- --------------------------------------------------------------------------------
U.S. SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
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FORM 10-QSB
------------------
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 2006
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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
------------------
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 | |
Indicate by check mark whether the registrant is a shell company (as defined in
Rule 12b-2 of the Exchange Act). Yes [ ] No [ X]
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CAPITAL REALTY INVESTORS-II LIMITED PARTNERSHIP
INDEX TO FORM 10-QSB
FOR THE QUARTER ENDED SEPTEMBER 30, 2006
Page
Part I - FINANCIAL INFORMATION
Item 1. Financial Statements
Balance Sheets
- September 30, 2006 and December 31, 2005.................... 1
Statements of Operations and Accumulated Losses
- for the three and nine months ended
September 30, 2006 and 2005 2
Statements of Cash Flows
- for the nine months ended September 30, 2006 and 2005....... 3
Notes to Financial Statements
- September 30, 2006 and 2005................................. 4
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations..................................... 14
Item 3. Controls and Procedures......................................... 17
Part II - OTHER INFORMATION
Item 3. Defaults Upon Senior Securities................................. 17
Item 5. Other Information............................................... 17
Item 6. Exhibits........................................................ 18
Signature................................................................ 19
Part I. FINANCIAL INFORMATION
Item 1. Financial Statements
CAPITAL REALTY INVESTORS-II LIMITED PARTNERSHIP
BALANCE SHEETS
ASSETS
September 30, December 31,
2006 2005
------------ ------------
(Unaudited)
Investment in partnerships held for sale or transfer .............................. $ 550,460 $ 559,613
Cash and cash equivalents ......................................................... 5,002,595 4,647,720
Sales proceeds receivable ......................................................... -- 797,693
Other assets ...................................................................... 21,925 1,891
------------ ------------
Total assets ................................................................... $ 5,574,980 $ 6,006,917
============ ============
LIABILITIES AND PARTNERS' CAPITAL
Due on investments in partnerships ................................................ $ 1,400,000 $ 1,400,000
Accrued interest payable .......................................................... 2,972,762 2,878,262
Accounts payable and accrued expenses ............................................. 116,441 140,423
------------ ------------
Total liabilities .............................................................. 4,489,203 4,418,685
------------ ------------
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 ......................................... (34,752,903) (34,500,041)
Offering costs ................................................................ (5,278,980) (5,278,980)
Accumulated losses ............................................................ (8,899,340) (8,649,747)
------------ ------------
Total partners' capital ..................................................... 1,085,777 1,588,232
------------ ------------
Total liabilities and partners' capital ..................................... $ 5,574,980 $ 6,006,917
============ ============
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 nine months ended
September 30, September 30,
---------------------------- ----------------------------
2006 2005 2006 2005
------------ ------------ ------------ ------------
Share of (loss) income from partnerships ........ $ (3,090) $ 139,366 $ 11,643 $ 486,675
------------ ------------ ------------ ------------
Other revenue and expenses:
Revenue:
Interest .................................... 65,543 32,361 183,031 94,083
------------ ------------ ------------ ------------
Expenses:
Management fee .............................. 62,499 62,499 187,497 187,497
General and administrative .................. 48,398 105,060 178,754 296,300
Interest .................................... 31,500 31,500 94,500 94,500
Professional fees ........................... 29,163 25,495 87,488 119,816
------------ ------------ ------------ ------------
171,560 224,554 548,239 698,113
------------ ------------ ------------ ------------
Total other revenue and expenses .......... (106,017) (192,193) (365,208) (604,030)
------------ ------------ ------------ ------------
Loss before gain (loss) on disposition of
investment in partnerships .................... (109,107) (52,827) (353,565) (117,355)
Additional gain (loss) on disposition of
investment in partnerships, net of
disposition fees .............................. 5,819 (6,510) 103,972 367,388
------------ ------------ ------------ ------------
Net (loss) income ............................... (103,288) (59,337) (249,593) 250,033
Accumulated losses, beginning of period ......... (8,796,052) (16,999,487) (8,649,747) (17,308,857)
------------ ------------ ------------ ------------
