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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, 2002
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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 o
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CAPITAL REALTY INVESTORS-II LIMITED PARTNERSHIP
INDEX TO FORM 10-QSB
FOR THE QUARTER ENDED MARCH 31, 2002
Page
Part I - FINANCIAL INFORMATION
Item 1. Financial Statements
Balance Sheets
- March 31, 2002 and December 31, 2001........................ 1
Statements of Operations and Accumulated Losses
- for the three months ended March 31, 2002 and 2001.......... 2
Statements of Cash Flows
- for the three months ended March 31, 2002 and 2001.......... 3
Notes to Financial Statements
- March 31, 2002 and 2001..................................... 4
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations..................................... 9
Part II - OTHER INFORMATION
Item 3. Defaults Upon Senior Securities................................. 12
Item 5. Other Information............................................... 12
Item 6. Exhibits and Reports on Form 8-K................................ 13
Signature................................................................ 14
Part I. FINANCIAL INFORMATION
---------------------
Item 1. Financial Statements
---------------------
CAPITAL REALTY INVESTORS-II LIMITED PARTNERSHIP
BALANCE SHEETS
ASSETS
March 31, December 31,
2002 2001
------------ ------------
(Unaudited)
Investments in and advances to partnerships ............................................ $ 1,579,407 $ 1,308,952
Investment in partnership held for transfer ............................................ 15,154 15,154
Cash and cash equivalents .............................................................. 3,430,830 3,242,912
Acquisition fees, principally paid to related parties,
net of accumulated amortization of $263,542 and $259,959, respectively ............... 166,445 170,029
Property purchase costs,
net of accumulated amortization of $246,582 and $243,162, respectively ............... 163,705 167,124
Other assets ........................................................................... 370 108
------------ ------------
Total assets ........................................................................ $ 5,355,911 $ 4,904,279
============ ============
LIABILITIES AND PARTNERS' CAPITAL (DEFICIT)
Due on investments in partnerships ..................................................... $ 1,900,000 $ 1,900,000
Accrued interest payable ............................................................... 3,110,832 3,052,897
Accounts payable and accrued expenses .................................................. 59,762 78,568
------------ ------------
Total liabilities ................................................................... 5,070,594 5,031,465
------------ ------------
Commitments and contingencies
Partners' capital (deficit):
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 .............................................. (10,814,009) (10,814,009)
Offering costs ..................................................................... (5,278,980) (5,278,980)
Accumulated losses ................................................................. (33,638,694) (34,051,197)
------------ ------------
Total partners' capital (deficit) ................................................ 285,317 (127,186)
------------ ------------
Total liabilities and partners' capital (deficit) ................................ $ 5,355,911 $ 4,904,279
============ ============
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,
----------------------------
2002 2001
------------ ------------
Share of income from partnerships .................................. $ 615,781 $ 752,413
------------ ------------
Other revenue and expenses:
Revenue:
Interest ....................................................... 10,085 79,206
------------ ------------
Expenses:
Interest ....................................................... 57,935 144,560
Management fee ................................................. 62,499 62,499
General and administrative ..................................... 63,677 55,919
Professional fees .............................................. 22,250 21,138
Amortization of deferred costs ................................. 7,002 7,002
------------ ------------
213,363 291,118
------------ ------------
Total other revenue and expenses ............................. (203,278) (211,912)
------------ ------------
Net income ......................................................... 412,503 540,501
Accumulated losses, beginning of period ............................ (34,051,197) (44,081,592)
------------ ------------
Accumulated losses, end of period .................................. $(33,638,694) $(43,541,091)
============ ============
Net income allocated to General Partners (1.51%) ................... $ 6,229 $ 8,162
============ ============
Net income allocated to Initial and Special Limited Partners (1.49%) $ 6,146 $ 8,053
============ ============
Net income allocated to Additional Limited Partners (97%) .......... $ 400,128 $ 524,286
============ ============
Net income per unit of Additional Limited Partner Interest
based on 50,000 units outstanding ................................ $ 8.00 $ 10.49
============ ============
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,
--------------------------
2002 2001
----------- -----------
Cash flows from operating activities:
Net income .................................................................. $ 412,503 $ 540,501
Adjustments to reconcile net income to net cash used in operating activities:
Share of income from partnerships ......................................... (615,781) (752,413)
Amortization of deferred costs ............................................ 7,002 7,002
Changes in assets and liabilities:
Increase in advances to partnerships .................................... (1,118) --
(Increase) decrease in other assets ..................................... (262) 734
Increase in accrued interest payable .................................... 57,935 144,560
Decrease in accounts payable and accrued expenses ....................... (18,806) (109,453)
----------- -----------
Net cash used in operating activities ................................. (158,527) (169,069)
----------- -----------
Cash flows from investing activities:
Receipt of distributions from partnerships .................................. 346,445 769,220
----------- -----------
Net increase in cash and cash equivalents ..................................... 187,918 600,151
Cash and cash equivalents, beginning of period ................................ 3,242,912 6,292,654
----------- -----------
Cash and cash equivalents, end of period ...................................... $ 3,430,830 $ 6,892,805
=========== ===========
The accompanying notes are an
integral part of these
financial statements.
