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U.S. SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
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FORM 10-QSB
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QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended June 30, 2005
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Commission file number 0-11973
CAPITAL REALTY INVESTORS-II LIMITED PARTNERSHIP
Organized pursuant to the Laws of the State of Maryland
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Internal Revenue Service - Employer Identification No. 52-1321492
11200 Rockville Pike, Rockville, Maryland 20852
(301) 468-9200
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Check whether the issuer (1) filed all reports required to be filed by Section
13 or 15(d) of the Exchange Act during the past 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 | |
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CAPITAL REALTY INVESTORS-II LIMITED PARTNERSHIP
INDEX TO FORM 10-QSB
FOR THE QUARTER ENDED JUNE 30, 2005
Page
Part I - FINANCIAL INFORMATION
Item 1. Financial Statements
Balance Sheets
- June 30, 2005 and December 31, 2004.......................... 1
Statements of Operations and Accumulated Losses
- for the three and six months ended June 30, 2005 and 2004.... 2
Statements of Cash Flows
- for the six months ended June 30, 2005 and 2004.............. 3
Notes to Financial Statements
- June 30, 2005 and 2004....................................... 4
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations...................................... 13
Item 3. Controls and Procedures.......................................... 17
Part II - OTHER INFORMATION
Item 3. Defaults Upon Senior Securities.................................. 17
Item 5. Other Information................................................ 18
Item 6. Exhibits......................................................... 19
Signature................................................................. 20
Part I. FINANCIAL INFORMATION
Item 1. Financial Statements
CAPITAL REALTY INVESTORS-II LIMITED PARTNERSHIP
BALANCE SHEETS
ASSETS
June 30, December 31,
2005 2004
------------ ------------
(Unaudited)
Investment in partnerships held for sale .......................................... $ 1,489,040 $ 1,491,380
Cash and cash equivalents ......................................................... 4,179,725 15,311,566
Sales proceeds receivable ......................................................... 951,734 832,879
Other assets ...................................................................... 281 572
------------ ------------
Total assets ................................................................... $ 6,620,780 $ 17,636,397
============ ============
LIABILITIES AND PARTNERS' CAPITAL
Due on investments in partnerships ................................................ $ 1,400,000 $ 1,400,000
Accrued interest payable .......................................................... 2,815,262 2,752,262
Accounts payable and accrued expenses ............................................. 147,648 138,537
Disposition fees payable to related party ......................................... -- 1,210,408
------------ ------------
Total liabilities .............................................................. 4,362,910 5,501,207
------------ ------------
Commitments and contingencies
Partners' capital:
Capital paid in:
General Partners .............................................................. 2,000 2,000
Limited Partners .............................................................. 50,015,000 50,015,000
------------ ------------
50,017,000 50,017,000
Less:
Accumulated distributions to partners ......................................... (25,480,663) (15,293,973)
Offering costs ................................................................ (5,278,980) (5,278,980)
Accumulated losses ............................................................ (16,999,487) (17,308,857)
------------ ------------
Total partners' capital ..................................................... 2,257,870 12,135,190
------------ ------------
Total liabilities and partners' capital ..................................... $ 6,620,780 $ 17,636,397
============ ============
The accompanying notes are an integral part'
of these financial statements.
-1-
Part I. FINANCIAL INFORMATION
Item 1. Financial Statements
CAPITAL REALTY INVESTORS-II LIMITED PARTNERSHIP
STATEMENTS OF OPERATIONS
AND ACCUMULATED LOSSES
(Unaudited)
For the three months ended For the six months ended
June 30, June 30,
---------------------------- ----------------------------
2005 2004 2005 2004
------------ ------------ ------------ ------------
Share of income from partnerships ............... $ 262,715 $ 835,537 $ 347,309 $ 1,068,527
------------ ------------ ------------ ------------
Other revenue and expenses:
Revenue:
Interest .................................... 27,104 4,613 61,722 8,737
------------ ------------ ------------ ------------
Expenses:
Interest .................................... 31,500 31,500 63,000 63,000
General and administrative .................. 93,571 87,686 191,240 169,659
Management fee .............................. 62,499 62,499 124,998 124,998
Professional fees ........................... 67,696 35,625 94,321 71,250
Amortization of deferred costs .............. -- 3,202 -- 7,043
------------ ------------ ------------ ------------
255,266 220,512 473,559 435,950
------------ ------------ ------------ ------------
Total other revenue and expenses .......... (228,162) (215,899) (411,837) (427,213)
------------ ------------ ------------ ------------
Income (loss) before gain on disposition of
investment in partnerships .................... 34,553 619,638 (64,528) 641,314
Gain on disposition of investments
in partnerships, net of disposition fees ...... 255,043 -- 373,898 --
------------ ------------ ------------ ------------
Net income ...................................... 289,596 619,638 309,370 641,314
Accumulated losses, beginning of period ......... (17,289,083) (29,112,013) (17,308,857) (29,133,689)
------------ ------------ ------------ ------------
Accumulated losses, end of period ............... $(16,999,487) $(28,492,375) $(16,999,487) $(28,492,375)
============ ============ ============ ============
Net income allocated
to General Partners (1.51%) ................... $ 4,373 $ 9,357 $ 4,671 $ 9,684
============ ============ ============ ============
Net income allocated
to Initial and Special Limited Partners (1.49%) $ 4,315 $ 9,233 $ 4,610 $ 9,556
============ ============ ============ ============
Net income allocated
to Additional Limited Partners (97%) .......... $ 280,908 $ 601,048 $ 300,089 $ 622,074
============ ============ ============ ============
Net income per unit of Additional Limited Partner
Interest, based on 49,910 units outstanding ... $ 5.63 $ 12.04 $ 6.01 $ 12.46
============ ============ ============ ============
The accompanying notes are an integral part
of these financial statements.
