10QSB 1 f10qsb_093006-cri2.txt QUARTERLY REPORT -------------------------------------------------------------------------------- U.S. SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 ------------------ 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 ------------------ Commission file number 0-11973 CAPITAL REALTY INVESTORS-II LIMITED PARTNERSHIP Organized pursuant to the Laws of the State of Maryland ------------------ 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] -------------------------------------------------------------------------------- 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. # # # -13- 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-