-3-
CAPITAL REALTY INVESTORS-II LIMITED PARTNERSHIP
NOTES TO FINANCIAL STATEMENTS
March 31, 2002 and 2001
(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, 2002, and the results of its operations and its cash flows for the
three months ended March 31, 2002 and 2001. The results of operations for the
interim period ended March 31, 2002, 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 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 accounting principles generally accepted
in the United States of America 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, 2001.
2. INVESTMENTS IN AND ADVANCES TO PARTNERSHIPS
-------------------------------------------
a. Due on investments in partnerships and accrued interest payable
---------------------------------------------------------------
Purchase money notes
--------------------
The Partnership's obligations with respect to its investments in Local
Partnerships, in the form of nonrecourse purchase money notes having an
aggregate principal balance of $1,900,000 plus aggregate accrued interest of
$3,110,832 as of March 31, 2002, are 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 notes, which are nonrecourse to the Partnership, are
generally secured by the Partnership's interest in the respective Local
Partnerships. There is no assurance that the underlying properties will have
sufficient appreciation and equity to enable the Partnership to pay the purchase
money notes' principal and accrued interest when due. If a purchase money note
is not paid in accordance with its terms, the Partnership will either have to
renegotiate the terms of repayment or risk losing its partnership interest in
the respective Local Partnership. In the event that a purchase money note
remains unpaid upon maturity, the noteholder may have the right to foreclose on
the Partnership's interest in the related Local Partnership.
The Partnership's inability to pay certain of the purchase money note
principal and accrued interest balances when due, and the resulting uncertainty
regarding the Partnership's continued ownership interest in the related Local
Partnerships, does not adversely impact the Partnership's financial condition
because the purchase money notes are nonrecourse and secured solely by the
Partnership's interest in the related Local Partnerships. Therefore, should the
investment in any of the Local Partnerships with maturing purchase money notes
not produce sufficient value to satisfy the related purchase money notes, the
Partnership's exposure to loss is limited because the
-4-
CAPITAL REALTY INVESTORS-II LIMITED PARTNERSHIP
NOTES TO FINANCIAL STATEMENTS
March 31, 2002 and 2001
(Unaudited)
2. INVESTMENTS IN AND ADVANCES TO PARTNERSHIPS - Continued
-------------------------------------------
amount of the nonrecourse indebtedness of each of the maturing purchase money
notes exceeds the carrying amount of the investment in, and advances to, each of
the related Local Partnerships. Thus, even a complete loss of the Partnership's
interest in one of these Local Partnerships would not have a material adverse
impact on the financial condition of the Partnership.
The Managing General Partner is continuing to investigate possible
alternatives to reduce the Partnership's debt obligations. These alternatives
include, among others, retaining the cash available for distribution to meet the
purchase money note requirements, paying off certain purchase money notes at a
discounted price, extending the due dates of certain purchase money notes,
refinancing the respective properties' underlying debt or selling the underlying
real estate and using the Partnership's share of the proceeds to pay or buy down
certain purchase money note obligations. Although the Managing General Partner
has had some success applying these strategies in the past, the Managing General
Partner cannot assure that these strategies will be successful in the future. If
the Managing General Partner is unable to negotiate an extension or discounted
payoff, in the event that the purchase money notes remain unpaid upon maturity,
the noteholders may have the right to foreclose on the Partnership's interest in
the related Local Partnerships. In the event of a foreclosure, the excess of the
nonrecourse indebtedness over the carrying amount of the Partnership's
investment in the related Local Partnership would be deemed cancellation of
indebtedness income, which would be taxable to Limited Partners at a federal tax
rate of up to 38.6%. Additionally, in the event of a foreclosure, the
Partnership would lose its investment in the Local Partnership and, likewise,
its share of any future cash flow distributed by the Local Partnership from
rental operations, mortgage debt refinancings, or the sale of the real estate.
