<PAGE>
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K/A
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 1995
-----------------
Commission file number 1-12034
-----------------
CAPITAL REALTY INVESTORS TAX EXEMPT FUND III LIMITED PARTNERSHIP
- --------------------------------------------------------------------------
(Exact name of registrant as specified in its charter)
Delaware 52-1551450
- ----------------------------------------- ---------------------
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
11200 Rockville Pike, Rockville, Maryland 20852
- ----------------------------------------- ---------------------
(Address of principal executive offices) (Zip Code)
(Registrant's telephone number, including area code) (301) 468-9200
------------------
Securities registered pursuant to Section 12(b) of the Act:
Name of each exchange
Title of each class on which registered
- --------------------------------- -----------------------------
Beneficial Assignee Certificates American Stock Exchange
Securities registered pursuant to Section 12(g) of the Act:
NONE
- --------------------------------------------------------------------------
(Title of class)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.
Yes [X] No[ ]
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [X]
As of April 23, 1996, 5,258,268 Series A Beneficial Assignee Certificates
(BACs) were outstanding and the aggregate market value of such BACs held by non-
affiliates of the Registrant on such date was $73,580,752.
DOCUMENTS INCORPORATED BY REFERENCE
Form 10-K Parts Document
- ------------------ ---------------------------------------
I, II, III and IV 1995 Annual Report to BAC Holders
<PAGE>
CAPITAL REALTY INVESTORS TAX EXEMPT FUND III LIMITED PARTNERSHIP
1995 ANNUAL REPORT ON FORM 10-K
TABLE OF CONTENTS
PART I
------
Page
----
Item 1. Business . . . . . . . . . . . . . . . . . . . . . I-1
Item 2. Properties . . . . . . . . . . . . . . . . . . . . I-1
Item 3. Legal Proceedings . . . . . . . . . . . . . . . . . I-1
Item 4. Submission of Matters to a Vote
of Security Holders . . . . . . . . . . . . . . . I-1
PART II
-------
Item 5. Market for the Registrant's Partnership
Interests and Related Partnership Matters . . . . II-1
Item 6. Selected Financial Data . . . . . . . . . . . . . . II-1
Item 7. Management's Discussion and Analysis
of Financial Condition and Results
of Operations . . . . . . . . . . . . . . . . . . II-1
Item 8. Financial Statements and Supplementary Data . . . . II-2
Item 9. Changes in and Disagreements with Accountants
on Accounting and Financial Disclosure . . . . . II-2
PART III
--------
Item 10. Directors and Executive Officers
of the Registrant . . . . . . . . . . . . . . . . III-1
Item 11. Executive Compensation . . . . . . . . . . . . . . III-2
Item 12. Security Ownership of Certain Beneficial
Owners and Management . . . . . . . . . . . . . . III-3
Item 13. Certain Relationships and Related Transactions . . III-4
PART IV
-------
Item 14. Exhibits, Financial Statement Schedules and
Reports on Form 8-K . . . . . . . . . . . . . . . IV-1
Signatures . . . . . . . . . . . . . . . . . . . . . . . . IV-4
Cross Reference Sheet . . . . . . . . . . . . . . . . . . . . IV-5
Exhibit Index . . . . . . . . . . . . . . . . . . . . . . . . IV-6
<PAGE>
PART I
------
ITEM 1. BUSINESS
--------
Development and Description of Business
---------------------------------------
Information concerning the business of Capital Realty Investors Tax
Exempt Fund III Limited Partnership (the Partnership) is contained in the
1995 Annual Report to BAC Holders which contains Management's Discussion
and Analysis of Financial Condition and Results of Operations and Notes 1,
5 and 7 of the notes to financial statements. The Annual Report is
contained in Part IV (filed in response to Item 8 hereof), which is
incorporated herein by reference.
Employees
---------
The Partnership has no employees. Services are performed for the
Partnership by affiliates of the General Partner and agents retained by
them.
ITEM 2. PROPERTIES
----------
The Partnership has invested in eight mortgage revenue bonds and three
working capital loans for which underlying first mortgages on eight
residential projects have been assigned to the Partnership as collateral.
A description of these projects is contained in the 1995 Annual Report to
BAC Holders which contains Management's Discussion and Analysis of
Financial Condition and Results of Operations and Notes 1 and 5 of the
notes to financial statements. The Annual Report is contained in Part IV
(filed in response to Item 8 hereof), which is incorporated herein by
reference.
ITEM 3. LEGAL PROCEEDINGS
-----------------
Reference is made to Note 8 of the notes to financial statements on
page 52 of the 1995 Annual Report to BAC Holders, which is incorporated
herein by reference.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
---------------------------------------------------
No matters were submitted to a vote of security holders during the
fourth quarter of 1995.
I-1
<PAGE>
PART II
--------
ITEM 5. MARKET FOR THE REGISTRANT'S PARTNERSHIP INTERESTS AND
-----------------------------------------------------
RELATED PARTNERSHIP MATTERS
---------------------------
(a) Market information.
Reference is made to the Selected Financial Data on pages 1 through 3
of the 1995 Annual Report to BAC Holders which is incorporated herein by
reference.
(b) Number of Security Holders.
As of December 31, 1995, there were approximately 6,200 registered
holders of BACs in the Partnership.
(c) Distributions.
Reference is made to the Selected Financial Data on pages 1 through 3
of the 1995 Annual Report to BAC Holders which is incorporated herein by
reference.
See Management's Discussion and Analysis of Financial Condition and
Results of Operations contained in the 1995 Annual Report to BAC Holders,
which is incorporated herein by reference, for information regarding the
sources of funds used for cash distributions and for a discussion of
factors which may affect the Partnership's ability to maintain cash
distributions at current levels.
ITEM 6. SELECTED FINANCIAL DATA
-----------------------
Reference is made to Selected Financial Data on pages 1 through 3 of
the 1995 Annual Report to BAC Holders, which is incorporated herein by
reference.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
-------------------------------------------------
CONDITION AND RESULTS OF OPERATIONS
-----------------------------------
Reference is made to Management's Discussion and Analysis of Financial
Condition and Results of Operations on pages 4 through 23 of the 1995
Annual Report to BAC Holders, which is incorporated herein by reference.
II-1
<PAGE>
PART II
-------
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
-------------------------------------------
Reference is made to pages 24 through 28 of the 1995 Annual Report to
BAC Holders for the financial statements of the registrant, which are
incorporated herein by reference. See also Item 14 of this report for
information concerning financial statements and financial statement
schedules.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON
------------------------------------------------
ACCOUNTING AND FINANCIAL DISCLOSURE
-----------------------------------
None.
II-2
<PAGE>
PART III
--------
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
--------------------------------------------------
(a), (b) and
(c) The Partnership has no directors, executive officers or
significant employees of its own.
(a), (b), (c)
and (e) The names, ages and business experience of the directors and
executive officers of C.R.I., Inc. (CRI), the Managing General
Partner of the Partnership, are as follows:
William B. Dockser, 59, has been the Chairman of the Board of CRI and a Director
since 1974. Prior to forming CRI, he served as President of Kaufman and Broad
Asset Management, Inc., an affiliate of Kaufman and Broad, Inc., which managed a
number of publicly held limited partnerships created to invest in low and
moderate income multifamily apartment complexes. For a period of 2-1/2 years
prior to joining Kaufman and Broad, he served in various positions at HUD,
culminating in the post of Deputy FHA Commissioner and Deputy Assistant
Secretary for Housing Production and Mortgage Credit, where he was responsible
for all federally insured housing production programs. Before coming to
Washington, Mr. Dockser was a practicing attorney in Boston and also was a
special Assistant Attorney General for the Commonwealth of Massachusetts. He
holds a Bachelor of Laws degree from Yale University Law School and a Bachelor
of Arts degree, cum laude, from Harvard University. He is also Chairman of the
Board of CRIIMI MAE Inc., CRIIMI, Inc. and CRI Liquidating REIT, Inc.
H. William Willoughby, 49, President, Secretary and a Director of CRI since
January 1990 and Senior Executive Vice President, Secretary and a Director of
CRI from 1974 to 1989. He is principally responsible for the financial
management of CRI and its associated partnerships. Prior to joining CRI in
1974, he was Vice President of Shelter Corporation of America and a number of
its subsidiaries dealing principally with real estate development and equity
financing. Before joining Shelter Corporation, he was a senior tax accountant
with Arthur Andersen & Company. He holds a Juris Doctorate degree, a Master of
Business Administration degree and a Bachelor of Science degree in Business
Administration from the University of South Dakota. He is also a Director and
executive officer of CRIIMI MAE Inc., CRIIMI, Inc. and CRI Liquidating REIT,
Inc.
Richard J. Palmer, 44, Senior Vice President-Chief Financial Officer. Prior to
joining CRI in 1983 as Director of Tax Policy, he was a Tax Manager at Grant
Thornton (formerly Alexander Grant & Company). He also served in the Tax and
Audit Departments of Peat, Marwick, Main and Company (formerly Peat, Marwick,
Mitchell and Company) prior to his seven years at Grant Thornton. He holds a
Bachelor of Business Administration degree from the Florida Atlantic University
and is also a Certified Public Accountant.
III-1
<PAGE>
PART III
--------
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT - Continued
--------------------------------------------------
Ronald W. Thompson, 49, Group Executive Vice President-Hotel Asset Management.
Prior to joining CRI in 1985, he was employed at the Hyatt Organization where he
most recently served as the General Manager of the Hyatt Regency in Flint,
Michigan. During his nine year tenure with Hyatt, he held senior management
positions with the Hyatt Regency in Dearborn, Michigan, the Hyatt in Richmond,
Virginia, the Hyatt in Winston-Salem, North Carolina and the Hyatt Regency in
Atlanta, Georgia. Before joining Hyatt, Mr. Thompson worked in London, England
for the English Tourist Board as well as holding management positions in Europe,
Australia, and New Zealand in the hotel industry. Mr. Thompson received his
education in England where he received a business degree in Hotel Administration
from Winston College.
Susan R. Campbell, 37, Senior Vice President-CRI Realty Services. Prior to
joining CRI in March 1985, she was a budget analyst for the B. F. Saul Advisory
Company. She holds a Bachelor of Science degree in General Business from the
University of Maryland.
Melissa Cecil Lackey, 40, Senior Vice President and General Counsel. Prior to
joining CRI in 1990, she was associated with the firms of Zuckerman, Spaeder,
Goldstein, Taylor & Kolker in Washington, D.C. and Hirsch & Westheimer in
Houston, Texas. She holds a Juris Doctorate from the University of Virginia
School of Law and a Bachelor of Arts degree from the College of William & Mary.
(d) There is no family relationship between any of the foregoing directors
and executive officers.
(f) Involvement in certain legal proceedings.
None.
(g) Promoters and control persons.
Not applicable.
ITEM 11. EXECUTIVE COMPENSATION
---------------------
(a), (b), (c) and (d)
The Partnership has no officers or directors. However, in accordance
with the Partnership Agreement and as disclosed in the Partnership's
Registration Statement on Form S-11, as amended, various kinds of
compensation and fees are payable or were paid to the General Partner
and/or its affiliates. Additional information required in these sections
is included in Notes 3 and 4 to the financial statements contained in Part
IV (filed in response to Item 8 hereof), which are incorporated herein by
reference.
(e) Termination of employment and change in control arrangement.
None.
III-2
<PAGE>
PART III
--------
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND
--------------------------------------------------
MANAGEMENT
----------
(a) Security ownership of certain beneficial owners
No person or "group", as that term is used in Section 13(d)(3) of the
Securities Exchange Act of 1934, is known by the Partnership to be the
beneficial owner of more than 5% of the issued and outstanding BACs as of
December 31, 1995.
(b) Security ownership of management
The following table sets forth certain information concerning all BACs
beneficially owned, as of April 23, 1996, by each director and by all
directors and officers as a group of the managing general partner of the
Partnership's General Partner. The voting and investment powers for the
BACs listed are held solely by the named beneficial owner. The General
Partner, which controls the day-to-day operations of the Partnership, is a
limited partnership whose managing general partner is CRI. Mr. Dockser and
Mr. Willoughby control CRI.
<TABLE>
<CAPTION>
Name of Amount and Nature % of total
Beneficial Owner of Beneficial Ownership BACs issued
- ---------------- ----------------------- -----------
<S> <C> <C>
William B. Dockser 500 BACs 0.01%
H. William Willoughby None 0.00%
All Directors and Officers
as a Group (6 persons) 2,500 BACs 0.05%
</TABLE>
(c) Changes in control.
There exists no arrangement known to the Partnership, the operation of
which may at a subsequent date result in a change in control of the
Partnership, with the exception of the merger agreement with an affiliate
of Capital Apartment Properties, Inc., as discussed in Management's
Discussion and Analysis of Financial Condition and Results of Operations
and Note 7 of the notes to financial statements, which are incorporated
herein by reference. There is a provision in the Limited Partnership
Agreement which allows, under certain circumstances, the ability to change
control.
III-3
<PAGE>
PART III
--------
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
----------------------------------------------
(a) Transactions with management and others.
The Partnership has no directors or officers. In addition, the
Partnership has had no transactions with individual officers or directors
of the managing general partner of the General Partner of the Partnership
other than any indirect interest such officers and directors may have (i)
in the amounts paid to the General Partner or its affiliates by virtue of
their stock ownership in CRI, as disclosed in Part IV, Item 14, in Note 3
of the notes to consolidated financial statements, which is incorporated
herein by reference; (ii) as shareholders in corporations that are partners
in partnerships that hold title to properties, subject to the existing
indebtedness, as a consequence of deeds in lieu of foreclosure from, or
transfers of partnership interests in, former borrowers; and/or (iii) in
the amounts paid to individual officers and directors of the General
Partner with respect to distributions in connection with BACs held by such
individuals.
Seven out of the eight loans on properties securing mortgage revenue
bonds held by the Partnership defaulted when they were unable to pay full
base interest on their respective loans. (One of the seven properties
successfully performed under a workout arrangement affecting the taxable
working capital mortgage loan only.) The primary goal of the Partnership
in dealing with the defaults was to attempt to preserve the tax-exempt
nature of interest on the mortgage revenue bonds. Accordingly, the
Partnership never declared a default under a mortgage revenue bond, only
under the associated loan. Entities (Owner Partnerships) were formed to
take title to the defaulted properties from the unrelated borrowers and
assume the existing indebtedness. These new entities were carefully
structured so as not to cause the Partnership to be a substantial user of
the properties or a party related to a substantial user. In most cases,
when title to the property was transferred to the Owner Partnership, the
related mortgage revenue bond was not amended. However, the new borrower
agreed to pay the loan to the Partnership on a cash flow basis. The Owner
Partnership also agreed that the Partnership would accrue interest on any
unpaid base interest at the base interest rate, with deferred base interest
and interest accrued thereon to be payable at the same priority level as
base interest itself under the existing loan agreement. In this way, the
Partnership is able to maintain the same effective yield on the mortgage
revenue bonds. Although distributions by the Partnership are lower than
anticipated in the prospectuses because most of the properties are unable
to pay full base interest, the Partnership continues to treat the interest
payments from the net cash flow of the properties as tax-exempt interest
income. Any taxable income of the Partnership consists of de minimus
interest on taxable investments held in the Partnership's reserves or
interest on three taxable working capital loans. In the case of Geary
Courtyard, an Owner Corporation assumed the partnership interests in the
original borrower. The Owner Partnerships or Owner Corporation and the
managing general partner of the General Partner of the Partnership have
common ownership (except for Ethan's Glen IIA prior to March 14, 1996) and
are under common control. No compensation or fees were paid by the
Partnership to the Owner Partnerships or Owner Corporation or their
principals in connection with the transfers of ownership. Item 11 of this
report, which contains a discussion of the fees and other compensation paid
or accrued by the Partnership to the General Partner or its affiliates, is
incorporated herein by reference.
III-4
<PAGE>
PART III
--------
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS - Continued
----------------------------------------------
PROPERTY OWNER PARTNERSHIP OR CORPORATION
----------------- ----------------------------------------------
Ethan's Glen IIA CRICO of Ethan's II Limited Partnership
---------------------------------------
General Partner: CRICO of Ethan's II, Inc.
Limited Partners: CRICO of Iona, Inc. and three
unrelated parties (the interest of which un-
related parties were terminated effective
March 14, 1996)
Geary Courtyard Geary Courtyard Associates
--------------------------
General Partner: CRICO of Geary Courtyard, Inc.
Limited Partner: CRICO Holdings, Inc.
Regency Woods CRICO of Regency Woods Limited Partnership
------------------------------------------
General Partner: CRICO of Regency Woods, Inc.
Limited Partner: CRICO Holdings, Inc.
Ocean Walk CRICO of Ocean Walk Limited Partnership
---------------------------------------
General Partner: CRICO of Ocean Walk, Inc.
Limited Partner: CRICO Holdings, Inc.
Valley Creek II CRICO of Valley Creek II Limited Partnership
--------------------------------------------
General Partner: CRICO of Valley Creek II, Inc.
Limited Partner: CRICO Minnesota Holdings, Inc.
Woodlane Place CRICO of Woodlane Place Limited Partnership
-------------------------------------------
General Partner: CRICO of Woodlane Place, Inc.
Limited Partner: CRICO Minnesota Holdings, Inc.
(b) Certain business relationships.
The Partnership's response to Item 13(a) is incorporated herein by
reference. In addition, the Partnership has no business relationship with
entities of which the general partners of the General Partner of the
Partnership are officers, directors or equity owners other than as set
forth in the Partnership's response to Item 13(a).
(c) Indebtedness of management.
None.
(d) Transactions with promoters.
Not applicable.
III-5
<PAGE>
PART IV
-------
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS
---------------------------------------------------
ON FORM 8-K
-----------
(a) List of documents filed as part of this report:
(1) Financial Statements Page(s)
-------------------- -------
Reports of Independent Public Accountants 24
Reports of Independent Public Accountants on
which Arthur Andersen LLP placed
reliance in 1993 IV-7
Balance Sheets as of December 31, 1995
and 1994 25
Statements of Operations for the years ended
December 31, 1995, 1994 and 1993 26
Statements of Changes in Partners' Capital
(Deficit) for the years ended December 31,
1995, 1994 and 1993 27
Statements of Cash Flows for the years ended
December 31, 1995, 1994 and 1993 28
Notes to Financial Statements which include
the information required to be included in
Schedule XII - Mortgage Loans on Real Estate
(Note 5) and pursuant to Staff Accounting
Bulletin 71 (Note 10) 29-58
(2) Financial Statement Schedules
-----------------------------
All financial statement schedules are omitted since they are
not required, are inapplicable, or the required information is
included in the financial statements or notes thereto.
(3) Exhibits (listed according to the number assigned in the table in
Item 601 of Regulation S-K).
Exhibit No. 3 - Articles of incorporation and bylaws
a. Certificate of Limited Partnership of Capital Realty
Investors Tax Exempt Fund III Limited Partnership.
(Incorporated by reference from Exhibit 3 to the Regis-
trant's Post-Effective Amendment No. 3, dated January 30,
1989, to the Registration Statement on Form S-11.)
Exhibit No. 4 - Instruments defining the rights of security
holders, including indentures
a. Agreement of Limited Partnership of Capital Realty Investors
Tax Exempt Fund III Limited Partnership. (Incorporated by
reference from Exhibit 4 to the Registrant's Post-Effective
Amendment No. 3, dated January 30, 1989, to the Registration
IV-1
<PAGE>
PART IV
-------
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS
---------------------------------------------------
ON FORM 8-K - Continued
-----------
Statement on Form S-11.)
Exhibit No. 10 - Material contracts
a. Beneficial Assignee Certificate. (Incorporated by reference
from Exhibit 10A to the Registrant's Post-Effective
Amendment No. 1, dated February 1, 1988, to the Registration
Statement on Form S-11.)
b. Amended and Restated Agreement and Plan of Merger, dated as
of March 14, 1996. (Incorporated by reference from Appendix
A-1 to the Registrant's Preliminary Proxy Statement Pursuant
to Section 14(a) of the Securities and Exchange Act of 1934
filed March 18, 1996.)
Exhibit No. 13 - Annual Report to security holders, Form 10-Q or
quarterly report to security holders
a. 1995 Annual Report to BAC Holders.
Exhibit No. 27 - Financial Data Schedule
Exhibit No. 99 - Additional Exhibits
a. Financial Statements and Independent Auditors' Report CRICO
of Ocean Walk Limited Partnership December 31, 1995.
(Incorporated by reference to the Registrants Form 8-K filed
March 25, 1996.)
b. Financial Statements and Independent Auditors' Report CRICO
of Ocean Walk Limited Partnership December 31, 1994.
(Incorporated by reference to the Registrants Form 8-K filed
March 25, 1996.)
(b) Report on Form 8-K
------------------
No Reports on Form 8-K were filed with the Commission during the
quarter ended December 31, 1995.
(c) Exhibits
--------
This list of Exhibits required by Item 601 of Regulation S-K is
included in Item (a)(3) above.
(d) Financial Statement Schedules
-----------------------------
See (a)(1) and (2) above.
IV-2
<PAGE>
SIGNATURES
----------
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, Registrant has duly caused this report to be signed on its
behalf by the undersigned, thereunto duly authorized.