-2-
Part I. FINANCIAL INFORMATION
Item 1. Financial Statements
CAPITAL REALTY INVESTORS-II LIMITED PARTNERSHIP
STATEMENTS OF CASH FLOWS
(Unaudited)
For the six months ended
June 30,
----------------------------
2005 2004
------------ ------------
Cash flows from operating activities:
Net income ................................................................... $ 309,370 $ 641,314
Adjustments to reconcile net income to net cash used in operating activities:
Share of income from partnerships .......................................... (347,309) (1,068,527)
Gain on distribution of investments in partnerships, net of disposition fees (255,043) --
Additional gain on disposition of investment in partnerships ............... (118,855) --
Amortization of deferred costs ............................................. -- 7,043
Changes in assets and liabilities:
Decrease (increase) in other assets ...................................... 291 (44)
Increase in accrued interest receivable on advances ...................... (744) --
Increase in accrued interest payable ..................................... 63,000 63,000
Decrease in accounts payable and accrued expenses ........................ 9,111 (29,077)
------------ ------------
Net cash used in operating activities .................................. (340,179) (386,291)
------------ ------------
Cash flows from investing activities:
Receipt of distributions from partnerships ................................... 350,393 1,165,200
Proceeds from disposition of investment in partnership ....................... 1,012,685 --
Additional proceeds from disposition of investment in partnership ............ -- 180
Payment of disposition fees to related party ................................. (1,968,050) --
------------ ------------
Net cash (used in) provided by investing activities .................... (604,972) 1,165,380
------------ ------------
Cash flows used in financing activities:
Distribution to Additional Limited Partners .................................. (9,582,720) --
Tax distribution on behalf of Additional Limited Partners .................... (603,970) --
------------ ------------
Net cash used in financing activities .................................. (10,186,690) --
------------ ------------
Net (decrease) increase in cash and cash equivalents ........................... (11,131,841) 779,089
Cash and cash equivalents, beginning of period ................................. 15,311,566 2,979,778
------------ ------------
Cash and cash equivalents, end of period ....................................... $ 4,179,725 $ 3,758,867
============ ============
The accompanying notes are an integral part
of these financial statements.
-3-
CAPITAL REALTY INVESTORS-II LIMITED PARTNERSHIP
NOTES TO FINANCIAL STATEMENTS
June 30, 2005 and 2004
(Unaudited)
1. BASIS OF PRESENTATION
In the opinion of C.R.I., Inc. (CRI), the Managing General Partner, the
accompanying unaudited financial statements reflect all adjustments, consisting
of normal recurring accruals, necessary for a fair presentation of the financial
position of Capital Realty Investors-II Limited Partnership (the Partnership) as
of June 30, 2005, and the results of its operations for the three and six months
ended June 30, 2005 and 2004, and its cash flows for the six months ended June
30, 2005 and 2004. The results of operations for the interim periods ended June
30, 2005, are not necessarily indicative of the results to be expected for the
full year.
The accompanying unaudited financial statements have been prepared in
conformity with accounting principles generally accepted in the United States of
America (US GAAP) and with the instructions to Form 10-QSB. Certain information
and accounting policies and footnote disclosures normally included in financial
statements prepared in conformity with US GAAP have been condensed or omitted
pursuant to such instructions. These condensed financial statements should be
read in conjunction with the financial statements and notes thereto included in
the Partnership's annual report on Form 10-KSB at December 31, 2004.
In December 2003, the Financial Accounting Standards Board issued FASB
Interpretation No. 46 (revised December 2003) (FIN 46-R), Consolidation of
Variable Interest Entities. FIN 46-R clarifies the application of Accounting
Research Bulletin 51, Consolidated Financial Statements, for certain entities
that do not have sufficient equity at risk for the entity to finance its
activities without additional subordinated financial support from other parties
or in which equity investors do not have the characteristics of a controlling
financial interest ("variable interest entities"). Variable interest entities
within the scope of FIN 46-R will be required to be consolidated by their
primary beneficiary. The primary beneficiary of a variable interest entity is
determined to be the party that absorbs a majority of the entity's expected
losses, receives a majority of its expected returns, or both. The Managing
General Partner has evaluated the partnerships in which the Partnership is
invested and has determined that they are not variable interest entities subject
to consolidation by the Partnership under the provisions of FIN 46-R.
2. PLAN OF LIQUIDATION AND DISSOLUTION
On February 4, 2004, the Partnership filed a Definitive Proxy Statement
pursuant to Section 14(a) of the Securities Exchange Act of 1934, and mailed it
to limited partners to solicit consents for approval of the following:
(1) The sale of all of the Partnership's assets and the dissolution of the
Partnership pursuant to a Plan of Liquidation and Dissolution, and the
amendment of the Partnership's Limited Partnership Agreement to permit the
Managing General Partner, CRI, to be eligible to receive property
disposition fees from the Partnership on the same basis as such fees may
currently be paid to Local General Partners, real estate brokers or other
third party intermediaries employed to sell Partnership properties, to the
extent that CRI markets and sells the Partnership's properties instead of
such persons (a "Disposition Fee");
-4-
CAPITAL REALTY INVESTORS-II LIMITED PARTNERSHIP
NOTES TO FINANCIAL STATEMENTS
June 30, 2005 and 2004
(Unaudited)
2. PLAN OF LIQUIDATION AND DISSOLUTION - Continued
(2) The amendment of the Partnership's Limited Partnership Agreement to permit
CRI to be eligible to receive a partnership liquidation fee in the amount
of $500,000, payable only if the Managing General Partner is successful in
liquidating all of the Partnership's investments within 36 months from the
date the liquidation is approved [March 22, 2004], in recognition that one
or more of the properties in which the Partnership holds an interest might
not be saleable to parties not affiliated with the respective Local
Partnership due to the amount and/or terms of their current indebtedness
(the "Partnership Liquidation Fee"); and
(3) To authorize the Managing General Partner, in its sole discretion, to elect
to extend the period during which Consents of Limited Partners may be
solicited and voted, but not beyond sixty (60) days from the date that the
Consent Solicitation Statement was sent to the Limited Partners.
The matters for which consent was solicited are collectively referred to as the
"Liquidation."
The record date for voting was December 31, 2003, and the final voting
deadline was March 22, 2004. A tabulation of votes received by the voting
deadline follows.
FOR AGAINST ABSTAIN TOTAL
------------------ ----------------- ------------------ ------------------
Units of Units of Units of Units of
limited limited limited limited
partner partner partner partner
Description interest Percent interest Percent interest Percent Interest Percent
----------- -------- ------- -------- ------- -------- ------- -------- -------
Sale, dissolution and
five percent
Disposition Fee 28,699 57.6% 1,264 2.5% 268 0.5% 30,231 60.6%
$500,000 Partnership
Liquidation Fee 25,841 51.8% 3,546 7.1% 844 1.7% 30,231 60.6%
Extension of
solicitation period 27,975 56.1% 1,767 3.5% 489 1.0% 30,231 60.6%
There can be no assurance that the Liquidation will be completed pursuant
to the Plan of Liquidation and Dissolution.
