10-Q 1 f10q_033109-cri2.txt QUARTERLY REPORT -------------------------------------------------------------------------------- UNITED STATES SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 --------------------------- FORM 10-Q --------------------------- |X| QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the Quarterly Period Ended March 31, 2009 OR |_| TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the Transition Period From to COMMISSION FILE NUMBER 0-11973 --------------------------- CAPITAL REALTY INVESTORS-II LIMITED PARTNERSHIP Maryland 52-1321492 (State or other jurisdiction of (I.R.S. Employer Identification No.) incorporation or organization) 11200 Rockville Pike, Rockville, Maryland 20852 (Address of principal executive offices) (Zip Code) (301) 468-9200 (Registrant's telephone number, including area code) None (Former name, former address and former fiscal year, if changed since last report) Indicate by check mark whether the Registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 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 large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See definition of "large accelerated filer," "accelerated filer" and "smaller reporting company" in Rule 12b-2 of the Exchange Act. Large accelerated filer |_| Accelerated filer |_| Non-accelerated filer |_| Smaller reporting company |X| 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-Q FOR THE QUARTER ENDED MARCH 31, 2009 Page Part I - FINANCIAL INFORMATION Item 1. Financial Statements Balance Sheets - March 31, 2009 and December 31, 2008......................... 1 Statements of Operations and Accumulated Losses - for the three months ended March 31, 2009 and 2008........... 2 Statements of Cash Flows - for the three months ended March 31, 2009 and 2008........... 3 Notes to Financial Statements - March 31, 2009 and 2008...................................... 4 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations...................................... 9 Item 4. Controls and Procedures.......................................... 11 Part II - OTHER INFORMATION Item 3. Defaults Upon Senior Securities.................................. 12 Item 5. Other Information................................................ 12 Item 6. Exhibits......................................................... 12 Signature................................................................. 13 Part I. FINANCIAL INFORMATION Item 1. Financial Statements CAPITAL REALTY INVESTORS-II LIMITED PARTNERSHIP BALANCE SHEETS ASSETS

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)

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)

The accompanying notes are an integral part of these financial statements. -3- CAPITAL REALTY INVESTORS-II LIMITED PARTNERSHIP NOTES TO FINANCIAL STATEMENTS March 31, 2009 and 2008 (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, 2009, and the results of its operations and its cash flows for the three month periods ended March 31, 2009 and 2008. The results of operations for the interim period ended March 31, 2009, 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-Q. 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-K at December 31, 2008. 2. PLAN OF LIQUIDATION AND DISSOLUTION On February 4, 2004, the Partnership filed a Definitive Proxy Statement pursuant to Section 14(a) of the Securities Exchange Act of 1934, and mailed it to limited partners to solicit consents for approval of the following: (1) The sale of all of the Partnership's assets and the dissolution of the Partnership pursuant to a Plan of Liquidation and Dissolution, and the amendment of the Partnership's Limited Partnership Agreement to permit the Managing General Partner, CRI, to be eligible to receive increased property disposition fees from the Partnership on the same basis as such fees may currently be paid to Local General Partners, real estate brokers or other third party intermediaries employed to sell Partnership properties, to the extent that CRI markets and sells the Partnership's properties instead of such persons (a "Disposition Fee"); (2) The amendment of the Partnership's Limited Partnership Agreement to permit CRI to be eligible to receive a partnership liquidation fee in the amount of $500,000, payable only if the Managing General Partner is successful in liquidating all of the Partnership' s investments within 36 months from the date the liquidation is approved [March 22,2004], in recognition that one or more of the properties in which the Partnership holds an interest might not be saleable to parties not affiliated with the respective Local Partnership due to the amount and/or terms of their current indebtedness (the "Partnership Liquidation Fee"); and -4- CAPITAL REALTY INVESTORS-II LIMITED PARTNERSHIP NOTES TO FINANCIAL STATEMENTS March 31, 2009 and 2008 (Unaudited) 2. PLAN OF LIQUIDATION AND DISSOLUTION - Continued (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 maters 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.

