merger proposal is approved by a
-39-
<PAGE>
PART I. FINANCIAL INFORMATION
---------------------
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
-------------------------------------------------
CONDITION AND RESULTS OF OPERATIONS - Continued
-----------------------------------
majority vote of BAC Holders, all of the BACs in both Series I and Series II
will be redeemed for cash and the interests represented by such BACs will be
canceled. The agreement for the proposed merger has been modified to improve
the terms of the original proposal. Under the original proposal and under the
Fourth Amended and Restated Agreement and Plan of Merger (the Fourth Amended
Agreement), the redemption amount per BAC was to be $13.761 and $14.82,
respectively, for Series I, and $13.313 and $14.50 for Series II, respectively.
Under the most recent modification, Amendment No. 1 to the Fourth Amended and
Restated Agreement and Plan of Merger (the Restated Merger Agreement), all of
the BACs will be redeemed for cash at a redemption price of $15.42 per BAC, net
to the holder, without interest, subject to upward adjustment based on Available
Cash (as defined in the Restated Merger Agreement) to not greater than $15.629
per BAC for Series I, and $15.11 per BAC, net to the holder, without interest,
subject to upward adjustment based on Available Cash to not greater than $15.319
per BAC for Series II. In arriving at the base redemption price, the
consideration to be paid to BAC holders in the mergers has been reduced by the
fees and expenses payable to counsel for the plaintiffs in certain class action
litigation, as discussed below, of $2 million in the aggregate, assuming both
the Partnership and CRITEF III (collectively, the Partnerships) consummate the
mergers.
The BAC Holders will also vote upon the sale of the Partnership's General
Partner's interest to an affiliate of CAPREIT immediately prior to consummation
of the proposed merger. CAPREIT has agreed to pay the General Partner $400,000
in consideration for its 1.01% general partner interest in the Partnership.
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.
After postponing the special meeting originally scheduled for October 29, 1996,
the General Partner established November 27, 1996 as the special meeting date
for BAC Holders of record as of November 12, 1996 to consider and vote upon the
proposed mergers.
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 Partner.
Under the Restated Merger Agreement, CAPREIT will pay the discounted amount of
$432,960 and $652,245 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 35% of the total accrued fees owed to CRI. Also,
CAPREIT will pay $332,460 and $489,120 to CRIIMI for the fees of Series I and
Series II, respectively, accrued from July 1, 1995 through September 30, 1996,
which represents 100% of the fees which are owed to CRIIMI for that period.
From October 1, 1996 to the closing of the proposed merger, the amounts to be
paid by CAPREIT to CRIIMI will increase, to reflect additional amounts currently
being accrued for mortgage servicing and administration fees, at a rate of
$22,164 and $32,608 per month (or portion thereof) for Series I and Series II,
respectively.
Each of the entities formed to take title to properties and assume the
existing indebtedness when the original unaffiliated borrowers defaulted (Owner
Partnerships), which are affiliates of the Partnership, 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
-40-
<PAGE>
PART I. FINANCIAL INFORMATION
---------------------
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
-------------------------------------------------
CONDITION AND RESULTS OF OPERATIONS - Continued
-----------------------------------
additional consideration or (b) admit CAPREIT or its designee as the managing
general partner, whereupon the general partner interests of the current general
partners will be converted into limited partner interests, and CAPREIT will have
the option to acquire all of the limited partner interests at any time within
five years from the closing date of the merger at the then fair market value
thereof (based on the fair market value of the property as encumbered by the
mortgage loans). Although such interests currently have nominal value, if the
fair market value of the partnership properties increases substantially prior to
the time CAPREIT exercises its option, such increase in value may benefit the
owners of the Owner Partnerships. This feature was required by CAPREIT as a
material business term of the merger.
In accordance with the Restated Merger Agreement, CAPREIT is to pay the
legal costs incurred by the Partnership associated with the proposed merger,
upon consummation of the proposed merger. As the Partnership is not responsible
for payment of these costs, they have not been reflected in the accompanying
financial statements. However, in the event that the proposed merger is not
consummated with CAPREIT, the Partnership will be responsible for these costs,
as discussed below. As of November 11, 1996, the Partnership had incurred legal
costs of approximately $69,000 each for Series I and II related to the proposed
merger. There is no reasonable estimate of remaining legal costs to be incurred
by the Partnership related to the proposed merger.
In the event the Restated Merger Agreement is terminated or abandoned under
certain specified circumstances, the Partnership may be liable for the payment
of a fee equal of $2,250,000 with respect to such terminated or abandoned
Restated Merger Agreement if there is a Fiduciary Out Termination (as defined in
the Restated Merger Agreement), a Triggering Event (as defined in the Restated
Merger Agreement) or the Partnership consummates an alternative transaction
within 270 days of the date of termination or abandonment of such Restated
Merger Agreement.
In addition, if the Restated Merger Agreement is terminated or abandoned
due to (i) a Fiduciary Out Termination, (ii) a willful and material breach by
the Partnership or any applicable Owner Partnership (other than a breach of the
representations and warranties), (iii) the failure by the Partnership or any of
such Owner Partnerships to perform in all material respects its obligations and
duties thereunder, or (iv) a termination of such Restated Merger Agreement by
such CAPREIT affiliate because the Partnership shall have settled designated
actions for an amount in excess of an agreed upon amount or such settlement or
compromise contains terms to which such CAPREIT affiliate reasonably objects,
then the Partnership shall bear all of its own expenses, as mentioned above, and
reimburse such CAPREIT affiliate and its affiliates for reasonable out-of-pocket
expenses (including, without limitation, all fees and expenses of counsel, and
its financing sources and consultants to the CAPREIT affiliate and its
affiliates) in connection with such merger and related transactions and the
proxy statement. In no event, however, shall the amount paid to reimburse
expenses under the Restated Merger Agreement exceed $2,600,000.
During February 1996, the General Partner and CRITEF III Associates LP
(CRITEF III LP) (collectively, the General Partners) received an inquiry
concerning the possible acquisition of the Partnerships from a group of
investors led by Mr. Terry McNellis and Mr. Gary Petrucci, of Piper Jaffray
Inc., and Mr. David Brierton and Mr. Jack Safar, of Dominium Management Services
Inc. (collectively, the Dominium Group). The Dominium Group executed
confidentiality and non-circumvention agreements, and by the beginning of April
-41-
<PAGE>
PART I. FINANCIAL INFORMATION
---------------------
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
-------------------------------------------------
CONDITION AND RESULTS OF OPERATIONS - Continued
-----------------------------------
1996, the Partnerships had provided the Dominium Group with all of the due
diligence materials they had requested. Thereafter, the General Partner did not
hear from any representative of the Dominium Group again until June 28, 1996,
just days prior to the initially scheduled date for the fairness hearing to be
held on the Stipulation of Settlement in the Zakin and Wingard putative class
actions (the Zakin and Wingard Actions), as discussed below.
On June 28, 1996, counsel to the plaintiffs in the Zakin and Wingard
Actions, and the Partnerships, received a letter from Dominium Tax Exempt Fund
L.L.P. (Dominium) indicating an interest in entering into merger agreements with
the Partnerships having similar terms as the CAPREIT merger agreement and
purportedly offering the BAC Holders of the Partnerships an aggregate merger
consideration of approximately $168,230,000. After reviewing the Dominium
letter, the General Partners determined that Dominium had not demonstrated any
firm financing ability. Notwithstanding such determination, the General
Partners, in a letter dated July 3, 1996, notified Dominium that it would make
documents available to Dominium for its due diligence. The General Partners,
however, also cautioned Dominium that it would not jeopardize the merger
agreement with CAPREIT by an unwarranted delay while Dominium and its potential
lenders continued to study the Partnerships and the mortgage revenue bonds and
complete their due diligence.