3. INVESTMENTS IN AND ADVANCES TO PARTNERSHIPS
a. Due on investments in partnerships and accrued interest payable
---------------------------------------------------------------
Westgate
--------
The Partnership defaulted on its one remaining purchase money note, related
to Westgate Limited Dividend Housing Association (Westgate), on September 1,
2003, when the note (as extended) matured and was not paid. The default amount
included principal and accrued interest of $1,400,000 and $2,584,492,
respectively. As of August 8, 2005, principal and accrued interest of $1,400,000
and $2,828,207, respectively, were due. In conjunction with the approved Plan of
Liquidation and Dissolution of the Partnership, the Managing General Partner is
currently negotiating the sale of the property related to Westgate. The sale is
scheduled to close in the second quarter of 2006. The noteholders have agreed to
accept the proceeds of such sale as a discounted payoff of the purchase money
note's principal and accrued interest. The discounted payoff would result in
cancellation of indebtedness income to the Limited Partners, which would be
taxed at a federal tax rate of up to 35 percent. There can be no assurance that
a sale of Westgate and discounted payoff of the purchase money note will occur.
-5-
CAPITAL REALTY INVESTORS-II LIMITED PARTNERSHIP
NOTES TO FINANCIAL STATEMENTS
June 30, 2005 and 2004
(Unaudited)
3. INVESTMENTS IN AND ADVANCES TO PARTNERSHIPS - Continued
Interest expense on the Partnership's Westgate purchase money note for each
of the three and six month periods ended June 30, 2005 and 2004, was $31,500 and
$63,000, respectively. The accrued interest payable on the purchase money note
of $2,815,262 and $2,752,262 as of June 30, 2005 and December 31, 2004,
respectively, is in default.
Due to the possible sale of the property related to Westgate, the
Partnership's basis in the Local Partnership, along with the net unamortized
amount of acquisition fees and property purchase costs, which totaled $470,717
and $486,187 as of June 30, 2005 and December 31, 2004, respectively, has been
reclassified to investment in partnerships held for sale in the accompanying
balance sheets.
b. Advance to Local Partnership
----------------------------
Four Winds West
---------------
In October 2004, the Partnership advanced $25,000 to Four Winds West
Company, Ltd., (Four Winds West) to assist with current cash requirements. For
financial reporting purposes, the Partnership reduced this advance to zero as of
December 31, 2004, as a result of losses at the related Local Partnership level.
c. Completed sales
---------------
Arrowhead
---------
On November 17, 2004, the Partnership's interest in Arrowhead Apartments
Associates (Arrowhead) was sold. Gross cash proceeds received by the Partnership
totaled $1,156,495. The sale resulted in net gain on disposition of investment
in partnerships of $698,210 for financial statement purposes and in total gain
of $6,082,297 for federal tax purposes in 2004. In accordance with the terms of
the Partnership Agreement, in December 2004 the Managing General Partner was
paid a disposition fee of $432,824 related to the sale. The fee was netted
against the related gain on disposition of investment in partnerships. In 2005,
the Partnership accrued $90,241 for additional cash proceeds expected to be
received upon the release of escrow reserves, resulting in additional gain on
disposition of investment in partnerships of $90,241 for financial statement
purposes in 2005.
Mercy Terrace
-------------
On June 6, 2005, the Partnership's interest in Mercy Terrace Associates
(Mercy Terrace) was sold. Gross proceeds received by the Partnership totaled
$1,012,685. The sale resulted in net gain on disposition of investment in
partnerships of $255,043 for financial statement purposes and in total gain of
$7,155,425 for federal tax purposes in 2005. In accordance with the terms of the
Partnership Agreement, in June 2005 the Managing General Partner was paid a
disposition fee of $757,642 related to the sale. The fee was netted against the
related gain on disposition of investment in partnerships.
-6-
CAPITAL REALTY INVESTORS-II LIMITED PARTNERSHIP
NOTES TO FINANCIAL STATEMENTS
June 30, 2005 and 2004
(Unaudited)
3. INVESTMENTS IN AND ADVANCES TO PARTNERSHIPS - Continued
Moorings
-------
On November 17, 2004, the Partnership's interest in Moorings Apartments
Associates (Moorings) was sold. Gross cash proceeds received by the Partnership
totaled $366,943. The sale resulted in net loss on disposition of investment in
partnerships of $120,694 for financial statement purposes and in total gain of
$6,216,291 for federal tax purposes in 2004. In accordance with the terms of the
Partnership Agreement, in December 2004 the Managing General Partner was paid a
disposition fee of $462,417 related to the sale. In 2005, the Partnership
accrued $28,614 for additional cash proceeds expected to be received upon the
release of escrow reserves, resulting in additional gain in disposition of
investment in partnerships of $28,614 for financial statement purposes in 2005.
Country Place I
---------------
On December 29, 2004, the Partnership's interest in Blackburn Limited
Partnership (Country Place I) was sold. Gross cash proceeds received by the
Partnership in 2004 totaled $6,821,935. In addition, at December 31, 2004, the
Partnership accrued $504,604 for cash proceeds to be received in 2005 upon the
release of escrow reserves, which were posted as security for the purchaser to
claim any monetary damages as a result of any breach of the representations and
warranties made by the seller within one year after closing. The sale resulted
in net gain on disposition of investment in partnerships of $6,565,858 for
financial statement purposes and in total gain of $11,060,421 for federal tax
purposes in 2004. In accordance with the terms of the Partnership agreement, in
January 2005 the Managing General Partner was paid a disposition fee of $743,366
related to the sale. The fee was accrued and netted against the related gain on
disposition of investment in partnerships at December 31, 2004.
Country Place II
----------------
On December 29, 2004, the Partnership's interest in Second Blackburn
Limited Partnership (Country Place II) was sold. Gross cash proceeds received by
the Partnership in 2004 totaled $4,438,748. In addition, at December 31, 2004,
the Partnership accrued $328,275 for cash proceeds to be received in 2005 upon
the release of escrow reserves, which were posted as security for the purchaser
to claim any monetary damages as a result of any breach of representations and
warranties made by the seller within one year after closing. The sale resulted
in net gain on disposition of investment in partnerships of $4,288,096 for
financial statement purposes and in total gain of $6,846,454 for federal tax
purposes in 2004. In accordance with the terms of the Partnership agreement, in
January 2005 the Managing General Partner was paid a disposition fee of $467,042
related to the sale. The fee was accrued and netted against the related gain on
disposition of investment in partnerships at December 31, 2004.