The Partnership was not liquidated within 36 months from the approved liquidation date of March 22, 2004, therefore no liquidation fee was taken by the Partnership. The Managing General Partner is continuing towards liquidation of all the Partnership's investments. There can be no assurance that the Liquidation will be completed pursuant to the Plan of Liquidation and Dissolution. 3. INVESTMENT IN PARTNERSHIP a. Due on investment 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 -5- CAPITAL REALTY INVESTORS-II LIMITED PARTNERSHIP NOTES TO FINANCIAL STATEMENTS March 31, 2009 and 2008 (Unaudited) 3. INVESTMENT IN PARTNERSHIP - Continued included principal and accrued interest of $1,400,000 and $2,584,492, respectively. As of May 7, 2009, principal and accrued interest of $1,400,000 and $3,300,103, respectively, were due. In conjunction with the approved Plan of Liquidation and Dissolution of the Partnership, the Managing General Partner and the representatives of the purchase money noteholders have signed a contract for the assignment of the Partnership's interest in Westgate in satisfaction of the purchase money note's principal and accrued interest. The gain on this assignment would be taxed at a federal tax rate of up to 35 percent. There can be no assurance that a transfer of Westgate will occur. Interest expense on the Partnership's Westgate purchase money note was $31,500 for each of the three month periods ended March 31, 2009 and 2008. The accrued interest payable on the purchase money note of $3,287,762 and $3,256,262 as of March 31, 2009 and December 31, 2008, respectively, is in default. Due to the possible transfer of Westgate, the Partnership's basis in the Local Partnership, along with the net unamortized amount of acquisition fees and property purchase costs, which totaled $447,490 and $436,484 as of March 31, 2009 and December 31, 2008, respectively, has been reclassified to investment in partnership held for sale or transfer in the accompanying balance sheets. b. Asset held for sale or transfer ------------------------------- Westgate -------- See Note 3.a., above. c. Summarized financial information -------------------------------- Statements of operations for the one Local Partnership in which the Partnership was invested as of March 31, 2009 and 2008 follow. The statements have been compiled from information supplied by the management agent of the property and are unaudited. Appended after the statements is information concerning the Partnership's share of income from the Local Partnership. -6- CAPITAL REALTY INVESTORS-II LIMITED PARTNERSHIP NOTES TO FINANCIAL STATEMENTS March 31, 2009 and 2008 (Unaudited) 3. INVESTMENT IN PARTNERSHIP - Continued COMBINED STATEMENTS OF OPERATIONS (Unaudited) For the three months ended March 31, ------------------------------- 2009 2008 ----------- ----------- Equity Equity Method Method ----------- ----------- Number of Local Partnerships 1 1 = = Revenue: Rental $171,047 $ 175,497 Other 10,002 7,095 -------- --------- Total revenue 181,049 182,592 -------- --------- Expenses: Operating 142,117 151,593 Interest (12,225) (9,753) Depreciation and amortization 39,925 40,800 -------- --------- Total expenses 169,817 182,640 -------- --------- Net income (loss) $ 11,232 $ (48) ======== ========= Partnership's share of Local Partnership net income (loss) 11,006 (46) -------- --------- Share of income (loss) from partnerships $ 11,006 $ (46) ======== ========= 4. RELATED PARTY TRANSACTIONS In accordance with the terms of the Partnership Agreement, the Partnership is obligated to reimburse the Managing General Partner or its affiliates for direct expenses in connection with managing the Partnership. For the three month periods ended March 31, 2009 and 2008, the Partnership paid $49,737 and $43,682, respectively. Such expenses are included in general and administrative expenses in the accompanying statements of operations. In accordance with the terms of the Partnership Agreement, the Partnership is obligated to pay the Managing General Partner an annual incentive management fee (Management Fee) after all other expenses of the Partnership are paid. The Partnership paid the Managing General Partner a Management Fee of $62,499 for each of the three month periods ended March 31, 2009 and 2008. -7- CAPITAL REALTY INVESTORS-II LIMITED PARTNERSHIP NOTES TO FINANCIAL STATEMENTS March 31, 2009 and 2008 (Unaudited) 4. RELATED PARTY TRANSACTIONS - Continued Pursuant to approval of the Partnership's Consent Solicitation Statement on March 22, 2004, the Managing General Partner is eligible to receive a fee of not more than five percent of the sale price of an investment in a Local Partnership or the property it owns, payable upon the sale of an investment in a Local Partnership or the property it owns, to the extent the Managing General Partner markets and sells a property instead of a real estate broker or unrelated Local General Partner. The disposition fee on sales of partnership interests (as opposed to sales of real property) is calculated as up to five percent of the imputed sale price, which is the amount the Local Partnership's property would have to be sold for to produce the same distribution to the investors as the sale of the partnership interests. In addition, the Managing General Partner was authorized pursuant to the approved proxy statement to receive a partnership liquidation fee in the amount of $500,000, payable only if the Managing General Partner is successful in liquidating all of the Partnership's investments within 36 months from the date the liquidation was approved. As the liquidation was not completed by March 22, 2007, the Managing General Partner did not earn the liquidation fee. 5. CASH CONCENTRATION RISK Financial instruments that potentially subject the Partnership to concentrations of risk consist primarily of cash. The Partnership maintains four cash accounts. As of March 31, 2009, the uninsured portion of the cash balances was $4,156,476. Number of Bank Balance Insured Uninsured Bank Accounts 03/31/09 03/31/09 03/31/09 ---------------------- -------- ------------ -------- ---------- Dreyfus Inst Preferred Money Market Fund 2 $4,156,000 $0 $4,156,000 SunTrust Bank 2 $18,476 $18,000 $476 # # # -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 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 Form10-K at December 31, 2008. The Partnership accounts for its remaining investment in partnership (Local Partnership) using the equity method because the Partnership is a limited partner in the Local Partnership. As such, the Partnership has no control over the selection and application of accounting policies, or the use of estimates, by the Local Partnership. Environmental and operational trends, events and uncertainties that might affect the property owned by the Local Partnership would not necessarily have a significant impact on the Partnership's application of the equity method of accounting. 