During the weeks of July 8, July 22 and July 29, representatives of
Dominium visited the principal offices of the Partnerships to continue their due
diligence review. During that period, the General Partners also responded to
numerous requests for copies of specific documents and coordinated site visits
to the properties by Dominium, its two proposed potential lenders, and its
engineering and environmental consultants. On July 12, 1996, the Partnerships
received copies of correspondence from Dominium to counsel for the plaintiffs in
the Zakin and Wingard Actions, indicating that Dominion had received purported
financing commitments, subject to its potential lenders' satisfactory completion
of their due diligence during the succeeding 21 days and the payment by Dominium
of an expense deposit of $75,000, a processing fee of $100,000 on July 23, 1999,
and a commitment fee of in excess of $3,000,000 of which $500,000 was due at the
end of the 21-day due diligence period. According to Dominium's letter, the net
amount payable to BAC Holders in the Partnerships under its adjusted proposal
would be at least $165,305,000. By letter dated July 18, 1996, the General
Partners requested that Dominium supply evidence that it had the financial
capability to cover the costs of the transaction it proposed and to provide the
equity that its potential lenders would require. The General Partners never
received any evidence that the $500,000 portion of the loan commitment fee or
the $100,000 processing fee was paid. The July 18 letter also requested that
Dominium's counsel submit their suggested revisions to the existing Merger
Agreement with CAPREIT to reflect the terms desired by Dominium. That request
was reiterated by letter dated July 24, 1996. Copies of the existing Merger
Agreement marked to reflect Dominium's proposed changes thereto were received on
July 29, 1996. By letter dated July 31, 1996, the General Partners requested
clarification of seven issues relating to Dominium's mark-up, but never received
a response.
The Partnership has been advised that, on August 2, 1996, representatives
of CAPREIT met with representatives of Dominium in New York City in an attempt
to assess the credibility of Dominium's proposal and to discern its motivations
with respect to the Partnerships, in view of CAPREIT's belief that Dominium's
proposal, as described in its letters to the Funds, was not financeable and
could not be accomplished as proposed. At that meeting and in a few subsequent
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<PAGE>
PART I. FINANCIAL INFORMATION
---------------------
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
-------------------------------------------------
CONDITION AND RESULTS OF OPERATIONS - Continued
-----------------------------------
phone conversations between a representative of CAPREIT and a representative of
Dominium, certain aspects of CAPREIT's and Dominium's respective proposals were
discussed. No agreements or understandings were reached between CAPREIT and
Dominium as a result of the meeting or in any subsequent communications. The
General Partners learned only recently that Dominium had proposed that CAPREIT
enter into a management contract that would have given Dominium $3.5 million in
termination fees upon approval of the mergers.
Dominium had previously indicated to counsel for the plaintiffs in the
Zakin and Wingard Actions that it would complete its due diligence and submit
firm financing commitments for its proposal in order to satisfy such counsel's
concerns about Dominium's ability to secure financing for a transaction with the
Partnerships by August 5, 1996. No such commitment was submitted on August 5,
1996 or at any time thereafter.
During the period of time while the Partnerships and counsel to the
plaintiffs in the Zakin and Wingard Actions continued to pursue a possible
transaction with Dominium, the fairness hearing in the Zakin and Wingard
Actions, initially scheduled to be held on June 19, 1996 and postponed by the
parties until July 2, 1996, was further postponed on three occasions in order to
accommodate Dominium's request for additional time to finalize its proposal.
The hearing was ultimately scheduled to be held on August 14, 1996.
On August 7, 1996, after not having received any word from Dominium by
August 5, 1996, the date Dominium itself had selected as the deadline for the
delivery of its definitive proposal and firm commitments for the financing
thereof, counsel for the plaintiffs in the Zakin and Wingard Actions wrote to
Dominium establishing a deadline of 12:00 noon, August 12, 1996 for their
receipt from Dominium of a documented "firm offer economically superior to" the
CAPREIT Mergers. No offer was received from Dominium by the August 12, 1996
deadline. CAPREIT, in order to bring finality to the process and to induce
plaintiff's counsel to proceed with the August 14, 1996 hearing date on the
Stipulation of Settlement as scheduled rather than postponing it for the fifth
time, agreed with plaintiffs' counsel to increase the consideration being
offered by it to the BAC Holders in the Partnerships by $2 million in the
aggregate. Plaintiffs' counsel advised Dominium's counsel, by letter of August
12, 1996, that in light of Dominium's repeated failure to respond to their
inquiries and to provide a firm offer for the acquisition of the Partnerships
with financing commitments therefore, and in light of the agreement of CAPREIT
to increase the aggregate consideration being offered by it in the Mergers by $2
million, such counsel intended to support the Stipulation of Settlement at the
hearing to be held on August 14, 1996.
Dominium responded to the Partnerships and plaintiffs' counsel in letters
received on August 13, 1996, that it was not in a position to provide evidence
of its ability to finance or to finalize its proposals. Dominium alleged that
with more time and "disinterested general partners" it would be able to make a
proposal superior to CAPREIT's. In light of the fact that Dominium had not been
able to put together a firm offer in nearly six months since their initial
expression of interest in February, 1996, the General Partners did not believe
it to be in the best interests of the BAC Holders to delay any further
proceeding with the merger with CAPREIT.
On August 13, 1996, the parties in the Zakin and Wingard Actions entered
into an Amendment to the Stipulation of Settlement which reflected CAPREIT's
agreement to increase the consideration to be paid by it in the Mergers and
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<PAGE>
PART I. FINANCIAL INFORMATION
---------------------
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
-------------------------------------------------
CONDITION AND RESULTS OF OPERATIONS - Continued
-----------------------------------
plaintiffs' counsels' agreement to support the Stipulation of Settlement, as
improved, notwithstanding any actions Dominium had taken or would take in the
future. The proposed Settlement, as amended, was presented to the Court for
final hearing and approval on August 14, 1996.
On August 14, 1996, at the fairness hearing on the Stipulation of
Settlement, as amended, in the Zakin and Wingard Actions, the Delaware Court of
Chancery certified the class of BAC Holders, found that the proposed settlement
was fair, reasonable, adequate and in the best interests of the BAC Holders,
approved the Stipulation of Settlement, awarded to plaintiff's counsel fees in
the amount of $2 million, and entered a final judgment dismissing the actions.
The 30-day period to appeal the final judgment ended with no appeal being taken.
Subsequent to the fairness hearing, the General Partners, based upon the
performance of the properties underlying the Mortgage Revenue Bonds during the
period since the Second Amended and Restated Merger Agreement was signed, sought
to obtain CAPREIT's agreement to a further increase in the aggregate merger
consideration in addition to the $2 million increase agreed to in connection
with the fairness hearing. In light of the delays in pursuing the merger and
the fairness hearing occasioned by the efforts of the General Partners and
plaintiffs' counsel to obtain an offer from Dominium, CAPREIT sought to extend
the termination date and to increase the amount of expenses for which the
CAPREIT affiliate may be reimbursed pursuant to the proposed merger. On August
21, 1996, as set forth in the Fourth Amended Agreement, CAPREIT agreed to
increase the aggregate amount of merger consideration by an additional $1.5
million, approximately, in consideration for the extension of the termination
date from November 30, 1996 to December 31, 1996 and an increase from $2,500,000
to $2,600,000 per merger agreement of the maximum amount of expenses for which
the CAPREIT affiliate may be reimbursed under certain circumstances if a merger
agreement is terminated.
By letter dated August 28, 1996, Dominium demanded that the Partnerships
provide it with a current list of the BAC Holders, information from nominees
containing the identity of brokerage and financial institutions holding BACS,
and a list of Non-Objecting Beneficial Owners. The General Partners notified
Dominium, by letter dated September 5, 1996, that it believed that, under
applicable law, Dominium's demand was legally deficient in a number of respects
and, accordingly, it could not make any decisions with respect to the request.
After various communications, Dominium cured the deficiencies in its
request. The Partnerships notified Dominium, on September 19, 1996, that it
would provide Dominium with a current list of BAC Holders and related
information.
On September 20, 1996, Oppenheimer delivered its Fairness Opinions to the
Partnership to the effect that, as of such date and subject to the assumptions
and limitations therein, the Redemption Prices as set forth in the Fourth
Amended Agreement of $14.82 per BAC with respect to Series I and $14.50 per BAC
with respect to Series II, net to the holders in cash, respectively, are fair to
such BAC Holders from a financial point of view.
On September 20, 1996, the Partnership filed its Joint Proxy Statement (the
Proxy) with the SEC in connection with the solicitation of BAC Holder approval
for the proposed mergers based on the merger terms as set forth in the Fourth
Amended Agreement. The Proxy announced a special meeting to be held on October
29, 1996 to consider and vote upon the proposed merger terms as set forth in the
-44-
<PAGE>
PART I. FINANCIAL INFORMATION
---------------------
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
-------------------------------------------------
CONDITION AND RESULTS OF OPERATIONS - Continued
-----------------------------------
Fourth Amended Agreement. On September 23, 1996, the Partnership commenced
mailing the Proxy and related proxy materials to BAC Holders on record as of
September 19, 1996.
On September 27, 1996, Dominium sent a letter to all BAC Holders voicing
its opposition to the proposed mergers. On the same day, Dominium initiated
litigation against the Partnership and others, as discussed below. The
Partnership and others responded in other lawsuits, also discussed below.