The Managing General Partner continues to address the maturity of its debt
obligations and to seek solutions that will provide the most favorable outcome
to the limited partners. However, there can be no assurance that these
strategies will be successful.
Interest expense on the Partnership's purchase money notes for the three
months ended March 31, 2002 and 2001 was $57,935 and $144,560, respectively. The
accrued interest payable on the purchase money notes of $3,110,832 and
$3,052,897 as of March 31, 2002 and December 31, 2001, respectively, is due on
the respective maturity dates of the purchase money notes or earlier, in some
instances, if (and to the extent of a portion thereof) the related Local
Partnership has distributable net cash flow, as defined in the relevant Local
Partnership agreement.
Frenchman's Wharf II
--------------------
The Partnership defaulted on its purchase money note related to Frenchman's
Wharf Associates II Limited Partnership (Frenchman's Wharf II) on June 1, 1998
when the note matured and was not paid. The default amount included principal
and accrued interest of $3,150,000 and $5,071,731, respectively. As of June 22,
2001, principal and accrued interest totaling $3,150,000 and $6,131,166,
respectively, were due. The purchase money note was initially due to mature on
June 1, 1988, but was extended to mature on June 1, 1998.
In January 2001, the Local Partnership entered into a contract to sell the
property. However, the purchaser was unable to consummate the purchase. As a
result, in accordance with
-5-
CAPITAL REALTY INVESTORS-II LIMITED PARTNERSHIP
NOTES TO FINANCIAL STATEMENTS
March 31, 2002 and 2001
(Unaudited)
2. INVESTMENTS IN AND ADVANCES TO PARTNERSHIPS - Continued
-------------------------------------------
the forbearance agreement, on June 22, 2001, the property was transferred by
deed-in-lieu of foreclosure to an assignee of the mortgagee. The transfer of the
property and resulting loss of the Partnership's interest in Frenchman's Wharf
II resulted in extraordinary gain from extinguishment of debt of $9,281,166 and
loss on disposition of investments in partnerships of $56,217 for financial
statement purposes in 2001, and a total gain of $16,450,868 for federal tax
purposes in 2001.
Princeton
---------
The Partnership defaulted on its purchase money note related to Princeton
Community Village Associates (Princeton) on January 1, 1999 when the note
matured and was not paid. The default amount included principal and accrued
interest of $500,000 and $1,422,064, respectively. On August 9, 1999, the
noteholder filed a complaint seeking declaratory judgment that the Partnership
had forfeited its interest in Princeton to the noteholder. The litigation was
settled effective January 1, 2000, when the Managing General Partner entered
into an agreement with the noteholder which granted the noteholder four options
to purchase the Partnership's 98.99% limited partner interest in Princeton over
a three and one-half year period, in exchange for the cancellation of pro-rata
portions of the then outstanding balance of the purchase money note. As part of
the agreement, the noteholder extended the maturity date of the purchase money
note to January 1, 2004, and the Partnership made a payment to the noteholder on
April 21, 2000, which was applied against accrued interest payable on the
purchase money note. However, pursuant to the option agreement with the
noteholder, the noteholder can exercise its acquisition of the final portion of
the Partnership's interest between January 1, 2003 and June 30, 2003. Therefore,
the Partnership has selected the earliest maturity date of the purchase money
note to be June 30, 2003.
On both June 1, 2001 and May 31, 2000, pursuant to the option agreement,
the noteholder purchased 26% of the Partnership's original interest in
Princeton, the consideration for which was the cancellation of a like percentage
of the outstanding purchase money note accrued interest of $392,333 and
$493,027, respectively, resulting in extraordinary gain from extinguishment of
debt of $384,123 and $484,862 for financial statement purposes in 2001 and 2000,
respectively, and in cancellation of indebtedness income of $1,583,512 and
$1,960,030 for federal tax purposes in 2001 and 2000, respectively. On April 11,
2002, the noteholder exercised its option to acquire half of the Partnership's
remaining limited partner interest in Princeton, which transfer will likely
close in June 2002.