Accumulated losses, end of period ............... $ (8,899,340) $(17,058,824) $ (8,899,340) $(17,058,824)
============ ============ ============ ============
Net (loss) income allocated
to General Partners (1.51%) ................... $ (1,560) $ (896) $ (3,769) $ 3,776
============ ============ ============ ============
Net (loss) income allocated
to Initial and Special Limited Partners (1.49%) $ (1,539) $ (884) $ (3,719) $ 3,725
============ ============ ============ ============
Net (loss) income allocated
to Additional Limited Partners (97%) .......... $ (100,189) $ (57,557) $ (242,105) $ 242,532
============ ============ ============ ============
Net (loss) income per unit of
Additional Limited Partner Interest,
based on 49,910 units outstanding ............. $ (2.01) $ (1.15) $ (4.85) $ 4.86
============ ============ ============ ============
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 nine months ended
September 30,
----------------------------
2006 2005
------------ ------------
Cash flows from operating activities:
Net (loss) income ........................................................... $ (249,593) $ 250,033
Adjustments to reconcile net (loss) income to net cash used in operating
activities:
Share of income from partnerships ......................................... (11,643) (486,675)
Gain on distribution of investment in partnerships, net of disposition fees -- (255,043)
Additional gain on disposition of investment in partnerships .............. (103,972) (112,345)
Loss on sale proceeds receivable .......................................... -- 15,733
Changes in assets and liabilities:
(Increase) decrease in other assets ..................................... (20,034) 204
Increase in accrued interest receivable on advances ..................... (1,122) (1,122)
Increase in accrued interest payable .................................... 94,500 94,500
(Decrease) increase in accounts payable and accrued expenses ............ (23,982) 45,743
------------ ------------
Net cash used in operating activities ................................. (315,846) (448,972)
------------ ------------
Cash flows from investing activities:
Receipt of distributions from partnerships .................................. 21,918 350,393
Proceeds from disposition of investment in partnership ...................... -- 1,012,685
Collection of sales proceeds ................................................ 901,665 456,879
Payment of disposition fees to related party ................................ -- (1,968,050)
------------ ------------
Net cash provided by (used in) investing activities ................... 923,583 (148,093)
------------ ------------
Cash flows used in financing activities:
Distribution to Additional Limited Partners ................................. -- (9,867,848)
Tax distribution on behalf of Additional Limited Partners ................... (252,862) (603,970)
------------ ------------
Net cash used in financing activities ................................. (252,862) (10,471,818)
------------ ------------
Net increase (decrease) in cash and cash equivalents .......................... 354,875 (11,068,883)
Cash and cash equivalents, beginning of period ................................ 4,647,720 15,311,566
------------ ------------
Cash and cash equivalents, end of period ...................................... $ 5,002,595 $ 4,242,683
============ ============
The accompanying notes are an integral part
of these financial statements.
-3-
CAPITAL REALTY INVESTORS-II LIMITED PARTNERSHIP
NOTES TO FINANCIAL STATEMENTS
September 30, 2006 and 2005
(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 September 30, 2006, and the results of its operations for the three and nine
month periods ended September 30, 2006 and 2005, and its cash flows for the nine
month periods ended September 30, 2006 and 2005. The results of operations for
the interim periods ended September 30, 2006, 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, 2005.
2. NEW ACCOUNTING PRONOUNCEMENT
In September 2006, the Securities and Exchange Commission ("SEC") issued
Staff Accounting Bulletin No. 108, "Considering the Effects of Prior Year
Misstatements when Quantifying Misstatements in Current Year Financial
Statements" ("SAB No. 108"). SAB No. 108 requires quantification of errors using
both a balance sheet approach and an income statement approach in the
determination of materiality in relation to a misstatement. SAB No. 108 is
effective the first fiscal year ending after November 15, 2006. Management
believes SAB No. 108 will not have any impact on the Partnership.
3. 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 increased 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
September 30, 2006 and 2005
(Unaudited)
3. 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.
4. 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 November 9, 2006, principal and accrued interest of
$1,400,000 and $2,986,311, 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 owned by
Westgate and seeking the consent of the noteholders
-5-
CAPITAL REALTY INVESTORS-II LIMITED PARTNERSHIP
NOTES TO FINANCIAL STATEMENTS
September 30, 2006 and 2005
(Unaudited)
4. INVESTMENTS IN AND ADVANCES TO PARTNERSHIPS - Continued
to accept the proceeds from 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.