Thereafter, on September 30, and October 1, 1996, Dominium filed its preliminary
proxy materials with the SEC and publicly announced that it would be soliciting
proxies against the proposed mergers.
On October 16, 1996, Dominium mailed its definitive proxy materials to BAC
Holders. Dominium's proxy materials confirmed that Dominium was not making, and
had no current plans to make, a superior proposal, or indeed any proposal, for
an acquisition of the Partnerships. In its proxy materials, Dominium stated that
it was soliciting proxies in opposition to the proposed mergers because, among
other things, it believed that the consideration then being offered to the BAC
Holders in the proposed mergers did not maximize BAC Holder values and that it
believed there might be alternatives to the proposed mergers in which BAC
Holders might realize higher values.
On October 28, 1996, the General Partner postponed the special meeting,
which had been scheduled to be held on October 29, 1996, until November 8, 1996,
in an effort to afford BAC Holders the opportunity to resolve any confusion
resulting from the competing claims of the General Partners and Dominium and to
provide additional time for BAC Holders to vote their BACs. As of the close of
business on November 6, 1996, the day prior to the Partnerships' public
announcement of the increase in the merger consideration, the Partnership had
received proxies from the holders of approximately 62% of the outstanding BACs
in the Partnership eligible to vote, approximately 69.7% of which proxies
(representing approximatley 43% of the outstanding BACs) had been voted in favor
of the proposed merger.
Following the postponement of the special meeting to be held on October 29,
1996, CAPREIT and the General Partners discussed the possibility of CAPREIT's
increasing the consideration that it was offering to BAC Holders in the proposed
mergers. At this time, CAPREIT also approached Dominium in an attempt to settle
its differences with Dominium and the outstanding litigations between them, as
discussed in Note 6, and to solicit Dominium's support for the improved proposed
merger terms it was considering. Over the course of several days, CAPREIT
negotiated with the General Partners and Dominium in an effort to reach an
agreement on improved proposed merger terms and on November 6, 1996, CAPREIT
agreed with the General Partners to increase the aggregate consideration that it
was offering BAC Holders in the proposed mergers by approximately $6.5 million
(or approximately $0.60 per BAC) and the General Partners and CRI agreed to
reduce by an aggregate of $500,000 the amounts to be paid the General Partners
and CRI upon consummation of the proposed mergers. Dominium advised CAPREIT
that, in its view, the agreed upon merger consideration maximized BAC Holder
values, and that it would endorse and support the proposed mergers if the merger
agreements were amended to incorporate these terms.
In connection with CAPREIT's agreement to increase its merger offer and the
execution of the Restated Merger Agreement, on November 6, 1996, CAPREIT and
Dominium entered into a settlement agreement pursuant to which, among other
things, (i) each of the parties and certain of their affiliates and the
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<PAGE>
PART I. FINANCIAL INFORMATION
---------------------
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
-------------------------------------------------
CONDITION AND RESULTS OF OPERATIONS - Continued
-----------------------------------
partnerships agreed to settle the various lawsuits between them and to release
all claims against the other arising from or relating to such actions, the
proposed mergers and the related transactions and their respective proxy
solicitation efforts; (ii) CAPREIT agreed to pay Dominium $500,000 upon signing
of the Restated Merger Agreement and to pay $2.5 million into escrow to be held
in escrow for a period of up to two years and to be paid to Dominium upon BAC
Holder approval of the proposed mergers or if CAPREIT otherwise acquires control
of the Partnerships, in consideration for Dominium's efforts in negotiating an
increase in the consideration being offered by CAPREIT in the proposed mergers
and the costs Dominium incurred in attempting to make a superior offer and
soliciting proxies in opposition to the proposed mergers; and (iii) Dominium
agreed to support the proposed mergers and related transactions, cease its
solicitation of proxies in opposition to the proposed mergers, and assist
CAPREIT and the Partnerships in soliciting proxies in favor of the proposed
mergers.
On November 8, 1996, the Partnership filed a Supplement to the Joint Proxy
Statement (the Proxy Supplement) with the SEC and announced improved merger
terms as set forth in the Restated Merger Agreement in connection with the
solicitation of BAC Holder approval for the proposed mergers. Additionally, the
Partnership announced the postponement of the November 8, 1996 meeting date
until November 27, 1996 for BAC Holders of record as of November 12, 1996.
Financing
---------
The amount required to pay the increase in the Redemption Prices and
related additional costs and expenses, less the $500,000 deduction in amounts to
be paid to the General Partners and CRI, is expected to be approximately $9
million. The funds required to pay such amount, as well as the amounts to be
paid to Dominium pursuant to its settlement agreement with CAPREIT, will be
provided by an additional equity contribution by CAPREIT.
Financial Condition and Liquidity
---------------------------------
The primary sources of the Partnership's future cash flows are expected to
be from receipts of base interest on mortgage loans, which are dependent upon
the net operating income of the properties. Therefore, the Partnership's
investment in the mortgage revenue bonds is subject to the general risks
inherent to the ownership of real property. These risks include reduction in
rental income due to an inability to maintain occupancy levels, adverse changes
in general economic conditions, and adverse changes in local conditions. The
General Partner expects that the properties transferred to Owner Partnerships
will continue to generate sufficient cash flow to pay all operating expenses,
meet escrow deposit requirements and pay some, but not all, of the base interest
due to the Partnership. The Partnership has no material commitments for capital
expenditures. However, in the event the Restated Merger Agreement is terminated
or abandoned under certain circumstances, the Partnership will be liable for
certain fees and expenses, as discussed above.
-46-
<PAGE>
PART I. FINANCIAL INFORMATION
---------------------
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
-------------------------------------------------
CONDITION AND RESULTS OF OPERATIONS - Continued
-----------------------------------
SERIES I
--------
Series I expects to continue to make distributions to BAC Holders on a
semi-annual basis. The Restated Merger Agreement stipulates that the 1996
distributions cannot exceed $0.09417 per BAC per month. There are no other
legal restrictions on Series I's present or future ability to make cash
distributions other than as set forth in the Restated Merger Agreement.
However, property level reserves are depleted and estimated cash flows from the
properties' operations are insufficient to pay full monthly base interest
(except for Observatory II), therefore, the distributions to BAC Holders may
fluctuate from current levels. The General Partner seeks to optimize cash flow
from the properties owned by Owner Partnerships. Despite these efforts, the
amounts paid to the Partnership from the borrowers may be expected to fluctuate
from period to period due to changes in occupancy rates, rental rates, operating
expenses and other variables. Based upon the current operations of the
Partnership, the General Partner expects the 1996 distribution to approximate
$1.13 per BAC, the maximum amount stipulated in the Restated Merger Agreement.
The following distributions were paid or accrued to BAC Holders of record
during the nine months ended September 30, 1996 and 1995:
-47-
<PAGE>
PART I. FINANCIAL INFORMATION
---------------------
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
-------------------------------------------------
CONDITION AND RESULTS OF OPERATIONS - Continued
-----------------------------------
<TABLE>
<CAPTION>
1996 1995
Distributions to Distributions to
BAC Holders BAC Holders
------------------------------ ------------------------------
Quarter Ended Total Per BAC Total Per BAC
- ------------- ----------- ------- ----------- -------
<S> <C> <C> <C> <C>
March 31, $ 644,100 $0.2825 $ 615,600 $0.2700
June 30, 644,100 0.2825 615,600 0.2700
September 30, 644,100 0.2825 615,600 0.2700
---------- ------- ---------- -------
$1,932,300 $0.8475 $1,846,800 $0.8100
========== ======= ========== =======
</TABLE>
Distributions to BAC Holders for the three and nine months ended
September 30, 1996 and 1995 were funded as follows:
<TABLE>
<CAPTION>
For the three months ended For the nine months ended
September 30, September 30,
---------------------------- -----------------------------
1996 1995 1996 1995
------------ ------------ ------------ ------------
<S> <C> <C> <C> <C>
Cash Available for Distribution:
Cash flow (1) $ 723,026 $ 687,175 $ 2,086,656 $ 2,055,481
Net deposits to working capital reserves (72,354) (65,294) (134,640) (189,838)
------------ ------------ ------------ ------------
Total cash available for distribution $ 650,672 $ 621,881 $ 1,952,016 $ 1,865,643
============ ============ ============ ============
Distributions to:
General partner (1.01%) $ 6,572 $ 6,281 $ 19,716 $ 18,843
============ ============ ============ ============
BAC Holders (98.99%) $ 644,100 $ 615,600 $ 1,932,300 $ 1,846,800
============ ============ ============ ============
</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
-48-
<PAGE>
PART I. FINANCIAL INFORMATION
---------------------
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
-------------------------------------------------
CONDITION AND RESULTS OF OPERATIONS - 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
generally accepted accounting principles (GAAP) as an indication of the
Partnership's operating performance.