-7-
CAPITAL REALTY INVESTORS-II LIMITED PARTNERSHIP
NOTES TO FINANCIAL STATEMENTS
June 30, 2005 and 2004
(Unaudited)
3. INVESTMENTS IN AND ADVANCES TO PARTNERSHIPS - Continued
d. Assets held for sale
--------------------
Chevy Chase
-----------
In December 2004, a contract for the sale of the property related to Chevy
Chase was signed. The sale is scheduled to close by October 31, 2005. Due to the
possible sale of the property related to the Partnership's investment in Chevy
Chase, the Partnership's basis in the Local Partnership, along with net
unamortized acquisition fees and property purchase costs, which totaled
$1,005,756 and $992,626, as of June 30, 2005 and December 31, 2004,
respectively, has been reclassified to investments in partnerships held for sale
in the accompanying balance sheets. There is no assurance that a sale of the
property will occur.
Posada Vallarta
---------------
The Partnership recently approved the sale of the property related to
Posada Associates Limited Partnership (Posada Vallarta). The sale is scheduled
to close September 7, 2005. There is no assurance that a sale of the property
will occur.
Westgate
--------
The Partnership's basis in Westgate, along with the net unamortized amount
of acquisition fees and property purchase costs are disclosed in Note 3.a.,
above.
Four Winds West, Golden Acres, Orangewood Plaza,
------------------------------------------------
and Troy Manor
--------------
In accordance with its approved Plan of Liquidation and Dissolution, the
Partnership is actively marketing its remaining four investments in the
following Local Partnerships:
1) Four Winds West Company, Ltd. (Four Winds West)
2) Chowchilla Elderly Associates, Ltd. (Golden Acres)
3) Orangewood Plaza Limited Partnership (Orangewood Plaza)
4) Troy Apartments Ltd. (Troy Manor)
The Partnership's net unamortized amount of acquisition fees and property
purchase costs, relating to Four Winds West, which totaled $12,567 at both June
30, 2005 and December 31, 2004, has been reclassified to investment in
partnerships held for sale in the accompanying balance sheets. There is no
assurance that the sale of any or all of these four investments will occur.
e. Summarized financial information
--------------------------------
Combined statements of operations for the seven and twelve Local
Partnerships in which the Partnership was invested as of June 30, 2005 and 2004,
respectively, follow. The combined statements have been compiled from
information supplied by the management agents of the properties and are
unaudited. The information for each of the periods is presented separately for
those Local Partnerships which have positive investment basis (equity method),
and for those Local Partnerships which have cumulative losses in excess of the
amount of the Partnership's investments in those Local Partnerships (equity
method suspended). Appended after the combined statements is information
concerning the Partnership's share of income from partnerships related to cash
distributions recorded as income, and related to the Partnership's share of
income from Local Partnerships.
-8-
CAPITAL REALTY INVESTORS-II LIMITED PARTNERSHIP
NOTES TO FINANCIAL STATEMENTS
June 30, 2005 and 2004
(Unaudited)
3. INVESTMENTS IN AND ADVANCES TO PARTNERSHIPS - Continued
COMBINED STATEMENTS OF OPERATIONS
(Unaudited)
For the three months ended
June 30,
------------------------------------------------------------
2005 2004 2005 2004
------------------------------------------------------------
Equity Equity
Method Suspended Method Suspended
---------- ---------- ---------- ----------
Number of Local Partnerships 2 5 4 8
= = = =
Revenue:
Rental $ 590,024 $ 799,228 $1,490,872 $2,512,057
Other 10,849 89,407 15,956 72,674
---------- ---------- ---------- ----------
Total revenue 600,873 888,635 1,506,828 2,584,731
---------- ---------- ---------- ----------
Expenses:
Operating 336,190 462,565 761,456 1,532,369
Interest (10,446) 293,148 213,730 943,917
Depreciation and amortization 89,232 192,454 205,575 447,688
---------- ---------- ---------- ----------
Total expenses 414,976 948,167 1,180,761 2,923,974
---------- ---------- ---------- ----------
Net income (loss) $ 185,897 $ (59,532) $ 326,067 $ (339,243)
========== ========== ========== ==========
Cash distributions $ -- $ 22,621 $ 986,287 $ 155,778
========== ========== ========== ==========
Cash distributions recorded
as reduction of investments
in partnerships $ -- $ -- $ 631,353 $ --
========== ========== ========== ==========
Cash distributions recorded
as income $ -- $ 77,066(1) $ 354,934 $ 155,778
Partnership's share of
Local Partnership net income 185,649 -- 324,645 --
Miscellaneous -- -- -- 180
------------------------------ -------------------------
Share of income from partnerships $262,715 $835,537
======== ========
(1) Includes Mercy Terrace sold June 2005.
-9-
CAPITAL REALTY INVESTORS-II LIMITED PARTNERSHIP
NOTES TO FINANCIAL STATEMENTS
June 30, 2005 and 2004
(Unaudited)
3. INVESTMENTS IN AND ADVANCES TO PARTNERSHIPS - Continued
For the six months ended
June 30,
-----------------------------------------------------------
2005 2004 2005 2004
-----------------------------------------------------------
Equity Equity
Method Suspended Method Suspended
---------- ---------- ---------- ----------
Number of Local Partnerships 2 5 4 8
= = = =
Revenue:
Rental $1,143,605 $1,598,456 $2,956,276 $5,024,112
Other 23,299 178,814 65,384 145,347
---------- ---------- ---------- ----------
Total revenue 1,166,904 1,777,270 3,021,660 5,169,459
---------- ---------- ---------- ----------
Expenses:
Operating 738,632 925,130 1,645,921 3,064,736
Interest (20,892) 586,296 427,461 1,887,834
Depreciation and amortization 178,465 384,908 411,149 895,373
---------- ---------- ---------- ----------
Total expenses 896,205 1,896,334 2,484,531 5,847,943
---------- ---------- ---------- ----------
Net income (loss) $ 270,699 $ (119,064) $ 537,129 $ (678,484)
========== ========== ========== ==========
Cash distributions $ 273,327 $ 22,621 $ 986,287 $ 178,913
========== ========== ========== ==========
Cash distributions recorded
as reduction of investments
in partnerships $ 273,327 $ -- $ 631,353 $ --
========== ========== ========== ==========
Cash distributions recorded
as income $ -- $ 77,066 (1) $ 354,934 $ 178,913
Partnership's share of Local
Partnership net income 270,243 -- 534,500 --
Miscellaneous -- -- -- 180
-------------------------- -------------------------
Share of income from partnerships $347,309 $1,068,527
======== ==========
(1) Includes Mercy Terrace sold June 2005.