Capital Realty Investors Tax Exempt
Fund III Limited Partnership
By: CRITEF III Associates Limited
Partnership, General Partner
By: C.R.I., Inc., General Partner
May 17, 1996 /s/ William B. Dockser
- ------------------- ------------------------------------
DATE William B. Dockser, Director
Chairman of the Board,
Treasurer and Principal
Executive Officer
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
Registrant and in the capacities and on the dates indicated:
May 17, 1996 /s/ H. William Willoughby
- ------------------- ------------------------------------
DATE H. William Willoughby
Director, President and Secretary
May 17, 1996 /s/ Richard J. Palmer
- ------------------- ------------------------------------
DATE Richard J. Palmer
Senior Vice President,
Chief Financial Officer,
Principal Financial and
Principal Accounting Officer
IV-3
<PAGE>
CROSS REFERENCE SHEET
The item numbers and captions in Parts I, II, III and IV hereof and the
page and/or pages in the referenced materials where the corresponding
information appears are as follows:
Item Reference Materials Pages
- ---- ------------------- -------------
3. Legal Proceedings 1995 Annual Report 52 through 55
5. Market for the Registrant's 1995 Annual Report 1 through 3
Partnership Interests and
Related Partnership Matters
6. Selected Financial Data 1995 Annual Report 1 through 3
7. Management's Discussion and 1995 Annual Report 4 through 23
Analysis of Financial
Condition and Results of
Operations
8. Financial Statements and 1995 Annual Report 24 through 28
Supplementary Data
14. Exhibits, Financial Statement 1995 Annual Report 24 through 58
Schedules, and Reports on
Form 8-K
IV-4
<PAGE>
EXHIBIT INDEX
Exhibit Page
- ------- ----------------------------
(13) Annual Report to BAC Holders 1 through 58
(27) Financial Data Schedule Filed herewith electronically
IV-5
<PAGE>
BROWDER & ASSOCIATES, P.C.
Certified Public Accountants
2320 Highland Avenue South, Suite 290
Birmingham, Alabama 35205
Telephone (205) 933-6855
Facsimile (205) 930-9486
Independent Auditor's Report
----------------------------
To the Partners
Investment VII, Ltd.,
d/b/a Washington Ridge Apartments
Birmingham, Alabama
We have audited the accompanying balance sheet of Investment VII, Ltd.,
d/b/a Washington Ridge Apartments, as of December 31, 1993, and the related
statements of income and expense, changes in partners' equity, and cash flows
for the year then ended. These financial statements are the responsibility of
the project's management. Our responsibility is to express an opinion on these
financial statements based on our audit.
We conducted our audit in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audit provides a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of Investment VII, Ltd., d/b/a
Washington Ridge Apartments as of December 31, 1993, and the results of its
operations and the changes in partners' equity and cash flows for the year then
ended in conformity with generally accepted accounting principles.
BROWDER & ASSOCIATES, P.C.
February 7, 1994
IV-6
<PAGE>
PETERSON, PETERSON & GOSS
Certified Public Accountants
417 North Topeka Avenue
P. O. Box 1259
Wichita, Kansas 67201-1259
Telephone (316) 262-8371
Fax (316) 262-5369
Independent Auditors' Report
----------------------------
To Partners
Regency Woods Limited Partnership
Wichita, Kansas
We have audited the accompanying balance sheets of Regency Woods Limited
Partnership as of December 31, 1994 and 1993, and the related statements of loss
and partners' deficit and cash flows for the years then ended. These financial
statements are the responsibility of the Partnerships' management. Our
responsibility is to express an opinion on these financial statements based on
our audit.
We conducted our audit in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audit provides a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of Regency Woods Limited
Partnership as of December 31, 1994 and 1993, and the results of its operations
and its cash flows for the years then ended, in conformity with generally
accepted accounting principles.
Our audit was conducted for the purpose of forming an opinion on the
financial statements taken as a whole. The supporting information included in
the report (shown on pages 10 through 13) are presented for the purpose of
additional analysis and are not a required part of the basic financial
statements of Regency Woods Limited Partnership. Such information has been
subjected to the auditing procedures applied in the audit of the basis financial
statements and, in our opinion, is fairly presented in all material respects in
relation to the financial statements taken as a whole.
The accompanying financial statements have been prepared assuming that the
partnership will continue as a going concern. As discussed in Note 7 to the
financial statements, the Partnership defaulted on it's mortgage debt raising
doubts about its ability to continue as a going concern. The financial
statements do not include any adjustments that might result from the outcome of
this uncertainty.
Peterson, Peterson & Goss, L.C.
January 13, 1995
IV-7
<PAGE>
CAPITAL REALTY INVESTORS TAX EXEMPT FUND III LIMITED PARTNERSHIP
1995 ANNUAL REPORT TO BAC HOLDERS
<PAGE>
CAPITAL REALTY INVESTORS TAX EXEMPT FUND III LIMITED PARTNERSHIP
SELECTED FINANCIAL DATA
- -----------------------
Restated Financial Data Schedule
- --------------------------------
<TABLE>
<CAPTION>
For the years ended December 31,
1995 1994 1993 1992 1991
------------ ------------ ------------ ------------ ------------
<S> <C> <C> <C> <C> <C>
Interest from mortgage revenue bonds
and working capital loans (1) $ 7,064,848 $ 6,906,896 $ -- $ -- $ 769,025
Net rental income (1) -- -- 2,822,609 2,198,325 1,067,970
Income from investment in mortgage
revenue bonds and working capital
loan -- -- -- -- 989,152
Other income (expenses) (541,312) (173,586) (230,847) 50,411 (19,760)
Valuation adjustment on investment in
real estate (1) -- -- -- -- (373,637)
------------ ------------ ------------ ------------ ------------
Income before cumulative effect of
accounting change 6,523,536 6,733,310 2,591,762 2,248,736 2,432,750
Cumulative effect of change in
accounting for mortgage revenue
bonds (1) -- (10,155,671) -- -- --
------------ ------------ ------------ ------------ ------------
Net income (loss) $ 6,523,536 $ (3,422,361) $ 2,591,762 $ 2,248,736 $ 2,432,750
============ ============ ============ ============ ============
Net income (loss) allocated to
BAC Holders (98.99%) $ 6,457,648 $ (3,387,795) $ 2,565,585 $ 2,226,024 $ 2,408,179
============ ============ ============ ============ ============
Net income (loss) per BAC outstanding $ 1.23 $ (0.64) $ 0.49 $ 0.42 $ 0.46
============ ============ ============ ============ ============
Cumulative effect of change in
accounting for mortgage revenue
bonds per BAC outstanding $ -- $ (1.91) $ -- $ -- $ --
============ ============ ============ ============ ============
Total cash distribution per
BAC outstanding $ 1.20 $ 1.63 $ 1.63 $ 1.63 $ 1.87
============ ============ ============ ============ ============
Number of BACs outstanding 5,258,268 5,258,268 5,258,268 5,258,268 5,258,268
============ ============ ============ ============ ============
Investment in mortgage revenue bonds
and working capital loans(1) $ 70,951,947 $ 70,951,947 $ -- $ -- $ --
============ ============ ============ ============ ============
Investment in real estate, before
accumulated depreciation(1) $ -- $ -- $ 91,576,714 $ 91,576,714 $ 91,576,714
============ ============ ============ ============ ============
-1-
<PAGE>
CAPITAL REALTY INVESTORS TAX EXEMPT FUND III LIMITED PARTNERSHIP
SELECTED FINANCIAL DATA - Continued
- -----------------------
Restated Financial Data Schedule - Continued
- --------------------------------
</TABLE>
<TABLE>
<CAPTION>
For the years ended December 31,
1995 1994 1993 1992 1991
------------ ------------ ------------ ------------ ------------
<S> <C> <C> <C> <C> <C>
Investment in real estate, before
accumulated depreciation, per
BAC outstanding $ -- $ -- $ 17.24 $ 17.24 $ 17.24
============ ============ ============ ============ ============
Total assets $ 76,933,879 $ 77,121,563 $ 92,296,205 $ 97,929,180 $102,798,278
============ ============ ============ ============ ============
Total assets per BAC outstanding $ 14.48 $ 14.52 $ 17.38 $ 18.44 $ 19.35
============ ============ ============ ============ ============
Net assets $ 74,946,957 $ 74,797,723 $ 86,878,511 $ 92,918,617 $ 99,301,738
============ ============ ============ ============ ============
Net assets per BAC outstanding $ 14.11 $ 14.08 $ 16.36 $ 17.49 $ 18.69
============ ============ ============ ============ ============
</TABLE>
(1) Certain properties collateralizing the mortgage revenue bonds have been
transferred by deed in lieu of foreclosure to affiliates of the Partnership
(Owner Partnerships), subject to existing indebtedness, or considered in-
substance foreclosed (ISF), generally as a result of defaults of the
borrowers. As a result, through December 31, 1993, the Partnership has
accounted for these investments as investments in real estate for financial
statement purposes. The Partnership recorded valuation adjustments
representing the lower of (a) the carrying value of the mortgage revenue
bond and related accrued interest or (b) the estimated fair value of the
property and other net assets of the property acquired in settlement of
loans or in-substance foreclosed at the earlier of acquisition, development
or construction (ADC) determination, transfer of the deed or when
considered ISF.
In May 1993, the Financial Accounting Standards Board (FASB) issued
Statement of Financial Accounting Standards No. 115 "Accounting for Certain
Investments in Debt and Equity Securities" (SFAS 115). This statement
requires that most investments in securities be classified into one of the
following investment categories based upon circumstances under which
securities might be sold: Held to Maturity, Available for Sale, and
Trading. Generally, investments in securities for which an enterprise has
both the ability and the intent to hold to maturity should be accounted for
using the amortized cost method and all other securities must be recorded
at their fair values. Following such adoption, the Partnership (as did
others in the industry) continued to account for its investments in
mortgage revenue bonds as investments in real estate based on ADC
determination or consolidation of the Owner Partnerships in accordance with
SEC Rules.
-2-
<PAGE>
CAPITAL REALTY INVESTORS TAX EXEMPT FUND III LIMITED PARTNERSHIP
SELECTED FINANCIAL DATA - Continued
- -----------------------
In conjunction with the review of the Partnership's 1995 financial
statements by the Securities and Exchange Commission (SEC) staff, the
Partnership agreed that it would account for all of its investments in
mortgage revenue bonds as debt securities under the provisions of SFAS 115
effective January 1, 1994, and restate its 1995 and 1994 financial
statements to reflect this change. Accordingly, effective January 1, 1994,
all investments in mortgage revenue bonds are classified and accounted for
as held to maturity securities and are carried at amortized cost because of
the Partnership's ability and intent to hold these investments to maturity.
The effect of adopting SFAS 115 on net income previously reported for 1995
and 1994 is $2,795,175 and $(6,678,675), respectively. Income per BAC as
previously reported was $0.70 and $0.61 for 1995 and 1994, respectively.
Income (loss) per BAC as previously reported has been revised to $1.23 and
$(0.64) per BAC for 1995 and 1994, respectively. The impact on partners
capital of adopting SFAS 115 for 1995 and 1994 is $(3,883,500) and
$(6,678,675), respectively.
Market Data
- -----------
On July 1, 1993, the General Partner listed the BACs on the American Stock
Exchange with a trading symbol of CRL. As of December 31, 1995, there were
5,258,268 BACs issued and outstanding. The following table sets forth the high
and low closing sales price and the distributions per BAC during the periods
indicated:
<TABLE>
<CAPTION>
1995
------------------------------------------
Sales Price
--------------------- Distributions
Quarter Ended High Low per BAC
- ------------------ ------- ------- -------------
<S> <C> <C> <C>
March 31 $12 1/4 $10 1/4 $ 0.30
June 30 12 3/4 11 3/4 0.30
September 30 14 11 5/8 0.30
December 31 13 3/4 13 1/8 0.30
---------
$ 1.20
=========
</TABLE>
-3-
<PAGE>
CAPITAL REALTY INVESTORS TAX EXEMPT FUND III LIMITED PARTNERSHIP
SELECTED FINANCIAL DATA - Continued
- -----------------------
<TABLE>
<CAPTION>
1994
------------------------------------------
Sales Price
--------------------- Distributions
Quarter Ended High Low per BAC
- ------------------ ------- ------- -------------
<S> <C> <C> <C>
March 31 $13 3/8 $11 1/4 $ 0.40
June 30 12 3/4 11 3/4 0.41
September 30 12 3/8 10 5/8 0.41
December 31 10 7/8 9 1/4 0.41
---------
$ 1.63
=========
</TABLE>
<TABLE>
<CAPTION>
1993
------------------------------------------
Sales Price
--------------------- Distributions
Quarter Ended High Low per BAC
- ------------------ ------- ------- -------------
<S> <C> <C> <C>
March 31 N/A N/A $ 0.40
June 30 N/A N/A 0.41
September 30 $15 $11 1/2 0.41
December 31 13 1/2 11 3/8 0.41
---------
$ 1.63
=========
</TABLE>
-4-
<PAGE>
CAPITAL REALTY INVESTORS TAX EXEMPT FUND III LIMITED PARTNERSHIP
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
- -----------------------------------------------------------
AND RESULTS OF OPERATIONS
-------------------------
Business
--------
Capital Realty Investors Tax Exempt Fund III Limited Partnership (the
Partnership) was organized on September 1, 1987 under the Delaware Revised
Uniform Limited Partnership Act and will continue until December 31, 2017,
unless dissolved earlier in accordance with the Agreement of Limited
Partnership. The Partnership was formed to acquire a portfolio of tax-exempt
mortgage revenue bonds, issued by various state or local governments or their
agencies or authorities and collateralized by non-recourse participating first
mortgage loans on multifamily residential developments. Additionally, the
Partnership was permitted to use up to 5% of its gross offering proceeds to make
taxable working capital loans to borrowers to cover certain expenses which could
not be financed from the proceeds of the mortgage revenue bonds.
The Partnership commenced a public offering of Series A Beneficial Assignee
Certificates (BACs) representing assignment of limited partnership interests in
February 1988. As provided in the original offering, the Partnership could
issue BACs in additional series at the discretion of the General Partner. As of
December 31, 1995, 5,258,268 Series A BACs had been sold, representing total
capital contributions of $131,456,700.
On July 1, 1993, the General Partner listed the BACs on the American Stock
Exchange (AMEX) with a trading symbol of CRL. The General Partner believes that
the benefits to BAC Holders from listing the BACs on AMEX include increased
liquidity and reduced transaction costs. However, a publicly traded partnership
is treated as a corporation for income tax purposes unless it meets certain
exceptions. In 1995, 1994 and 1993, the Partnership met these exceptions and
was not taxed as a corporation.
The Partnership's objectives have been to: (1) provide quarterly cash
distributions that will be exempt from regular federal income tax from base
interest on the mortgage revenue bonds; (2) provide additional cash
distributions that will be exempt from regular federal income tax from payments
of contingent interest on the mortgage revenue bonds which will be determined
(a) on the basis of the cash flow of the mortgaged properties, or (b) to the
extent that cash flow is not sufficient to provide for the current payment of
the maximum amount of contingent interest, on the basis of either (i) the net
proceeds resulting from the sale of the mortgaged properties or redemption or
remarketing of the applicable mortgage revenue bond or (ii) the appraised value
of the mortgaged properties upon repayment of the mortgage loans or remarketing
of the mortgage revenue bonds; (3) in certain circumstances, provide additional
taxable cash distributions from payments of interest on the working capital
loans; and (4) preserve and protect the Partnership's capital. As of December
31, 1995, six of the eight properties securing the loans have been taken control
of by affiliates of the General Partner (Owner Partnerships) through deed in
lieu of foreclosure or through transfer of partnership interests of the borrower
(in the case of Geary Courtyard), subject to existing indebtedness, which
resulted in significant valuation adjustments to the carrying values of these
investments during 1991 and 1990. Although the Partnership will use diligent
efforts to recover its investment, it is probable that the full amount of BAC
Holder invested capital, based on the original offering price of $25 per BAC,
may not be recoverable on most of the bonds through net sale or refinancing
proceeds as originally anticipated at the time of the BAC offerings.
Consequently, in the absence of the proposed merger, it may be
-5-
<PAGE>
CAPITAL REALTY INVESTORS TAX EXEMPT FUND III LIMITED PARTNERSHIP
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
- -----------------------------------------------------------
AND RESULTS OF OPERATIONS - Continued
-------------------------
advisable, with BAC Holder consent, to extend the maturity dates of the mortgage
loans, which currently mature from 1999 through 2000. Due to proposed Internal
Revenue Service (IRS) regulations, the General Partner cannot be sure at this
time how long the mortgage loans could be extended without triggering a deemed
reissuance of the mortgage revenue bonds for federal income tax purposes. If an
extension of the mortgage loan maturity dates is a deemed reissuance, it would
most likely result in the loss of the tax-exempt status of the mortgage revenue
bonds.
Base interest income on the mortgage loans is funded from property
operations, certain borrowers' operating deficit guarantees, and reserves, if
any, established at the time of closing on the acquisition of the mortgage
revenue bonds. If base interest payments cannot be fully satisfied, the General
Partner evaluates various courses of action, including sale, recapitalization,
loan modification, deed in lieu of foreclosure or foreclosure.
The Partnership invested in eight Federally tax-exempt mortgage revenue
bonds with an aggregate principal amount of $97,101,000 and made three working
capital loans with an aggregate principal amount of $3,409,604. A description
of the mortgage revenue bonds and working capital loans held by the Partnership
is as follows:
-6-
<PAGE>
CAPITAL REALTY INVESTORS TAX EXEMPT FUND III LIMITED PARTNERSHIP
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
- -----------------------------------------------------------
AND RESULTS OF OPERATIONS - Continued
-------------------------
<TABLE>
<CAPTION>
Permanent
Loan
Loan Maturity Loan Carrying
Mortgaged Property No. of Origination Face Amount Maturity Value
Name and Location Rental Units Date (000's) Date (000's)
- -------------------- ------------ ------------ -------------- ---------- -----------
<S> <C> <C> <C> <C> <C>
ETHAN'S GLEN IIA
KANSAS CITY, MO 242 8/18/88 $ 10,525 3/31/2000 $ 8,840
GEARY COURTYARD
SAN FRANCISCO, CA (1) 164 8/18/88 18,900 9/01/2000 8,706
OCEAN WALK
KEY WEST, FL 296 1/27/89 19,826 4/01/2000 16,084
PACES RIVER 2
ROCK HILL, SC (1) 230 7/28/88 9,600 2/02/2000 7,842
REGENCY WOODS
WEST DES MOINES, IA (1) 200 1/29/90 7,560 2/01/2000 4,812
VALLEY CREEK II
WOODBURY, MN 177 2/21/89 10,100 7/01/2000 6,508
WASHINGTON RIDGE
KNOXVILLE, TN 248 12/14/88 10,000 7/01/2000 7,642
WOODLANE PLACE
WOODBURY, MN 216 9/16/88 14,000 11/01/1999 10,518
----- -------- -------
1,773 $100,511 $70,952
===== ======== =======
</TABLE>
(1) The amount listed under face amount of mortgage includes both the first
lien tax-exempt loan and the second lien working capital loan.
Prior to January 1, 1994, the Partnership accounted for its investment in
mortgage revenue bonds in accordance with the American Institute of Certified
Public Accountants (AICPA) "Notice to Practitioners - ADC Arrangements" (the
Notice). Under the Notice, loans qualifying as ADC arrangements follow real
estate or joint venture accounting policies if the lender effectively has the
risks and rewards of an owner or investor in real estate. Generally, the lender
has the same risks and rewards as an owner or investor if the borrower has
little or no equity in the project and if the lender expects to participate in
residual profits (as defined in the Notice) of the project. Further, if the
lender is expected to receive over 50 percent of the expected residual profits
from a project, the lender should account for the arrangement as real estate.
As such, the Ocean Walk, Regency Woods, Valley Creek II, and Washington Ridge
investments originally qualified as ADC arrangements and followed real estate
accounting policies. However, Owner Partnerships received deeds in lieu of
foreclosure, subject to existing indebtedness, on all of these investments,
except Washington Ridge, from 1993 through 1995.
Also prior to January 1, 1994, investments in mortgage revenue bonds and
working capital loans were accounted for as real estate on the earlier of the
date of ADC determination, deed in lieu of foreclosure, transfer of partnership
interests, or in-substance foreclosure, and were recorded at the lower of (a)
-7-
<PAGE>
CAPITAL REALTY INVESTORS TAX EXEMPT FUND III LIMITED PARTNERSHIP
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
- -----------------------------------------------------------
AND RESULTS OF OPERATIONS - Continued
-------------------------
the carrying value of the mortgage revenue bonds and working capital loans and
related accrued interest or (b) the estimated fair value of the property,
including other net assets of the property. The estimated fair values of the
properties were the amounts the owners of the properties could reasonably expect
to receive in an as-is sale between a willing buyer and a willing seller. The
General Partner determined the estimated fair value of the properties acquired
based upon information obtained from independent real estate appraisers and/or
its own market analyses. To the extent fair value was less than carrying value,
direct write-downs were recorded to establish a new basis for these assets.
Since the working capital loans are subordinate to the first mortgage loan on
the properties, write-downs were first applied against the working capital loans
and then against the mortgage revenue bonds. As of January 1, 1994, the
Partnership's investment in working capital loans had been written down to zero.
Subsequent to the recording of its investment as real estate, the Partner-
ship evaluated its recorded investment in the properties on a lower of cost or
net realizable value basis, under the guidance of the American Institute of
Certified Public Accountants (AICPA) Statement of Position 92-3 "Accounting for
Foreclosed Assets". The Partnership's net realizable value determination took
into account the Partnership's intention to hold these properties for the long
term, if necessary, to recover its recorded investment. If the Partnership
determined that its estimated net realizable value was less than the recorded
investment in the property, an additional valuation adjustment was recorded if
the decline was considered permanent.
In May 1993, the Financial Accounting Standards Board (FASB) issued
Statement of Financial Accounting Standards No. 115 "Accounting for Certain
Investments in Debt and Equity Securities" (SFAS 115). This statement requires
that most investments in securities be classified into one of the following
investment categories based upon circumstances under which securities might be
sold: Held to Maturity, Available for Sale, and Trading. Generally,
investments in securities for which an enterprise has both the ability and the
intent to hold to maturity should be accounted for using the amortized cost
method and all other securities must be recorded at their fair values.