The General Partner expects the distribution for the six months ending
December 31, 1996 to total approximately $0.565 per BAC, payable on February 28,
1997, or possibly earlier depending on the merger closing date, payable to
Series I BAC Holders of record as of the last day in each month during this
period.
As of September 30, 1996, Series I had cash and cash equivalents of
$82,027, unrestricted marketable securities of $680,690 and working capital
reserves invested in marketable securities of $1,419,310. Marketable securities
consist of tax-exempt municipal bonds which generally contain a seven-day put
option with established banks or brokerage houses. The Partnership has
classified its investments in marketable securities into the available for sale
category under SFAS 115. Realized gains and losses on the sale of marketable
securities were determined on a specific identification basis. There were no
net unrealized holding gains or losses recognized during the three or nine
months ended September 30, 1996 or 1995 for Series I as the cost for the tax-
exempt municipal bonds approximated market value throughout the respective
periods.
The Partnership closely monitors its cash flow and liquidity position for
Series I in an effort to ensure that sufficient cash is available for operating
requirements and distributions to BAC Holders. Series I's net cash provided by
operating activities, which consists primarily of receipt of base interest on
mortgage loans, for the nine months ended September 30, 1996 was adequate to
support operating, investing and financing requirements and the declared
distributions to BAC Holders and the General Partner. The Partnership estimates
that future cash flows from receipt of base interest on mortgage loans, in the
aggregate, will be sufficient to pay operating expenses and make distributions
to BAC Holders and the General Partner.
SERIES II
---------
Series II expects to continue to make distributions to BAC Holders on a
semi-annual basis. The Restated Merger Agreement stipulates that 1996
distributions cannot exceed $0.09667 per BAC per month. There are no other
legal restrictions on Series II's present or future ability to make cash
distributions other than as set forth in the Restated Merger Agreement.
However, property level reserves are depleted and estimated cash flows from the
properties' operations are insufficient to pay full monthly base interest,
therefore, the distributions to BAC Holders may fluctuate from current levels.
The General Partner seeks to optimize cash flow from the properties owned by
Owner Partnerships. Despite these efforts, the amounts paid to the Partnership
from the borrowers may be expected to fluctuate from period to period due to
changes in occupancy rates, rental rates, operating expenses and other
variables. Based upon the current operations of the Partnership, the General
Partner expects the 1996 distribution to approximate $1.16 per BAC, the maximum
amount stipulated in the Restated Merger Agreement.
The following distributions were paid or accrued to BAC Holders of record
during the nine months ended September 30, 1996 and 1995:
-49-
<PAGE>
PART I. FINANCIAL INFORMATION
---------------------
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
-------------------------------------------------
CONDITION AND RESULTS OF OPERATIONS - Continued
-----------------------------------
<TABLE>
<CAPTION>
1996 1995
Distributions to Distributions to
BAC Holders BAC Holders
----------------------------- -----------------------------
Quarter Ended Total Per BAC Total Per BAC
- ------------- ----------- ------- ----------- -------
<S> <C> <C> <C> <C>
March 31, $ 939,240 $0.2900 $ 874,465 $0.2700
June 30, 939,240 0.2900 874,465 0.2700
September 30, 939,240 0.2900 874,465 0.2700
---------- ------- ---------- -------
$2,817,720 $0.8700 $2,623,395 $0.8100
========== ======= ========== =======
</TABLE>
Distributions to BAC Holders for the three and nine months ended
September 30, 1996 and 1995 were funded as follows:
<TABLE>
<CAPTION>
For the three months ended For the nine months ended
September 30, September 30,
---------------------------- -----------------------------
1996 1995 1996 1995
------------ ------------ ------------ ------------
<S> <C> <C> <C> <C>
Cash Available for Distribution:
Cash flow (1) $ 972,645 $ 930,135 $ 2,846,573 $ 2,995,965
Net withdrawals from (deposits to) working
capital reserves (23,822) (46,748) (104) (345,804)
------------ ------------ ------------ ------------
Total cash available for distribution $ 948,823 $ 883,387 $ 2,846,469 $ 2,650,161
============ ============ ============ ============
Distributions to:
General partner (1.01%) $ 9,583 $ 8,922 $ 28,749 $ 26,766
============ ============ ============ ============
BAC Holders (98.99%) $ 939,240 $ 874,465 $ 2,817,720 $ 2,623,395
============ ============ ============ ============
</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
-50-
<PAGE>
PART I. FINANCIAL INFORMATION
---------------------
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
-------------------------------------------------
CONDITION AND RESULTS OF OPERATIONS - Continued
-----------------------------------
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
GAAP as an indication of the Partnership's operating performance.
The General Partner expects the distribution for the six months ending
December 31, 1996 to total approximately $0.58 per BAC, payable on February 28,
1997, or possibly earlier depending on the merger closing date, payable to
Series II BAC Holders of record as of the last day in each month during this
period.
As of September 30, 1996, Series II had cash and cash equivalents of
$14,979, unrestricted marketable securities of $923,428, and working capital
reserves invested in marketable securities of $2,307,489. Marketable securities
consist of tax-exempt municipal bonds which generally contain a seven-day put
option with established banks or brokerage houses. The Partnership has
classified its investments in marketable securities into the Available for Sale
category under SFAS 115. Realized gains and losses on the sale of marketable
securities were determined on a specific identification basis. There were no
net unrealized holding gains or losses recognized during the three and nine
months ended September 30, 1996 or 1995 for Series II as the cost for the tax-
exempt municipal bonds approximated market value throughout these periods.
The Partnership closely monitors its cash flow and liquidity position for
Series II in an effort to ensure that sufficient cash is available for operating
requirements and distributions to BAC Holders. Series II's net cash provided by
operating activities for the nine months ended September 30, 1996, which
consists primarily of receipt of base interest on mortgage loans, was
supplemented by the sale of marketable securities to support operating
requirements and the payment of declared distributions to BAC Holders and the
General Partner. For the nine months ended September 30, 1996, cash and cash
equivalents decreased due to the timing of distribution payments. The
Partnership estimates that future cash flows from receipt of base interest on
mortgage loans, in the aggregate, will be sufficient to pay operating expenses
and make distributions to BAC Holders and the General Partner.
Results of Operations
---------------------
SERIES I
--------
The Partnership's Series I net income for the three months ended September
30, 1996 increased by approximately $124,000 or 20% from the corresponding
period in 1995 primarily due to a decrease in merger- related expenses of
approximately $109,000 resulting principally from fees incurred by the
Partnership during the three months ended September 30, 1995 for an independent
fairness opinion in connection with the consideration to be received by BAC
Holders in the proposed merger. Contributing to the increase in net income was
an increase in interest from mortgage revenue bonds of approximately $14,000
resulting principally from an increase in rental rates at the underlying
properties. There were no material increases or decreases in Series I's
remaining income or expenses for the three months ended September 30, 1996.
-51-
<PAGE>
PART I. FINANCIAL INFORMATION
---------------------
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
-------------------------------------------------
CONDITION AND RESULTS OF OPERATIONS - Continued
-----------------------------------
The Partnership's Series I net income for the nine months ended September
30, 1996 increased by approximately $26,000 or 1% from the corresponding period
in 1995 primarily due to an increase in interest from mortgage revenue bonds of
approximately $139,000, as discussed above. Partially offsetting the increase
in net income was an increase in merger-related expenses of approximately
$125,000 due to legal and consulting fees and payroll costs incurred during 1996
in connection with the proposed merger. Also partially offsetting the increase
in net income was an increase in professional fees of approximately $25,000
primarily due to audit and consulting fees incurred during 1996 related to the
restatement of the 1995 financial statements. There were no material increases
or decreases in Series I's remaining income or expenses for the nine months
ended September 30, 1996.
The restatement of the 1995 financial statements resulted in increases of
$432,444 and $1,224,759 in the previously reported net income for the three and
nine months ended September 30, 1995, respectively. The restatement of the 1995
financial statements also resulted in increases of $0.18 and $0.53 in the
previously reported net income per BAC for the three and nine months ended
September 30, 1995, respectively. Net income per BAC as previously reported for
the three and nine months ended September 30, 1995 was $0.09 and $0.34,
respectively.