Interest expense on the Partnership's Westgate purchase money note was
$31,500 and $94,500 for each of the three and nine month periods ended September
30, 2006 and 2005, respectively. The accrued interest payable on the purchase
money note of $2,972,762 and$2,878,262 as of September 30, 2006 and December 31,
2005, 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 $424,803
and $423,113 as of September 30, 2006 and December 31, 2005, respectively, has
been reclassified to investment in partnerships held for sale in the
accompanying balance sheets.
b. Completed sales
---------------
Arrowhead
---------
On November 17, 2004, the Partnership's interest in Arrowhead Apartments
Associates (Arrowhead) was sold. Gross cash proceeds received in 2004 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 $85,470 for additional cash proceeds expected to
be received upon the release of escrow reserves, of which $42,649 was received
in August 2005 and the remaining $42,821 was received in January 2006.
Chevy Chase
-----------
On November 22, 2005, the property owned by Chevy Chase Park, Ltd. (Chevy
Chase) was sold. Gross cash proceeds received in 2005 by the Partnership totaled
$6,814,125. The sale resulted in net gain on disposition of investment in
partnerships of $5,238,173 for financial statement purposes and in total gain of
$7,115,800 for federal tax purposes in 2005. The Partnership accrued $23,208,
which is included in gain on disposition of investment in partnerships in 2005,
for additional sale proceeds receivable related to the sale of which $18,909 was
received in March 2006 and the remaining $4,299 was received in April 2006. In
2006, net gain on disposition of investment in partnerships was reduced by
$11,602 relating to additional expenses incurred. In accordance with the terms
of the Partnership Agreement, in November 2005 the Managing General Partner was
paid a disposition fee of $435,000 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
September 30, 2006 and 2005
(Unaudited)
4. INVESTMENTS IN AND ADVANCES TO PARTNERSHIPS - Continued
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. In August 2005,
approximately fifty percent of the escrowed reserves was received. The remaining
amount of $253,358 was received in January 2006. In April 2005, an additional
$9,000 that was received from the Local Partnership was recorded as gain on
disposition of investments in partnerships at December 31, 2005.
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 in
2004 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.
In August 2005, approximately fifty percent of the escrowed reserves was
received. The remaining amount of $164,728 was received in January 2006. In
April 2005, an additional $9,000 that was received from the Local Partnership
was recorded as gain on disposition of investments in partnerships at December
31, 2005.
Mercy Terrace
-------------
On June 6, 2005, the Partnership's interest in Mercy Terrace Associates
(Mercy Terrace) was sold. Gross proceeds received in 2005 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 $7,320,022 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.
-7-
CAPITAL REALTY INVESTORS-II LIMITED PARTNERSHIP
NOTES TO FINANCIAL STATEMENTS
September 30, 2006 and 2005
(Unaudited)
4. 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 in 2004 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 $27,101 for additional cash proceeds expected to be received
upon the release of escrow reserves, of which $13,523 was received in August
2005 and $13,578 was received in January 2006.
Posada Vallarta
---------------
On December 12, 2005, the property owned by Posada Associates Limited
Partnership (Posada Vallarta) was sold. Gross cash proceeds received in 2005 by
the Partnership totaled $3,930,457. The sale resulted in net gain on disposition
of investment in partnerships of $3,111,832 for financial statement purposes and
in total gain of $13,057,662 for federal tax purposes in 2005. In accordance
with the terms of the Partnership Agreement, in December 2005 the Managing
General Partner was paid a disposition fee of $1,118,625 related to the sale.
The fee was netted against the related gain on disposition of investment in
partnerships. The Partnership accrued $300,000, which is included in gain on
disposition of investment in partnerships in 2005, for additional sale proceeds
received in March 2006. During the first quarter of 2006, the Partnership
recorded gain on disposition of investment in partnerships of $113,617, of which
$54,035 was received in March 2006 and $59,582 was received in April 2006.
During the second quarter of 2006, gain on disposition of investment in
partnerships was reduced by $3,861 relating to additional expenses incurred.
During the third quarter of 2006, the Partnership recorded gain in disposition
of investment in partnerships of $5,819, of which $4,989 was received in July
2006 and $830 was received in September 2006.
c. Assets held for sale or transfer
--------------------------------
Four Winds West
---------------
As of October 31, 2006, the Partnership's interest in Four Winds West
Company Ltd. (Four Winds West) was transferred to an affiliate of the local
managing general partner. The transfer will result in gain on disposition of
investment in partnerships of $12,567 for financial statement purposes and in
total gain of approximately $544,000 for federal income tax purposes in 2006.