Following such adoption, the Partnership (as did others in the industry)
continued to account for its investments in mortgage revenue bonds as
investments in real estate based on ADC determination or consolidation of the
Owner Partnerships in accordance with SEC Rules.
In conjunction with the review of the Partnership's 1995 financial
statements by the Securities and Exchange Commission (SEC) staff, the
Partnership agreed that it would account for all of its investments in mortgage
revenue bonds as debt securities under the provisions of SFAS 115 effective
January 1, 1994, and restate its 1995 and 1994 financial statements to reflect
this change. Accordingly, effective January 1, 1994, all investments in
mortgage revenue bonds are classified and accounted for as held to maturity
securities and are carried at amortized cost because of the Partnership's
ability and intent to hold these investments to maturity. The effect of
adopting SFAS 115 on net income previously reported for 1995 and 1994 is
$2,795,175 and $(6,678,675), respectively. Income per BAC as previously
reported was $0.70 and $0.61 for 1995 and 1994, respectively. Income (loss) per
BAC as previously reported has been revised to $1.23 and $(0.64) per BAC for
1995 and 1994, respectively. The impact on partners capital of adopting SFAS
115 for 1995 and 1994 is $(3,883,500) and $(6,678,675), respectively.
-8-
<PAGE>
CAPITAL REALTY INVESTORS TAX EXEMPT FUND III LIMITED PARTNERSHIP
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
- -----------------------------------------------------------
AND RESULTS OF OPERATIONS - Continued
-------------------------
As discussed above, the Partnership accounted for its investment in
mortgage revenue bonds and working capital loans as real estate, until January
1, 1994, when the financial statements were restated to reflect implementation
of SFAS 115. Net realizable value, prior to implementation of SFAS 115, was
based on holding the assets for long-term income production - as such net
realizable value only considered the recovery of the Partnership's investments
over time based on the properties' ability to generate sufficient cash flow to
recover the Partnership's investment over the long term. Based on the SEC's
requirement that the Partnership account for its mortgage revenue bonds as debt
securities, the implementation of SFAS 115 has a different accounting framework
for evaluating realizability. In accordance with SFAS 115's provisions for held
to maturity securities, the Partnership evaluates the fair value of its mortgage
revenue bonds to determine if impairment exists. If a decline in fair value is
determined to be other-than-temporary, the security is written down to its fair
value. Since most of these bonds are in default the Partnership has concluded
that permanent impairment has occurred. As such, the amount of permanent
impairment is measured by the Partnership's estimate of the mortgage revenue
bonds' fair value at January 1, 1994. The Partnership has measured fair value
as discussed below. This effect of adopting SFAS 115 is reflected as a
cumulative effect of change in accounting for mortgage revenue bonds in the
statements of operations. On an ongoing basis, the Partnership evaluates the
permanent impairment; however, subsequent to January 1, 1994, the Partnership
did not recognize any impairment losses.
Since six of the eight mortgage revenue bonds are in default and write-
downs have been taken on all of the mortgage revenue bonds due to impairment,
base interest and contingent interest on the mortgage revenue bonds is
recognized as revenue when collected.
As of December 31, 1995, six properties collateralizing certain of the
mortgage revenue bonds have been transferred by deed in lieu of foreclosure (or
by transfer of partnership interests in the borrower entity) to Owner
Partnerships, subject to existing indebtedness. In connection with the
transfers of properties to Owner Partnerships, the Partnership obtained an
opinion from its former independent accounting firm in July of 1991 that the
reduction in pay rate and compounding of unpaid base interest at the original
base interest rate would not cause a reissuance of the bonds under Section 103
of the Internal Revenue Code of 1986, as amended (the Code) (which would cause
the bonds to lose their tax-exempt status). The Partnership also obtained
opinions from certain bond counsel that certain transfers of the properties to
Owner Partnerships would not cause the Partnership to become a substantial user
of the projects or a related party to a substantial user pursuant to Section 103
of the Code (which also could have caused the bonds to lose their tax-exempt
status). The bond counsel opinions were obtained in connection with the Ethan's
Glen IIA and Ocean Walk transfers.
In April 1991, the U.S. Supreme Court decided a case, Cottage Savings
Association V. Commissioner (Cottage Savings) that could be interpreted to
impact then existing authority addressing the modification of debt instruments.
In response to this decision in December 1992 the Internal Revenue Service
issued Proposed Regulation Section 1.1001-3 which specifically address the tax
consequences of modifications of debt instruments. Among other things, these
proposed regulations, if they become effective in their current form, would
provide that certain modifications of the current interest payments or maturity
-9-
<PAGE>
CAPITAL REALTY INVESTORS TAX EXEMPT FUND III LIMITED PARTNERSHIP
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
- -----------------------------------------------------------
AND RESULTS OF OPERATIONS - Continued
-------------------------
date of a debt instrument will be treated as a taxable exchange of the original
instrument for the modified debt instrument. As a result of this treatment,
modifications of the mortgage loans which secure the mortgage revenue bonds
could be treated as a deemed reissuance of the mortgage revenue bonds for
federal income tax purposes. Any reissuance without the cooperation of the
mortgage revenue bond issuers would result in the loss of the tax-exempt status
of the mortgage revenue bonds. Such issuers might cooperate and consent to the
reissuance; however, there can be no assurance that such issuers would do so or
would not impose additional requirements that would have an adverse impact on
the properties.
Even if issuer consent were obtained, if the modifications are considered
material, the debt would have to be re-examined to determine whether it would
still be considered debt for tax purposes. This could result in a write-down of
principal, would most likely result in a write-off of all accrued and unpaid
past due interest and could change the contingent interest feature of the
existing mortgage loans. The write down of principal and unpaid interest would
not be recoverable upon ultimate disposition or payoff of the mortgage revenue
bond and would instead accrue to the benefit of the Owner Partnership to the
extent realized.
Proposed Regulation Section 1.001-3 will become effective only with respect
to modifications made on or after the date that is 30 days after the publication
of final regulations in the Federal Register. It is uncertain at this time when
this proposed regulation will be finalized and whether it will be finalized in
its current form. It is also unclear at this time what effect the Cottage
Savings decision may have on modifications that have been made to mortgage loans
which secure the mortgage revenue bonds or on modifications that might be
appropriate in the future. The General Partner believes that the modifications
which have been made were consistent with the relevant tax authority which
existed at the time of those modifications and have not jeopardized the tax-
exempt status of the mortgage revenue bonds. However, these can be no assurance
as to the tax-exempt status of the mortgage revenue bonds.
In March 1995, the Partnership was notified by the Paces River 2 borrower
that the property may not have been in compliance with the low to moderate
income requirements under the tax-exempt bonds. The borrower had applied tenant
certification criteria consistent with that used by state authorities. Further,
state authorities had reviewed and approved the compliance on an annual basis.
However, the borrower believed that certain technical aspects of the tenant
certification criteria may not have been appropriately applied. The borrower
met with the state authorities and determined the appropriate criteria. As of
December 31, 1995, the borrower was in compliance with the requirements for tax-
exempt status.
In March 1994, the Partnership was notified by the management agent of
Woodlane Place that certain buildings at the property experienced damage due to
frost heaving. The Owner Partnerships hired an engineer to analyze the
underlying problem of inadequate drainage at the property and to determine the
number of affected buildings and the severity of the drainage problem. Based on
this analysis, the costs associated with the correction of the drainage problem
are expected to be approximately $300,000, and will not be covered by the
property's insurance carrier. Due to the nature of the drainage problem,
occupancy levels at the property are not expected to decrease as a result of the
-10-
<PAGE>
CAPITAL REALTY INVESTORS TAX EXEMPT FUND III LIMITED PARTNERSHIP
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
- -----------------------------------------------------------
AND RESULTS OF OPERATIONS - Continued
-------------------------
ongoing capital improvements. Funding for these capital improvements may be
provided from the borrowers existing replacement reserves, future property cash
flow, and/or a loan to the borrower from the working capital reserves of the
Partnership. The Partnership has joined with the borrower's insurance carrier
in a lawsuit against the original architect and general contractor of Woodlane
Place. The Partnership has joined on a contingent basis, with no legal fees
being incurred unless the Partnership receives a settlement or judgment, and
with other legal expenses estimated to be less than $20,000. There is no
assurance that the Partnership will receive any funds as a result of this
lawsuit.
The General Partner's ongoing strategy has been to continue holding the
mortgage revenue bonds until the loan maturity dates. If the merger proposal,
as discussed below, is approved, the interests of the BAC Holders will be
redeemed for cash. If the merger proposal is not approved, in order to maximize
the overall yield, the General Partner may recommend, subject to satisfactory
resolution of any issues relating to the tax-exempt status of the mortgage
revenue bonds, for investor approval of the extension of certain loan maturity
dates and, if approved, arrange any necessary related amendments to the
pertinent mortgage revenue bonds.
Merger Proposal
- ---------------
On September 11, 1995, the Partnership and its General Partner entered into
a merger agreement, subject to BAC Holder approval, with an affiliate of Capital
Apartment Properties, Inc. (CAPREIT), a private real estate investment trust.
An affiliate of CAPREIT is the property manager for five of the eight properties
securing the bonds held by the Partnership. All five of the properties managed
by an affiliate of CAPREIT are presently in default with respect to their
mortgage loans held by the Partnership. If the merger proposal is approved by a
majority vote of BAC Holders, all of the BACs in the Partnership will be
redeemed for cash and the interests represented by such BACs will be canceled.
On January 31, 1996, the agreement for the proposed merger was modified for the
first time to improve the terms of the original proposal. Under the original
proposal, the redemption amount per BAC was to be $14.360. Under the first
modified agreement, the redemption amount per BAC was to be $15.1735, subject to
adjustment but not less than $15.0372 or greater than $15.3098. On March 14,
1996, the merger agreement was modified for the second time to round the
expected redemption amount per BAC from $15.1735 to $15.18, subject to
adjustment for available cash as defined in the amended merger agreement, but
not less than $15.04 or greater than $15.32. In addition, the redemption
amounts will be reduced by the amount of court approved legal fees and expenses
awarded to counsel of the plaintiffs in the putative class action suits naming
the Partnership and others, as described below. Such legal fees and expenses
are not expected to exceed $0.19 per BAC.
The BAC Holders will also vote upon the removal of the Partnership's
General Partner immediately prior to consummation of the proposed merger and the
election in its stead of a newly-formed wholly-owned subsidiary of CAPREIT.
CAPREIT has agreed to pay the General Partner $500,000 in consideration for its
1.01% general partner interest in the Partnership.
CAPREIT and/or its designee will also acquire accounts receivable held by
-11-
<PAGE>
CAPITAL REALTY INVESTORS TAX EXEMPT FUND III LIMITED PARTNERSHIP
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
- -----------------------------------------------------------
AND RESULTS OF OPERATIONS - Continued
-------------------------
CRI and CRIIMI MAE Services Limited Partnership (CRIIMI), for the accrued
mortgage servicing and administration fees on certain property mortgage loans of
the Partnership. The general partner of CRIIMI is a subsidiary of CRIIMI MAE
Inc., a publicly-traded company affiliated with the General Partners. Under the
second modified agreement, CAPREIT will pay the discounted amount of $667,485 to
CRI for its fees accrued through June 30, 1995, which represents approximately
42% of the total accrued fees owed to CRI. Also, CAPREIT will pay $566,676 to
CRIIMI for its fees accrued from July 1, 1995 through June 30, 1996, which
represents 100% of the fees which are expected to be owed to CRIIMI for that
period. If the closing of the proposed merger does not occur by June 30, 1996,
the amounts to be paid by CAPREIT to CRIIMI will increase, to reflect additional
amounts currently being accrued for mortgage servicing and administration fees,
at a rate of $47,223 per month.
Each of the Owner Partnerships has agreed to either (a) sell, assign and
transfer the partnership interests in, or the real property and other assets of,
such Owner Partnerships to CAPREIT or its designee for no additional
consideration or (b) admit CAPREIT or its designee as the managing general
partner, whereupon the general partner interests of the current general partners
will be converted into limited partner interests, and CAPREIT will have the
option to acquire all of the limited partner interests at any time within five
years from the closing date of the merger at the then fair market value thereof
(defined as the proportionate interest of such limited partner in the fair
market value of the partnership property as encumbered by the mortgage loans).
Although such interests currently have nominal value, if the fair market value
of the partnership properties increases prior to the time CAPREIT exercises its
option, such increase in value may benefit the owners of the Owner Partnerships.
This feature is required by CAPREIT as a condition of the merger.
Consummation of the merger is contingent upon the approval of a majority of
BAC Holders. The proposed merger is also contingent upon receiving a favorable
opinion regarding the fairness of the redemption amount to BAC Holders from a
financial point of view. A favorable opinion from an independent investment
banking firm was issued on March 14, 1996. A proxy statement is expected to be
issued to BAC Holders after it is filed with and clearance is received from the
SEC. A preliminary proxy statement was filed with the SEC on March 18, 1996.
This proxy statement includes a full description of the proposed merger and the
independent fairness opinion.
Litigation
- ----------
On September 22, 1995, Irving Zakin commenced a putative class action (the
Zakin Action) against the Partnership, its General Partner (CRITEF III
Associates Limited Partnership), its Assignor Limited Partner (CRITEF III,
Inc.), CRI, William B. Dockser, H. William Willoughby, Capital Realty Investors
Tax Exempt Fund Limited Partnership, CRITEF Associates Limited Partnership,
CRITEF, Inc., and CAPREIT (collectively, the Defendants) in the Court of
Chancery of the State of Delaware in New Castle County (the Chancery Court)
(C.A. No. 14558). The complaint alleges, among other things, that the amount
offered to the BAC Holders in the proposed merger at the time the complaint was
filed was inadequate, and that the Defendants breached their fiduciary duty to
the BAC Holders, or aided and abetted such a breach, engaged in self-dealing and
misled BAC Holders in connection with the proposed merger. The suit seeks to
-12-
<PAGE>
CAPITAL REALTY INVESTORS TAX EXEMPT FUND III LIMITED PARTNERSHIP
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
- -----------------------------------------------------------
AND RESULTS OF OPERATIONS - Continued
-------------------------
enjoin the proposed merger, to obtain damages in an unspecified amount for the
BAC Holders, and to compel the Defendants to maximize the amount paid to the BAC
Holders and consider unspecified alternatives to the proposed merger.
On October 5, 1995, David and Johanna Wingard (the Wingard Action)
commenced a second putative class action against the Defendants in the Chancery
Court (C.A. No 14604). The complaint in the Wingard Action contains virtually
the identical allegations and seeks virtually the identical relief as in the
Zakin Action. A request to the Chancery Court has been made by the plaintiffs
in both lawsuits to consolidate the two actions.
On January 31, 1996, the Defendants and the plaintiffs and their respective
attorneys reached a tentative settlement of the putative class actions which is
memorialized in a Memorandum of Understanding (the Memorandum), dated as of such
date. The proposed settlement must be approved by the Chancery Court. The
Memorandum contemplates the complete discharge, settlement and release of all
claims that have been, could have been, or in the future might be asserted in
any action or any other proceeding in connection with the proposed merger. The
parties to the Memorandum will use their best efforts to execute an appropriate
Stipulation of Settlement (the Stipulation) and such other documents as may be
required in order to obtain approval by the Chancery Court of the settlement.
The Defendants have denied, and continue to deny, that any of them have
committed or threatened to commit any violations of law or breaches of duty to
the BAC Holders. The Defendants have entered into the Memorandum solely because
the proposed settlement would eliminate the burden and expense of further
litigation and would facilitate the consummation of the proposed merger, which
the General Partner believes to be in the best interest of the BAC Holders.
In accordance with the Memorandum, the agreements for the proposed merger
were amended to provide for the revised merger terms, as previously discussed
above. Pursuant to the Memorandum, the plaintiffs' counsel will be entitled to
apply to the Chancery Court for an award of reasonable attorneys' fees and
expenses. Such expenses are not expected to exceed $0.19 per BAC. These fees
will reduce the redemption amounts to BAC Holders in connection with the
proposed merger, as discussed. In the event that the proposed merger is not
consummated, these fees will not be borne by the Partnership. As such, the
Partnership's financial statements do not include any adjustment for these fees.
Counsel for the plaintiffs have reviewed certain documents relating to the
proposed mergers, and will have the opportunity to review and take depositions
of representatives of the General Partner and CAPREIT. After such review,
counsel for the plaintiffs shall have the right to terminate the settlement
contemplated in the Memorandum, based on material information not presently
available to them.
After the Stipulation is executed, the parties will seek preliminary
approval of the settlement by the Chancery Court and will then mail notice of
the proposed settlement to members of the putative class. As soon as
practicable following completion of the discovery described in the preceding
paragraph and after class members have had a period of time to review the notice
of proposed settlement, the parties will use their best efforts to obtain final
Chancery Court approval of the settlement and the dismissal of the class actions
as to all of the claims.
-13-
<PAGE>
CAPITAL REALTY INVESTORS TAX EXEMPT FUND III LIMITED PARTNERSHIP
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
- -----------------------------------------------------------
AND RESULTS OF OPERATIONS - Continued
-------------------------
On November 9, 1995, CRI filed a complaint against Capital Management
Strategies, Inc. (CMS), a company controlled by Martin C. Schwartzberg, to
determine the proper amount of fees to be paid in 1996 under an asset management
agreement. CMS answered on January 10, 1996, but asserted no counterclaims.
Thereafter, Mr. Schwartzberg launched a hostile consent solicitation to be
designated as managing general partner of approximately 125 private partnerships
sponsored by CRI. Mr. Schwartzberg is a former shareholder and executive
officer of CRI who decided to leave the company as of January 1, 1990. In
connection with his departure, he relinquished his general partner duties for
all CRI-sponsored partnerships, including those of the General Partner. On
March 28, 1996, Mr. Schwartzberg filed a preliminary proxy statement with the
SEC opposing the proposed merger.
On January 18, 1996, Mr. Schwartzberg and CMS filed a complaint in the
Circuit Court of Montgomery County, Maryland (the Circuit Court), against CRI
and Messrs. Dockser and Willoughby alleging, among other things, (i) that CRI
and Messrs. Dockser and Willoughby have breached an asset management agreement
pursuant to which Mr. Schwartzberg's company, CMS, agreed to perform limited
functions related to property-level issues for a portion of CRI's subsidized
housing portfolio (but not properties securing the mortgage revenue bonds) by
reducing the proposed budget for 1996, (ii) that the actions of CRI and Messrs.
Dockser and Willoughby in connection with the proposed merger involve self-
dealing and constitute a breach of their fiduciary duties to Mr. Schwartzberg,
and (iii) that the actions in connection with the merger of CRIIMI MAE Inc. in
June, 1995 involved self-interest and led in part to the proposed reduction of
the asset management agreement budget. Neither the Partnership nor the General
Partner was named as a defendant in this action, and Mr. Schwartzberg does not
allege that he is a BAC Holder. Messrs. Dockser and Willoughby have entered an
answer denying all of Mr. Schwartzberg's claims and moving to strike the
allegations concerning the Partnership and CRIIMI MAE Inc. and dismiss the
related counts for failure to state a claim upon which relief can be granted.
Messrs. Dockser and Willoughby have publicly responded that Mr. Schwartzberg's
suit is motivated by his budget dispute with CRI and personal animosity.
On February 12, 1996, the Circuit Court issued a memorandum opinion and
order enjoining CMS and Mr. Schwartzberg from disclosing information made
confidential under the asset management agreement.
On February 15, 1996, Mr. Schwartzberg filed suit in the Chancery Court
against the General Partner and CRITEF III Associates Limited Partnership (No.
14837). He alleges that he has made demands upon the General Partner and CRITEF
III Associates Limited Partnership, in his capacity as a general and limited
partner of the General Partner and as a limited partner of CRITEF III Associates
Limited Partnership, to inspect and obtain copies of a current list of the BAC
Holders and other documents. He further alleges that his demands were rejected.
On February 23, 1996, the General Partner and CRITEF III Associates Limited
Partnership answered the complaint, admitting that his demands have been
rejected and denying that Mr. Schwartzberg is entitled to the materials
requested because, among other things, he lacks standing and proper purpose to
inspect and obtain copies of the requested materials. A hearing was held on
March 6 and 7, 1996 and it is expected that the Chancery Court will render a
decision following submission of briefs by the parties.
-14-
<PAGE>
CAPITAL REALTY INVESTORS TAX EXEMPT FUND III LIMITED PARTNERSHIP
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
- -----------------------------------------------------------
AND RESULTS OF OPERATIONS - Continued
-------------------------
On February 16, 1996, the Partnership, together with the General Partner,
Capital Realty Investors Tax Exempt Fund Limited Partnership and its general
partner, CRI and CAPREIT (collectively, the Plaintiffs) filed suit against Mr.
Schwartzberg in the United States District Court for the Southern District of
New York (the District Court), No. 96 Civ. 1186 (LAK) (the New York Action).
The complaint alleges that Mr. Schwartzberg is engaged in an unlawful
solicitation of proxies of the BAC Holders through two press releases he issued
in violation of the federal securities laws and rules promulgated by the SEC
requiring definitive proxy materials to be filed with the SEC and delivered to
the BAC Holders. The complaint also alleges that Mr. Schwartzberg has made
false and misleading statements in the solicitations concerning the terms of the
proposed merger and the availability of certain financial information, and has
falsely imputed base motives to the principals of the General Partner. On
February 23, 1996, the District Court, without making a finding of fact, issued
a temporary restraining order barring Mr. Schwartzberg from making any
solicitation of the BAC Holders without first complying with the SEC rules
pending a hearing on a proposed preliminary injunction. The District Court held
a hearing on March 5, 1996, on the motion of preliminary injunction, and,
pending a decision, continued the temporary restraining order.