Presented below is a summary of base interest payments for the nine months
ended September 30, 1996 and 1995 that are due to Series I from the borrowers:
-52-
<PAGE>
<PAGE>
PART I. FINANCIAL INFORMATION
---------------------
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
-------------------------------------------------
CONDITION AND RESULTS OF OPERATIONS - Continued
-----------------------------------
<TABLE>
<CAPTION>
For the nine months ended September 30, 1996
------------------------------------------------------------------------
Base Interest Cumulative
Paid From Current Base Unpaid
Current Base Properties' Interest Full Base
Interest Due(1) Operations Not Paid Interest
--------------- ------------- ------------ -----------
<S> <C> <C> <C> <C>
Observatory II $ 96,000 $ 96,000 $ -- $ --
Royal Oaks 801,972 691,417 110,555 1,703,799
Trailway Pond 345,366 178,874 166,492 1,018,964
Valley Creek 994,764 714,047 280,717 3,031,898
White Bear Woods 983,194 706,082 277,112 2,277,863
------------ ------------- ------------ -----------
$ 3,221,296 $ 2,386,420 $ 834,876 $ 8,032,524
============ ============= ============ ===========
</TABLE>
<TABLE>
<CAPTION>
For the nine months ended September 30, 1995
------------------------------------------------------------------------
Base Interest Cumulative
Paid From Current Base Unpaid
Current Base Properties' Interest Full Base
Interest Due(1) Operations Not Paid Interest
--------------- ------------- ------------ -----------
<S> <C> <C> <C> <C>
Observatory II $ 96,000 $ 96,000 $ -- $ --
Royal Oaks 801,972 602,387 199,585 1,562,058
Trailway Pond 345,366 182,636 162,730 799,562
Valley Creek 994,764 677,430 317,334 2,686,641
White Bear Woods 983,194 688,514 294,680 1,932,437
------------- ------------- ------------ -----------
$ 3,221,296 $ 2,246,967 $ 974,329 $ 6,980,698
============= ============= ============ ===========
</TABLE>
(1) The Partnership charges the borrowers interest on unpaid base
interest, which totalled $714,230 and $569,902 for the nine months
ended September 30, 1996 and 1995, respectively.
SERIES II
---------
The Partnership's Series II net income for the three months ended September
30, 1996 increased by approximately $47,000 or 5% from the corresponding period
in 1995 primarily due to a decrease in merger-related expenses of approximately
$110,000 resulting principally from fees incurred by the Partnership during the
three months ended September 30, 1995 for an independent fairness opinion in
connection with the consideration to be received by BAC Holders in the proposed
merger. Partially offsetting the increase in net income was a decrease in
interest from mortgage revenue bonds of approximately $48,000 due to a decrease
in occupancy at the underlying properties. Also partially offsetting the
-53-
<PAGE>
PART I. FINANCIAL INFORMATION
---------------------
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
-------------------------------------------------
CONDITION AND RESULTS OF OPERATIONS - Continued
-----------------------------------
increase in net income was an increase in professional fees of approximately
$32,000 primarily due to audit and consulting fees incurred during 1996 related
to the restatement of the 1995 financial statements. There were no material
increases or decreases in Series II's remaining income or expenses for the three
months ended September 30, 1996.
The Partnership's Series II net income for the nine months ended September
30, 1996 increased by approximately $37,000 or 1% from the corresponding period
in 1995 primarily due to an increase in interest from mortgage revenue bonds of
approximately $156,000 resulting principally from interest received during 1996
due to the release of $140,500 in excess tax and insurance reserves relating to
three of the underlying properties. Partially offsetting the increase in net
income was an increase in merger-related expenses of approximately $124,000 due
to legal and consulting fees and payroll costs incurred during 1996 in
connection with the proposed merger. There were no material increases or
decreases in Series II's remaining income or expenses for the three months ended
September 30, 1996.
The restatement of the 1995 financial statements resulted in increases of
$520,391 and $1,503,438 in the previously reported net income for the three and
nine months ended September 30, 1995, respectively. The restatement of the 1995
financial statements also resulted in increases of $0.16 and $0.46 in the
previously reported net income per BAC for the three and nine months ended
September 30, 1995, respectively. Net income per BAC as previously reported for
the three and nine months ended September 30, 1995 was $0.12 and $0.44,
respectively.
Presented below is a summary of base interest payments for the nine months
ended September 30, 1996 and 1995 that are due to Series II from the borrowers:
-54-
<PAGE>
PART I. FINANCIAL INFORMATION
---------------------
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
-------------------------------------------------
CONDITION AND RESULTS OF OPERATIONS - Continued
-----------------------------------
<TABLE>
<CAPTION>
For the nine months ended September 30, 1996
-------------------------------------------------------------------------
Base Interest Cumulative
Paid From Current Base Unpaid
Current Base Properties' Interest Full Base
Interest Due(1) Operations(2) Not Paid Interest
--------------- ------------- ------------ -----------
<S> <C> <C> <C> <C>
Ethan's Ridge and
Ethan's Glen IIB $ 1,139,062 $ 1,056,372 $ 82,690 $ 2,084,883
Fountain Place 1,489,125 1,093,548 395,577 5,459,075
James Street
Crossing 1,001,818 776,850 224,968 1,920,139
Trailway Pond II 752,250 398,157 354,093 2,922,799
------------ ------------ ------------ -----------
$ 4,382,255 $ 3,324,927 $ 1,057,328 $12,386,896
============ ============ ============ ===========
</TABLE>
<TABLE>
<CAPTION>
For the nine months ended September 30, 1995
-------------------------------------------------------------------------
Base Interest Cumulative
Paid From Current Base Unpaid
Current Base Properties' Interest Full Base
Interest Due(1) Operations Not Paid Interest
--------------- ------------- ------------- ------------
<S> <C> <C> <C> <C>
Ethan's Ridge and
Ethan's Glen IIB $ 1,139,062 $ 871,763 $ 267,299 $ 1,965,823
Fountain Place 1,489,125 1,090,395 398,730 4,893,097
James Street
Crossing 1,001,818 794,261 207,557 1,637,286
Trailway Pond II 752,250 412,188 340,062 2,480,937
------------ ------------ ------------ ------------
$ 4,382,255 $ 3,168,607 $ 1,213,648 $ 10,977,143
============ ============ ============ ============
</TABLE>
(1) The Partnership charges the borrowers interest on unpaid base interest,
which totalled $1,061,535 and $874,077 for the nine months ended September
30, 1996 and 1995, respectively.
(2) Includes amounts received by the Partnership in January 1996 from the
release of excess tax and insurance reserves relating to 1995. Such
amounts received from Ethan's Ridge and Ethan's Glen IIB, Fountain Place
and James Street Crossing totalled $107,000, $25,700 and $7,800,
respectively.
-55-
<PAGE>
PART II. OTHER INFORMATION
-----------------
ITEM 1. LEGAL PROCEEDINGS
-----------------
On September 22, 1995, Irving Zakin commenced a putative class action (the
Zakin Action) against the Partnership, its general partner (CRITEF Associates
Limited Partnership), its Assignor Limited Partner (CRITEF, Inc.), CRI, William
B. Dockser, H. William Willoughby, CRITEF III, CRITEF III Associates Limited
Partnership, CRITEF III, Inc., and CAPREIT (collectively, the Defendants) in the
court of Chancery of the State of Delaware in New Castle County (the Chancery
Court) (C.A. No. 14558). The complaint alleged, among other things, that the
price offered to the BAC Holders in the proposed mergers at the time the
complaint was filed was inadequate, and that the Defendants breached their
fiduciary duty to the BAC Holders, or aided and abetted such a breach, engaged
in self-dealing and misled BAC Holders, in connection with the proposed mergers.
The suit sought 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 commenced a second putative
class action (the Wingard Action) against the Defendants in the Chancery Court
(C.A. No 14604). The complaint in the Wingard Action contained virtually the
identical allegations and sought virtually the identical relief as in the Zakin
Action. The Court consolidated the two actions.
The Defendants denied that any of them committed or threatened to commit
any violations of law or breaches of duty to the BAC Holders.