The Partnership's net unamortized amount of acquisition fees and property
purchase costs relating to Four Winds West, which totaled $12,567 at both
September 30, 2006 and December 31, 2005, has been reclassified to investment in
partnerships held for sale or transfer in the accompanying balance sheets.
-8-
CAPITAL REALTY INVESTORS-II LIMITED PARTNERSHIP
NOTES TO FINANCIAL STATEMENTS
September 30, 2006 and 2005
(Unaudited)
4. INVESTMENTS IN AND ADVANCES TO PARTNERSHIPS - Continued
Golden Acres, Orangewood Plaza, and Troy Manor
----------------------------------------------
In accordance with its approved Plan of Liquidation and Dissolution, the
Partnership is currently negotiating the sale of the Partnership's interests
relating to Chowchilla Elderly Associates, Ltd. (Golden Acres), Orangewood Plaza
Limited Partnership (Orangewood Plaza) and Troy Apartments Ltd. (Troy Manor).
The Partnership's basis in Golden Acres, which totaled $113,090 and
$123,933 at September 30, 2006 and December 31, 2005, respectively, has been
reclassified to investment in partnerships held for sale or transfer in the
accompanying balance sheets. The Partnership's basis in Orangewood Plaza and
Troy Manor, both totaled $0 at September 30, 2006 and December 31, 2005. There
is no assurance that the sale of any or all of these investments will occur.
Westgate
--------
See Note 4.a., above.
d. Advance to Local Partnership
----------------------------
Four Winds West
---------------
As of October 12, 2004, the Partnership advanced $25,000 to Four Winds West
to assist with current cash requirements. As of October 31, 2006, the note was
canceled. For financial reporting purposes, the advance was reduced to zero by
the Partnership as a result of losses at the related Local Partnership level in
2004.
e. Summarized financial information
--------------------------------
Combined statements of operations for the five and seven Local Partnerships
in which the Partnership was invested as of September 30, 2006 and 2005,
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.
-9-
CAPITAL REALTY INVESTORS-II LIMITED PARTNERSHIP
NOTES TO FINANCIAL STATEMENTS
September 30, 2006 and 2005
(Unaudited)
4. INVESTMENTS IN AND ADVANCES TO PARTNERSHIPS - Continued
COMBINED STATEMENTS OF OPERATIONS
(Unaudited)
For the three months ended
September 30,
----------------------------------------------------------
2006 2005
-------------------------- ------------------------
Equity Equity
Method Suspended Method Suspended
---------- ---------- ---------- ---------
Number of Local Partnerships 2 3 2 5
= = = =
Revenue:
Rental $ 233,100 $ 209,221 $ 560,950 $ 799,228
Other 9,070 1,820 13,192 89,407
---------- ---------- ---------- ----------
Total revenue 242,170 211,041 574,142 888,635
---------- ---------- ---------- ----------
Expenses:
Operating 187,872 158,299 355,564 462,565
Interest 5,078 31,682 (10,446) 293,148
Depreciation and amortization 51,915 40,651 89,232 192,454
---------- ---------- ---------- ----------
Total expenses 244,865 230,632 434,350 948,167
---------- ---------- ---------- ----------
Net (loss) income $ (2,695) $ (19,591) $ 139,792 $ (59,532)
========== ========== ========== ==========
Cash distributions $ -- $ -- $ -- $ --
========== ========== ========== ==========
Partnership's share of
Local Partnership net income (2,712) -- 139,744 --
Miscellaneous -- (378) -- (378)
-------------------------- -------------------------
Share of (loss) income from
partnerships $(3,090) $139,366
======= ========
-10-
CAPITAL REALTY INVESTORS-II LIMITED PARTNERSHIP
NOTES TO FINANCIAL STATEMENTS
September 30, 2006 and 2005
(Unaudited)
4. INVESTMENTS IN AND ADVANCES TO PARTNERSHIPS - Continued
For the nine months ended
September 30,
-----------------------------------------------------------
2006 2005
-------------------------- -------------------------
Equity Equity
Method Suspended Method Suspended
---------- ---------- ---------- ----------
Number of Local Partnerships 2 3 2 5
= = = =
Revenue:
Rental $ 694,031 $ 627,663 $1,704,555 $2,397,683
Other 32,338 5,459 36,491 268,221
---------- ---------- ---------- ----------
Total revenue 726,369 633,122 1,741,046 2,665,904
---------- ---------- ---------- ----------
Expenses:
Operating 558,248 474,898 1,094,196 1,387,694
Interest 15,235 95,045 (31,337) 879,443
Depreciation and amortization 155,746 121,953 267,697 577,363
---------- ---------- ---------- ----------
Total expenses 729,229 691,896 1,330,556 2,844,500
---------- ---------- ---------- ----------
Net (loss) gain $ (2,860) $ (58,774) $ 410,490 $ (178,596)
========== ========== ========== ==========
Cash distributions $ 6,305 $ 15,613 $ 273,327 $ 77,066 (1)
========== ========== ========== ==========
Cash distributions recorded
as reduction of investments
in partnerships $ 6,305 $ -- $ 273,327 $ --
========== ========== ========== ==========
Cash distributions recorded
as income $ -- $ 15,613 $ -- $ 77,066 (1)
Partnership's share of Local
Partnership net income (2,848) -- 410,731 --
Miscellaneous -- (1,122) -- (1,122)
-------------------------- -------------------------
Share of income from partnerships $11,643 $486,675
======= ========
(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 September 30, 2006 and 2005, the Partnership's share of
cumulative losses to date for the three of the five and five of the seven Local
Partnerships, respectively, exceeded the amount of the Partnership's investments
in those Local Partnerships by $1,032,411 and $9,488,093, 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.