Cash distributions received from Local Partnerships which have investment
basis (equity method) are recorded as a reduction of investments in partnerships
and as cash receipts on the respective balance sheets. Cash distributions
received from Local Partnerships which have cumulative losses in excess of the
amount of the Partnership's investments in those Local Partnerships (equity
method suspended) are recorded as share of income from partnerships on the
respective statements of operations and as cash receipts on the respective
balance sheets. As of June 30, 2005 and 2004, the Partnership's share of
cumulative losses to date for the five of the seven and eight of the twelve
Local Partnerships, respectively, exceeded the amount of the Partnership's
investments in those Local Partnerships by $9,431,463 and $20,904,113,
respectively. As the Partnership has no further obligation to advance funds or
provide financing to these Local Partnerships, the excess losses have not been
reflected in the accompanying financial statements.
-10-
CAPITAL REALTY INVESTORS-II LIMITED PARTNERSHIP
NOTES TO FINANCIAL STATEMENTS
June 30, 2005 and 2004
(Unaudited)
4. RELATED PARTY TRANSACTIONS
In accordance with the terms of the Partnership Agreement, the Partnership
is obligated to reimburse the Managing General Partner for its direct expenses
in connection with managing the Partnership. The Partnership paid $61,518 and
$139,970 for the three and six month periods ended June 30, 2005, respectively,
and $56,562 and $120,856 for the three and six month periods ended June 30,
2004, respectively, to the Managing General Partner as direct reimbursement of
expenses incurred on behalf of the Partnership. Such expenses are included in
general and administrative expenses in the accompanying statements of
operations.
In accordance with the terms of the Partnership Agreement, the Partnership
is obligated to pay the Managing General Partner an annual incentive management
fee (Management Fee) after all other expenses of the Partnership are paid. The
Partnership paid the Managing General Partner a Management Fee of $62,499 for
each of the three month periods ended June 30, 2005 and 2004, and $124,998 for
each of the six month periods ended June 30, 2005 and 2004.
In accordance with the terms of a Definitive Proxy Statement for the
Liquidation and Dissolution of the Partnership, which was approved on March 22,
2004, by holders of a majority of the Units of Limited Partner Interest, the
Managing General Partner may receive property disposition fees from the
Partnership on the same basis as such fees may currently be paid to Local
General Partners, real estate brokers or other third party intermediaries
employed to sell Partnership properties, to the extent that CRI markets and
sells the Partnership's properties instead of such persons. In addition, the
Managing General Partner may receive a partnership liquidation fee in the amount
of $500,000, payable only if the Managing General Partner is successful in
liquidating all of the Partnership's investments within 36 months from the date
the liquidation is approved, in recognition that one or more of the properties
in which the Partnership holds an interest might not be saleable to parties not
affiliated with the respective Local Partnership due to the amount and/or terms
of their current indebtedness. In accordance with the terms of the amended
Partnership Agreement, in December 2004 the Managing General Partner was paid
disposition fees of $895,241 related to the sales of Arrowhead and Moorings,
which were netted against the related gain on disposition of investment in
partnerships at December 31, 2004. In January 2005, the Managing General Partner
was paid disposition fees in the amount of $1,210,408 related to the sales of
Country Place I and II in December 2004, which were accrued and netted against
the related gain on disposition of investment in partnerships at December 31,
2004. In June 2005, the Managing General Partner was paid a disposition fee of
$757,642 related to the sale of Mercy Terrace, which was netted against the
related gain on disposition of investment in partnerships.
-11-
CAPITAL REALTY INVESTORS-II LIMITED PARTNERSHIP
NOTES TO FINANCIAL STATEMENTS
June 30, 2005 and 2004
(Unaudited)
5. CASH DISTRIBUTIONS
On January 31, 2005, the Partnership made a cash distribution of $9,582,720
($192 per Unit) to Additional Limited Partners who were holders of record as of
December 31, 2004. The distribution consisted of proceeds received from the
sales of the Partnership's interests in Arrowhead, Moorings, Country Place I and
Country Place II. On April 7, 2005, the Partnership made a tax distribution of
$603,970 (approximately $17.50 per Unit) on behalf of Additional Limited
Partners who are not residents of Maryland. On July 12, 2005, the Partnership
made a cash distribution of $285,128 ($17.50 per Unit) to Additional Limited
Partners who were holders of record and Maryland residents as of December 31,
2004. The distributions consisted of proceeds from the sale of Country Place I
and Country Place II.
# # #
-12-
Part I. FINANCIAL INFORMATION
Item 2. Management's Discussion Analysis of Financial Condition
and Results of Operations
Capital Realty Investors-II Limited Partnership's (the Partnership)
Management's Discussion and Analysis of Financial Condition and Results of
Operations section is based on the financial statements, and contains
information that may be considered forward looking, including statements
regarding the effect of governmental regulations. Actual results may differ
materially from those described in the forward looking statements and will be
affected by a variety of factors including national and local economic
conditions, the general level of interest rates, governmental regulations
affecting the Partnership and interpretations of those regulations, the
competitive environment in which the Partnership operates, and the availability
of working capital.
Critical Accounting Policies
----------------------------
The Partnership has disclosed its selection and application of significant
accounting policies in Note 1 of the notes to financial statements included in
the Partnership's annual report on Form 10-KSB at December 31, 2004. The
Partnership accounts for its investments in partnerships (Local Partnerships) by
the equity method because the Partnership is a limited partner in the Local
Partnerships. As such the Partnership has no control over the selection and
application of accounting policies, or the use of estimates, by the Local
Partnerships. Environmental and operational trends, events and uncertainties
that might affect the properties owned by the Local Partnerships would not
necessarily have a significant impact on the Partnership's application of the
equity method of accounting, since the equity method has been suspended for five
Local Partnerships which have cumulative losses in excess of the amount of the
Partnership's investments in those Local Partnerships.