On March 18, 1996, the District Court issued its Opinion enjoining Mr.
Schwartzberg from (1) making any further solicitation of BAC Holders without
complying with the provisions of Regulation 14A under the Securities Exchange
Act of 1934, and (2) committing any violation of Rule 14a-9 (regarding false or
misleading statements) in connection with any solicitation relating to the
Partnerships. The injunction was based on the District Court's findings of fact
and conclusions of law, in which it stated that the Plaintiffs (including the
Partnership) have established a strong likelihood of success on their claim that
the press releases constitute a proxy solicitation in violation of securities
laws and that the Plaintiffs are likely to establish that Mr. Schwartzberg acted
with the requisite culpability with respect to at least some of the false
statements made in his press releases. Also on March 18, 1996, Mr. Schwartzberg
filed his answer to the complaint in the New York action, coupled with
counterclaims against the General Partner alleging that three press releases
issued by the General Partner of the Partnership constituted solicitations in
violation of the same provisions of the Securities Exchange Act and that they
were false and misleading. The counter-defendants deny the allegations. The
counter claims sought a temporary restraining order against the General Partner
regarding further alleged solicitations and false and misleading statements.
The District Court denied the injunction request by order on April 23, 1996. On
April 16, 1996, Mr. Schwartzberg also filed a Notice of Appeal with respect to
the injunction against him with the U. S. Court of Appeals for the Second
Circuit.
The Partnership Agreement provides for the indemnification of the General
Partners and its affiliates for acts or omissions by the General Partner in good
faith and in the best interest of the Partnership. Such indemnification does
not extend to a finding of liability for conduct which constitutes fraud, bad
faith, misconduct, breach of fiduciary duties or violation of state or federal
securities laws. At this time, there is no estimate as to the timing or amount,
if any, of the outcome of the New York Action, but the General Partners do not
anticipate that the litigation will have a material adverse affect on the
Partnership.
-15-
<PAGE>
CAPITAL REALTY INVESTORS TAX EXEMPT FUND III LIMITED PARTNERSHIP
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
- -----------------------------------------------------------
AND RESULTS OF OPERATIONS - Continued
-------------------------
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 and working capital loans 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, subject to existing indebtedness, 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 expendi-
tures.
The Partnership expects to continue to make distributions to BAC Holders on
a quarterly basis. The amended merger agreement stipulates that 1996
distributions cannot exceed ten cents per BAC per month. There are no other
legal restrictions on the Partnership's present or future ability to make cash
distributions other than as set forth in the amended merger agreement. The
distributions to BAC Holders have been funded from three primary sources: cash
flow from the underlying properties' operations, surplus working capital
reserves of the Partnership, and funds from property reserves/borrower
guarantees. However, because the surplus working capital reserves are almost
depleted and property reserves/borrower guarantees were depleted during the
first quarter of 1995, it is expected that distributions will be based primarily
on cash flow from the Partnership's operations. Cash flow from the
Partnership's operations consists of cash flow from six of the properties, plus
specified interest payments from two properties and contingent interest from one
property, supplemented by any available property reserves/borrower guarantees,
less Partnership expenses. 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 operations may be expected to
fluctuate from period to period due to changes in occupancy rates, rental rates,
operating expenses and other variables. Based upon the current operations of
the Partnership, the General Partner expects the 1996 distribution to
approximate $1.20 per BAC, the maximum amount stipulated in the amended merger
agreement.
-16-
<PAGE>
CAPITAL REALTY INVESTORS TAX EXEMPT FUND III LIMITED PARTNERSHIP
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
- -----------------------------------------------------------
AND RESULTS OF OPERATIONS - Continued
-------------------------
The following distributions were paid or accrued to BAC Holders of record
during 1995, 1994 and 1993:
<TABLE>
<CAPTION>
1995 1994 1993
Distributions to Distributions to Distributions to
BAC Holders BAC Holders BAC Holders
------------------------ ------------------------ ------------------------
Quarter Ended Total Per BAC Total Per BAC Total Per BAC
- ---------------------- ----------- ------- ----------- ------- ----------- -------
<S> <C> <C> <C> <C> <C> <C>
March 31 $ 1,577,480 0.30 $ 2,103,307 $ 0.40 $ 2,106,988 $ 0.40
June 30 1,577,480 0.30 2,155,890 0.41 2,135,908 0.41
September 30 1,577,480 0.30 2,155,890 0.41 2,141,693 0.41
December 31 1,577,482 0.30 2,155,890 0.41 2,160,097 0.41
----------- ------- ----------- ------- ----------- -------
Total $ 6,309,922 $ 1.20 $ 8,570,977 $ 1.63 $ 8,544,686 $ 1.63
=========== ======= =========== ======= =========== =======
</TABLE>
Distributions to BAC Holders for the years ended December 31, 1995,
1994 and 1993 were funded as follows:
<TABLE>
<CAPTION>
For the years ended
December 31,
------------------------------------------------
1995 1994 1993
------------ ------------ ------------
<S> <C> <C> <C>
Cash Flow (1) $ 6,647,350 $ 6,740,474 $ 7,132,542
Net (deposits to) withdrawals from working
capital/interest reserves (273,048) 1,917,953 1,499,326 (2)
------------ ------------ ------------
Total cash available for distribution $ 6,374,302 $ 8,658,427 $ 8,631,868
============ ============ ============
Distributions to:
General Partner (1.01%) $ 64,380 $ 87,450 $ 87,182
============ ============ ============
BAC Holders (98.99%) $ 6,309,922 $ 8,570,977 $ 8,544,686
============ ============ ============
</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
-17-
<PAGE>
CAPITAL REALTY INVESTORS TAX EXEMPT FUND III LIMITED PARTNERSHIP
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
- -----------------------------------------------------------
AND RESULTS OF OPERATIONS - Continued
-------------------------
Partnership paid from reserves during the period, including any expenses
paid to the General Partner, but not including such amounts paid from the
Working Capital Reserve, (ii) all cash payments made from Revenues during
such period to discharge Partnership indebtedness, and (iii) all amounts
from revenues, if any, added to the Working Capital Reserve during such
period. Cash flow as defined in the Limited Partnership Agreement is not
to be construed as an alternative to operating income in accordance with
generally accepted accounting principles (GAAP) as an indication of the
Partnership's operating performance.
(2) Excludes working capital loan advances and repayments of $153,000 and
$83,939, respectively.
Although distributions are paid on a quarterly basis, in July 1993, the
Partnership began declaring distributions on a monthly basis as a result of
listing the BACs on AMEX. Distributions to BAC Holders totalling $2,103,307 or
$0.40 per BAC were declared for the four months ending April 30, 1996, payable
to BAC Holders of record as of the last day of each month.
As of December 31, 1995, the Partnership had cash and cash equivalents of
$187,747 and unrestricted marketable securities of $1,213,572. Marketable
securities consist of tax-exempt municipal bonds which generally contain a
seven-day put option with established banks or brokerage houses. The
Partnership classified its investments in marketable securities into the
Available for Sale category under SFAS 115. Realized gains or losses on the
sale of the marketable securities were determined on a specific identification
basis. There were no net unrealized holding gains or losses recognized during
1995 and 1994 as the cost for the tax-exempt municipal bonds approximated fair
value throughout 1995 and 1994.
The Partnership has working capital reserves which may be available for the
ongoing costs of operating the Partnership, for supplementing distributions to
investors and for making working capital loans to the borrowers. As of December
31, 1995 and 1994, the working capital reserves were $4,235,144 and $3,846,520,
respectively, both of which exceed the Partnership's minimum working capital
reserve balance of approximately $3,718,000. The minimum working capital
reserve balance may be increased or decreased from time to time as deemed
necessary by the General Partner. The surplus working capital reserve balance
of approximately $517,000 as of December 31, 1995 may be used to supplement
distributions to BAC Holders. Of the total distributions made during 1995, 1994
and 1993, $0, $1,917,953 and $1,499,326, respectively, were funded from the
surplus working capital reserves.
The Partnership established interest reserves which represent the General
Partner's estimate of the total base interest on the investment in mortgage
revenue bonds and working capital loans to be deferred during the deferral
period (generally, the project construction period), as defined by the
respective loan agreements. The interest reserves also included debt service
reserves established by the Partnership for six mortgage loans. Funds in the
interest reserves are invested in tax-exempt municipal bonds with terms similar
to the Partnership's marketable securities and are stated at their approximate
market value. The interest reserves may be used to supplement distributions to
BAC Holders in an amount sufficient to achieve an equivalent gross base interest
rate as if the full amount of base interest had been paid to the Partnership
-18-
<PAGE>
CAPITAL REALTY INVESTORS TAX EXEMPT FUND III LIMITED PARTNERSHIP
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
- -----------------------------------------------------------
AND RESULTS OF OPERATIONS - Continued
-------------------------
during the deferral period. Interest reserves were $298,750 and $414,326 as of
December 31, 1995 and 1994, respectively. There were no interest reserves
established during 1995, 1994 or 1993. During 1995, 1994 and 1993, amounts of
$115,576, $0 and $15,000, respectively, were transferred to working capital
reserves to fund distributions to BAC Holders from the debt service reserve or
used to fund distributions to BAC Holders from the deferred interest reserve.
As of December 31, 1995, the Partnership had aggregate investments in
marketable securities (including those held in working capital and interest
reserves) with the following maturities:
Amount Maturity
----------- --------
$ 900,632 Within one year
1,030,711 Between one and five years
690,000 Between five and ten years
3,126,123 After ten years
-----------
$5,747,466
===========
In December 1991, the FASB issued Statement of Financial Accounting
Standards No. 107 "Disclosures about Fair Value of Financial Instruments" (SFAS
107). This statement requires the disclosure of fair value information about
financial instruments for which it is practicable to estimate that value. The
Partnership implemented SFAS 107 in 1995. The Partnership has determined that
the carrying amount of its cash and cash equivalents approximate fair value.
The estimated fair value of marketable securities and working capital/interest
reserves invested in marketable securities are based on the quoted market prices
of these instruments at December 31, 1995. The estimated fair value of the
mortgage revenue bonds is based upon the redemption amount relating to the
mortgage revenue bonds under the amended merger agreement.
The following table presents information on the Partnership's financial
instruments:
-19-
<PAGE>
CAPITAL REALTY INVESTORS TAX EXEMPT FUND III LIMITED PARTNERSHIP
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
- -----------------------------------------------------------
AND RESULTS OF OPERATIONS - Continued
-------------------------
<TABLE>
<CAPTION>
Carrying Estimated Fair
Value at Value at
December 31, 1995 December 31, 1995
(000's) (000's)
----------------- -----------------
<S> <C> <C>
Cash and cash equivalents $ 188 $ 188
Marketable securities 1,214 1,211
Working capital reserves
invested in marketable
securities 4,235 4,228
Interest reserves invested in
marketable securities 299 298
Mortgage revenue bonds 70,952 73,896
</TABLE>
The Partnership closely monitors its cash flow and liquidity position in an
effort to ensure that sufficient cash is available for operating requirements
and distributions to BAC Holders. The Partnership's net cash provided by
operating activities for 1995 and 1994, which consisted primarily of receipt of
base interest on mortgage loans, was adequate to support operating requirements
and the payment of declared distributions to BAC Holders and the General
Partner. The Partnership estimates that future cash flows from receipt of base
interest on mortgage loans, in the aggregate, will be sufficient to pay
operating expenses and make distributions to BAC Holders and the General
Partner. Distributions to BAC Holders may be supplemented by withdrawals from
working capital and interest reserves, as discussed above.
Results of Operations
---------------------
The Partnership's net income for 1995 increased approximately $9.9 million
from 1994 primarily due to the cumulative effect of change in accounting for
mortgage revenue bonds of approximately $10.2 million in 1994, as discussed
above. Contributing to the increase in net income was an increase in interest
from mortgage revenue bonds and working capital loans of approximately $158,000
resulting principally from an increase in occupancy and rental rates at certain
of the underlying properties. Partially offsetting the increase in interest from
mortgage revenue bonds and working capital loans was a decrease in interest from
Regency Woods due to the borrowers default on the working capital loan, as
discussed below. Partially offsetting the increase in net income were 1995
merger related expenses of approximately $339,000, including fees incurred by
the Partnership for an independent fairness opinion in connection with the
consideration to be received by BAC Holders in the proposed merger, as
previously discussed. There were no material increases or decreases in the
Partnership's remaining income or expenses.
The Partnership's net loss for 1994 increased approximately $6.0 million
from 1993 primarily due to the cumulative effect of change in accounting for
mortgage revenue bonds of approximately $10.2 million in 1994, as discussed
above. Contributing to the increase in net loss was a decrease in other
-20-
<PAGE>
CAPITAL REALTY INVESTORS TAX EXEMPT FUND III LIMITED PARTNERSHIP
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
- -----------------------------------------------------------
AND RESULTS OF OPERATIONS - Continued
-------------------------
interest income of approximately $131,000 resulting from less cash available for
short-term investments. Partially offsetting the increase in net loss was an
increase in income from investments of $4.1 million due to the reclassification
of all of the mortgage revenue bonds and working capital loans from real estate
to securities and loans, respectively, as discussed above. The 1993 income from
investments was limited to the underlying properties' net rental income. Actual
interest received by the Partnership from the borrowers decreased approximately
$379,000 in 1994 from 1993 primarily due to an increase in non-recurring repairs
and maintenance, payroll expense and marketing fees at certain underlying
properties. Also partially offsetting the increase in net loss was a decrease
in general and administrative expenses and professional fees of approximately
$170,000 primarily related to loan workout negotiations in 1993 concerning Paces
River 2 and the transfer of the deed of Ocean Walk. There were no material
increases or decreases in the Partnership's remaining income or expenses.
In March 1993, the Partnership finalized a three-year workout agreement
(the Workout) with Paces River 2. The balance of the borrower's guarantee
amount has been paid in full. The Workout required the borrower to pay the base
interest on the tax-exempt loan in full on a monthly basis, while allowing all
or a portion of the interest on the working capital loan to accrue (the amount
adjusted annually). Upon the occurrence of a monetary default during the term
of the Workout, the Partnership could direct the release of the deed currently
held in escrow to be recorded in lieu of foreclosure. The borrower has complied
with the terms of the Workout, which expired in March 1996. Effective April
1996, Paces River 2 is required to pay full base interest on both the tax-exempt
loan and the working capital loan.
Shortfalls in interest payments from Regency Woods were being paid from
draws on a $250,000 irrevocable letter of credit. The Partnership drew down the
full amount remaining under the letter of credit in January 1995, resulting in
the default by the borrower on the working capital loan. The borrower
transferred the property by deed in lieu of foreclosure to an Owner Partnership
as of February 28, 1995.
In the fourth quarter of 1994, Washington Ridge informed the Partnership
that the debt service coverage requirement had been met. Upon review of
documentation from the borrower's independent accounting firm, the General
Partner released the operating deficit guarantee on March 30, 1995. Contingent
interest is being paid on a quarterly basis.
In March 1994, the Partnership was notified by the management agent of
Woodlane Place that certain buildings at the property experienced damage due to
frost heaving. The Owner Partnerships hired an engineer to analyze the
underlying problem of inadequate drainage at the property and to determine the
number of affected buildings and the severity of the drainage problem. Based on
this analysis, the costs associated with the correction of the drainage problem
are expected to be approximately $300,000, and will not be covered by the
property's insurance carrier. Due to the nature of the drainage problem,
occupancy levels at the property are not expected to decrease as a result of the
ongoing capital improvements. Funding for these capital improvements may be
provided from the borrowers existing replacement reserves, future property cash
flow, and/or a loan to the borrower from the working capital reserves of the
Partnership. The Partnership has joined with the borrower's insurance carrier
in a lawsuit against the original architect and general contractor of Woodlane
-21-
<PAGE>
CAPITAL REALTY INVESTORS TAX EXEMPT FUND III LIMITED PARTNERSHIP
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
- -----------------------------------------------------------
AND RESULTS OF OPERATIONS - Continued
-------------------------
Place. The Partnership has joined on a contingent basis, with no legal fees
being incurred unless the Partnership receives a settlement or judgment, and
with other legal expenses estimated to be less than $20,000. There is no
assurance that the Partnership will receive any funds as a result of this
lawsuit.
Presented below is a summary of base interest payments for the years ended
December 31, 1995, 1994 and 1993 that are due to the Partnership from the
borrowers.
-22-
<PAGE>
CAPITAL REALTY INVESTORS TAX EXEMPT FUND III LIMITED PARTNERSHIP
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
- -----------------------------------------------------------
AND RESULTS OF OPERATIONS - Continued
-------------------------
<TABLE>
<CAPTION>
For the year ended December 31, 1995
----------------------------------------------------------------------------------
Base Interest Base Interest Cumulative
Paid From Paid From Current Base Unpaid
Current Base Properties' Non-Operating Interest Base
Interest Due(1) Operations(3,4) Sources(2) Not Paid Interest
--------------- -------------- ------------- ------------ -----------
<S> <C> <C> <C> <C> <C>
Ethan's Glen IIA $ 920,937 $ 754,900 $ -- $ 166,037 $ 321,262
Geary Courtyard 1,740,600 762,000 -- 978,600 5,722,503
Ocean Walk 1,774,427 1,648,840 -- 125,587 1,466,416
Paces River 2 769,025 795,522 -- (26,497) 197,359
Regency Woods 693,458 463,362 17,834 212,262 270,050
Valley Creek II 919,100 722,363 -- 196,737 707,343
Washington Ridge 875,000 875,000 -- -- 72,917
Woodlane Place 1,407,000 954,478 -- 452,522 2,662,408
------------ ---------- ------------ ----------- -----------
$ 9,099,547 $6,976,465 $ 17,834 $ 2,105,248 $11,420,258
============ ========== ============ =========== ===========
</TABLE>
<TABLE>
<CAPTION>
For the year ended December 31, 1994
---------------------------------------------------------------------------------
Base Interest Base Interest Cumulative
Paid From Paid From Current Base Unpaid
Current Base Properties' Non-Operating Interest Base
Interest Due(1) Operations Sources(2) Not Paid Interest
--------------- ------------- ------------- ------------ -----------
<S> <C> <C> <C> <C> <C>
Ethan's Glen IIA $ 920,937 $ 776,803 $ 16,053 $ 128,081 $ 155,225
Geary Courtyard 1,740,600 601,329 -- 1,139,271 4,743,903
Ocean Walk 1,774,427 1,571,022 35,838 167,567 1,340,829
Paces River 2 769,025 743,314 -- 25,711 223,856
Regency Woods 693,458 544,268 149,190 -- 57,788
Valley Creek II 919,100 614,332 -- 304,768 510,606
Washington Ridge 875,000 875,000 -- -- 72,917
Woodlane Place 1,407,000 979,747 -- 427,253 2,209,886
------------ ------------ ------------ ----------- -----------
$ 9,099,547 $ 6,705,815 $ 201,081 $ 2,192,651 $ 9,315,010
============ ============ ============ =========== ===========
</TABLE>
-23-
<PAGE>
CAPITAL REALTY INVESTORS TAX EXEMPT FUND III LIMITED PARTNERSHIP
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
- -----------------------------------------------------------
AND RESULTS OF OPERATIONS - Continued
-------------------------
<TABLE>
<CAPTION>
For the year ended December 31, 1993
---------------------------------------------------------------------------------
Base Interest Base Interest Cumulative
Paid From Paid From Current Base Unpaid
Current Base Properties' Non-Operating Interest Base
Interest Due(1) Operations Sources(2) Not Paid Interest
--------------- ------------- ------------- ------------ -----------
<S> <C> <C> <C> <C> <C>
Ethan's Glen IIA $ 920,937 $ 811,075 $ 159,463 $ (49,601) $ 27,144
Geary Courtyard 1,740,600 687,267 -- 1,053,333 3,604,632
Ocean Walk 1,774,427 1,560,048 -- 214,379 1,173,262
Paces River 2 769,025 706,634 142,848 (80,457) 198,145
Regency Woods 673,303 538,836 134,467 -- 57,788
Valley Creek II 919,100 554,970 234,883 129,247 205,838
Washington Ridge 875,000 875,000 -- -- 72,917
Woodlane Place 1,407,000 880,463 -- 526,537 1,782,633
------------ ------------ ------------ ----------- -----------
$ 9,079,392 $ 6,614,293 $ 671,661 $ 1,793,438 $ 7,122,359
============ ========== ========== ========== ===========
</TABLE>
(1) The Partnership charges the borrowers interest on unpaid base interest,
which, totaled $1,050,137, $803,279 and $518,381 for 1995, 1994 and 1993,
respectively.
(2) Amounts were funded from reserves provided for from the mortgage loan
proceeds and/or funds from the general partners of the borrowers.
(3) Excludes amounts received by the Partnership in January 1996 from the
release of excess tax and insurance reserves relating to 1995. Such
amounts received from Ethan's Glen IIA, Paces River 2 and Woodlane Place
totalled $70,000, $12,000 and $23,000, respectively.
(4) Excludes contingent interest of $70,549 received by the Partnership from
Washington Ridge during 1995.
-24-
<PAGE>
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
----------------------------------------
To the Partners and Beneficial Assignee Certificate Holders of
Capital Realty Investors Tax Exempt Fund III Limited Partnership:
We have audited the accompanying balance sheets of Capital Realty Investors
Tax Exempt Fund III Limited Partnership (the Partnership, a Delaware limited
partnership) as of December 31, 1995 and 1994, the related statements of
operations, changes in partners' capital (deficit) and cash flows for the years
ended December 31, 1995 and 1994 and the related consolidated statement of
operations, changes in partners' capital (deficit) and cash flows for the year
ended December 31, 1993. These financial statements are the responsibility of
the Partnership's management. Our responsibility is to express an opinion on
these financial statements based on our audits. We did not audit the financial
statements of certain borrowers (Washington Ridge and Regency Woods in 1993)
which received the proceeds of the Partnership's investments in mortgage revenue
bonds, which combined statements reflect total revenues of 21 percent of 1993
totals. Those statements were audited by other auditors whose reports have been
furnished to us, and our opinion, insofar as it relates to the amounts included
for these borrowers, is based solely on the reports of the other auditors.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits and the reports of other auditors provide a
reasonable basis for our opinion.