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. General ------- The Managing General Partner has sold certain properties by utilizing opportunities presented by federal affordable housing legislation, favorable financing terms and preservation incentives available to tax credit and not-for-profit purchasers. The remaining rental property owned by the Local Partnership is financed by a state housing agency. Programs developed by the agency 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 property 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. However, it appears unlikely that a sale under any of the agency's current programs would produce sufficient cash to pay off the Partnership's purchase money note secured by its interest in the Local Partnership. -9- 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 at this time, the Managing General Partner will continue to work with the Local Partnership to develop strategies that maximize the benefits to investors. Financial Condition/Liquidity ----------------------------- The Partnership's liquidity, with unrestricted cash resources of $3,968,310 as of March 31, 2009, is expected to be adequate to meet its current and anticipated operating cash needs. As of May 7, 2009, there were no material commitments for capital expenditures. The Managing General Partner currently intends to retain all of the Partnership's remaining undistributed cash for operating cash reserves pending further distributions under its Plan of Liquidation and Dissolution. The Partnership's remaining obligation with respect to its investment in Westgate Tower Limited Dividend Housing Associates (Westgate), in the form of a nonrecourse purchase money note which matured September 1, 2003, has a principal balance of $1,400,000 plus accrued interest of $3,287,762 as of March 31, 2009, and is payable in full upon the earliest of: (i) sale or refinancing of the respective Local Partnership's rental property; (ii) payment in full of the respective Local Partnership's permanent loan; or (iii) maturity. The purchase money note, which is nonrecourse to the Partnership, is secured by the Partnership's interest in the Westgate Local Partnership, which owns Westgate Tower Apartments. The underlying property does not have sufficient appreciation and equity to enable the Partnership to pay the purchase money note's principal and accrued interest. In conjunction with the approved Plan of Liquidation and Dissolution of the Partnership, the Managing General Partner and the representatives of the purchase money noteholders have signed a contract for the assignment of the Partnership's interest in Westgate in satisfaction of the purchase money note's principal and accrued interest. The gain on this assignment would be taxed at a federal tax rate of up to 35 percent. There can be no assurance that a transfer of Westgate will occur. The Managing General Partner has received consent from a majority of Unit Holders for the liquidation of the Partnership. (See Note 2 of the notes to financial statements contained in Part I, Item 1, hereof.) It is anticipated that the Partnership's obligation, discussed above, would be retired in conjunction with such Liquidation. There can be no assurance that the Liquidation will be completed pursuant to the Plan of Liquidation and Dissolution. The Partnership closely monitors its cash flow and liquidity position in an effort to ensure that sufficient cash is available for operating requirements. For the three month period ended March 31, 2009, existing cash resources was adequate to support operating cash requirements. Cash and cash equivalents decreased $169,391 during the three month period ended March 31, 2009, primarily due to operating expenses paid in cash. -10- Part I. FINANCIAL INFORMATION Item 2. Management's Discussion Analysis of Financial Condition and Results of Operations - Continued Results of Operations --------------------- The Partnership's net loss for the three month period ended March 31, 2009 increased from the corresponding period in 2008, primarily due to a decrease in interest revenue and increases in general and administrative expenses and professional fees, partially offset by an increase in share of income from partnership. Interest revenue decreased due to lower cash and cash equivalent balances and interest rates in 2009. General and administrative expenses increased primarily due to higher reimbursed payroll costs. Professional fees increased due to higher audit costs. Share of income from partnership increased primarily due to lower operating expenses at Westgate. No other significant changes in the Partnership's operations have taken place during the three month period ended March 31, 2009. Certain states may assert claims against the Partnership for failure to withhold and remit state income tax on operating profit or where the sale(s) of property in which the Partnership was invested failed to produce sufficient cash proceeds with which to pay the state tax and/or to pay statutory partnership filing fees. The Partnership is unable to quantify the amount of such potential claims at this time. The Partnership has consistently advised its Partners that they should consult with their tax advisors as to the necessity of filing non-resident returns in such states with respect to their proportional taxes due. Item 4. Controls and Procedures In April 2009, 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 such evaluation, our principal executive officer and principal financial officer have concluded that as of March 31, 2009, our disclosure controls and procedures were effective to ensure that (i) the information required to be disclosed by us in the reports filed or submitted by us under the Securities Exchange Act of 1934, as amended, was recorded, processed, summarized or reported within the time periods -11- Part I. FINANCIAL INFORMATION Item 4. Controls and Procedures - Continued specified in the SEC's rules and forms and (ii) such information was accumulated and communicated to management, including our principal executive officer and principal financial officer, to allow timely decisions regarding required disclosure. 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 has materially affected, or is 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 March 31, 2009, but not reported, whether or not otherwise required by this Form 10-Q at March 31, 2009. 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. 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. -12- 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 7, 2009 by: /s/ H. William Willoughby ----------- ------------------------------------- DATE H. William Willoughby, Director, President, Secretary, Principal Financial Officer, and Principal Accounting Officer -13-

CAPITAL REALTY INVESTORS II LTD PARTNERSHIP 10-Q