-11-
CAPITAL REALTY INVESTORS-II LIMITED PARTNERSHIP
NOTES TO FINANCIAL STATEMENTS
September 30, 2006 and 2005
(Unaudited)
5. 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 $38,295 and
$121,953 for the three and nine month periods ended September 30, 2006,
respectively, and $52,896 and $192,866 for the three and nine month periods
ended September 30, 2005, 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 September 30, 2006 and 2005, and $187,497
for each of the nine month periods ended September 20, 2006 and 2005.
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 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 in 2005. On November
28, 2005, the Managing General Partner was paid a disposition fee of $435,000,
related to the sale of the property owned by Chevy Chase, which was netted
against the related gain on disposition of investment in partnerships in 2005.
On December 14, 2005, the Managing General Partner was paid a disposition fee of
$1,118,625, related to the sale of the property owned by Posada Vallarta, which
was netted against the related gain on disposition of investment in partnerships
in 2005.
6. 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
-12-
CAPITAL REALTY INVESTORS-II LIMITED PARTNERSHIP
NOTES TO FINANCIAL STATEMENTS
September 30, 2006 and 2005
(Unaudited)
6. CASH DISTRIBUTIONS - Continued
Partners who were holders of record and Maryland residents as of December 31,
2004. The distributions consisted of proceeds from the 2004 sales of Country
Place I and Country Place II. On December 22, 2005, the Partnership made a cash
distribution of $8,734,250 ($175 per unit) to Additional Limited Partners who
were holders of record as of December 1, 2005. The distribution consisted of
proceeds from the 2005 sale of the Partnership's interest in Mercy Terrace, and
the 2005 sales of the properties owned by Chevy Chase and Posada Vallarta. On
April 4, 2006, the Partnership made a tax distribution of $252,862
(approximately $7.20 per Unit) on behalf of Additional Limited Partners who are
not residents of Ohio.
7. SUBSEQUENT EVENT
As of October 31, 2006, the Partnership's interest in Four Winds West was
transferred to an affiliate of the local managing general partner. See Note 4.c.
Assets held for sale or transfer in Part I Item 1 for further information.
# # #
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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, 2005. 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
three Local Partnerships which have cumulative losses in excess of the amount of
the Partnership's investments in those Local Partnerships.
New Accounting Pronouncement
----------------------------
In September 2006, the SEC issued Staff Accounting Bulletin No. 108,
"Considering the Effects of Prior Year Misstatements when Quantifying
Misstatements in Current Year Financial Statements" ("SAB No. 108"). SAB No. 108
requires quantification of errors using both a balance sheet approach and an
income statement approach in the determination of materiality in relation to a
misstatement. SAB No. 108 is effective the first fiscal year ending after
November 15, 2006. Management believes SAB No. 108 will not have any impact on
the Partnership.
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 and the sales of properties owned by Local
Partnerships.
General
-------
Some of the rental properties owned by the Local Partnerships are financed
by state and federal housing agencies. The Managing General Partner has sold or
refinanced, and will continue to sell, 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. 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.