Due to the impending and likely transfer of the remaining 46.99% of the
Partnership's investment in Princeton, the net unamortized amounts of
acquisition fees and property purchase costs related to Princeton, which totaled
$15,154 as of both March 31, 2002 and December 31, 2001, have been reclassified
to investment in partnership held for transfer in the accompanying balance
sheets.
-6-
CAPITAL REALTY INVESTORS-II LIMITED PARTNERSHIP
NOTES TO FINANCIAL STATEMENTS
March 31, 2002 and 2001
(Unaudited)
2. INVESTMENTS IN AND ADVANCES TO PARTNERSHIPS - Continued
-------------------------------------------
b. Advances to Local Partnership
-----------------------------
To cover a tax liability incurred in 2001 by Troy Apartments Ltd. (Troy
Manor), the Partnership advanced funds of $1,118 as of March 31, 2002. This
advance is payable from cash flow of Troy Manor. For financial reporting
purposes, this advance has been reduced to zero by the Partnership as a result
of losses at the Local Partnership level.
c. Property matters
----------------
Country Place II
----------------
The Section 8 Housing Assistance Payments (HAP) contract for the property
owned by Second Blackburn Ltd. Partnership (Country Place II) originally expired
August 29, 2000. The Section 8 HAP contract covers 20% of the property's
apartment units. The Local Partnership has caused the Section 8 HAP contract to
be renewed periodically, with the current renewal period expiring in June 2002,
at which time the Local Partnership intends to opt out of the HAP program.
Orangewood Plaza
----------------
The 1983 construction loan related to Orangewood Plaza, a 40-unit apartment
complex in Orange Cove, California, was never formally converted to a permanent
loan. It is now anticipated that this loan will be restructured in 2002 as a
permanent loan, with no tax impact to either the Local Partnership or the
Partnership. There is no assurance that the restructuring will be consummated.
In 1983, the Partnership pledged its interest in the Local Partnership as
security on an acquisition note, in the amount of $170,000, made by the Local
Partnership. The note matured on July 28, 1998 and was not paid when due. On May
7, 2001, the Partnership made a capital contribution of $198,241 to the Local
Partnership, which amount was used to pay in full the principal and accrued
interest on the acquisition note.
d. Summarized financial information
--------------------------------
Combined statements of operations for the 14 and 15 Local Partnerships in
which the Partnership was invested as of March 31, 2002 and 2001, respectively,
follow. The combined statements have been compiled from information supplied by
the management agents of the projects and are unaudited. The combined statement
of operations for the three months ended March 31, 2001, includes information
for Frenchman's Wharf II.
-7-
CAPITAL REALTY INVESTORS-II LIMITED PARTNERSHIP
NOTES TO FINANCIAL STATEMENTS
March 31, 2002 and 2001
(Unaudited)
2. INVESTMENTS IN AND ADVANCES TO PARTNERSHIPS - Continued
-------------------------------------------
COMBINED STATEMENTS OF OPERATIONS
(Unaudited)
For the three months ended
March 31,
----------------------------
2002 2001
---------- ----------
Revenue:
Rental $4,816,866 $4,861,740
Other 282,460 211,391
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Total revenue 5,099,326 5,073,131
---------- ----------
Expenses:
Operating 2,904,192 2,990,201
Interest 1,267,747 1,428,191
Depreciation and amortization 819,015 910,645
---------- ----------
Total expenses 4,990,954 5,329,037
---------- ----------
Net income (loss) $ 108,372 $ (255,906)
========== ==========
As of March 31, 2002 and 2001, the Partnership's share of cumulative losses
to date for 10 and 11 of the 14 and 15 Local Partnerships, respectively,
exceeded the amount of the Partnership's investments in and advances to those
Local Partnerships by $21,058,523 and $26,154,823, 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.
3. 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 $59,966 and
$41,971 for the three month periods ended March 31, 2002 and 2001, respectively,
to the Managing General Partner as direct reimbursement of expenses incurred on
behalf of the Partnership. Such expenses are included in the accompanying
statements of operations as general and administrative expenses.
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, 2002 and 2001.
# # #
-8-
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 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.
General
-------
Some of the rental properties owned by the Local Partnerships are financed
by state housing agencies. The Managing General Partner has sold or refinanced,
and will continue to sell or refinance, certain properties pursuant to programs
developed by these agencies. These programs may include opportunities to sell a
property to a qualifying purchaser who would agree to maintain the property as
low to moderate income housing, or to refinance a property, or to obtain
supplemental financing. The Managing General Partner continues to monitor
certain state housing agency programs, and/or programs provided by certain
lenders, to ascertain whether the properties would qualify within the parameters
of a given program and whether these programs would provide an appropriate
economic benefit to the limited partners of the Partnership.