As discussed in Note 2 to the financial statements, the Partnership's 1994
and 1995 financial statements have been restated to account for its investments
in mortgage revenue bonds as debt securities.
In our opinion, based on our audits and the reports of other auditors, the
financial statements referred to above present fairly, in all material respects,
the financial position of Capital Realty Investors Tax Exempt Fund III Limited
Partnership as of December 31, 1995 and 1994, and the results of its operations
and its cash flows for the years ended December 31, 1995, 1994 and 1993, in
conformity with generally accepted accounting principles.
Arthur Andersen LLP
Washington, D.C.
May 8, 1996
-25-
<PAGE>
CAPITAL REALTY INVESTORS TAX EXEMPT FUND III LIMITED PARTNERSHIP
BALANCE SHEETS
ASSETS
<TABLE>
<CAPTION>
As of December 31,
-------------------------------
1995 1994
------------ ------------
<S> <C> <C>
Investment in mortgage revenue bonds $ 70,951,947 $ 70,951,947
Cash and cash equivalents 187,747 100,513
Marketable securities 1,213,572 1,707,572
Working capital reserves invested in marketable securities 4,235,144 3,846,520
Interest reserves invested in marketable securities 298,750 414,326
Receivables and other assets 46,719 100,685
------------ ------------
Total assets $ 76,933,879 $ 77,121,563
============ ============
LIABILITIES AND PARTNERS' CAPITAL (DEFICIT)
Distributions payable $ 1,593,577 $ 2,177,886
Accounts payable and accrued expenses 393,345 145,954
------------ ------------
Total liabilities 1,986,922 2,323,840
------------ ------------
Partners' capital (deficit):
General Partner (448,563) (450,071)
Beneficial Assignee Certificates (BACs) - 5,258,268 BACs
issued and outstanding 75,395,520 75,247,794
------------ ------------
Total partners' capital 74,946,957 74,797,723
------------ ------------
Total liabilities and partners' capital $ 76,933,879 $ 77,121,563
============ ============
</TABLE>
The accompanying notes are an integral
part of these financial statements.
-26-
<PAGE>
CAPITAL REALTY INVESTORS TAX EXEMPT FUND III LIMITED PARTNERSHIP
STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
For the years ended December 31,
1995 1994 1993
----------- ----------- -----------
<S> <C> <C> <C>
Interest from mortgage revenue bonds and working
capital loans $ 7,064,848 $ 6,906,896 $ --
----------- ----------- -----------
Income from investment in real estate:
Rental revenue -- -- 13,433,679
Rental expense -- -- (7,144,288)
Depreciation -- -- (3,466,782)
----------- ----------- -----------
Net rental income -- -- 2,822,609
----------- ----------- -----------
7,064,848 6,906,896 2,822,609
----------- ----------- -----------
Other income (expenses):
Other interest income 175,506 214,004 345,366
Merger-related expenses (338,559) -- --
General and administrative (297,001) (314,850) (446,474)
Professional fees (81,258) (72,740) (111,222)
AMEX Listing -- -- (18,517)
----------- ----------- -----------
(541,312) (173,586) (230,847)
----------- ----------- -----------
Income before cumulative effect of accounting change 6,523,536 6,733,310 2,591,762
Cumulative effect of change in accounting for mortgage
revenue bonds -- (10,155,671) --
----------- ----------- -----------
Net income (loss) $ 6,523,536 $(3,422,361) $ 2,591,762
=========== =========== ===========
Net income (loss) allocated to General Partner (1.01%) $ 65,888 $ (34,566) $ 26,177
=========== =========== ===========
Net income (loss) allocated to BAC Holders (98.99%) $ 6,457,648 $(3,387,795) $ 2,565,585
=========== =========== ===========
Per BAC data:
Income before cumulative effect of accounting change 1.23 1.27 0.49
Cumulative effect of change in accounting for
mortgage revenue bonds -- (1.91) --
----------- ----------- -----------
Net income (loss) per BAC $ 1.23 $ (0.64) $ 0.49
=========== =========== ===========
BACs outstanding 5,258,268 5,258,268 5,258,268
=========== =========== ===========
</TABLE>
The accompanying notes are an integral
part of these financial statements.
-27-
<PAGE>
CAPITAL REALTY INVESTORS TAX EXEMPT FUND III LIMITED PARTNERSHIP
STATEMENTS OF CHANGES IN PARTNERS' CAPITAL (DEFICIT)
For the years ended December 31, 1995, 1994 and 1993
<TABLE>
<CAPTION>
Beneficial
Assignee
Certificate General
Holders Partner Total
------------ ----------- ------------
<S> <C> <C> <C>
Balance, December 31, 1992 $ 93,185,667 $ (267,050) $ 92,918,617
Distributions of $1.63 per BAC (including return
of capital of $1.14 per BAC) (8,544,686) (87,182) (8,631,868)
Net income 2,565,585 26,177 2,591,762
------------ ----------- ------------
Balance, December 31, 1993 87,206,566 (328,055) 86,878,511
Distributions of $1.63 per BAC (all of which is
return of capital) (8,570,977) (87,450) (8,658,427)
Net loss (3,387,795) (34,566) (3,422,361)
------------ ----------- ------------
Balance, December 31, 1994 75,247,794 (450,071) 74,797,723
Distributions of $1.20 per BAC (including return
of capital of $0.00 per BAC) (6,309,922) (64,380) (6,374,302)
Net income 6,457,648 65,888 6,523,536
------------ ----------- ------------
Balance, December 31, 1995 $ 75,395,520 $ (448,563) $ 74,946,957
============ =========== ============
</TABLE>
The accompanying notes are an integral
part of these financial statements.
-28-
<PAGE>
CAPITAL REALTY INVESTORS TAX EXEMPT FUND III LIMITED PARTNERSHIP
STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
For the years ended December 31,
1995 1994 1993
------------ ------------ ------------
<S> <C> <C> <C>
Cash flows from operating activities:
Net income (loss) $ 6,523,536 $ (3,422,361) $ 2,591,762
Adjustments to reconcile net income (loss) to
net cash provided by operating activities:
Depreciation -- -- 3,466,782
Cumulative effect of accounting change -- 10,155,671 --
Changes in assets and liabilities:
Decrease in restricted cash
and cash equivalents -- -- 577,009
Decrease in receivables and other assets 53,966 16,290 61,100
Increase in deferred revenue -- -- 252,996
Increase in accrued mortgage administration
and servicing fees due to related parties -- -- 416,811
Decrease in other liabilities
related to real estate operations -- -- (277,563)
Increase (decrease) in accounts payable and
accrued expenses 247,391 (231) 3,203
------------ ------------ ------------
Net cash provided by operating activities 6,824,893 6,749,369 7,092,100
------------ ------------ ------------
Cash flows from investing activities:
Sale of marketable securities 12,938,223 10,618,490 14,418,516
Purchase of marketable securities (12,444,223) (10,589,456) (14,398,858)
Deposits to working capital reserves invested
in marketable securities (539,995) -- (98,939)
Withdrawals from working capital reserves invested
in marketable securities 151,371 1,917,953 1,652,326
Withdrawals from interest reserves invested
in marketable securities 115,576 -- 15,000
------------ ------------ ------------
Net cash provided by investing activities 220,952 1,946,987 1,588,045
------------ ------------ ------------
Cash flows from financing activities:
Distributions to BAC Holders and General Partner (6,958,611) (8,662,676) (8,620,184)
------------ ------------ ------------
Net increase in cash and cash equivalents 87,234 33,680 59,961
Cash and cash equivalents, beginning of year 100,513 66,833 6,872
------------ ------------ ------------
Cash and cash equivalents, end of year $ 187,747 $ 100,513 $ 66,833
============ ============ ============
</TABLE>
The accompanying notes are an integral
part of these financial statements.
-29-
<PAGE>
CAPITAL REALTY INVESTORS TAX EXEMPT FUND III LIMITED PARTNERSHIP
NOTES TO FINANCIAL STATEMENTS
1. Organization
Capital Realty Investors Tax Exempt Fund III Limited Partnership (the
Partnership) was organized on September 1, 1987 under the Delaware Revised
Uniform Limited Partnership Act and will continue until December 31, 2017,
unless dissolved earlier in accordance with the Agreement of Limited
Partnership. The Partnership was formed to acquire a portfolio of tax-exempt
mortgage revenue bonds, issued by various state or local governments or their
agencies or authorities and collateralized by nonrecourse participating first
mortgage loans on multifamily residential developments. Additionally, the
Partnership was permitted to use up to 5% of its gross offering proceeds to make
taxable working capital loans to borrowers to cover certain expenses which could
not be financed from the proceeds of the mortgage revenue bonds.
The Partnership received initial capital contributions from the General
Partner and the Assignor Limited Partner. The General Partner is CRITEF III
Associates Limited Partnership (CRITEF III Associates) whose managing general
partner is C.R.I., Inc. (CRI). The limited partners of CRITEF III Associates
include the shareholders of CRI and a general partnership comprised of certain
current and former employees of CRI and others. The Assignor Limited Partner is
CRITEF III, Inc. whose outstanding shares of stock are owned by the shareholders
of CRI. The Assignor Limited Partner has assigned certain of the ownership
attributes of its limited partnership interest, including rights to a percentage
of the income, gains, losses, deductions and distributions of the Partnership,
to the purchasers of the Beneficial Assignee Certificates (BACs) on the basis of
one unit of limited partnership interest for one BAC.
A Form S-11 Registration Statement was filed with the Securities and
Exchange Commission (SEC) and became effective on February 3, 1988 for a maximum
offering of 10,000,000 BACs at $25 per BAC. The Registration Statement
provided, as was allowed for in the Limited Partnership Agreement, that the BACs
could be issued in series at the discretion of the General Partner. On February
8, 1989, CRITEF III Series A completed its tenth and final investor closing
after raising $131,456,700 from the sale of 5,258,268 BACs. The Partnership
suspended selling the remaining 4,741,732 BACs as Series B effective April 3,
1989. All funds held in escrow pending issuance of the Series B BACs were
refunded to investors. On February 28, 1990, Post-Effective Amendment No. 3 was
filed at the SEC deregistering the Partnership's remaining unsold BACs.
On July 1, 1993, the General Partner listed the BACs on the American Stock
Exchange (AMEX) with a trading symbol of CRL. The General Partner believes that
the benefits to BAC Holders from listing the BACs on AMEX include increased
liquidity and reduced transaction costs. However, a publicly traded partnership
is treated as a corporation for income tax purposes unless it meets certain
exceptions. In 1995, 1994 and 1993, the Partnership met these exceptions and
was not taxed as a corporation.
-30-
<PAGE>
CAPITAL REALTY INVESTORS TAX EXEMPT FUND III LIMITED PARTNERSHIP
NOTES TO FINANCIAL STATEMENTS
2. Summary of significant accounting policies
a. Method of accounting
--------------------
The financial statements of the Partnership are prepared in accordance
with generally accepted accounting principles (GAAP).
b. Use of estimates
----------------
In preparing financial statements in conformity with GAAP, the
Partnership is required to make estimates and assumptions that affect the
reported amounts of assets and liabilities and the disclosure of contingent
assets and liabilities at the date of the financial statements and revenues
and expenses during the reporting period. Actual results could differ from
those estimates.
c. Investments in mortgage revenue bonds and working capital loans
---------------------------------------------------------------
Prior to January 1, 1994, the Partnership accounted for its investment
in mortgage revenue bonds in accordance with the American Institute of
Certified Public Accountants (AICPA) "Notice to Practitioners - ADC
Arrangements" (the Notice). Under the Notice, loans qualifying as ADC
arrangements follow real estate or joint venture accounting policies if the
lender effectively has the risks and rewards of an owner or investor in
real estate. Generally, the lender has the same risks and rewards as an
owner or investor if the borrower has little or no equity in the project
and if the lender expects to participate in residual profits (as defined in
the Notice) of the project. Further, if the lender is expected to receive
over 50 percent of the expected residual profits from a project, the lender
should account for the arrangement as real estate. As such, the Ocean
Walk, Regency Woods, Valley Creek II, and Washington Ridge investments
originally qualified as ADC arrangements and followed real estate
accounting policies. However, affiliates of the Partnership formed to take
title to the properties (Owner Partnerships) received deeds in lieu of
foreclosure, subject to existing indebtedness, on all of these investments,
except Washington Ridge, from 1993 through 1995.
Also prior to January 1, 1994, investments in mortgage revenue bonds
and working capital loans were accounted for as real estate on the earlier
of the date of ADC determination, deed in lieu of foreclosure, transfer of
partnership interests, or in-substance foreclosure, and were recorded at
the lower of (a) the carrying value of the mortgage revenue bonds and
working capital loans and related accrued interest or (b) the estimated
fair value of the property, including other net assets of the property.
The estimated fair values of the properties were the amounts the owners of
the properties could reasonably expect to receive in an as-is sale between
a willing buyer and a willing seller. The General Partner determined the
estimated fair value of the properties acquired based upon information
obtained from independent real estate appraisers and/or its own market
analyses. To the extent fair value was less than carrying value, direct
write-downs were recorded to establish a new basis for these assets. Since
the working capital loans are subordinate to the first mortgage loan on the
properties, write-downs were first applied against the working capital
loans and then against the mortgage revenue bonds. As of January 1, 1994,
the Partnership's investment in working capital loans had been written down
to zero.
-31-
<PAGE>
CAPITAL REALTY INVESTORS TAX EXEMPT FUND III LIMITED PARTNERSHIP
NOTES TO FINANCIAL STATEMENTS
2. Summary of significant accounting policies - Continued
Subsequent to recording its investment as real estate, the Partnership
evaluated its recorded investment in the properties on a lower of cost or
net realizable value basis, under the guidance of the American Institute of
Certified Public Accountants (AICPA) Statement of Position 92-3
"Accounting for Foreclosed Assets". The Partnership's net realizable value
determination took into account the Partnership's intention to hold these
properties for the long term, if necessary, to recover its recorded
investment. If the Partnership determined that its estimated net
realizable value was less than the recorded investment in the property, an
additional valuation adjustment was recorded if the decline was considered
permanent.
In May 1993, the Financial Accounting Standards Board (FASB) issued
Statement of Financial Accounting Standards No. 115 "Accounting for Certain
Investments in Debt and Equity Securities" (SFAS 115). This statement
requires that most investments in securities be classified into one of the
following investment categories based upon circumstances under which
securities might be sold: Held to Maturity, Available for Sale, and
Trading. Generally, investments in securities for which an enterprise has
both the ability and the intent to hold to maturity should be accounted for
using the amortized cost method and all other securities must be recorded
at their fair values. Following such adoption, the Partnership (as did
others in the industry) continued to account for its investments in
mortgage revenue bonds as investments in real estate based on ADC
determination or consolidation of the Owner Partnership in accordance with
SEC rules.
In conjunction with the review of the Partnership's 1995 financial
statements by the Securities and Exchange Commission (SEC) staff, the
Partnership agreed that it would account for all of its investments in
mortgage revenue bonds as debt securities under the provisions of SFAS 115
effective January 1, 1994, and restate its 1995 and 1994 financial
statements to reflect this change. Accordingly, effective January 1, 1994,
all investments in mortgage revenue bonds are classified and accounted for
as held to maturity securities and are carried at amortized cost because of
the Partnership's ability and intent to hold these investments to maturity.
The effect of adopting SFAS 115 on net income previously reported for 1995
and 1994 is $2,795,175 and $(6,678,675), respectively. Income per BAC as
previously reported was $0.70 and $0.61 for 1995 and 1994, respectively.
Income (loss) per BAC as previously reported has been revised to $1.23 and
$(0.64) per BAC for 1995 and 1994, respectively. The impact on partners
capital of adopting SFAS 115 for 1995 and 1994 is $(3,883,500) and
$(6,678,675), respectively.
As discussed above, the Partnership accounted for its investment in
mortgage revenue bonds and working capital loans as real estate, until
January 1, 1994, when the financial statements were restated to reflect
implementation of SFAS 115. Net realizable value, prior to implementation
of SFAS 115, was based on holding the assets for long-term income
production - as such net realizable value only considered the recovery of
the Partnership's investments over time based on the properties' ability to
generate sufficient cash flow to recover the Partnership's investment over
the long term. Based on the SEC's requirement that the Partnership account
for its mortgage revenue bonds as debt securities, the implementation of
SFAS 115 has a different accounting framework for evaluating realizability.
In accordance with SFAS 115's provisions for held to maturity securities,
the Partnership evaluates the fair value of its mortgage revenue bonds to
-32-
<PAGE>
CAPITAL REALTY INVESTORS TAX EXEMPT FUND III LIMITED PARTNERSHIP
NOTES TO FINANCIAL STATEMENTS
2. Summary of significant accounting policies - Continued
determine if impairment exists. If a decline in fair value is determined
to be other-than-temporary, the security is written down to its fair value.
Since most of these bonds are in default the Partnership has concluded that
permanent impairment has occurred. As such, the amount of permanent
impairment is measured by the Partnership's estimate of the mortgage
revenue bonds' fair value at January 1, 1994. The Partnership has measured
fair value as discussed below. This effect of adopting SFAS 115 is
reflected as a cumulative effect of change in accounting for mortgage
revenue bonds in the statements of operations. On an ongoing basis, the
Partnership evaluates the permanent impairment; however, subsequent to
January 1, 1994, the Partnership did not recognize any impairment losses.
Interest Income Recognition
---------------------------
Since six of the eight mortgage revenue bonds are in default and
write-downs have been taken on all of the mortgage revenue bonds due to
impairment, base interest and contingent interest on the mortgage revenue
bonds is recognized as revenue when collected.
d. Depreciation
------------
Through December 31, 1993, depreciation of real estate was based on
the estimated useful lives of the properties, which consist of 27.5 years
for building and 7 years for personal property. The straight-line method
was used for building, and the double declining balance method was used for
personal property.
e. Cash and cash equivalents
-------------------------
Cash and cash equivalents consist of tax-exempt money market funds
with original maturities of three months or less.
f. Marketable securities
---------------------
Marketable securities, consisting of tax-exempt municipal bonds with
carrying amounts of $1,213,572 and $1,707,572 as of December 31, 1995 and
1994, respectively, are stated at their approximate market value. The
Partnership has the option to resell certain bonds to the seller on seven
days' notice at the bonds' par value. Proceeds from the sale of marketable
securities totalled $13,205,170, $12,536,443 and $16,085,842 for the years
ended December 31, 1995, 1994 and 1993, respectively. Realized gains and
losses on these sales were determined on a specific identification basis.
The interest rate on the bonds is generally adjusted weekly.
The Partnership has classified its investments in marketable
securities into the Available for Sale category under SFAS 115. There were
no net unrealized holding gains or losses recognized during 1995 and 1994
as the cost for the tax-exempt municipal bonds approximated fair value
throughout 1995 and 1994.
As of December 31, 1995, the Partnership had aggregate investments in
marketable securities (including those held in working capital and interest
reserves, as discussed below) with the following maturities:
-33-
<PAGE>
CAPITAL REALTY INVESTORS TAX EXEMPT FUND III LIMITED PARTNERSHIP
NOTES TO FINANCIAL STATEMENTS
2. Summary of significant accounting policies - Continued
Amount Maturity
----------- --------
$ 900,632 Within one year
1,030,711 Between one and five years
690,000 Between five and ten years
3,126,123 After ten years
-----------
$5,747,466
===========
g. Working capital reserves
------------------------
The Partnership has working capital reserves which may be available
for the ongoing costs of operating the Partnership, for supplementing
distributions to investors and for making working capital loans to the
borrowers. As of December 31, 1995 and 1994, the working capital reserves
were $4,235,144 and $3,846,520, respectively, both of which exceed the
Partnership's minimum working capital reserve balance of approximately
$3,718,000. The minimum working capital reserve balance may be increased
or decreased from time to time as deemed necessary by the General Partner.
The surplus working capital reserve balance of approximately $517,000 as of
December 31, 1995 may be used to supplement distributions to BAC Holders.
Of the total distributions made during 1995, 1994 and 1993, $0, $1,917,953
and $1,499,326, respectively, were funded from the surplus working capital
reserves.
h. Interest reserves
-----------------
The Partnership established interest reserves which represent the
General Partner's estimate of the total base interest on the investment in
mortgage revenue bonds and working capital loans to be deferred during the
deferral period (generally, the project construction period), as defined by
the respective loan agreements. The interest reserves also included debt
service reserves established by the Partnership for six mortgage loans.
Funds in the interest reserves are invested in tax-exempt municipal bonds
with terms similar to the Partnership's marketable securities and are
stated at their approximate market value. The interest reserves may be
used to supplement distributions to BAC Holders in an amount sufficient to
achieve an equivalent gross base interest rate as if the full amount of
base interest had been paid to the Partnership during the deferral period.