-14-
Part I. FINANCIAL INFORMATION
Item 2. Management's Discussion Analysis of Financial Condition
and Results of Operations - Continued
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 $5,002,595
as of September 30, 2006, along with anticipated future cash distributions from
Local Partnerships, is expected to be adequate to meet its current and
anticipated operating needs. As of November 9, 2006, 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
Local Partnerships, 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 $2,972,762 as of September 30, 2006, 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 Tower Apartments (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 currently negotiating the sale of the property owned by Westgate and
seeking the consent of the noteholders 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.
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 nine month period ended September 30, 2006, the receipt of distributions
from Local Partnerships and the collection of sale proceeds were adequate to
support operating cash requirements. Cash and cash equivalents increased
$354,875 during the nine month period ended September 30, 2006, primarily as a
result of sale proceeds collected and the receipt of distributions from Local
Partnerships, partially offset by the tax 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
-15-
Part I. FINANCIAL INFORMATION
Item 2. Management's Discussion Analysis of Financial Condition
and Results of Operations - Continued
Partners who were holders of record and Maryland residents as of December 31,
2004. The distributions consisted of proceeds from the 2004 sales of Country
Place I and Country Place II. On December 22, 2005, the Partnership made a cash
distribution of $8,734,250 ($175 per unit) to Additional Limited Partners who
were holders of record as of December 1, 2005. The distribution consisted of
proceeds from the 2005 sale of the Partnership's interest in Mercy Terrace, and
the 2005 sales of the properties owned by Chevy Chase and Posada Vallarta. On
April 4, 2006, the Partnership made a tax distribution of $252,862
(approximately $7.20 per Unit) on behalf of Additional Limited Partners who are
not residents of Ohio.
Results of Operations
---------------------
The Partnership's net loss for the three month period ended September 30,
2006, increased from the corresponding period in 2005, primarily due to a
decrease in share of income from partnerships and an increase in professional
fees, partially offset by increases in interest revenue and additional gain on
disposition of investment in partnerships and a decrease in general and
administrative expenses. Share of income from partnerships decreased in 2006
primarily due to the cessation of income from one property sold in 2005. General
and administrative expenses decreased primarily due to lower reimbursed payroll
costs. Interest revenue increased due to higher rates in 2006.
The Partnership's net loss for the nine month period ended September 30,
2006 decreased from the corresponding period in 2005, primarily due to an
increase in interest revenue and decreases in general and administrative
expenses and professional fees, partially offset by decreases in share of income
from partnerships and additional gain on disposition of investment in
partnerships. Interest revenue increased due to higher rates in 2006. General
and administrative fees decreased primarily due to lower reimbursed payroll
costs. Professional fees decreased due to lower audit costs in 2006. Share of
income from partnerships decreased primarily due to the cessation of income from
two properties sold in 2005.
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
nine month periods ended September 30, 2006, did not include losses of $19,369
and $58,106, respectively, compared to excluded losses of $56,630 and $169,892
for the three and nine month periods ended September 30, 2005, respectively.
As of October 31, 2006, the Partnership's interest in Four Winds West was
transferred to an affiliate of the local managing general partner. See Note 4.c.
Assets held for sale or transfer in Part I Item 1 for further information.
No other significant changes in the Partnership's operations have taken
place during the three month period ended September 30, 2006.
-16-
Part I. FINANCIAL INFORMATION
Item 3. Controls and Procedures
In October 2006, 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 October 2006
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.
Item 5. Other Information
There has not been any information required to be disclosed in a report on
Form 8-K during the quarter ended September 30, 2006, but not reported, whether
or not otherwise required by this Form 10-QSB at September 30, 2006.
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.
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 2004 sales of Country
Place I and Country Place II. On December 22, 2005, the Partnership
-17-
PART II. OTHER INFORMATION
Item 5. Other Information - Continued
made a cash distribution of $8,734,250 ($175 per unit) to Additional Limited
Partners who were holders of record as of December 1, 2005. The distribution
consisted of proceeds from the 2005 sale of the Partnership's interest in Mercy
Terrace, and the 2005 sales of the properties owned by Chevy Chase and Posada
Vallarta. On April 4, 2006, the Partnership made a tax distribution of $252,862
(approximately $7.20 per Unit) on behalf of Additional Limited Partners who are
not residents of Ohio.
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.
All other Items are not applicable.
-18-
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
November 9, 2006 by: /s/ H. William Willoughby
- ---------------- ------------------------------------
DATE H. William Willoughby,
Director, President, Secretary,
Principal Financial Officer,
and Principal Accounting Officer
-19-