New Accounting Pronouncement
----------------------------
In December 2003, the Financial Accounting Standards Board issued FASB
Interpretation No. 46 (revised December 2003) (FIN 46-R), Consolidation of
Variable Interest Entities. FIN 46-R clarifies the application of Accounting
Research Bulletin 51, Consolidated Financial Statements, for certain entities
that do not have sufficient equity at risk for the entity to finance its
activities without additional subordinated financial support from other parties
or in which equity investors do not have the characteristics of a controlling
financial interest ("variable interest entities"). Variable interest entities
within the scope of FIN 46-R will be required to be consolidated by their
primary beneficiary. The primary beneficiary of a variable interest entity is
determined to be the party that absorbs a majority of the entity's expected
losses, receives a majority of its expected returns, or both. The Managing
General Partner has evaluated the partnerships in which the Partnership is
invested and has determined that they are not variable interest entities subject
to consolidation by the Partnership under the provisions of FIN 46-R.
Plan of Liquidation and Dissolution
-----------------------------------
On February 4, 2004, the Partnership filed a Definitive Proxy Statement,
pursuant to Section 14(a) of the Securities Exchange Act of 1934, to solicit
consent for, among other things, the sale of all of the Partnership's assets and
the dissolution of the Partnership pursuant to a Plan of Liquidation and
Dissolution. As of the voting deadline, March 22, 2004, the holders of 28,699
units of limited partner interest (57.6%) voted "for" such sale and dissolution.
See Note 3 of the notes to financial statements contained in Part I, Item 1,
hereof, for additional information concerning the sale of the Partnership's
limited partner interests in four Local Partnerships in 2004.
-13-
Part I. FINANCIAL INFORMATION
Item 2. Management's Discussion Analysis of Financial Condition
and Results of Operations - Continued
General
-------
Some of the rental properties owned by the Local Partnerships are financed
by state housing agencies. The Managing General Partner has sold or refinanced,
and will continue to sell or refinance, certain properties pursuant to programs
developed by these agencies. These programs may include opportunities to sell a
property to a qualifying purchaser who would agree to maintain the property as
low to moderate income housing, or to refinance a property, or to obtain
supplemental financing. The Managing General Partner continues to monitor
certain state housing agency programs, and/or programs provided by certain
lenders, to ascertain whether the properties would qualify within the parameters
of a given program and whether these programs would provide an appropriate
economic benefit to the Limited Partners of the Partnership.
Some of the rental properties owned by the Local Partnerships are dependent
on the receipt of project-based Section 8 Rental Housing Assistance Payments
(HAP) provided by the U.S. Department of Housing and Urban Development (HUD)
pursuant to Section 8 HAP contracts. Current legislation allows all expired
Section 8 HAP contracts with rents at less than 100% of fair market rents to be
renewed for up to one year. Expiring Section 8 HAP contracts with rents that
exceed 100% of fair market rents could be renewed for up to one year, but at
rents reduced to 100% of fair market rents (Mark-to-Market). All expiring
Section 8 HAP contracts with rents exceeding comparable market rents, and
properties with mortgage loans insured by the Federal Housing Administration
(FHA), became subject to the Mark-to-Market legislation.
Mark-to-Market (M2M) implementation will reduce rental income at properties
that are currently subsidized at higher-than-market rental rates, and will
therefore lower cash flow available to meet mortgage payments and operating
expenses. In some instances, a property will be able to meet its existing debt
service payments after the reduction in rental income. In this case, the
property may enter the M2M "Lite" program, which would not require a debt
restructuring. In the remaining instances, the affected property may undergo
debt restructuring according to terms determined by an individual property and
operations evaluation. This would involve reducing the first mortgage loan
balance to an amount supportable by the property's operations, taking into
account the property's operating expenses and reduced income. The balance of the
amount written down from the first mortgage loan would be converted to a
non-performing but accruing (soft) second mortgage loan. When the existing first
mortgage loan is bifurcated into a first and second mortgage loan, the newly
created second mortgage loan will accrue interest at a below-market rate. The
Internal Revenue Service issued a ruling in July 1998, that concluded that the
below-market rate of interest would not generate additional ordinary income.
Each property subject to M2M will be affected in a different manner, and it is
difficult to predict the exact form of restructuring, or potential tax
liabilities to the Limited Partners, at this time. All properties, upon entering
the M2M program (excluding M2M Lite), are required to enter into an agreement
restricting the property's use to affordable housing for 30 years.
Finally, under HUD's "Mark-up-to-Market" program, properties with expiring
Section 8 HAP contracts that are located in high-rent areas as defined by HUD
are eligible for rent increases which would be necessary to bring Section 8 HAP
contract rents in line with market rate rents. For properties that enter the
program and have interest rate subsidized FHA loans, the rents are adjusted to
take into account the benefits the property is already receiving from the
below-market interest rate by means of a HUD-determined adjustment factor. The
purpose of this program is to provide incentives to owners of properties with
expiring Section 8 HAP contracts not to convert these properties to market rate
housing.
-14-
Part I. FINANCIAL INFORMATION
Item 2. Management's Discussion Analysis of Financial Condition
and Results of Operations - Continued
In return for receiving market rate rents under Mark-up-to-Market, the
property owner must enter into a five year conditional Section 8 HAP contract
with HUD, subject to the annual availability of funding by Congress. In
addition, property owners who enter into the Mark-up-to- Market program may
receive increased cash flow as the limited dividend will be increased in an
amount equal to the increase in gross rental revenues.
Troy Manor Associates (Troy Manor) has a Section 8 HAP contract covering
100% of its apartment units which expires in October 2005. Troy Manor
anticipates a one-year renewal of its Section 8 HAP Contract at expiration.
Chevy Chase Park, Ltd. (Chevy Chase) has a Section 8 HAP contract covering 100%
of its apartment units which expired in September 2000. The Local Managing
General Partner entered Chevy Chase into the Mark-up-to-Market program at that
time, for a five year term. The Section 8 HAP contract has been renewed
annually. Chevy Chase is under contract for sale, with closing expected by the
end of October, 2005. There can be no assurance that the property will be sold.