Interest reserves were $298,750 and $414,326 as of December 31, 1995 and
1994, respectively. There were no interest reserves established during
1995, 1994 or 1993. During 1995, 1994 and 1993, amounts of $115,576 and $0
and $15,000, respectively, were transferred to working capital reserves to
fund distributions to BAC Holders from the debt service reserve or used to
fund distributions to BAC Holders from the deferred interest reserve.
i. Fair value of financial instruments
-----------------------------------
In December 1991, the FASB issued Statement of Financial Accounting
Standards No. 107 "Disclosures about Fair Value of Financial Instruments"
(SFAS 107). This statement requires the disclosure of fair value
information about financial instruments for which it is practicable to
-34-
<PAGE>
CAPITAL REALTY INVESTORS TAX EXEMPT FUND III LIMITED PARTNERSHIP
NOTES TO FINANCIAL STATEMENTS
2. Summary of significant accounting policies - Continued
estimate that value. The Partnership implemented SFAS 107 in 1995. The
Partnership has determined that the carrying value of its cash and cash
equivalents approximate fair value. The estimated fair value of marketable
securities and working capital/interest reserves invested in marketable
securities are based on the quoted market prices of these instruments at
December 31, 1995. The estimated fair value of the mortgage revenue bonds
is based upon the redemption amount relating to the mortgage revenue bonds
under the amended merger agreement.
The following table presents information on the Partnership's
financial instruments:
<TABLE>
<CAPTION>
Carrying Estimated Fair
Value at Value at
December 31, 1995 December 31, 1995
(000's) (000's)
----------------- -----------------
<S> <C> <C>
Cash and cash equivalents $ 188 $ 188
Marketable securities 1,214 1,211
Working capital reserves
invested in marketable
securities 4,235 4,228
Interest reserves invested in
marketable securities 299 298
Mortgage revenue bonds 70,952 73,896
</TABLE>
j. Statements of Cash Flows
------------------------
The statements of cash flows are intended to reflect only cash receipt
and cash payment activity; therefore, the statements do not reflect non-
cash investing and financing activities that affect the balance sheets.
k. Income taxes
------------
No provision has been made for federal, state or local income taxes in
the financial statements since the General Partner and the BAC Holders are
required to report on their individual tax returns their allocable share of
taxable income, gains, losses, deductions and credits of the Partnership.
For federal income tax purposes, the Partnership's investment in mortgage
revenue bonds and working capital loans is carried at cost in the aggregate
amount of $100,510,604 as of both December 31, 1995 and 1994. Interest
income from the mortgage revenue bonds is exempt from regular federal
income tax, as discussed in Notes 5 and 6.
l. Net income (loss) and distributions per BAC
-------------------------------------------
Net income (loss) and distributions per BAC represent 98.99% of net
income (loss) and distributions declared, respectively, divided by the
number of BACs outstanding during the year.
-35-
<PAGE>
CAPITAL REALTY INVESTORS TAX EXEMPT FUND III LIMITED PARTNERSHIP
NOTES TO FINANCIAL STATEMENTS
2. Summary of significant accounting policies - Continued
m. Reclassifications
-----------------
Certain amounts in the financial statements for the year ended
December 31, 1993 and 1994 have been reclassified to conform with the 1995
presentation.
3. Related-party transactions
The General Partner has the authority and responsibility for, among other
things, the overall management and control of the Partnership. The General
Partner and its affiliates do not receive any fees from the Partnership for
their services to the Partnership, but are reimbursed by the Partnership for any
actual costs and expenses incurred in connection with the operation of the
Partnership. During 1995, 1994 and 1993, $188,546, $191,411 and $163,540,
respectively, were reimbursed for such costs and are included in general and
administrative expense and merger- related expense in the statements of
operations.
CRICO Mortgage Company, Inc. (CRICO Mortgage), a former affiliate of the
General Partner, was entitled to annual mortgage administration and servicing
fees from the borrowers which were payable from operating revenues each month
after payment of full base interest on the mortgage loans. On June 30, 1995,
CRICO Mortgage merged with and into CRIIMI MAE Services Limited Partnership
(CRIIMI), an affiliate of CRIIMI MAE Inc., a publicly traded real estate
investment trust (the REIT). The REIT was originally sponsored by CRI, the
general partner of the General Partner, but is not controlled by CRI, although
the CRI stockholders are directors, officers and major stockholders of the REIT.
Pursuant to the REIT merger agreement, the right to receive the accrued and
unpaid mortgage administration and servicing fees as of the date of the REIT
merger was distributed by CRICO Mortgage to its shareholders and contributed by
them to CRI. After June 30, 1995, the mortgage administration and servicing are
being performed by CRIIMI and mortgage administration and servicing fees are
payable to that entity. The merger did not result in any increase in fees or
changes in the amount of fees which are currently payable.
The following unpaid fees were due to CRI/CRICO Mortgage and CRIIMI from
the borrowers as of December 31, 1995 and 1994:
<TABLE>
<CAPTION>
As of December 31,
1995 1994
----------- -----------
<S> <C> <C>
CRI/CRICO Mortgage $ 1,578,694 $ 1,307,173
CRIIMI 283,338 --
----------- -----------
Total $ 1,862,032 $ 1,307,173
=========== ===========
</TABLE>
The unpaid fees are payable from available cash flow after payment of all
current and delinquent base interest and accrued interest on delinquent base
interest. If available cash flow from the borrower is insufficient to pay the
fee, it is payable on the earlier of prepayment or maturity of the loan, after
debt repayment. Any payments made with respect to unpaid fees will be applied
-36-
<PAGE>
CAPITAL REALTY INVESTORS TAX EXEMPT FUND III LIMITED PARTNERSHIP
NOTES TO FINANCIAL STATEMENTS
3. Related-party transactions - Continued
against the oldest outstanding fees first.
In connection with the amended merger agreement entered into by the
Partnership, as discussed in Note 7, unpaid fees accrued through June 30, 1995
will be purchased from CRI for the discounted amount of $667,485, which
represents approximately 42% of the total accrued fees owed to CRI. In
addition, unpaid fees accrued from July 1, 1995 through June 30, 1996 will be
purchased by Capital Apartment Properties, Inc. (CAPREIT) from CRIIMI for
$556,674, which represents 100% of the accrued fees which are expected to be
owed to CRIIMI for that period. The proposed purchase price for CRIIMI's
portion remains in effect until June 30, 1996. If the proposed merger is not
consummated by such date, the purchase price of CRIIMI's portion of the accrued
servicing fees will be adjusted upward at a rate of $47,223 per month.
Fees paid by the borrowers to CRI/CRICO Mortgage and CRIIMI for the years
ended December 31, 1995, 1994 and 1993 were as follows:
<TABLE>
<CAPTION>
For the years ended December 31,
1995 1994 1993
----------- ----------- -----------
<S> <C> <C> <C>
CRI/CRICO Mortgage $ 49,312 $ 144,175 $ 212,359
CRIIMI 37,500 - -
----------- ----------- -----------
Total $ 86,812 $ 144,175 $ 212,359
=========== =========== ===========
</TABLE>
CRICO Management Corporation (CRICO), an affiliate of the General Partner,
assumed the property management responsibilities for Woodlane Place on October
1, 1991, and for Ethan's Glen IIA on June 1, 1992. The General Partner engaged
CRICO Management of Minnesota, Inc. (CRICO Minnesota), another affiliate of the
General Partner, as management agent for the Valley Creek II and Ocean Walk
properties on July 1, 1992 and November 1, 1993, respectively. Effective August
1, 1992, CRICO transferred its property management responsibilities for Woodlane
Place and Ethan's Glen IIA to CRICO Minnesota. Management fees of $21,399 were
paid or accrued to the affiliates of the General Partner by the properties for
the month ended January 31, 1994. In addition, 1993 incentive management fees
of $9,990 relating to Woodlane Place were paid to CRICO Minnesota in December
1994. Management fees of $198,645 were paid or accrued during 1993. The amount
paid under each management contract represented a base fee equal to 3.75% of
total gross revenues of the property, plus an additional incentive fee of .50%
payable only if certain performance standards were met.
On February 1, 1994, CRICO and CRICO Minnesota contributed their property
management contracts and personnel to CAPREIT Residential Corporation
(Residential). Residential was formed by CRI, but on February 1, 1994,
Residential was sold to A.P. CAPREIT Limited Partnership, which is not currently
owned or controlled by CRI and/or its affiliates, although CRI and several
affiliates held up to an aggregate 22% residual profit interest until June 30,
1995, when the interests were redeemed. This change did not result in any
increase in property management fees.
Owner Partnerships formed to take title to properties, subject to existing
indebtedness, are structured as limited partnerships. The Owner Partnerships
-37-
<PAGE>
CAPITAL REALTY INVESTORS TAX EXEMPT FUND III LIMITED PARTNERSHIP
NOTES TO FINANCIAL STATEMENTS
3. Related-party transactions - Continued
and the managing general partner of the General Partner have primarily common
ownership (except for Ethan's Glen IIA prior to March 14, 1996) 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 the interest on the mortgage revenue bonds and to hold their
properties until their ultimate disposition. No compensation or fees were paid
by the Partnership to the Owner Partnerships or their principals in connection
with the transfers of ownership.
In connection with the amended merger agreement, each of the Owner
Partnerships has agreed to either (a) sell, assign and transfer the partnership
interests in, or the real property and other assets of, such Owner Partnerships
to CAPREIT or its designee for no additional consideration or (b) admit CAPREIT
or its designee as the managing general partner, whereupon the general partner
interests of the current general partners will be converted into limited partner
interests, and CAPREIT will have the option to acquire all of the limited
partner interests at any time within five years from the closing date of the
merger at the then fair market value (defined as the proportionate interest of
such limited partner in the fair market value of the partnership property as
encumbered by the mortgage loans) thereof. Although such interests currently
have nominal value, if the fair market value of the partnership properties
increases prior to the time CAPREIT exercises its option, such increase in value
may benefit the owners of the Owner Partnerships.
4. Profits, losses and cash distributions to Partners
Cash available for distribution (defined below) is distributed on a
quarterly basis within 45 days after the end of each quarter. Each year, cash
available for distribution is distributed 98.99% to the BAC Holders and 1.01% to
the General Partner for each year until the BAC Holders receive a noncumulative
return equal to 10% per annum of their adjusted capital contribution (adjusted
for any return of capital contributions and by any distributions of residual or
liquidation proceeds from the sale of mortgaged properties or the dissolution of
the Partnership, described below). Thereafter, during such year, the balance of
all such cash available for distribution will be distributed 90% to the BAC
Holders and 10% to the General Partner.
Cash available for distribution, as defined in the Partnership Agreement,
is as follows:
(1) all revenues received by the Partnership, plus
(2) any amounts released by the General Partner from the working capital
reserves, plus
-38-
<PAGE>
CAPITAL REALTY INVESTORS TAX EXEMPT FUND III LIMITED PARTNERSHIP
NOTES TO FINANCIAL STATEMENTS
4. Profits, losses and cash distributions to Partners - Continued
(3) any amounts released from the interest reserves after completion of
any applicable interest deferral period with respect to the mortgage
loan in connection with such mortgaged property, less:
(i) payments from revenues of operating expenses and Partnership
indebtedness, and
(ii) any amounts set aside for deposit into the working capital
reserves.
All cash receipts of the Partnership arising from a sale or other
disposition of a mortgaged property or the repayment of the principal and the
payment of interest, if any, payable upon the redemption or remarketing of the
applicable mortgage revenue bond (residual proceeds) will be distributed as
follows:
(1) to the payment of debts and liabilities of the Partnership (including
any expenses of the Partnership incident to a sale or repayment),
including loans or other debts and liabilities of the Partnership to
any Partner or any affiliate (such debts and liabilities, in the case
of a nonliquidating distribution, to be only those which are then
required to be paid or, in the judgment of the General Partner,
required to be provided for) and to any additions to the working
capital reserves as the General Partner deems reasonably necessary for
contingent, unmatured or unforeseen liabilities or obligations of the
Partnership;
(2) to the General Partner and BAC Holders in the total amount of their
capital contributions reduced (but not below zero) by any return of
capital contributions previously made to the General Partner and BAC
Holders and by the total amount of all prior distributions of residual
proceeds to them; and
(3) to the General Partner and BAC Holders, in accordance with the
respective positive balances in their capital accounts as of the date
of sale or repayment, adjusted for operations and distributions to
that date, and after allocation of any profits from such sale or
repayment.
All cash receipts other than residual proceeds arising from the dissolution
of the Partnership and the liquidation of the Partnership's assets less the
amounts utilized to pay the expenses of such liquidation (liquidation proceeds)
will be allocated in the same order as residual proceeds.
All profits and losses not arising from a sale of a mortgaged property or
repayment of a mortgage loan shall be allocated 98.99% to the BAC Holders and
1.01% to the General Partner until the BAC Holders have received any unpaid
portion of the preferred cash flow return. Thereafter, such profits and losses
shall be allocated 90% to the BAC Holders and 10% to the General Partner.
Profits arising from a sale of a mortgaged property or repayment of a
mortgage loan will be allocated to the General Partner and BAC Holders as
follows: (i) that portion of profits as of the date immediately prior to the
date of sale or repayment shall be allocated in proportion to the negative
balances in their capital accounts, if any, to bring such negative balances in
their capital accounts to zero; (ii) to the General Partner and BAC Holders in
the amount of their capital contributions reduced (but not below zero) by any
return of capital contributions previously made to them and reduced by the sum
of (a) the total amount of all prior distributions of residual proceeds made to
them, plus (b) the positive balance in their respective capital accounts prior
-39-
<PAGE>
CAPITAL REALTY INVESTORS TAX EXEMPT FUND III LIMITED PARTNERSHIP
NOTES TO FINANCIAL STATEMENTS
4. Profits, losses and cash distributions to Partners - Continued
to this allocation; (iii) of the remainder, 98.99% to the BAC Holders and 1.01%
to the General Partner, until the BAC Holders have received an allocation equal
to any unpaid portion of an amount which equals an annual noncompounded return
of 10% on their adjusted capital contributions (the Preferred Cash Flow Return);
provided however, that the allocation to the General Partner pursuant to this
provision will be deferred until after the BAC Holders have been allocated an
amount equal to any unpaid portion of the Preferred Cash Flow Return; and (iv)
the remainder, 90% to the BAC Holders and 10% to the General Partner. No
proceeds were received in connection with any transfers of properties to Owner
Partnerships.
Losses from such a sale or repayment shall be allocated as follows: (i) an
amount of loss to the Partners and BAC Holders to the extent and in such
proportions as shall be necessary such that, after giving effect thereto, the
respective balances in all Partners' and BAC Holders' capital accounts are
proportionate to their interests; (ii) an amount of loss, if any, to the
Partners and BAC Holders until each Partners' and BAC Holders' capital account
equals his capital contributions to the Partnership; (iii) an amount of loss to
the Partners and BAC Holders to the extent of and in proportion to the Partners'
and BAC Holders' capital accounts after the above-described adjustments; and
(iv) any remaining loss to the Partners and BAC Holders in accordance with the
manner in which they bear the economic risk of loss or, if none, in accordance
with their interests.
The Partnership expects to continue to make distributions to BAC Holders on
a quarterly basis. The amended merger agreement stipulates that 1996
distributions cannot exceed ten cents per BAC per month. There are no other
legal restrictions on the Partnership's present or future ability to make cash
distributions other than as set forth in the amended merger agreement. The
distributions to BAC Holders have been funded from three primary sources: cash
flow from the underlying properties' operations, surplus working capital
reserves of the Partnership, and funds from property reserves/borrower
guarantees. However, because the surplus working capital reserves are almost
depleted and property reserves/borrower guarantees were depleted during the
first quarter of 1995, it is expected that distributions will be based primarily
on cash flow from the Partnership's operations. Cash flow from the
Partnership's operations consists of cash flow from six of the properties, plus
specified interest payments from two properties and contingent interest from one
property, supplemented by any available property reserves/borrower guarantees,
less Partnership expenses. 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.
-40-
<PAGE>
CAPITAL REALTY INVESTORS TAX EXEMPT FUND III LIMITED PARTNERSHIP
NOTES TO FINANCIAL STATEMENTS
4. Profits, losses and cash distributions to Partners - Continued
The following distributions were paid or accrued to BAC Holders of record
during 1995, 1994 and 1993:
<TABLE>
<CAPTION>
1995 1994 1993
Distributions to Distributions to Distributions to
BAC Holders BAC Holders BAC Holders
------------------------ ------------------------ ------------------------
Quarter Ended Total Per BAC Total Per BAC Total Per BAC
- ---------------------- ----------- ------- ----------- ------- ----------- -------
<S> <C> <C> <C> <C> <C> <C>
March 31 $ 1,577,480 $ 0.30 $ 2,103,307 $ 0.40 $ 2,106,988 $ 0.40
June 30 1,577,480 0.30 2,155,890 0.41 2,135,908 0.41
September 30 1,577,480 0.30 2,155,890 0.41 2,141,693 0.41
December 31 1,577,482 0.30 2,155,890 0.41 2,160,097 0.41
----------- ------- ----------- ------- ----------- -------
Total $ 6,309,922 $ 1.20 $ 8,570,977 $ 1.63 $ 8,544,686 $ 1.63
=========== ======= =========== ======= =========== =======
</TABLE>
Distributions to BAC Holders for the years ended December 31, 1995,
1994 and 1993 were funded as follows:
<TABLE>
<CAPTION>
For the years ended
December 31,
-------------------------------------------------
1995 1994 1993
------------ ------------ ------------
<S> <C> <C> <C>
Cash Flow (1) $ 6,647,350 $ 6,740,474 $ 7,132,542
Net (deposits to) withdrawals from working
capital/interest reserves (273,048) 1,917,953 1,499,326(2)
------------ ------------ ------------
Total cash available for distribution $ 6,374,302 $ 8,658,427 $ 8,631,868
============ ============ ============
Distributions to:
General Partner (1.01%) $ 64,380 $ 87,450 $ 87,182
============ ============ ============
BAC Holders (98.99%) $ 6,309,922 $ 8,570,977 $ 8,544,686
============ ============ ============
</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
-41-
<PAGE>
CAPITAL REALTY INVESTORS TAX EXEMPT FUND III LIMITED PARTNERSHIP
NOTES TO FINANCIAL STATEMENTS
4. Profits, losses and cash distributions to Partners - 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.
(2) Excludes working capital loan advances and repayments of $153,000 and
$83,939, respectively.
Although distributions are paid on a quarterly basis, in July 1993, the
Partnership began declaring distributions on a monthly basis as a result of
listing the BACs on AMEX. Distributions to BAC Holders totalling $2,103,307 or
$0.40 per BAC were declared for the four months ending April 30, 1996, payable
to BAC Holders of record as of the last day of each month.
5. Investment in Mortgage Revenue Bonds
Description of the portfolio
- ----------------------------
The Partnership acquired a portfolio of eight tax-exempt mortgage revenue
bonds issued by various state and local governments or their agencies or
authorities. The proceeds from the mortgage revenue bonds were used by the
issuers to make nonrecourse participating mortgage loans to finance construction
and ownership of multifamily residential developments. The mortgage revenue
bond with respect to each mortgaged property is payable only from payments made
on the corresponding mortgage loan. None of the mortgage revenue bonds
constitutes a general obligation of any state or local government agency or
authority and no such government agency or authority is liable for the mortgage
revenue bonds.
The Partnership invested in eight Federally tax-exempt mortgage revenue
bonds with an aggregate principal amount of $97,101,000 and made three working
capital loans with an aggregate principal amount of $3,409,604. A description
of the mortgage revenue bonds and working capital loans held by the Partnership
is as follows:
-42-
<PAGE>
CAPITAL REALTY INVESTORS TAX EXEMPT FUND III LIMITED PARTNERSHIP
NOTES TO FINANCIAL STATEMENTS
5. Investment in Mortgage Revenue Bonds - Continued
<TABLE>
<CAPTION>
Permanent
Loan
Loan Maturity Loan Carrying
Mortgaged Property No. of Origination Face Amount Maturity Value
Name and Location Rental Units Date (000's) Date (000's)
- -------------------- ------------ ------------ -------------- ---------- -----------
<S> <C> <C> <C> <C> <C>
ETHAN'S GLEN IIA
KANSAS CITY, MO 242 8/18/88 $ 10,525 3/31/2000 $ 8,840
GEARY COURTYARD
SAN FRANCISCO, CA (1) 164 8/18/88 18,900 9/01/2000 8,706
OCEAN WALK
KEY WEST, FL 296 1/27/89 19,826 4/01/2000 16,084
PACES RIVER 2
ROCK HILL, SC (1) 230 7/28/88 9,600 2/02/2000 7,842
REGENCY WOODS
WEST DES MOINES, IA (1) 200 1/29/90 7,560 2/01/2000 4,812
VALLEY CREEK II
WOODBURY, MN 177 2/21/89 10,100 7/01/2000 6,508
WASHINGTON RIDGE
KNOXVILLE, TN 248 12/14/88 10,000 7/01/2000 7,642
WOODLANE PLACE
WOODBURY, MN 216 9/16/88 14,000 11/01/1999 10,518
----- ----------- ---------
1,773 $ 100,511 $ 70,952
===== =========== =========
</TABLE>
(1) The amount listed under face amount of mortgage includes both the first
lien tax-exempt loan and the second lien working capital loan.
Base interest income on the mortgage loans is funded from property
operations, certain borrowers' operating deficit guarantees and reserves, if
any, established at the time of closing on the acquisition of the mortgage
revenue bonds. If base interest payments cannot be fully satisfied, the General
Partner evaluates various courses of action, including sale, recapitalization,
loan modification, deed in lieu of foreclosure or foreclosure.
In March 1993, the Partnership finalized a three-year workout agreement
(the Workout) with Paces River 2. The balance of the borrower's guarantee
amount has been paid in full. The Workout required the borrower to pay the base
interest on the tax-exempt loan in full on a monthly basis, while allowing all
or a portion of the interest on the working capital loan to accrue (the amount
adjusted annually). Upon the occurrence of a monetary default during the term
of the Workout, the Partnership could direct the release of the deed currently
held in escrow to be recorded in lieu of foreclosure. The borrower has complied
with the terms of the Workout, which expired in March 1996. Effective April
1996, Paces River 2 is required to pay full base interest on both the tax-exempt
loan and the working capital loan.
