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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 March 31, 2007
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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 | |
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 MARCH 31, 2007
Page
Part I - FINANCIAL INFORMATION
Item 1. Financial Statements
Balance Sheets
- March 31, 2007 and December 31, 2006........................... 1
Statements of Operations and Accumulated Losses
- for the three months ended March 31, 2007 and 2006............. 2
Statements of Cash Flows
- for the three months ended March 31, 2007 and 2006............. 3
Notes to Financial Statements
- March 31, 2007 and 2006........................................ 4
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations........................................ 12
Item 3. Controls and Procedures............................................ 14
Part II - OTHER INFORMATION
Item 3. Defaults Upon Senior Securities.................................... 15
Item 5. Other Information.................................................. 15
Item 6. Exhibits........................................................... 15
Signature................................................................... 16
Part I. FINANCIAL INFORMATION
Item 1. Financial Statements
CAPITAL REALTY INVESTORS-II LIMITED PARTNERSHIP
BALANCE SHEETS
ASSETS
March 31, December 31,
2007 2006
------------ ------------
(Unaudited)
Investment in partnerships held for sale .......................................... $ 385,025 $ 392,643
Cash and cash equivalents ......................................................... 4,809,003 4,845,857
Other assets ...................................................................... 21,370 117,806
------------ ------------
Total assets ................................................................... $ 5,215,398 $ 5,356,306
============ ============
LIABILITIES AND PARTNERS' CAPITAL
Due on investments in partnerships ................................................ $ 1,400,000 $ 1,400,000
Accrued interest payable .......................................................... 3,035,762 3,004,262
Accounts payable and accrued expenses ............................................. 117,227 147,849
------------ ------------
Total liabilities .............................................................. 4,552,989 4,552,111
------------ ------------
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) (34,752,903)
Offering costs ................................................................ (5,278,980) (5,278,980)
Accumulated losses ............................................................ (9,322,708) (9,180,922)
------------ ------------
Total partners' capital ..................................................... 662,409 804,195
------------ ------------
Total liabilities and partners' capital ..................................... $ 5,215,398 $ 5,356,306
============ ============
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
March 31,
---------------------------
2007 2006
------------ ------------
Share of loss from partnerships .................................. $ (7,618) $ (29,372)
----------- -----------
Other revenue and expenses:
Revenue:
Interest ..................................................... 63,929 57,244
----------- -----------
Expenses:
General and administrative ................................... 69,285 71,492
Management fee ............................................... 62,499 62,499
Interest ..................................................... 31,500 31,500
Professional fees ............................................ 34,813 29,163
----------- -----------
198,097 194,654
----------- -----------
Total other revenue and expenses ........................... (134,168) (137,410)
----------- -----------
Loss before additional gain on disposition
of investment in partnerships ................................. (141,786) (166,782)
Additional gain on disposition of investment in partnerships ..... -- 102,013
----------- -----------
Net loss ......................................................... (141,786) (64,769)
Accumulated losses, beginning of period .......................... (9,180,922) (8,649,747)
----------- -----------
Accumulated losses, end of period ................................ $(9,322,708) $(8,714,516)
=========== ===========
Net loss allocated to General Partners (1.51%) ................... $ (2,141) $ (978)
=========== ===========
Net loss allocated to Initial and Special Limited Partners (1.49%) $ (2,113) $ (965)
=========== ===========
Net loss allocated to Additional Limited Partners (97%) .......... $ (137,532) $ (62,826)
=========== ===========
Net loss per unit of Additional Limited Partner Interest,
based on 49,910 units outstanding .............................. $ (2.76) $ (1.26)
=========== ===========
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 three months ended
March 31,
--------------------------
2007 2006
------------ -----------
Cash flows from operating activities:
Net loss .................................................................. $ (141,786) $ (64,769)
Adjustments to reconcile net loss to net cash used in operating activities:
Share of loss from partnerships ......................................... 7,618 29,372
Additional gain on disposition of investment in partnerships ............ -- (102,013)
Changes in assets and liabilities:
Decrease in other assets .............................................. 96,436 1,268
Increase in accrued interest receivable on advances ................... -- (370)
Increase in accrued interest payable .................................. 31,500 31,500
Decrease in accounts payable and accrued expenses ..................... (30,622) (5,204)
----------- -----------
Net cash used in operating activities ............................... (36,854) (110,216)
----------- -----------
Cash flows from investing activities:
Receipt of distributions from partnerships ................................ -- 6,305
Collection of sale proceeds ............................................... -- 835,824
----------- -----------
Net cash provided by investing activities ........................... -- 842,129
----------- -----------
Net (decrease) increase in cash and cash equivalents ........................ (36,854) 731,913
Cash and cash equivalents, beginning of period .............................. 4,845,857 4,647,720
----------- -----------
Cash and cash equivalents, end of period .................................... $ 4,809,003 $ 5,379,633
=========== ===========
The accompanying notes are an integral part
of these financial statements.