As of June 30, 2005, the carrying amount of the Partnership's investments in two
Local Partnerships with Section 8 HAP contracts expiring in the next 12 months
was $981,571.
The Managing General Partner continues to seek strategies to deal with
affordable housing requirements. While the Managing General Partner cannot
predict the outcome for any particular property at this time, the Managing
General Partner will continue to work with the Local Partnerships to develop
strategies that maximize the benefits to investors.
Financial Condition/Liquidity
-----------------------------
The Partnership's liquidity, with unrestricted cash resources of
$4,179,725 as of June 30, 2005, along with anticipated future cash distributions
from the Local Partnerships, is expected to be adequate to meet its current and
anticipated operating cash needs. As of August 8, 2005, there were no material
commitments for capital expenditures. The Managing General Partner currently
intends to retain all of the Partnership's remaining undistributed cash for
operating cash reserves pending further distributions under its Plan of
Liquidation and Dissolution.
The Partnership's remaining obligation with respect to its investments in
Westgate Limited Dividend Housing Association (Westgate), in the form of a
nonrecourse purchase money note which matured September 1, 2003, has a principal
balance of $1,400,000 plus accrued interest of $2,815,262 as of June 30, 2005,
and is payable in full upon the earliest of: (i) sale or refinancing of the
respective Local Partnership's rental property; (ii) payment in full of the
respective Local Partnership's permanent loan; or (iii) maturity.
The purchase money note, which is nonrecourse to the Partnership, is
secured by the Partnership's interest in the Westgate Local Partnership, which
owns Westgate. The underlying property does not have sufficient appreciation and
equity to enable the Partnership to pay the purchase money note's principal and
accrued interest. In conjunction with the approved Plan of Liquidation and
Dissolution of the Partnership, the Managing General Partner is actively
marketing Westgate for sale. The noteholders have agreed to accept the proceeds
of such sale as a discounted payoff of the purchase money note's principal and
accrued interest. The discounted payoff would result in cancellation of
indebtedness income to the Limited Partners, which would be taxed at a federal
tax rate of up to 35 percent. There can be no assurance that a sale of Westgate
and discounted payoff of the purchase money note will occur.
-15-
Part I. FINANCIAL INFORMATION
Item 2. Management's Discussion Analysis of Financial Condition
and Results of Operations - Continued
The Managing General Partner has received consent from a majority of Unit
Holders for the liquidation of the Partnership. (See Note 2 of the notes to
financial statements contained in Part I, Item 1, hereof.) It is anticipated
that the Partnership's obligation, discussed above, would be retired in
conjunction with such Liquidation. There can be no assurance that the
Liquidation will be completed pursuant to the Plan of Liquidation and
Dissolution.
The Partnership closely monitors its cash flow and liquidity position in an
effort to ensure that sufficient cash is available for operating requirements.
For the six month period ended June 30, 2005, the receipt of distributions from
Local Partnerships was adequate to support operating cash requirements. Cash and
cash equivalents decreased $11,131,841 during the six month period ended June
30, 2005, primarily as a result of a distribution to Additional Limited Partners
in January 2005, and a tax distribution made on behalf of the Additional Limited
Partners in April 2005 and the payment of an accrued disposition fee.
On January 31, 2005, the Partnership made a cash distribution of $9,582,720
($192 per Unit) to Additional Limited Partners who were holders of record as of
December 31, 2004. The distribution consisted of proceeds received from the
sales of the Partnership's interests in Arrowhead, Moorings, Country Place I and
Country Place II. On April 7, 2005, the Partnership made a tax distribution of
$603,970 (approximately $17.50 per Unit) on behalf of Additional Limited
Partners who are not residents of Maryland. On July 12, 2005, the Partnership
made a cash distribution of $285,128 ($17.50 per Unit) to Additional Limited
Partners who were holders of record and Maryland residents as of December 31,
2004. The distributions consisted of proceeds from the sale of Country Place I
and Country Place II.
Results of Operations
---------------------
The Partnership's net income for the three month period ended June 30,
2005, decreased from the corresponding period in 2004, primarily due to a
decrease in share of income from partnerships and increases in general and
administrative expenses and professional fees, partially offset by increases in
gain on disposition of investments in partnerships and interest revenue, and a
decrease in amortization of deferred costs. Share of income from partnerships
decreased in 2005 primarily due to the sale of the Partnership's interests in
four Local Partnerships during 2004, partially offset by higher rental income at
two properties in 2005. General and administrative expenses increased primarily
due to higher reimbursed payroll costs, partially offset by lower printing
costs. Professional fees increased due to higher audit costs, partially offset
by lower legal expenses due to proxy costs incurred in 2004, but not in 2005.
The increase in gain on disposition of investment in partnerships relates to the
sale of the Partnership's interest in Mercy Terrace in 2005. Interest revenue
increased in 2005 due to higher interest rates. Amortization of deferred costs
decreased to $0 since all the Partnership's investments in Local Partnerships
had been reclassified to investment in partnerships held for sale by the end of
2004.
The Partnership's net income for the six month period ended June 30, 2005,
decreased from the corresponding period in 2004, primarily due to a decrease in
share of income from partnerships and increases in general and administrative
expenses and professional fees, partially offset by an increase in interest
revenue and a decrease in amortization of deferred costs, all as discussed
above. The increase in gain on disposition of investment in partnerships relates
to the sales of the Partnership's interests in Arrowhead, Mercy Terrace and
Moorings as discussed in Note 3.c., above.
-16-
Part I. FINANCIAL INFORMATION
Item 2. Management's Discussion Analysis of Financial Condition
and Results of Operations - Continued
For financial reporting purposes, the Partnership, as a limited partner in
the Local Partnerships, does not record losses from the Local Partnerships in
excess of its investment to the extent that the Partnership has no further
obligation to advance funds or provide financing to the Local Partnerships. As a
result, the Partnership's share of income from partnerships for the three and
six month periods ended June 30, 2005 did not include losses of $56,632 and
$113,262, respectively, compared to excluded losses of $332,133 and $664,264 for
the three and six month periods ended June 30, 2004, respectively.
No other significant changes in the Partnership's operations have taken
place during the six month period ended June 30, 2005.