Shortfalls in interest payments from Regency Woods were being paid from
draws on a $250,000 irrevocable letter of credit. The Partnership drew down the
full amount remaining under the letter of credit in January 1995, resulting in
the default by the borrower on the working capital loan. The borrower
transferred the property by deed in lieu of foreclosure to an Owner Partnership
-43-
<PAGE>
CAPITAL REALTY INVESTORS TAX EXEMPT FUND III LIMITED PARTNERSHIP
NOTES TO FINANCIAL STATEMENTS
5. Investment in Mortgage Revenue Bonds - Continued
as of February 28, 1995.
In the fourth quarter of 1994, Washington Ridge informed the Partnership
that the debt service coverage requirement had been met. Upon review of
documentation from the borrower's independent accounting firm, the General
Partner released the operating deficit guarantee on March 30, 1995. Contingent
interest is being paid on a quarterly basis.
Collateral
- ----------
The mortgage revenue bonds are secured by mortgage loans which are
collateralized by first mortgages on the properties, assignments of existing and
future rents and security agreements with respect to personal property evidenced
by the filing of Uniform Commercial Code (UCC) financing statements. Addition-
ally, the Partnership required the borrowers to establish operating reserves,
replacement reserves, tax and insurance escrows and debt service reserves and
provide operating deficit guarantees. As a result of various circumstances,
including, but not limited to, slow rent-up of the properties, unstable
operations and depletion of certain properties' operating and debt service
reserves, Owner Partnerships had received title to six of the properties as of
December 31, 1995.
As of December 31, 1995, six properties collateralizing certain of the
mortgage revenue bonds have been transferred by deed in lieu of foreclosure (or
by transfer of partnership interests in the borrower entity) to Owner
Partnerships, subject to existing indebtedness. In connection with the
transfers of properties to Owner Partnerships, the Partnership obtained an
opinion from its former independent accounting firm in July of 1991 that the
reduction in pay rate and compounding of unpaid base interest at the original
base interest rate would not cause a reissuance of the bonds under Section 103
of the Internal Revenue Code of 1986, as amended (the Code) (which would cause
the bonds to lose their tax-exempt status). The Partnership also obtained
opinions from certain bond counsel that certain transfers of the properties to
Owner Partnerships would not cause the Partnership to become a substantial user
of the projects or a related party to a substantial user pursuant to Section 103
of the Code (which also could have caused the bonds to lose their tax-exempt
status). The bond counsel opinions were obtained in connection with the Ethan's
Glen IIA and Ocean Walk transfers.
In April 1991, the U.S. Supreme Court decided a case, Cottage Savings
Association V. Commissioner (Cottage Savings) that could be interpreted to
impact then existing authority addressing the modification of debt instruments.
In response to this decision in December 1992 the Internal Revenue Service
issued Proposed Regulation Section 1.1001-3 which specifically address the tax
consequences of modifications of debt instruments. Among other things, these
proposed regulations, if they become effective in their current form, would
provide that certain modifications of the current interest payments or maturity
date of a debt instrument will be treated as a taxable exchange of the original
instrument for the modified debt instrument. As a result of this treatment,
modifications of the mortgage loans which secure the mortgage revenue bonds
could be treated as a deemed reissuance of the mortgage revenue bonds for
federal income tax purposes. Any reissuance without the cooperation of the
mortgage revenue bond issuers would result in the loss of the tax-exempt status
of the mortgage revenue bonds. Such issuers might cooperate and consent to the
reissuance; however, there can be no assurance that such issuers would do so or
would not impose additional requirements that would have an adverse impact on
-44-
<PAGE>
CAPITAL REALTY INVESTORS TAX EXEMPT FUND III LIMITED PARTNERSHIP
NOTES TO FINANCIAL STATEMENTS
5. Investment in Mortgage Revenue Bonds - Continued
the properties.
Even if issuer consent were obtained, if the modifications are considered
material, the debt would have to be re-examined to determine whether it would
still be considered debt for tax purposes. This could result in a write-down of
principal, would most likely result in a write-off of all accrued and unpaid
past due interest and could change the contingent interest feature of the
existing mortgage loans. The write down of principal and unpaid interest would
not be recoverable upon ultimate disposition or payoff of the mortgage revenue
bond and would instead accrue to the benefit of the Owner Partnership to the
extent realized.
Proposed Regulation Section 1.001-3 will become effective only with respect
to modifications made on or after the date that is 30 days after the publication
of final regulations in the Federal Register. It is uncertain at this time when
this proposed regulation will be finalized and whether it will be finalized in
its current form. It is also unclear at this time what effect the Cottage
Savings decision may have on modifications that have been made to mortgage loans
which secure the mortgage revenue bonds or on modifications that might be
appropriate in the future. The General Partner believes that the modifications
which have been made were consistent with the relevant tax authority which
existed at the time of those modifications and have not jeopardized the tax-
exempt status of the mortgage revenue bonds. However, these can be no assurance
as to the tax-exempt status of the mortgage revenue bonds.
In March 1995, the Partnership was notified by the Paces River 2 borrower
that the property may not have been in compliance with the low to moderate
income requirements under the tax-exempt bonds. The borrower had applied tenant
certification criteria consistent with that used by state authorities. Further,
state authorities had reviewed and approved the compliance on an annual basis.
However, the borrower believed that certain technical aspects of the tenant
certification criteria may not have been appropriately applied. The borrower
met with the state authorities and determined the appropriate criteria. As of
December 31, 1995, the borrower was in compliance with the requirements for tax-
exempt status.
In March 1994, the Partnership was notified by the management agent of
Woodlane Place that certain buildings at the property experienced damage due to
frost heaving. The Owner Partnerships hired an engineer to analyze the
underlying problem of inadequate drainage at the property and to determine the
number of affected buildings and the severity of the drainage problem. Based on
this analysis, the costs associated with the correction of the drainage problem
are expected to be approximately $300,000, and will not be covered by the
property's insurance carrier. Due to the nature of the drainage problem,
occupancy levels at the property are not expected to decrease as a result of the
ongoing capital improvements. Funding for these capital improvements may be
provided from the borrowers existing replacement reserves, future property cash
flow, and/or a loan to the borrower from the working capital reserves of the
Partnership. The Partnership has joined with the borrower's insurance carrier
in a lawsuit against the original architect and general contractor of Woodlane
Place. The Partnership has joined on a contingent basis, with no legal fees
being incurred unless the Partnership receives a settlement or judgment, and
with other legal expenses estimated to be less than $20,000. There is no
assurance that the Partnership will receive any funds as a result of this
lawsuit.
-45-
<PAGE>
CAPITAL REALTY INVESTORS TAX EXEMPT FUND III LIMITED PARTNERSHIP
NOTES TO FINANCIAL STATEMENTS
5. Investment in Mortgage Revenue Bonds - Continued
The General Partner's ongoing strategy has been to continue holding the
mortgage revenue bonds until the loan maturity dates. If the merger proposal,
as discussed in Note 7, is approved, the interests of the BAC Holders will be
redeemed for cash. If the merger proposal is not approved, in order to maximize
the overall yield, the General Partner may recommend, subject to satisfactory
resolution of any issues relating to the tax-exempt status of the mortgage
revenue bonds, for investor approval of the extension of certain loan maturity
dates and, if approved, arrange any necessary related amendments to the
pertinent mortgage revenue bonds.
Interest
- --------
The mortgage loans, and correspondingly the mortgage revenue bonds, bear
interest at a base interest rate and provide for contingent interest, payable as
described below, in an amount equal to the difference between the base mortgage
interest rate and an annual noncompounding rate of return to the Partnership of
16% per annum. The mortgage loans provide for base mortgage interest which is
unconditional and payable monthly, in arrears. After depletion of properties'
reserves, the payment of base interest from properties currently owned by
nominees of the Partnership will be solely from cash flow from the properties'
operations. The mortgage loan on the Regency Woods property provided that only
a portion of the base mortgage interest was required to be paid on a current
basis during an initial period of the loan, not to exceed three years from
acquisition of the mortgage revenue bond. The deferred base mortgage interest
is unconditionally due and payable upon sale of the project or repayment of the
loan. The unpaid base mortgage interest bears interest at the base mortgage
interest rate and is to be repaid prior to contingent interest.
Contingent interest will be equal to the sum of (i) 100% of the project
cash flow for each year up to an amount which provides the Partnership a
noncompounded interest rate between 1.5% and 2.25% over the base mortgage
interest rate in effect, and (ii) 42.5% to 60% of remaining cash flow (subject
to certain priority payments including any currently payable interest with
respect to a working capital loan to such borrower) to provide the Partnership a
total return of 16% per annum. Contingent interest is payable quarterly on an
estimated basis, in arrears but only to the extent of available net cash flow,
if any. Contingent interest is recognized as revenue when collected.
Contingent interest due as of December 31, 1995, 1994 and 1993 amounted to
$37,635,033, $30,841,439 and $23,977,293, respectively. No contingent interest
was received or accrued by the Partnership during 1994 or 1993. The Partnership
received contingent interest of $70,549 from Washington Ridge during 1995.
To the extent that the aggregate of all interest payments, including
contingent interest, for any period after completion of construction does not
equal 16% per annum, the difference will be deferred (without interest on
contingent interest) until the mortgaged property is sold or the mortgage loan
is otherwise repaid and will only be payable if sufficient proceeds exist. The
amount of deferred contingent interest payable in such event will equal the sum
of (i) 100% of the sale or repayment proceeds (after certain priority payments)
up to the amount necessary for the Partnership to achieve the full amount of the
100% participation, to the extent that such amount was previously deferred,
and/or (ii)(a) with respect to mortgage loans for to-be-constructed or
rehabilitated mortgaged properties, 50% of the sale or repayment proceeds, or
(b) with respect to mortgage loans for existing mortgaged properties, up to
42.5% to 60% of the sale or repayment proceeds, in either instance after the
payment of any 100% participation, if applicable, up to the amount necessary for
-46-
<PAGE>
CAPITAL REALTY INVESTORS TAX EXEMPT FUND III LIMITED PARTNERSHIP
NOTES TO FINANCIAL STATEMENTS
5. Investment in Mortgage Revenue Bonds - Continued
the Partnership to achieve a total return of 16% per annum. Consequently, the
ability of the Partnership to collect all contingent interest will be dependent
upon the mortgaged property's operating performance and the sale or repayment
proceeds. Because the Partnership may not be able ultimately to collect
contingent interest, the Partnership has not recorded any contingent interest
since inception of the Partnership with exception to the contingent interest
received from Washington Ridge, as discussed above.
-47-
<PAGE>
CAPITAL REALTY INVESTORS TAX EXEMPT FUND III LIMITED PARTNERSHIP
NOTES TO FINANCIAL STATEMENTS
5. Investment in Mortgage Revenue Bonds - Continued
Presented below is a summary of base interest payments for the years ended
December 31, 1995, 1994 and 1993 that are due to the Partnership from the
borrowers.
<TABLE>
<CAPTION>
For the year ended December 31, 1995
----------------------------------------------------------------------------------
Base Interest Base Interest Cumulative
Paid From Paid From Current Base Unpaid
Current Base Properties' Non-Operating Interest Base
Interest Due(1) Operations(3,4) Sources(2) Not Paid Interest
--------------- ------------- ------------- ------------ -----------
<S> <C> <C> <C> <C> <C>
Ethan's Glen IIA $ 920,937 $ 754,900 $ -- $ 166,037 $ 321,262
Geary Courtyard 1,740,600 762,000 -- 978,600 5,722,503
Ocean Walk 1,774,427 1,648,840 -- 125,587 1,466,416
Paces River 2 769,025 795,522 -- (26,497) 197,359
Regency Woods 693,458 463,362 17,834 212,262 270,050
Valley Creek II 919,100 722,363 -- 196,737 707,343
Washington Ridge 875,000 875,000 -- -- 72,917
Woodlane Place 1,407,000 954,478 -- 452,522 2,662,408
------------ ------------ ------------ ----------- -----------
$ 9,099,547 $ 6,976,465 $ 17,834 $ 2,105,248 $11,420,258
============ ============ ============ =========== ===========
</TABLE>
<TABLE>
<CAPTION>
For the year ended December 31, 1994
---------------------------------------------------------------------------------
Base Interest Base Interest Cumulative
Paid From Paid From Current Base Unpaid
Current Base Properties' Non-Operating Interest Base
Interest Due(1) Operations Sources(2) Not Paid Interest
--------------- ------------- ------------- ------------ -----------
<S> <C> <C> <C> <C> <C>
Ethan's Glen IIA $ 920,937 $ 776,803 $ 16,053 $ 128,081 $ 155,225
Geary Courtyard 1,740,600 601,329 -- 1,139,271 4,743,903
Ocean Walk 1,774,427 1,571,022 35,838 167,567 1,340,829
Paces River 2 769,025 743,314 -- 25,711 223,856
Regency Woods 693,458 544,268 149,190 -- 57,788
Valley Creek II 919,100 614,332 -- 304,768 510,606
Washington Ridge 875,000 875,000 -- -- 72,917
Woodlane Place 1,407,000 979,747 -- 427,253 2,209,886
------------ ------------ ------------ ----------- -----------
$ 9,099,547 $ 6,705,815 $ 201,081 $ 2,192,651 $ 9,315,010
============ ============ ============ =========== ===========
</TABLE>
-48-
<PAGE>
CAPITAL REALTY INVESTORS TAX EXEMPT FUND III LIMITED PARTNERSHIP
NOTES TO FINANCIAL STATEMENTS
5. Investment in Mortgage Revenue Bonds - Continued
<TABLE>
<CAPTION>
For the year ended December 31, 1993
---------------------------------------------------------------------------------
Base Interest Base Interest Cumulative
Paid From Paid From Current Base Unpaid
Current Base Properties' Non-Operating Interest Base
Interest Due(1) Operations Sources(2) Not Paid Interest
--------------- ------------- ------------- ------------ -----------
<S> <C> <C> <C> <C> <C>
Ethan's Glen IIA $ 920,937 $ 811,075 $ 159,463 $ (49,601) $ 27,144
Geary Courtyard 1,740,600 687,267 -- 1,053,333 3,604,632
Ocean Walk 1,774,427 1,560,048 -- 214,379 1,173,262
Paces River 2 769,025 706,634 142,848 (80,457) 198,145
Regency Woods 673,303 538,836 134,467 -- 57,788
Valley Creek II 919,100 554,970 234,883 129,247 205,838
Washington Ridge 875,000 875,000 -- -- 72,917
Woodlane Place 1,407,000 880,463 -- 526,537 1,782,633
------------ ------------ ------------ ----------- -----------
$ 9,079,392 $ 6,614,293 $ 671,661 $ 1,793,438 $ 7,122,359
============ ============ ============ =========== ===========
</TABLE>
(1) The Partnership charges the borrowers interest on unpaid base interest,
which, totaled $1,050,137, $803,279 and $518,381 for 1995, 1994 and 1993,
respectively.
(2) Amounts were funded from reserves provided for from the mortgage loan
proceeds and/or funds from the general partners of the borrowers.
(3) Excludes amounts received by the Partnership in January 1996 from the
release of excess tax and insurance reserves relating to 1995. Such
amounts received from Ethan's Glen IIA, Paces River 2 and Woodlane Place
totalled $70,000, $12,000 and $23,000, respectively.
(4) Excludes contingent interest of $70,549 received by the Partnership from
Washington Ridge during 1995.
Terms
- -----
In general, the terms of the mortgage loans extend for 10 years after the
completion of construction, except for Regency Woods which is for 10 years from
the commencement of the mortgage loan. The corresponding bonds contain
provisions requiring payment or redemption of the bonds upon maturity of the
related loan. The Partnership may seek authority from investors and the issuers
of the mortgage revenue bonds to hold the mortgage loans with respect to the
mortgaged properties through longer periods within the mortgage revenue bond
terms, as described below, if necessary, in an effort to maximize overall yields
and residual proceeds upon the sale or refinancing of the underlying properties.
There can be no assurance that the investors or the issuers will consent to such
extensions.
The principal of the mortgage revenue bonds will not be amortized during
the terms of the bond and will be required to be repaid in a lump-sum balloon
payment at the expiration of the loan term or at such earlier time as the loan
may require. Each mortgage loan is non-assumable and due on sale of the
mortgaged property. Prepayment and sale of a mortgaged property is prohibited
-49-
<PAGE>
CAPITAL REALTY INVESTORS TAX EXEMPT FUND III LIMITED PARTNERSHIP
NOTES TO FINANCIAL STATEMENTS
5. Investment in Mortgage Revenue Bonds - Continued
during the first seven years of a mortgage loan following completion of
construction. Prepayment of the Regency Woods loan (or sale of the Regency Woods
property) is prohibited during the first seven years following the Partnership's
acquisition of that bond. Thereafter, prepayment in full is permitted under any
mortgage loan, subject to the payment to the Partnership of:
(1) any 100% participation contingent interest accrued to the date of
prepayment, and
(2) additional interest in an amount equal to the highest total amount of
all contingent interest paid by the borrower in any of the three years
preceding the date of prepayment, capitalized at the base mortgage
loan interest rate then in effect.
The Partnership may require prepayment upon the occurrence of an "event of
taxability" which would include, among others, any act or event which presents
significant risk that interest on the mortgage revenue bonds would be subjected
to federal taxation. As of December 31, 1995 the Partnership is aware of no
"event of taxability" which has occurred.
Working capital loans
- ---------------------
The Partnership was permitted to use up to 5% of its gross offering
proceeds to make working capital loans to borrowers to cover certain expenses
which were not financeable from the proceeds of the mortgage revenue bonds. The
interest on the working capital loans is subject to federal income tax. As of
December 31, 1995, the Partnership had made taxable working capital loans to
Paces River 2, Geary Courtyard and Regency Woods in the amounts of $850,000,
$900,000 and $1,659,604, respectively. These loans are collateralized by second
deeds of trust on the properties and mature on February 1, 2000, September 1,
2000 and February 1, 2000, respectively.
The principal of the working capital loans will not be amortized during the
terms of the loans and will be required to be repaid in a lump-sum balloon
payment at the expiration of the loan term or at such earlier time as the loan
terms may require. Each working capital loan is nonassumable and due on sale of
the mortgaged property. Prepayment and sale of the mortgaged property is
prohibited during the first seven years after the commencement dates. The
working capital loans provide for base interest during the construction and
permanent phases of the loans and contingent interest, which commenced after the
completion of construction of the applicable project, on a basis similar to the
mortgage revenue bonds.
6. Income taxes
For income tax purposes, base interest income is accrued when earned. The
accrual of base interest is discontinued when at the time of accrual, ultimate
collectibility of the base interest due is considered unlikely. Once a loan has
been placed in a non-accrual status, income is recorded only as cash payments
are received from the borrower or nominee until such time as the uncertainty of
collection of unpaid base interest is eliminated. Loans relating to Geary
Courtyard, Valley Creek II and Woodlane Place were placed on non-accrual status
in 1993; therefore, for income tax purposes, income is recognized to the extent
of cash received. Contingent interest from the investment is recognized as
revenue when collected. Contingent interest of $70,549, as discussed above, was
recognized for the year ended December 31, 1995. No contingent interest was
-50-
<PAGE>
CAPITAL REALTY INVESTORS TAX EXEMPT FUND III LIMITED PARTNERSHIP
NOTES TO FINANCIAL STATEMENTS
6. Income taxes - Continued
recognized for the years ended December 31, 1994 and 1993.
For federal income tax purposes, the investments in all of the mortgage
revenue bonds are treated as loans, interest on which is exempt from federal
income tax. A reconciliation of the primary differences between the financial
statement net income (loss) and municipal income for tax purposes is as follows:
-51-
<PAGE>
CAPITAL REALTY INVESTORS TAX EXEMPT FUND III LIMITED PARTNERSHIP
NOTES TO FINANCIAL STATEMENTS
6. Income taxes - Continued
<TABLE>
<CAPTION> For the years ended
December 31,
-----------------------------------------------
1995 1994 1993
------------ ------------ ------------
<S> <C> <C> <C>
Financial statement net income (loss) $ 6,523,536 $ (3,422,361) $ 2,591,726
Municipal interest income not recognized (1) -- -- 6,830,474
Rental income, net (2) -- -- (2,822,609)
Investment expenses and losses not allowable
for tax purposes 29,166 25,344 720,849
Excess amortization for tax purposes (144,600) (144,600) (144,600)
Adjustment for timing of municipal income
recognition 467,023 194,754 --
Taxable income on working capital loans, net -- -- (252,033)
Cumulative effect of accounting change -- 10,155,671 --
------------ ------------ ------------
Municipal income, net for tax purposes $ 6,875,125 $ 6,808,808 $ 6,923,807
============ ============ ============
Municipal income per BAC $ 1.29 $ 1.28 $ 1.30
============ ============ ============
</TABLE>
(1) Represents the adjustment for interest income received or receivable during
the period, which was previously eliminated from net income for financial
statement purposes.
(2) Represents net rental income from investments accounted for as real estate.
7. Merger Proposal
On September 11, 1995, the Partnership and its General Partner entered into
a merger agreement, subject to BAC Holder approval, with an affiliate of
CAPREIT, a private real estate investment trust. An affiliate of CAPREIT is the
property manager for five of the eight properties securing the bonds held by the
Partnership. All five of the properties managed by an affiliate of CAPREIT are
presently in default with respect to their mortgage loans held by the
Partnership. If the merger proposal is approved by a majority vote of BAC
Holders, all of the BACs in the Partnership will be redeemed for cash and the
interests represented by such BACs will be canceled. On January 31, 1996, the
agreement for the proposed merger was modified for the first time to improve the
terms of the original proposal. Under the original proposal, the redemption
amount per BAC was to be $14.360. Under the first modified agreement, the
redemption amount per BAC was to be $15.1735, subject to adjustment but not less
than $15.0372 or greater than $15.3098. On March 14, 1996, the merger agreement
was modified for the second time to round the expected redemption amount per BAC
from $15.1735 to $15.18, subject to adjustment for available cash as defined in
the amended merger agreement, but not less than $15.04 or greater than $15.32.