Some of the rental properties owned by the Local Partnerships are dependent
on the receipt of project-based Section 8 Rental Housing Assistance Payments
(HAP) provided by the U.S. Department of Housing and Urban Development (HUD)
pursuant to Section 8 HAP contracts. Current legislation allows all expired
Section 8 HAP contracts with rents at less than 100% of fair market rents to be
renewed for up to one year. Expiring Section 8 HAP contracts with rents that
exceed 100% of fair market rents could be renewed for up to one year, but at
rents reduced to 100% of fair market rents (Mark-to-Market). All expiring
Section 8 HAP contracts with rents exceeding comparable market rents, and
properties with mortgage loans insured by the Federal Housing Administration
(FHA), became subject to the Mark-to-Market legislation.
Mark-to-Market (M2M) implementation will reduce rental income at properties
that are currently subsidized at higher-than-market rental rates, and will
therefore lower cash flow available to meet mortgage payments and operating
expenses. In some instances, a property will be able to meet its existing debt
service payments after the reduction in rental income. In this case, the
property may enter the M2M "Lite" program which would not require a debt
restructuring. In the remaining instances, the affected property may undergo
debt restructuring according to terms determined by an individual property and
operations evaluation. This would involve reducing the first mortgage loan
balance to an amount supportable by the property's operations, taking into
account the property's operating expenses and reduced income. The balance of the
amount written down from the first mortgage loan would be converted to a non-
performing but accruing (soft) second mortgage loan. When the existing first
mortgage loan is bifurcated into a first and second mortgage loan, the newly
created second mortgage loan will accrue interest at a below-market rate;
however, the Internal Revenue Service issued a ruling in July 1998 that
concluded that the below-market rate of interest would not generate additional
ordinary income. Each property subject to M2M will be affected in a different
manner, and it is very difficult to predict the exact form of restructuring, or
potential tax liabilities to the limited partners, at this time. All properties,
upon entering the M2M program (excluding M2M Lite), are required to enter into
an agreement restricting the property's use to affordable housing for 30 years.
-9-
Part I. FINANCIAL INFORMATION
---------------------
Item 2. Management's Discussion Analysis of Financial Condition
-------------------------------------------------------
and Results of Operations - Continued
-------------------------
Finally, under HUD's "Mark-up-to-Market" program, properties with expiring
Section 8 HAP contracts that are located in high-rent areas as defined by HUD
are eligible for rent increases which would be necessary to bring Section 8
rents in line with market rate rents. For properties that enter the program and
have interest rate subsidized FHA loans, the rents are adjusted to take into
account the benefits the property is already receiving from the below-market
interest rate by means of a HUD-determined adjustment factor. The purpose of
this program is to provide incentives to owners of properties with expiring
Section 8 HAP contracts not to convert these properties to market rate housing.
In return for receiving market rate rents under Mark-up-to-Market, the
property owner must enter into a five year conditional Section 8 HAP contract
with HUD, subject to the annual availability of funding by Congress. In
addition, property owners who enter into the Mark-up-to- Market program will
receive increased cash flow as the limited dividend will be increased in an
amount equal to the increase in gross revenues.
Country Place II has a Section 8 HAP contract which covers 20% of the
property's apartment units. The current renewal period of the Section 8 HAP
contract expires in June 2002, at which time the Local Partnership intends to
opt out of the HAP program.
As of March 31, 2002, the carrying amount of the Partnership's investments
in and advances to Local Partnerships with Section 8 HAP contracts expiring in
the next 12 months was $96,505.
The Managing General Partner continues to seek strategies to deal with
affordable housing policy. Where opportunities exist, the Managing General
Partner will continue to work with the Local Partnerships to develop strategies
that make economic sense.
Financial Condition/Liquidity
-----------------------------
The Partnership's liquidity, with unrestricted cash resources of $3,430,830
as of March 31, 2002, 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 6, 2002, there were no material
commitments for capital expenditures.
The Partnership's obligations with respect to its investments in Local
Partnerships, in the form of nonrecourse purchase money notes having an
aggregate principal balance of $1,900,000 plus aggregate accrued interest of
$3,110,832 as of March 31, 2002, are 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.