On January 31, 1996, the Defendants and the plaintiffs and their respective
attorneys reached a tentative settlement of the Zakin and Wingard Actions
memorialized in a Memorandum of Understanding (the Memorandum), dated as of such
date. In accordance with the Memorandum, the merger agreements were amended on
January 31, 1996, to provide that (a) the aggregate cash consideration to be
paid to the BAC Holders of the Partnerships was increased by $8.5 million from
$150.0 million to $158.5 million (subject to the adjustment up or down based
upon Available Cash, as defined in the Restated Merger Agreement), and (b) the
aggregate amount payable in consideration for the Accrued Fees payable to CRI
for the Partnerships was reduced to no more than $2,000,000 (subsequently
reduced to $1,950,000) as compared with $4,023,000 provided for in the original
merger agreement. The Defendants also agreed that they would not object to an
application for attorneys' fees and reimbursement of out-of-pocket expenses of
plaintiffs' counsel for up to 20% of the improved merger consideration
negotiated by them with such fees and expenses as are awarded by the Court to
plaintiffs' counsel to be paid from the improved merger consideration negotiated
by them. Subsequently, the parties agreed that the maximum amount of fees and
expenses for the Partnerships, assuming the merger is consummated, shall be
$1,700,000, plus an amount equal to 20% (up to a maximum of $75,000) of any
adjustment amount at closing. These fees will reduce the cash paid to BAC
Holders in connection with the proposed merger, as discussed. In the event that
the proposed merger is not consummated, these fees will not be borne by the
Partnership. As such, the Partnership's financial statements do not include any
adjustment for these fees. Counsel for the plaintiffs and experts retained by
them reviewed voluminous documents relating to the proposed merger, and took
depositions of representatives of the General Partners and CAPREIT and
Oppenheimer and Co., Inc., the fairness opinion provider.
On May 16, 1996, the Defendants and the plaintiffs filed a Stipulation and
Agreement of Settlement with the Chancery Court, and sought preliminary approval
of the putative class (the Class) and approval of a form of notice to the Class
of the proposed Settlement. The Stipulation of Settlement contemplates the
complete discharge, settlement and release of all claims that have been, could
-56-
<PAGE>
PART II. OTHER INFORMATION
-----------------
ITEM 1. LEGAL PROCEEDINGS - Continued
-----------------
have been, or in the future might be asserted in any action or any other
proceeding in connection with the proposed merger. The Stipulation of
Settlement also permits plaintiffs to terminate the proposed settlement if, in
their opinion, a superior financial offer is presented for the Partnership.
On August 13, 1996, following further negotiations between counsel for the
plaintiffs and the Defendants and the failure of Dominium to come forward with a
firmly committed acquisition proposal superior to CAPREIT's by the date
specified by Dominium itself for delivery of an offer, CAPREIT agreed with
plaintiffs' counsel to increase the aggregate Redemption Prices being offered by
it to the BAC Holders by $2,000,000 and the parties entered into an amendment to
the Stipulation of Settlement pursuant to which CAPREIT agreed to so increase
the Redemption Prices and plaintiffs' counsel agreed to support the Stipulation
of Settlement, as improved by the amendment, notwithstanding any actions
Dominium has taken or in the future may take.
On August 14, 1996, at the fairness hearing on the Stipulation of
Settlement, as amended, in the Zakin and Wingard Actions, the Delaware Court of
Chancery certified the class of BAC Holders, found that the proposed settlement
was fair, reasonable, adequate and in the best interests of the BAC Holders,
approved the Stipulation of Settlement, awarded to plaintiffs' counsel fees in
the amount of $2 million and entered a final judgment dismissing the actions.
The 30-day period to appeal the final judgment expired with no appeal being
taken.
In response to Dominium's September 27 letter to BAC Holders voicing its
opposition to the proposed mergers, as discussed previously, on October 3, 1996,
the General Partner, CRI, the Partnership, CRITEF III CRITEF III LP, and CAPREIT
filed an action against Dominium and its principals in the United States
District Court for the Southern District of New York (Civ. Action No. 96 CIV
7684) alleging, among other things, that Dominium and its principals, in order
to disrupt the proposed mergers, were engaged in improper proxy solicitations
and had made false and misleading statements in violation of Federal securities
laws. The plaintiffs sought, among other things, an order barring the
defendants from soliciting BAC Holders prior to providing them with a proxy
statement and requiring Dominium to issue corrective disclosure with respect to,
among other things, its implication that it was intending to propose an
alternative offer to the BAC Holders. On October 11, 1996, the U.S. District
Court conducted a hearing on plaintiffs' motion for a preliminary injunction,
and on October 15, 1996, issued its opinion denying the plaintiffs' motion on
the grounds that it found no irreparable harm.
On September 27, 1996, the same day it mailed its first letter to BAC
Holders, Dominium filed an action in Federal District Court for the District of
Minnesota (Civ. Action No. 4-96 CIV 956) against Messrs. Dockser, Willoughby,
CRI, the Partnership, CRITEF III and the General Partners alleging that the
Proxy Statement was false and misleading in violation of Federal securities
laws. Dominium also moved for expedited discovery and a briefing order for a
preliminary injunction motion (which it never made). The defendants in the
Minnesota action denied the allegations and asserted various defenses,
including, among others, that Dominium's claims were barred by the settlement of
the Zakin and Wingard class action litigations relating to the proposed mergers.
The defendants also moved to disqualify Faegre & Benson, Dominium's principal
law firm, on the grounds that Faegre & Benson had a conflict of interest by
virtue of its concurrent representation of Dominium and various entities which
are participants in the financing for proposed mergers.
-57-
<PAGE>
PART II. OTHER INFORMATION
-----------------
ITEM 1. LEGAL PROCEEDINGS - Continued
-----------------
On October 8, 1996, the defendants in the Minnesota action filed with the
Delaware Court of Chancery an Emergency Motion to enforce the Court's Final
Order to enjoin Dominium from violating the Final Order entered in the Zakin and
Wingard Actions and for civil contempt on the grounds that Dominium was a class
member in the Zakin and Wingard Actions and had not opposed or opted out of the
proposed class settlement and was therefore bound by the settlement of those
actions.
On October 17, 1996, the Minnesota court issued a decision in the Minnesota
action denying Dominium's motion for expedited discovery, finding, among other
things, that Dominium already had virtually all of the information it sought and
that Dominium was unlikely to prevail in its argument that its claims were not
barred by the settlement reached in the Zakin and Wingard Actions.
On October 17, 1996, counsel for CAPREIT advised the Delaware court that,
in light of the ruling in Minnesota, it no longer sought any relief from the
Delaware court.
Following the postponement of the special meeting to be held on October 29,
1996, as discussed previously, CAPREIT and the General Partners discussed the
possibility of CAPREIT's increasing the consideration that it was offering to
BAC Holders in the proposed mergers, as set forth in the Fourth Amended
Agreement. At this time, CAPREIT also approached Dominium in an attempt to
settle its differences with Dominium and the outstanding litigations between
them and to solicit Dominium's support for the improved proposed merger terms it
was considering. Over the course of several days, CAPREIT negotiated with the
General Partners and Dominium in an effort to reach an agreement on improved
proposed merger terms and on November 6, 1996, CAPREIT agreed with the General
Partners to increase the aggregate consideration that it was offering BAC
Holders in the proposed mergers by approximately $6.5 million (or approximately
$0.60 per BAC) and the General Partners and CRI agreed to reduce by an aggregate
of $500,000 the amounts to be paid the General Partners and CRI upon
consummation of the proposed mergers. Dominium advised CAPREIT that, in its
view, the agreed upon merger consideration maximized BAC Holder values, and that
it would endorse and support the proposed mergers if the merger agreements were
amended to incorporate these terms.
In connection with CAPREIT's agreement to increase its merger offer and the
execution of the Restated Merger Agreement, on November 6, 1996, CAPREIT and
Dominium entered into a settlement agreement pursuant to which, among other
things, (i) each of the parties and certain of their affiliates and the
partnerships agreed to settle the various lawsuits between them and to release
all claims against the other arising from or relating to such actions, the
proposed mergers and the related transactions and their respective proxy
solicitation efforts; (ii) CAPREIT agreed to pay Dominium $500,000 upon signing
of the Restated Merger Agreement and to pay $2.5 million into escrow to be held
in escrow for a period of up to two years and to be paid to Dominium upon BAC
Holder approval of the proposed mergers or if CAPREIT otherwise acquires control
of the Partnerships, in consideration for Dominium's efforts in negotiating an
increase in the consideration being offered by CAPREIT in the proposed mergers
and the costs Dominium incurred in attempting to make a superior offer and
soliciting proxies in opposition to the proposed mergers; and (iii) Dominium
agreed to support the proposed mergers and related transactions, cease its
solicitation of proxies in opposition to the proposed mergers, and assist
CAPREIT and the Partnerships in soliciting proxies in favor of the proposed
mergers.