-3-
CAPITAL REALTY INVESTORS-II LIMITED PARTNERSHIP
NOTES TO FINANCIAL STATEMENTS
March 31, 2007 and 2006
(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 March 31, 2007, and the results of its operations and its cash flows for the
three month periods ended March 31, 2007 and 2006. The results of operations for
the interim period ended March 31, 2007, 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, 2006.
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 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");
(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."
-4-
CAPITAL REALTY INVESTORS-II LIMITED PARTNERSHIP
NOTES TO FINANCIAL STATEMENTS
March 31, 2007 and 2006
(Unaudited)
2. PLAN OF LIQUIDATION AND DISSOLUTION - Continued
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%
The Partnership was not liquidated within 36 months from the approved
liquidation date of March 22, 2004, therefore no liquidation fee was taken by
the Partnership. The Managing General Partner is continuing towards liquidation
of all the Partnership's investments.
There can be no assurance that the Liquidation will be completed pursuant
to the Plan of Liquidation and Dissolution.
3. NEW ACCOUNTING PRONOUNCEMENTS
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.
In September 2006, the Financial Accounts Standards Board (FASB) issued
SFAS No. 157, Fair Value Measurements ("SFAS No. 157"). SFAS No. 157 establishes
a formal framework for measuring fair value under generally accepted accounting
principles. Although SFAS No. 157 applies (amends) the provisions of existing
FASB and AICPA pronouncements, it does not require any new fair value
measurements, nor does it establish valuation standards. SFAS No. 157 is
effective for fiscal years beginning after November 15, 2007. Management has
determined that SFAS No. 157 will have no material impact to the Partnership.
-5-
CAPITAL REALTY INVESTORS-II LIMITED PARTNERSHIP
NOTES TO FINANCIAL STATEMENTS
March 31, 2007 and 2006
(Unaudited)
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 May 11, 2007, principal and accrued interest of $1,400,000
and $3,049,484, 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 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 for each of the three month periods ended March 31, 2007 and 2006. The
accrued interest payable on the purchase money note of $3,035,762 and $3,004,262
as of March 31, 2007 and December 31, 2006, 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 $385,025
and $392,643 as of March 31, 2007 and December 31, 2006, 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 $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
-6-
CAPITAL REALTY INVESTORS-II LIMITED PARTNERSHIP
NOTES TO FINANCIAL STATEMENTS
March 31, 2007 and 2006
(Unaudited)
4. INVESTMENTS IN AND ADVANCES TO PARTNERSHIPS - Continued
$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 $4,299 was received in April 2006. In 2006, net
gain on disposition of investment in partnerships was reduced by $11,604
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.
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.
-7-
CAPITAL REALTY INVESTORS-II LIMITED PARTNERSHIP
NOTES TO FINANCIAL STATEMENTS
March 31, 2007 and 2006
(Unaudited)
4. INVESTMENTS IN AND ADVANCES TO PARTNERSHIPS - Continued
Four Winds West
---------------
As of October 31, 2006, the Partnership's interest in Four Winds West was
transferred to an affiliate of the local managing general partner. The transfer
resulted in loss on disposition of investment in partnerships of $12,567 for
financial statement purposes and in total gain of $587,569 for federal income
tax purposes. In March 2007, the Partnership received a cash distribution of
$12,305, which was accrued and included in other income in the accompanying
financial statements at December 31, 2006.
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. During the fourth quarter of 2006,
gain on disposition of investment in partnerships was reduced by $474.
Troy Manor
----------
On December 31, 2006, the Partnership's interest in Troy Manor was
transferred to an affiliate of the local managing general partner. The transfer
resulted in no gain or loss for financial statement purposes and in total gain
of $633,155 for federal income tax purposes. In March 2007, the Partnership
received a cash distribution of $7,425 which was accrued and included in other
income in the accompanying financial statements at December 31, 2006.
-8-
CAPITAL REALTY INVESTORS-II LIMITED PARTNERSHIP
NOTES TO FINANCIAL STATEMENTS
March 31, 2007 and 2006
(Unaudited)
4. INVESTMENTS IN AND ADVANCES TO PARTNERSHIPS - Continued
c. Assets held for sale
--------------------
Golden Acres
------------
On April 24, 2007, a contract for the sale of the Partnership's interest in
Golden Acres was signed. The Partnership's basis in Golden Acres, which totaled
$0 at both March 31, 2007 and December 31, 2006, has been reclassified to
investment in partnerships held for sale in the accompanying balance sheets.
There is no assurance that a sale will occur.
Orangewood Plaza
----------------
On December 28, 2006, a contract for the sale of the Partnership's interest
in Orangewood Plaza was signed. The Partnership's basis in Orangewood Plaza,
which totaled $0 at both March 31, 2007 and December 31, 2006, has been
reclassified to investment in partnerships held for sale in the accompanying
balance sheets. There is no assurance that the sale will occur.