Item 3. Controls and Procedures
In July 2005, representatives of the Managing General Partner of the
Partnership carried out an evaluation of the effectiveness of the design and
operation of the Partnership's disclosure controls and procedures, pursuant to
Exchange Act Rules 13a-15 and 15d-15. The Managing General Partner does not
expect that the Partnership's disclosure controls and procedures will prevent
all error and all fraud. A control system, no matter how well conceived and
operated, can provide only reasonable assurance that the objectives of the
control system are met. Further, the design of a control system must reflect the
fact that there are resource constraints, and the benefits of controls must be
considered relative to their costs. Because of the inherent limitations in all
control systems, no evaluation of controls can provide absolute assurance that
all control issues have been detected. These inherent limitations include the
realities that judgments in decision-making can be faulty, and that breakdowns
can occur because of simple error or mistake. The design of any system of
controls also is based in part upon certain assumptions about the likelihood of
future events, and there can be no assurance that any design will succeed in
achieving its stated goals under all potential future conditions. Over time,
controls may become inadequate because of changes in conditions, or the degree
of compliance with the policies or procedures may deteriorate. Because of the
inherent limitations in a cost-effective control system, misstatements due to
error or fraud may occur and not be detected. Based on the July 2005 evaluation,
and subject to the foregoing, the Principal Executive Officer and Principal
Financial Officer concluded that the Partnership's disclosure controls and
procedures are effective as of the end of the period covered by this report to
alert them in a timely manner to any material information relating to the
Partnership that must be included in the Partnership's periodic SEC filings, and
particularly during the period in which this report is being prepared. In
addition, there have been no significant changes in the Partnership's internal
control over financial reporting that occurred during the Partnership's most
recent fiscal quarter that have materially affected, or are reasonably likely to
materially affect, the Partnership's internal control over financial reporting.
Part II. OTHER INFORMATION
Item 3. Defaults Upon Senior Securities
See Note 3.a. of the notes to financial statements contained in Part I,
Item 1, hereof, for information concerning the Partnership's default on one
purchase money note.
-17-
Part II. OTHER INFORMATION
Item 5. Other Information
a. There has not been any information required to be disclosed in a
report on Form 8-K during the quarter ended June 30, 2005, but not
reported, whether or not otherwise required by this Form 10-QSB at
June 30, 2005.
b. There is no established market for the purchase and sale of units of
additional limited partner interest (Units) in the Partnership,
although various informal secondary market services exist. Due to the
limited markets, however, investors may be unable to sell or otherwise
dispose of their Units.
Registered Tender Offer
-----------------------
On January 23, 2004, Equity Resource Fund XXII (Equity) initiated a
registered tender offer to purchase up to 5,000 of the outstanding
Units in the Partnership at a price of $175 per Unit; the offer, as
extended, expired March 23, 2004. Aside from its limited partner
interests in the Partnership, Equity is unaffiliated with the
Partnership or the Managing General Partner. The price offered was
determined solely at the discretion of Equity and does not necessarily
represent the fair market value of each Unit.
In response to the registered tender offer, on February 4, 2004, the
Managing General Partner filed Schedule 14D-9. In that filing, the
Managing General Partner recommended that Limited Partners reject the
offer because it viewed the offer price as inadequate.
Unregistered Tender Offers
--------------------------
On January 26, 2004, Peachtree Partners (Peachtree) initiated an
unregistered tender offer to purchase up to 4.9% (including 1,525
Units or 3.1%, already owned by affiliates) of the outstanding Units
in the Partnership at a price of $175 per Unit less a transfer fee of
$100 per investor; the offer expired March 23, 2004. Aside from its
limited partner interests in the Partnership, Peachtree is
unaffiliated with the Partnership or the Managing General Partner. The
price offered was determined solely at the discretion of Peachtree and
does not necessarily represent the fair market value of each Unit.
In its Definitive Proxy Statement, dated February 4, 2004, the
Managing General Partner recommended that Limited Partners reject the
unregistered tender offer because it viewed the offer price as
inadequate.
Cash Distribution
-----------------
On January 31, 2005, the Partnership made a cash distribution of
$9,582,720 ($192 per Unit) to Additional Limited Partners who were
holders of record as of December 31, 2004. The distribution consisted
of proceeds received from the sales of the Partnership's interests in
Arrowhead, Moorings, Country Place I and Country Place II. On April 7,
2005, the Partnership made a tax distribution of $603,970
(approximately $17.50 per Unit) on behalf of Additional Limited
Partners who are not residents of Maryland. On July 12, 2005, the
Partnership made a cash distribution of $285,128 ($17.50 per Unit) to
Additional Limited Partners who were holders of record and Maryland
residents as of December 31, 2004. The distributions consisted of
proceeds from the sale of Country Place I and Country Place II.
-18-
Part II. OTHER INFORMATION
Item 5. Other Information - Continued
Effective at close of business on May 6, 2005, the Principal Financial
Officer and Principal Accounting Officer (one individual) of C.R.I., Inc. (the
Managing General Partner of the Registrant) resigned. The duties of these
positions have been assumed by H. William Willoughby. Mr. Willoughby has held
the office of President of CRI since 1990 and has also served as one of its
Directors. He has no employment contract.
Item 6. Exhibits
Exhibit No. Description
- ----------- -----------
31.1 Certification of Principal Executive Officer, pursuant to 18
U.S.C. Section 1350, as adopted pursuant to Section 302 of the
Sarbanes-Oxley Act of 2002.
31.2 Certification of Principal Financial Officer, pursuant to 18
U.S.C. Section 1350, as adopted pursuant to Section 302 of the
Sarbanes-Oxley Act of 2002.
32 Certification of Principal Executive Officer and Principal
Financial Officer, pursuant to 18 U.S.C. Section 1350, as adopted
pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
99 Schedule 13D, dated July 2, 2004. (Incorporated by reference
thereto.)
All other Items are not applicable.
-19-
SIGNATURE
In accordance with the requirements of the Exchange Act, the registrant
caused this report to be signed on its behalf by the undersigned, thereunto duly
authorized.
CAPITAL REALTY INVESTORS-II LIMITED
PARTNERSHIP
----------------------------------------------
(Registrant)
by: C.R.I., Inc.
-----------------------------------------
Managing General Partner
August 8, 2005 by: /s/ H. William Willoughby
- -------------- ------------------------------------
DATE H. William Willoughby,
Director, President,
and Secretary
-20-