-58-
<PAGE>
PART II. OTHER INFORMATION
-----------------
ITEM 1. LEGAL PROCEEDINGS - Continued
-----------------
Martin C. Schwartzberg, formerly a general partner of the General Partner,
is a former shareholder and executive officer of CRI who retired from CRI as of
January 1, 1990. In connection therewith, he relinquished his general partner
duties for all CRI-sponsored partnerships, including those of the General
Partner. In February 1996, Mr. Schwartzberg publicly stated that he would
oppose the proposed merger until the Partnership made its financial statements
and the financial statements of the Owner Partnerships publicly available. The
financial statements of the Partnership are included in this Form 10-Q and have
been filed quarterly. The financial statements of the Owner Partnerships were
filed as exhibits to Current Reports on Form 8-K, filed with the SEC by the
Partnership on March 25, 1996. As discussed below, Mr. Schwartzberg has since
reviewed the requested information and has determined to support the merger.
On November 9, 1995, CRI filed a complaint seeking declaratory relief in
the Circuit Court for Montgomery County, Maryland (the Montgomery Circuit Court)
against Capital Management Strategies, Inc. (CMS), a company controlled by Mr.
Schwartzberg, to determine the proper amount of fees to be paid in 1996 under an
asset management agreement. CMS answered the complaint on January 10, 1996, but
asserted no counterclaims. Thereafter, Mr. Schwartzberg launched a hostile
consent solicitation to be designated as managing general partner of 125
private partnerships sponsored by CRI.
On January 18, 1996, Mr. Schwartzberg and CMS filed a complaint in the
Montgomery County, Maryland Circuit Court, against CRI and Messrs. Dockser and
Willoughby alleging, among other things, that the actions of CRI and Messrs.
Dockser and Willoughby in connection with the proposed merger involved self-
dealing and constituted a breach of their fiduciary duties to Mr. Schwartzberg.
Neither the Partnership nor the General Partner was named as a defendant in this
action, and Mr. Schwartzberg did not allege that he was a BAC Holder. Messrs.
Dockser and Willoughby entered an answer denying all of Mr. Schwartzberg's
claims and moved to dismiss or strike the allegations concerning the Partnership
and CRIIMI MAE Inc. Messrs. Dockser and Willoughby publicly responded that Mr.
Schwartzberg's suit was motivated by his budget dispute with CRI and personal
animosity.
On February 15, 1996, Mr. Schwartzberg filed suit in the New Castle County,
Delaware Chancery Court (the Chancery Court) against the General Partners
alleging that he had made demands upon the General Partners, in his capacity as
a general and limited partner of the General Partner and a limited partner of
CRITEF III LP, to inspect and obtain copies of the BAC Holder lists and other
documents and that his demands were rejected. On February 23, 1996, the General
Partners answered the complaint, admitting that his demands had been rejected
and denying that Mr. Schwartzberg was entitled to the materials requested
because, among other things, he lacked standing and proper purpose to inspect
and obtain copies of the requested materials. Following a hearing on March 6
and 7, 1996, on June 7, 1996, the Chancery Court denied Mr. Schwartzberg's
request for relief, holding that Mr. Schwartzberg's request was for an "improper
purpose" under Delaware law.
On February 16, 1996, the Partnerships, together with the General Partners,
CRI, and CAPREIT, filed suit against Mr. Schwartzberg in the United States
District Court for the Southern District of New York (the New York Action). The
complaint alleged that Mr. Schwartzberg was engaged in an unlawful solicitation
of proxies of the BAC Holders through two press releases he issued. On March
18, 1996, the District Court enjoined Mr. Schwartzberg from (1) making any
further solicitation of BAC Holders within the meaning of Section 14(a) of the
Securities Exchange Act of 1934 without complying with SEC regulations, and (2)
-59-
<PAGE>
PART II. OTHER INFORMATION
-----------------
ITEM 1. LEGAL PROCEEDINGS - Continued
-----------------
committing any violation of Rule 14a-9 promulgated under the Securities Exchange
Act (regarding false or misleading statements) in connection with any
solicitation relating to the Partnerships.
On March 18, 1996, Mr. Schwartzberg filed a counterclaim against the
General Partners alleging that three press releases issued by the General
Partners and the Partnerships constituted solicitations in violation of the
Securities Exchange Act and that they were false and misleading. The counter-
defendants denied the allegations. On April 23, 1996, the District Court denied
Mr. Schwartzberg's motion for an injunction. The District Court held that an
injunction was unwarranted, given the scope and extent of Mr. Schwartzberg's
prospects for succeeding on the merits, and the fact that he could show neither
a sufficient threat of irreparable injury nor a balance in his favor of the
hardships associated with granting or denying an injunction.
On June 12, 1996, Mr. Schwartzberg withdrew as a general partner of the
General Partner of the Partnership, converting his interest to that of a special
limited partner.
Pursuant to the resolution of the various disputes between Mr.
Schwartzberg, and CRI and its affiliates, the actions in the United States
District Court for the Southern District of New York were dismissed with
prejudice and the injunction against Mr. Schwartzberg was dissolved on August 8,
1996. All other pending litigation between Mr. Schwartzberg and CRI, Mr.
Dockser, and Mr. Willoughby is to be dismissed.
After extensive review of the merger agreements, the Partnerships'
financial statements and other materials and pursuant to the terms of the
agreement between CAPREIT and Mr. Schwartzberg and CMS (the CAPREIT Agreement),
Mr. Schwartzberg has advised CAPREIT, the General Partners and the Partnerships
that he and his family members and entities under his control (the Schwartzberg
Entities) will vote their BACs in favor of the proposed merger and in accordance
with the recommendations of the General Partners. In connection therewith, the
Schwartzberg Entities have agreed to grant to CAPREIT an irrevocable proxy to
vote their interests in the Partnerships.
The Schwartzberg Entities have agreed not to attempt to (i) dispose of or
acquire any interest in the Partnerships or join or participate with any group
seeking to do the same, (ii) solicit proxies or participate in a solicitation in
opposition to the proposed merger, in opposition to the recommendations of the
General Partners with respect to the proposed merger, or to remove the General
Partners or seek to have himself or his designee become a general partner of the
Partnerships, (iii) make any public statements in opposition to the proposed
merger, (iv) make any public statements with respect to, or offer, solicit, or
submit a proposal relating to consolidation or combination with the
Partnerships, or the admission of new general partners into the Partnerships.
In addition, Mr. Schwartzberg disclosed that he had discussions with Lenner
Corp. regarding the terms of the offer and the submission of a competing bid.
Lenner Corp. declined to submit a competing offer to the Partnership and has
entered into a confidentiality and standstill agreement with CAPREIT regarding
the proposed merger and the Partnerships.
Provided that the Schwartzberg Entities comply with the terms of the
CAPREIT Agreement, CAPREIT is obligated to cause to be paid into escrow the
aggregate amount of $867,000 in four installments over a three year period.
These funds will be used for the partial payment of Mr. Schwartzberg's counsel
-60-
<PAGE>
PART II. OTHER INFORMATION
-----------------
ITEM 1. LEGAL PROCEEDINGS - Continued
-----------------
and consultants in connection with their review of the merger agreements, drafts
of the preliminary and definitive proxy statements filed with the SEC on July
17, 1996 and September 20, 1996, respectively, financial information of the
Partnership, Partnership documents, Delaware-related claims, and other
documents. CRI will provide CAPREIT with $400,000 in respect of CAPREIT's
obligations under the CAPREIT Agreement, counsel for the plaintiffs in the Zakin
and Wingard Actions will provide $100,000 in respect of such payments and Mr.
Schwartzberg will provide $33,500 of such payments. No such payments other than
the first installment will be paid into escrow until the proposed merger has
been consummated and each of the payments is contingent upon there having been
no defaults on the part of the Schwartzberg Entities or under the third party
standstill agreement.
The Schwartzberg Entities are personally liable to CAPREIT for any breaches
occasioned by them of the CAPREIT Agreement. Mr. Schwartzberg has covenanted to
CAPREIT that he will maintain a net worth of at least $3.5 million through
December 31, 2002. In the event that the Schwartzberg Entities are in default
under the CAPREIT Agreement as a result of a violation of a third party
standstill agreement, Mr. Schwartzberg shall pay CAPREIT liquidated damages in
accordance with the terms of the CAPREIT Agreement.