In addition, the redemption amounts will be reduced by the amount of court
approved legal fees and expenses awarded to counsel of the plaintiffs in the
putative class action suits naming the Partnership and others, as described
below. Such legal fees and expenses are not expected to exceed $0.19 per BAC.
The BAC Holders will also vote upon the removal of the Partnership's
General Partner immediately prior to consummation of the proposed merger and the
-52-
<PAGE>
CAPITAL REALTY INVESTORS TAX EXEMPT FUND III LIMITED PARTNERSHIP
NOTES TO FINANCIAL STATEMENTS
7. Merger Proposal - Continued
election in its stead of a newly-formed wholly-owned subsidiary of CAPREIT.
CAPREIT has agreed to pay the General Partner $500,000 in consideration for its
1.01% general partner interest in the Partnership.
CAPREIT and/or its designee will also acquire accounts receivables held by
CRI and CRIIMI, for the accrued mortgage servicing and administration fees on
certain property mortgage loans of the Partnership. The general partner of
CRIIMI is a subsidiary of CRIIMI MAE Inc., a publicly-traded company affiliated
with the General Partners. Under the second modified agreement, CAPREIT will
pay the discounted amount of $667,485 to CRI for its fees accrued through June
30, 1995, which represents approximately 42% of the total accrued fees owed to
CRI. Also, CAPREIT will pay $566,676 to CRIIMI for its fees accrued from July
1, 1995 through June 30, 1996, which represents 100% of the fees which are
expected to be owed to CRIIMI for that period. If the closing of the proposed
merger does not occur by June 30, 1996, the amounts to be paid by CAPREIT to
CRIIMI will increase, to reflect additional amounts currently being accrued for
mortgage servicing and administration fees, at a rate of $47,223 per month.
Each of the Owner Partnerships has agreed to either (a) sell, assign and
transfer the partnership interests in, or the real property and other assets of,
such Owner Partnerships to CAPREIT or its designee for no additional
consideration or (b) admit CAPREIT or its designee as the managing general
partner, whereupon the general partner interests of the current general partners
will be converted into limited partner interests, and CAPREIT will have the
option to acquire all of the limited partner interests at any time within five
years from the closing date of the merger at the then fair market value thereof
(defined as the proportionate interest of such limited partner in the fair
market value of the partnership property as encumbered by the mortgage loans).
Although such interests currently have nominal value, if the fair market value
of the partnership properties increases prior to the time CAPREIT exercises its
option, such increase in value may benefit the owners of the Owner Partnerships.
This feature is required by CAPREIT as a condition of the merger.
Consummation of the merger is contingent upon the approval of a majority of
BAC Holders. The proposed merger is also contingent upon receiving a favorable
opinion regarding the fairness of the redemption amount to BAC Holders from a
financial point of view. A favorable opinion from an independent investment
banking firm was issued on March 14, 1996. A proxy statement is expected to be
issued to BAC Holders after it is filed with and clearance is received from the
SEC. A preliminary proxy statement was filed with the SEC on March 18, 1996.
This proxy statement includes a full description of the proposed merger and the
independent fairness opinion.
8. Litigation
On September 22, 1995, Irving Zakin commenced a putative class action (the
Zakin Action) against the Partnership, its General Partner (CRITEF III
Associates Limited Partnership), its Assignor Limited Partner (CRITEF III,
Inc.), CRI, William B. Dockser, H. William Willoughby, Capital Realty Investors
Tax Exempt Fund Limited Partnership, CRITEF Associates Limited Partnership,
CRITEF, Inc., and CAPREIT (collectively, the Defendants) in the Court of
Chancery of the State of Delaware in New Castle County (the Chancery Court)
(C.A. No. 14558). The complaint alleges, among other things, that the amount
offered to the BAC Holders in the proposed merger at the time the complaint was
filed was inadequate, and that the Defendants breached their fiduciary duty to
the BAC Holders, or aided and abetted such a breach, engaged in self-dealing and
misled BAC Holders in connection with the proposed merger. The suit seeks to
-53-
<PAGE>
CAPITAL REALTY INVESTORS TAX EXEMPT FUND III LIMITED PARTNERSHIP
NOTES TO FINANCIAL STATEMENTS
8. Litigation - Continued
enjoin the proposed merger, to obtain damages in an unspecified amount for the
BAC Holders, and to compel the Defendants to maximize the amount paid to the BAC
Holders and consider unspecified alternatives to the proposed merger.
On October 5, 1995, David and Johanna Wingard (the Wingard Action)
commenced a second putative class action against the Defendants in the Chancery
Court (C.A. No 14604). The complaint in the Wingard Action contains virtually
the identical allegations and seeks virtually the identical relief as in the
Zakin Action. A request to the Chancery Court has been made by the plaintiffs
in both lawsuits to consolidate the two actions.
On January 31, 1996, the Defendants and the plaintiffs and their respective
attorneys reached a tentative settlement of the putative class actions which is
memorialized in a Memorandum of Understanding (the Memorandum), dated as of such
date. The proposed settlement must be approved by the Chancery Court. The
Memorandum contemplates the complete discharge, settlement and release of all
claims that have been, could have been, or in the future might be asserted in
any action or any other proceeding in connection with the proposed merger. The
parties to the Memorandum will use their best efforts to execute an appropriate
Stipulation of Settlement (the Stipulation) and such other documents as may be
required in order to obtain approval by the Chancery Court of the settlement.
The Defendants have denied, and continue to deny, that any of them have
committed or threatened to commit any violations of law or breaches of duty to
the BAC Holders. The Defendants have entered into the Memorandum solely because
the proposed settlement would eliminate the burden and expense of further
litigation and would facilitate the consummation of the proposed merger, which
the General Partner believes to be in the best interest of the BAC Holders.
In accordance with the Memorandum, the agreements for the proposed merger
were amended to provide for the revised merger terms, as previously discussed
above. Pursuant to the Memorandum, the plaintiffs' counsel will be entitled to
apply to the Chancery Court for an award of reasonable attorneys' fees and
expenses. Such expenses are not expected to exceed $0.19 per BAC. These fees
will reduce the redemption amounts to BAC Holders in connection with the
proposed merger, as discussed. In the event that the proposed merger is not
consummated, these fees will not be borne by the Partnership. As such, the
Partnership's financial statements do not include any adjustment for these fees.
Counsel for the plaintiffs have reviewed certain documents relating to the
proposed mergers, and will have the opportunity to review and take depositions
of representatives of the General Partner and CAPREIT. After such review,
counsel for the plaintiffs shall have the right to terminate the settlement
contemplated in the Memorandum, based on material information not presently
available to them.
After the Stipulation is executed, the parties will seek preliminary
approval of the settlement by the Chancery Court and will then mail notice of
the proposed settlement to members of the putative class. As soon as
practicable following completion of the discovery described in the preceding
paragraph and after class members have had a period of time to review the notice
of proposed settlement, the parties will use their best efforts to obtain final
Chancery Court approval of the settlement and the dismissal of the class actions
as to all of the claims.
On November 9, 1995, CRI filed a complaint against Capital Management
Strategies, Inc. (CMS), a company controlled by Martin C. Schwartzberg, to
-54-
<PAGE>
CAPITAL REALTY INVESTORS TAX EXEMPT FUND III LIMITED PARTNERSHIP
NOTES TO FINANCIAL STATEMENTS
8. Litigation - Continued
determine the proper amount of fees to be paid in 1996 under an asset management
agreement. CMS answered on January 10, 1996, but asserted no counterclaims.
Thereafter, Mr. Schwartzberg launched a hostile consent solicitation to be
designated as managing general partner of approximately 125 private partnerships
sponsored by CRI. Mr. Schwartzberg is a former shareholder and executive
officer of CRI who decided to leave the company as of January 1, 1990. In
connection with his departure, he relinquished his general partner duties for
all CRI-sponsored partnerships, including those of the General Partner. On
March 28, 1996, Mr. Schwartzberg filed a preliminary proxy statement with the
SEC opposing the proposed merger.
On January 18, 1996, Mr. Schwartzberg and CMS filed a complaint in the
Circuit Court of Montgomery County, Maryland (the Circuit Court), against CRI
and Messrs. Dockser and Willoughby alleging, among other things, (i) that CRI
and Messrs. Dockser and Willoughby have breached an asset management agreement
pursuant to which Mr. Schwartzberg's company, CMS, agreed to perform limited
functions related to property-level issues for a portion of CRI's subsidized
housing portfolio (but not properties securing the mortgage revenue bonds) by
reducing the proposed budget for 1996, (ii) that the actions of CRI and Messrs.
Dockser and Willoughby in connection with the proposed merger involve self-
dealing and constitute a breach of their fiduciary duties to Mr. Schwartzberg,
and (iii) that the actions in connection with the merger of CRIIMI MAE Inc. in
June, 1995 involved self-interest and led in part to the proposed reduction of
the asset management agreement budget. Neither the Partnership nor the General
Partner was named as a defendant in this action, and Mr. Schwartzberg does not
allege that he is a BAC Holder. Messrs. Dockser and Willoughby have entered an
answer denying all of Mr. Schwartzberg's claims and moving to strike the
allegations concerning the Partnership and CRIIMI MAE Inc. and dismiss the
related counts for failure to state a claim upon which relief can be granted.
Messrs. Dockser and Willoughby have publicly responded that Mr. Schwartzberg's
suit is motivated by his budget dispute with CRI and personal animosity.
On February 12, 1996, the Circuit Court issued a memorandum opinion and
order enjoining CMS and Mr. Schwartzberg from disclosing information made
confidential under the asset management agreement.
On February 15, 1996, Mr. Schwartzberg filed suit in the Chancery Court
against the General Partner and CRITEF Associates Limited Partnership (No.
14837). He alleges that he has made demands upon the General Partner and CRITEF
III Associates Limited Partnership, in his capacity as a general and limited
partner of the General Partner and as a limited partner of CRITEF III Associates
Limited Partnership, to inspect and obtain copies of a current list of the BAC
holders and other documents. He further alleges that his demands were rejected.
On February 23, 1996, the General Partner and CRITEF III Associates Limited
Partnership answered the complaint, admitting that his demands have been
rejected and denying that Mr. Schwartzberg is entitled to the materials
requested because, among other things, he lacks standing and proper purpose to
inspect and obtain copies of the requested materials. A hearing was held on
March 6 and 7, 1996 and it is expected that the Chancery Court will render a
decision following submission of briefs by the parties.
On February 16, 1996, the Partnership, together with the General Partner,
Capital Realty Investors Tax Exempt Fund Limited Partnership and its general
partner, CRI and CAPREIT (collectively, the Plaintiffs) filed suit against Mr.
Schwartzberg in the United States District Court for the Southern District of
New York (the District Court), No. 96 Civ. 1186 (LAK) (the New York Action).
-55-
<PAGE>
CAPITAL REALTY INVESTORS TAX EXEMPT FUND III LIMITED PARTNERSHIP
NOTES TO FINANCIAL STATEMENTS
8. Litigation - Continued
The complaint alleges that Mr. Schwartzberg is engaged in an unlawful
solicitation of proxies of the BAC Holders through two press releases he issued
in violation of the federal securities laws and rules promulgated by the SEC
requiring definitive proxy materials to be filed with the SEC and delivered to
the BAC Holders. The complaint also alleges that Mr. Schwartzberg has made
false and misleading statements in the solicitations concerning the terms of the
proposed merger and the availability of certain financial information, and has
falsely imputed base motives to the principals of the General Partner. On
February 23, 1996, the District Court, without making a finding of fact, issued
a temporary restraining order barring Mr. Schwartzberg from making any
solicitation of the BAC Holders without first complying with the SEC rules
pending a hearing on a proposed preliminary injunction. The District Court held
a hearing on March 5, 1996, on the motion of preliminary injunction, and,
pending a decision, continued the temporary restraining order.
On March 18, 1996, the District Court issued its Opinion enjoining Mr.
Schwartzberg from (1) making any further solicitation of BAC Holders without
complying with the provisions of Regulation 14A under the Securities Exchange
Act of 1934, and (2) committing any violation of Rule 14a-9 (regarding false or
misleading statements) in connection with any solicitation relating to the
Partnerships. The injunction was based on the District Court's findings of fact
and conclusions of law, in which it stated that the Plaintiffs (including the
Partnership) have established a strong likelihood of success on their claim that
the press releases constitute a proxy solicitation in violation of securities
laws and that the Plaintiffs are likely to establish that Mr. Schwartzberg acted
with the requisite culpability with respect to at least some of the false
statements made in his press releases. Also on March 18, 1996, Mr. Schwartzberg
filed his answer to the complaint in the New York action, coupled with
counterclaims against the General Partner alleging that three press releases
issued by the General Partner of the Partnership constituted solicitations in
violation of the same provisions of the Securities Exchange Act and that they
were false and misleading. The counter-defendants deny the allegations. The
counter claims sought a temporary restraining order against the General Partner
regarding further alleged solicitations and false and misleading statements.
The District Court denied the injunction request by order on April 23, 1996. On
April 16, 1996, Mr. Schwartzberg also filed a Notice of Appeal with respect to
the injunction against him with the U. S. Court of Appeals for the Second
Circuit.
The Partnership Agreement provides for the indemnification of the General
Partners and its affiliates for acts or omissions by the General Partner in good
faith and in the best interest of the Partnership. Such indemnification does
not extend to a finding of liability for conduct which constitutes fraud, bad
faith, misconduct, breach of fiduciary duties or violation of state or federal
securities laws. At this time, there is no estimate as to the timing or amount,
if any, of the outcome of the New York Action, but the General Partners do not
anticipate that the litigation will have a material adverse affect on the
Partnership.
9. Summary of Quarterly Results of Operations (Unaudited)
The following is a summary of unaudited quarterly results of operations for
the years ended December 31, 1995, 1994 and 1993:
-56-
<PAGE>
CAPITAL REALTY INVESTORS TAX EXEMPT FUND III LIMITED PARTNERSHIP
NOTES TO FINANCIAL STATEMENTS
9. Summary of Quarterly Results of Operations (Unaudited) - Continued
<TABLE>
<CAPTION>
1995
Quarter Ended
March 31 June 30 September 30 December 31
------------ ------------ ------------ ------------
<S> <C> <C> <C> <C>
Income (principally interest from mortgage
revenue bonds and working capital loans) $ 1,792,076 $ 1,825,340 $ 1,753,266 $ 1,869,672
Net income 1,656,548 1,736,348 1,397,099 1,733,541
Net income per BAC 0.31 0.33 0.26 0.33
</TABLE>
<TABLE>
<CAPTION>
1994
Quarter Ended
March 31 June 30 September 30 December 31
------------ ------------ ------------ ------------
<S> <C> <C> <C> <C>
Income (principally interest from mortgage
revenue bonds and working capital loans) $ 1,664,038 $ 1,803,417 $ 1,564,260 $ 2,089,185
Cumulative effect of change in accounting
for mortgage revenue bonds (10,155,671) -- -- --
Net (loss) income (8,605,170) 1,671,292 1,511,190 2,000,327
Cumulative effect of change in accounting
for mortgage revenue bonds per BAC (1.91) -- -- --
Net (loss) income per BAC (1.62) 0.31 0.28 0.37
</TABLE>
<TABLE>
<CAPTION>
1993
Quarter Ended
March 31 June 30 September 30 December 31
------------ ------------ ------------ ------------
<S> <C> <C> <C> <C>
Income (principally rental income) $ 3,306,527 $ 3,349,443 $ 3,456,373 $ 3,666,702
Net income 432,414 574,392 615,836 969,120
Net income per BAC 0.08 0.11 0.12 0.18
</TABLE>
-57-
<PAGE>
CAPITAL REALTY INVESTORS TAX EXEMPT FUND III LIMITED PARTNERSHIP
NOTES TO FINANCIAL STATEMENTS
10. Condensed Combined Financial Information
Condensed combined financial information on a GAAP basis for the years
ended December 31, 1995 and 1994 for all of the borrowers is as follows:
<TABLE>
<CAPTION>
As of December 31, 1995
------------------------------------------------
Investments- Investments-
Greater Than Less Than
20% of Total 20% of Total
Assets Assets Total
------------ ------------ ------------
<S> <C> <C> <C>
Rental property, net of accumulated
depreciation $ 14,873,382 $ 61,343,840 $ 76,217,222
Other assets 638,440 2,376,260 3,014,700
------------ ------------ ------------
Total Assets $ 15,511,822 $ 63,720,100 $ 79,231,922
============ ============ ============
Mortgage loans payable $ 19,826,000 $ 79,834,604 $ 99,660,604
Accrued interest payable 1,466,416 11,884,948 13,351,364
Other liabilities 621,345 3,095,150 3,716,495
------------ ------------ ------------
Total liabilities 21,913,761 94,814,702 116,728,463
Partners' capital (6,401,939) (31,094,602) (37,496,541)
------------ ------------ ------------
Total liabilities and partners' capital $ 15,511,822 $ 63,720,100 $ 79,231,922
============ ============ ============
</TABLE>
-58-
<PAGE>
CAPITAL REALTY INVESTORS TAX EXEMPT FUND III LIMITED PARTNERSHIP
NOTES TO FINANCIAL STATEMENTS
10. Condensed Combined Financial Information - Continued
<TABLE>
<CAPTION>
As of December 31, 1994
------------------------------------------------
Investments- Investments-
Greater Than Less Than
10% of Total 20% Of Total
Assets Assets Total
------------ ------------ ------------
<S> <C> <C> <C>
Rental property, net of accumulated
depreciation $ 15,391,664 $ 64,012,930 $ 79,404,594
Other assets 647,832 1,829,009 2,476,841
------------ ------------ ------------
Total Assets $ 16,039,496 $ 65,841,939 $ 81,881,435
============ ============ ============
Mortgage loans payable $ 19,826,000 $ 80,376,241 $100,202,241
Accrued interest payable 1,340,913 9,932,128 11,273,041
Other liabilities 529,330 2,731,381 3,260,711
------------ ------------ ------------
Total liabilities 21,696,243 93,039,750 114,735,993
Partners' capital (5,656,747) (27,197,811) (32,854,558)
------------ ------------ ------------
Total liabilities and partners' capital $ 16,039,496 $ 65,841,939 $ 81,881,435
============ ============ ============
</TABLE>
<TABLE>
<CAPTION>
For the year ended December 31, 1995
-----------------------------------------------
Investments- Investments-
Greater Than Less Than
20% of Total 20% Of Total
Assets Assets Total
------------ ------------ ------------
<S> <C> <C> <C>
Rental Income $ 3,135,481 $ 11,443,751 $ 14,579,232
Rental Expenses (1,587,965) (6,009,541) (7,597,506)
Interest Expense (1,774,427) (7,367,733) (9,142,160)
Depreciation (518,282) (2,669,089) (3,187,371)
------------ ------------ ------------
Net Loss $ (745,193) $ (4,602,612) $ (5,347,805)
============ ============ ============
</TABLE>
-59-
<PAGE>
CAPITAL REALTY INVESTORS TAX EXEMPT FUND III LIMITED PARTNERSHIP
NOTES TO FINANCIAL STATEMENTS
10. Condensed Combined Financial Information - Continued
<TABLE>
<CAPTION>
For the year ended December 31, 1994
-----------------------------------------------
Investments- Investments-
Greater Than Less Than
20% of Total 20% Of Total
Assets Assets Total
------------ ------------ ------------
<S> <C> <C> <C>
Rental Income $ 3,308,029 $ 11,059,336 $ 14,367,365
Rental Expenses (1,607,192) (6,019,660) (7,626,852)
Interest Expense (1,774,427) (7,334,514) (9,108,941)
Depreciation (504,271) (2,799,146) (3,303,417)
------------ ------------ ------------
Net Loss $ (577,861) $ (5,093,984) $ (5,671,845)
============ ============ ============
</TABLE>
In accordance with Staff Accounting Bulletin 71, complete financial
statements are for all borrowers in which the Partnership investment in mortgage
revenue bond is 20% or more of the total assets of the Partnership at December
31, 1995 and 1994 are included as an exhibit to the Partnership's financial
statements. The borrowers' financial statements are prepared on an income tax
basis, which differs from GAAP. The principal differences between income tax
basis and GAAP are (i) for income tax purposes the apartment properties are not
valued at the lower of cost or net realizable value and a write down to fair
value at deed-in-lieu of foreclosure was not taken, (ii) an intangible asset was
recognized for tax purposes representing the value to the borrower of its
favorable financing when the properties were transferred to Owner Partnership
and (iii) depreciable life and method.
-60-
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM
THE ANNUAL REPORT ON FORM 10-K/A AND IS QUALIFIED IN ITS ENTIRETY BY
REFERENCE TO SUCH ANNUAL REPORT ON FORM 10-K/A.
</LEGEND>
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1995
<PERIOD-START> JAN-01-1995
<PERIOD-END> DEC-31-1995
<CASH> 187,747
<SECURITIES> 5,747,466
<RECEIVABLES> 0
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 0
<PP&E> 0
<DEPRECIATION> 0
<TOTAL-ASSETS> 76,933,879
<CURRENT-LIABILITIES> 0
<BONDS> 0
0
0
<COMMON> 0
<OTHER-SE> 74,946,957
<TOTAL-LIABILITY-AND-EQUITY> 76,933,879
<SALES> 0
<TOTAL-REVENUES> 7,240,354
<CGS> 0
<TOTAL-COSTS> 0
<OTHER-EXPENSES> 716,818
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> 6,523,536
<INCOME-TAX> 0
<INCOME-CONTINUING> 6,523,536
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 6,523,536
<EPS-PRIMARY> 1.23
<EPS-DILUTED> 1.23
</TABLE>