See the notes to financial statements contained in Part I, Item 1, hereof,
for information concerning purchase money notes.
The purchase money notes, which are nonrecourse to the Partnership, are
generally secured by the Partnership's interest in the respective Local
Partnerships. There is no assurance that the underlying properties will have
sufficient appreciation and equity to enable the Partnership to pay the purchase
money notes' principal and accrued interest when due. If a purchase money note
is not paid in accordance with its terms, the Partnership will either have to
renegotiate the terms of repayment or risk losing its partnership interest in
the respective Local Partnership. In the event that a purchase money note
remains unpaid upon maturity the noteholders may have the right to foreclose on
the Partnership's interest in the related Local Partnership.
-10-
Part I. FINANCIAL INFORMATION
---------------------
Item 2. Management's Discussion Analysis of Financial Condition
-------------------------------------------------------
and Results of Operations - Continued
-------------------------
The Partnership's inability to pay certain of the purchase money note
principal and accrued interest balances when due, and the resulting uncertainty
regarding the Partnership's continued ownership interest in the related Local
Partnerships, does not adversely impact the Partnership's financial condition
because the purchase money notes are nonrecourse and secured solely by the
Partnership's interest in the related Local Partnerships. Therefore, should the
investment in any of the Local Partnerships with maturing purchase money notes
not produce sufficient value to satisfy the related purchase money notes, the
Partnership's exposure to loss is limited because the amount of the nonrecourse
indebtedness of each of the maturing purchase money notes exceeds the carrying
amount of the investment in, and advances to, each of the related Local
Partnerships. Thus, even a complete loss of the Partnership's interest in one of
these Local Partnerships would not have a material adverse impact on the
financial condition of the Partnership.
The Managing General Partner is continuing to investigate possible
alternatives to reduce the Partnership's debt obligations. These alternatives
include, among others, retaining the cash available for distribution to meet the
purchase money note requirements, paying off certain purchase money notes at a
discounted price, extending the due dates of certain purchase money notes,
refinancing the respective properties' underlying debt or selling the underlying
real estate and using the Partnership's share of the proceeds to pay or buy down
certain purchase money note obligations. Although the Managing General Partner
has had some success applying these strategies in the past, the Managing General
Partner cannot assure that these strategies will be successful in the future. If
the Managing General Partner is unable to negotiate an extension or discounted
payoff, in the event that the purchase money notes remain unpaid upon maturity,
the noteholders may have the right to foreclose on the Partnership's interest in
the related Local Partnerships. In the event of a foreclosure, the excess of the
nonrecourse indebtedness over the carrying amount of the Partnership's
investment in the related Local Partnership would be deemed cancellation of
indebtedness income, which would be taxable to Limited Partners at a federal tax
rate of up to 38.6%. Additionally, in the event of a foreclosure, the
Partnership would lose its investment in the Local Partnership and, likewise,
its share of any future cash flow distributed by the Local Partnership from
rental operations, mortgage debt refinancings, or the sale of the real estate.
The Managing General Partner continues to address the maturity of its debt
obligations and to seek solutions that will provide the most favorable outcome
to the limited partners. However, there can be no assurance that these
strategies will be successful.
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 periods ended March 31, 2002 and 2001, the receipt of
distributions from Local Partnerships was adequate to support operating cash
requirements. Cash and cash equivalents increased during the three month period
ended March 31, 2002, as the receipt of distributions from Local Partnerships
exceeded net cash used in operating activities.
Results of Operations
---------------------
The Partnership's net income for the three month period ended March 31,
2002 decreased from the corresponding period in 2001 primarily due to a decrease
in share of income from partnerships related to cash distributions in excess of
basis received from two Local Partnerships in the first quarter of 2001, but not
2002, partially offset by higher rental income at another property. Contributing
to the decrease in the Partnership's net income were a decrease in interest
revenue due to lower cash and cash equivalent balances and lower interest rates
in 2002, and higher general and administrative expenses related to higher
reimbursed payroll costs. Partially offsetting the decrease in net income was a
decrease in interest expense due to a lower purchase money note balance in the
first quarter of 2002 compared to the first quarter of 2001.