An agreement among Mr. Schwartzberg, CMS and CRI (the CRI Agreement), dated
June 12, 1996, in addition to providing that Mr. Schwartzberg will not oppose
the proposed mergers, also provides for a resolution of all disputes between CRI
and Mr. Schwartzberg. As part of the CRI Agreement, Mr. Schwartzberg and CRI
have all agreed not to take any actions which might interfere with each others'
businesses. Mr. Schwartzberg has also retracted any derogatory statements that
he previously made about CRI, its principals, and the proposed merger, and has
promised not to make any similar statements in the future. Although the CRI
Agreement provides that it is legally binding, that agreement contemplates
execution of a more detailed agreement and the exchange of full general releases
between Mr. Schwartzberg and CRI, and Messrs. Dockser and Willoughby.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
---------------------------------------------------
On September 20, 1996, the General Partner of the Partnership initiated a
solicitation of proxies pursuant to Section 14A of the Securities Exchange Act
of 1934 (the Proxy) to vote upon the proposed mergers and related transactions,
as discussed previously. The special meeting date for BAC Holders of record as
of September 19, 1996 was initially scheduled for October 29, 1996, but was
subsequently postponed.
On October 16, 1996, Dominium initiated a solicitation of proxies pursuant
to Section 14A of the Securities Exchange Act of 1934 (the Dominium Proxy) to
oppose the proposed merger at the special meeting.
On October 28, 1996, the General Partner announced a postponement of the
special meeting until November 8, 1996 to give BAC Holders more opportunity to
vote in view of the competing proxy solicitations from Dominium, as discussed
previously.
In connection with CAPREIT's agreement to increase its merger offer and the
execution of the Restated Merger Agreement, on November 6, 1996, CAPREIT and
Dominium entered into a settlement agreement pursuant to which, among other
things, (i) each of the parties and certain of their affiliates and the
-61-
<PAGE>
PART II. OTHER INFORMATION
-----------------
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS - Continued
---------------------------------------------------
partnerships agreed to settle the various lawsuits between them and to release
all claims against the other arising from or relating to such actions, the
proposed mergers and the related transactions and their respective proxy
solicitation efforts; (ii) CAPREIT agreed to pay Dominium $500,000 upon signing
of the Restated Merger Agreement and to pay $2.5 million into escrow to be held
in escrow for a period of up to two years and to be paid to Dominium upon BAC
Holder approval of the proposed mergers or if CAPREIT otherwise acquires control
of the Partnerships, in consideration for Dominium's efforts in negotiating an
increase in the consideration being offered by CAPREIT in the proposed mergers
and the costs Dominium incurred in attempting to make a superior offer and
soliciting proxies in opposition to the proposed mergers; and (iii) Dominium
agreed to support the proposed mergers and related transactions, cease its
solicitation of proxies in opposition to the proposed mergers, and assist
CAPREIT and the Partnerships in soliciting proxies in favor of the proposed
mergers. The Partnership incurred no costs in connection with the settlement
between CAPREIT and Dominium.
On November 7, 1996, the Restated Merger agreement was amended to reflect
(i) an increase in the aggregate consideration offered by the CAPREIT affiliate
to BAC Holders, (ii) a decrease in consideration to be paid to the General
Partners and CRI in the aggregate amount of $500,000, and an extension of the
termination date until February 28, 1997. Dominium advised CAPREIT that, in its
view, the new merger consideration maximized BAC Holder values, and that it
would endorse and support the proposed mergers.
On November 8, 1996, the General Partner of the Partnership filed a
supplement to the Joint Proxy Statement regarding solicitation of proxies
pursuant to Section 14A of the Securities Exchange Act of 1934 (the Proxy
Supplement). The special meeting date for BAC Holders of record as of November
12, 1996 is rescheduled for November 27, 1996.
The purpose of the Proxy Supplement is to solicit approval for the
following items:
i. Approval and adoption of the Restated Merger Agreement among the
Partnership, an affiliate of CAPREIT, the General Partner and others.
Upon consummation of the proposed merger, all of the BACs would be
redeemed for cash at a redemption price of $15.42 per BAC, net to the
holder, without interest, subject to upward adjustment based on
Available Cash (as defined in the Restated Merger Agreement) to not
greater than $15.629 per BAC for Series I, and $15.11 per BAC, net to
the holder, without interest, subject to upward adjustment based on
Available Cash to not greater than $15.319 per BAC for Series II.
ii. Approval of the sale of the Partnership's General Partner's 1.01%
interest to an affiliate of CAPREIT immediately prior to the
consummation of the proposed merger in exchange for $400,000 and the
substitution of the CAPREIT affiliate as general partner in its stead.
iii. Any adjournments of the special meetings to allow for the additional
solicitation of BAC Holder votes in order to obtain more votes in
favor of items i. and ii. above.
Under the Proxy Supplement, BAC Holders have an opportunity to recast their
previous votes. However, if a new vote is not cast, the last vote submitted for
either the Proxy or the Dominium Proxy will constitute the actual vote under the
Proxy Supplement.
-62-
<PAGE>
PART II. OTHER INFORMATION
-----------------
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS - Continued
---------------------------------------------------
The following is a tabulation of the votes cast under the Proxy Supplement
as of November 11, 1996:
SERIES I and II
---------------
Votes For Votes Against Abstained
--------- ------------- ---------
i. 41.4% 25.1% 1.8%
ii. 41.3% 25.2% 1.8%
iii. 41.4% 24.5% 2.3%
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
--------------------------------
A report on Form 8-K was filed with the Commission on August 28, 1996
regarding improved terms of the proposed merger with an affiliate of CAPREIT, as
set forth in the Fourth Amended Agreement, as well as the settlement and
dismissal of a consolidated class action suit related to the proposed merger.
Additionally, a report on Form 8-K was filed with the Commission on
November 8, 1996 regarding further improved terms of the proposed merger with an
affiliate of CAPREIT, as set forth in the Restated Merger Agreement. The report
also announced settlement of various disputes between CAPREIT and Dominium, and
Dominium's support of the improved proposed merger terms. Lastly, the report
announced the rescheduling of the special meetings of BAC Holders on record as
of November 12, 1996 to vote on the proposed mergers until November 27, 1996.
All other items are not applicable.
-63-
<PAGE>
SIGNATURE
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, Registrant has duly caused this report to be signed on its
behalf by the undersigned, thereunto duly authorized.
Capital Realty Investors Tax Exempt
Fund Limited Partnership
By: CRITEF Associates Limited
Partnership
General Partner
By: C.R.I., Inc.
General Partner
November 14, 1996 By: /s/ Deborah K. Browning
- ---------------------- --------------------------------
Date Deborah K. Browning
Vice President/Chief Accounting
Officer
Signing on behalf of the Registrant
and as Principal Accounting Officer
-64-
<PAGE>
EXHIBIT INDEX
-------------
Exhibit Method of Filing
- ------- -----------------------------
27 Financial Data Schedule Filed herewith electronically
-65-
WARNING: THE EDGAR SYSTEM ENCOUNTERED ERROR(S) WHILE PROCESSING THIS SCHEDULE.
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM
THE THIRD QUARTER 10-Q AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE
TO SUCH 10-Q.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-START> JAN-01-1996
<PERIOD-END> SEP-30-1996
<CASH> 82,027
<SECURITIES> 2,100,000
<RECEIVABLES> 0
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 0
<PP&E> 0
<DEPRECIATION> 0
<TOTAL-ASSETS> 32,938,800
<CURRENT-LIABILITIES> 0
<BONDS> 0
0
0
<COMMON> 0
<OTHER-SE> 32,053,918
<TOTAL-LIABILITY-AND-EQUITY> 32,938,800
<SALES> 0
<TOTAL-REVENUES> 2,456,951
<CGS> 0
<TOTAL-COSTS> 0
<OTHER-EXPENSES> 429,861
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> 2,027,090
<INCOME-TAX> 0
<INCOME-CONTINUING> 2,027,090
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 2,027,090
<EPS-PRIMARY> 0.88
<EPS-DILUTED> 0.88
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM
THE THIRD QURTER 10-Q AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE
TO SUCH 10-Q.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-START> JAN-01-1996
<PERIOD-END> SEP-30-1996
<CASH> 14,979
<SECURITIES> 3,230,917
<RECEIVABLES> 0
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 0
<PP&E> 0
<DEPRECIATION> 0
<TOTAL-ASSETS> 47,055,156
<CURRENT-LIABILITIES> 0
<BONDS> 0
0
0
<COMMON> 0
<OTHER-SE> 45,868,444
<TOTAL-LIABILITY-AND-EQUITY> 47,055,156
<SALES> 0
<TOTAL-REVENUES> 3,430,101
<CGS> 0
<TOTAL-COSTS> 0
<OTHER-EXPENSES> 463,177
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> 2,966,924
<INCOME-TAX> 0
<INCOME-CONTINUING> 2,966,924
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 2,966,924
<EPS-PRIMARY> 0.91
<EPS-DILUTED> 0.91
</TABLE>