Westgate
--------
See Note 4.a., above.
d. Summarized financial information
--------------------------------
Combined statements of operations for the three and five Local Partnerships
in which the Partnership was invested as of March 31, 2007 and 2006,
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
March 31, 2007 and 2006
(Unaudited)
4. INVESTMENTS IN AND ADVANCES TO PARTNERSHIPS - Continued
COMBINED STATEMENTS OF OPERATIONS
(Unaudited)
For the three months ended
March 31,
-----------------------------------------------------------
2007 2006
-------------------------- --------------------------
Equity Equity
Method Suspended Method Suspended
---------- ---------- ---------- ----------
Number of Local Partnerships 1 2 2 3
= = = =
Revenue:
Rental $ 170,087 $ 106,934 $ 240,702 $ 209,221
Other 7,221 5,394 9,232 1,820
---------- ----------- ---------- ----------
Total revenue 177,308 112,328 249,934 211,041
---------- ----------- ---------- ----------
Expenses:
Operating 153,364 176,964 222,401 158,299
Interest (8,966) 10,247 5,078 31,682
Depreciation and amortization 40,684 27,176 51,915 40,651
---------- ----------- ---------- ----------
Total expenses 185,082 214,387 279,394 230,632
---------- ----------- ---------- ----------
Net loss $ (7,774) $ (102,059) $ (29,460) $ (19,591)
========== =========== ========== ==========
Cash distributions $ -- $ -- $ 6,305 $ --
========== =========== ========== ==========
Cash distributions recorded as
reduction of investments in
partnerships $ -- $ -- $ 6,305 $ --
========== =========== ========== ==========
Partnership's share of
Local Partnership net income (7,618) -- (29,002) --
Miscellaneous -- -- -- (370)
--------------------------- --------------------------
Share of loss from partnerships $ (7,618) $(29,372)
======== ========
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 March 31, 2007 and 2006, the Partnership's share of
cumulative losses to date for two of three and three of five Local Partnerships,
respectively, exceeded the amount of the Partnership's investments in those
Local Partnerships by $1,109,987 and $993,674, 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
March 31, 2007 and 2006
(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 $49,912 and
$30,929 for the three month periods ended March 31, 2007 and 2006, 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 March 31, 2007 and 2006.
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 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 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 investments 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 investments in partnerships.
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.
In addition, the Managing General Partner was authorized pursuant to the
approved proxy statement 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 was approved. As the liquidation was not completed by March 22,
2007, the Managing General Partner did not earn the liquidation fee.
6. CASH DISTRIBUTIONS
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 were
not residents of Ohio.
# # #
-11-
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, 2006. The
Partnership accounts for its investments in partnerships (Local Partnerships)
using 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 two
Local Partnerships which have cumulative losses in excess of the amount of the
Partnership's investments in those Local Partnerships.
New Accounting Pronouncements
-----------------------------
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.
In September 2006, the Financial Accounts Standards Board (FASB) issued
SFAS No. 157, Fair Value Measurements ("SFAS No. 157"). SFAS No. 157 establishes
a formal framework for measuring fair value under generally accepted accounting
principles. Although SFAS No. 157 applies (amends) the provisions of existing
FASB and AICPA pronouncements, it does not require any new fair value
measurements, nor does it establish valuation standards. SFAS No. 157 is
effective for fiscal years beginning after November 15, 2007. Management has
determined that SFAS No. 157 will have no material impact to 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.
-12-
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 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.
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 $4,809,003
as of March 31, 2007, 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 May 11, 2007, 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 investment in
Westgate Tower Limited Dividend Housing Associates (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 $3,035,762 as of March 31, 2007,
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. 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 three month period ended March 31, 2007, existing cash resources was
adequate to support operating cash requirements. Cash and cash equivalents
decreased $36,854 during the three month period ended March 31, 2007, primarily
due to operating expenses paid in cash.
-13-
Part I. FINANCIAL INFORMATION
Item 2. Management's Discussion Analysis of Financial Condition
and Results of Operations - Continued
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 were
not residents of Ohio.
Results of Operations
---------------------
The Partnership's net loss for the three month period ended March 31, 2007
increased from the corresponding period in 2006, primarily due to a decrease in
additional gain on disposition of investment in partnerships related to the
sales of Chevy Chase and Posada Vallarta and an increase in professional fees,
partially offset by decreases in share of loss from partnerships and general and
administrative expenses and an increase in interest revenue. Share of loss from
partnerships decreased as one property had positive investment basis in 2006,
but not in 2007. Interest revenue increased due to higher rates in 2007.
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 month
periods ended March 31, 2007 and 2006, did not include losses of $101,029 and
$19,369, respectively.
No other significant changes in the Partnership's operations have taken
place during the three month period ended March 31, 2007.
Item 3. Controls and Procedures
In May 2007, 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 May 2007 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.
-14-
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 March 31, 2007, but not reported, whether or
not otherwise required by this Form 10-QSB at March 31, 2007.
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 April 4, 2006, the Partnership made a tax distribution of $252,862
(approximately $7.20 per Unit) on behalf of Additional Limited Partners who were
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.
-15-
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
May 11, 2007 by: /s/ H. William Willoughby
- ------------ ------------------------------------
DATE H. William Willoughby,
Director, President, Secretary,
Principal Financial Officer,
and Principal Accounting Officer
-16-