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Part I. FINANCIAL INFORMATION
---------------------
Item 2. Management's Discussion Analysis of Financial Condition
-------------------------------------------------------
and Results of Operations - Continued
-------------------------
For financial reporting purposes, the Partnership, as a limited partner in
the Local Partnerships, does not record losses from the Local Partnerships in
excess of its investment to the extent that the Partnership has no further
obligation to advance funds or provide financing to the Local Partnerships. As a
result, the Partnership's share of income from partnerships for the three month
periods ended March 31, 2002 and 2001 did not include losses of $275,281 and
$370,039, respectively.
No other significant changes in the Partnership's operations have taken
place during this period.
Part II. OTHER INFORMATION
-----------------
Item 3. Defaults upon Senior Securities
-------------------------------
See Note 2.a. of the notes to financial statements contained in Part I,
Item 1, hereof, for information concerning the Partnership's defaults on
purchase money notes.
Item 5. Other Information
-----------------
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.
Tender offers
-------------
On March 13, 2001, Bond Purchase, L.L.C. (Bond) initiated an unregistered
tender offer to purchase approximately 2,475 of the outstanding Units in the
Partnership at a price of $53 per Unit; the offer expired April 30, 2001. Bond
is unaffiliated with the Partnership or the Managing General Partner. The price
offered was determined solely at the discretion of Bond and does not necessarily
represent the fair market value of each Unit.
The Managing General Partner did not express any opinion and remained
neutral toward the Bond offer for the purchase of Units described above.
On or about May 10, 2001, Limited Partners in the Partnership may have
received an unregistered tender offer from Peachtree Partners (Peachtree) to
purchase their units of Limited Partner interest for the cost of the $100
transfer fee.
The Managing General Partner recommended that Limited Partners reject the
Peachtree offer because it concluded that the tender offer was inadequate and
not in the best interests of the Limited Partners.
On June 22, 2001, Equity Resources Lexington Fund Limited Partnership
(Lexington) initiated a registered tender offer to purchase up to 10,000 of the
outstanding Units in the Partnership at a price of $100 per Unit; the offer
expired July 23, 2001. On November 19, 2001, Lexington initiated a registered
tender offer to purchase up to 10,000 of the outstanding Units in the
Partnership at a price of $100 per Unit; the offer expired December 19, 2001.
Lexington is unaffiliated with the Partnership or the Managing General Partner.
The prices offered were determined solely at the discretion of Lexington and do
not necessarily represent the fair market value of each Unit.
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Part II. OTHER INFORMATION
-----------------
Item 5. Other Information - Continued
-----------------
In response to the Lexington tender offers, on July 5, 2001 and December 3,
2001, the Managing General Partner filed Schedules 14D-9. In those filings, the
Managing General Partner recommended that Limited Partners reject the Lexington
offers because it viewed the offer prices as inadequate.
During 2001, a number of investors sold their Units in the Partnership to
other investors as a result of the tender offers described above. If more than
five percent of the total outstanding Units in the Partnership are transferred
due to sale in any one calendar year (not counting certain exempt transfers),
the Partnership could be taxed as a "publicly traded partnership," with
potentially severe tax implications for the Partnership and its investors.
Specifically, the Partnership could be taxed as a corporation and, if so, the
income and losses from the Partnership would no longer be considered a passive
activity. From January 1, 2001, through August 13, 2001, the Partnership
received sale transfer requests for approximately 4.9% of the total outstanding
Units. Accordingly, to remain within the five percent safe harbor, effective
August 13, 2001, the Managing General Partner halted recognition of any
transfers that would exceed the safe harbor limit through December 31, 2001. As
a result, transfers of Units due to sales transactions were not recognized by
the Partnership between August 14, 2001 and December 31, 2001. The halt was
lifted effective January 1, 2002. For the calendar year 2002 to May 6, 2002,
Units transferred have not exceeded 4.9% of the total outstanding Units;
therefore, the Partnership has not halted recognition of transfers.
Cash distribution
On May 2, 2001, the Partnership made a cash distribution of $3,244,150
($65.00 per Unit) to Additional Limited Partners who were holders of record as
of April 1, 2001.
Item 6. Exhibits and Reports on Form 8-K
--------------------------------
a. None
b. No reports on Form 8-K were filed with the Commission during the
quarter ended March 31, 2002.
All other items are not applicable.
-13-
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 6, 2002 by: /s/ Michael J. Tuszka
- ----------- ------------------------------------------
DATE Michael J. Tuszka
Vice President
and Chief Accounting Officer
(Principal Financial Officer
and Principal Accounting Officer)
-14-