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AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON JULY 21, 1999.
REGISTRATION NO. 333-52117
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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PRE-EFFECTIVE AMENDMENT NO. 3
TO
FORM S-4
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
------
AMERICA FIRST REAL ESTATE INVESTMENT PARTNERS, L.P.
(Exact name of registrant as specified in its charter)
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DELAWARE 6513 39-1965590
(State or other (Primary Standard Industrial (I.R.S. Employer Identification No.)
jurisdiction of organization) Classification Number)
</TABLE>
1004 FARNAM STREET, SUITE 400
OMAHA, NEBRASKA 68102
(402) 444-1630
(Address, including zip code, and telephone number, including area code, of
registrant's principal executive offices)
MICHAEL B. YANNEY
1004 FARNAM STREET, SUITE 400
OMAHA, NEBRASKA 68102
(402) 444-1630
(Name, address, including zip code, and telephone number, including area code,
of agent for service)
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WITH COPIES TO:
PAUL E. BELITZ, ESQ.
Kutak Rock
717 17th Street, Suite 2900
Denver, Colorado 80202
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APPROXIMATE DATE OF COMMENCEMENT OF THE PROPOSED SALE TO THE PUBLIC: AS SOON
AS PRACTICABLE AFTER THIS REGISTRATION STATEMENT BECOMES EFFECTIVE AND AFTER
CONDITIONS IN THE MERGER AGREEMENT HAVE BEEN SATISFIED.
------
If the securities being registered on this Form are being offered in
connection with the formation of a holding company and there is compliance with
General Instruction G, check the following box. / /
If this Form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, check the following box and
list the Securities Act registration statement number of the earlier effective
registration statement for the same offering / /
If this Form is post-effective amendment filed pursuant to Rule 462(d) under
the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. / /
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CALCULATION OF REGISTRATION FEE
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TITLE OF EACH CLASS OF AMOUNT PROPOSED MAXIMUM PROPOSED MAXIMUM AGGREGATE AMOUNT OF
SECURITIES TO BE REGISTERED TO BE REGISTERED OFFERING PRICE PER UNIT(1) OFFERING PRICE(1) REGISTRATION FEE(1)
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Units of assigned limited partner
interests...................... 7,765,772 $10 $77,657,720 $21,588.85(3)
Variable Rate Junior Notes and
Promissory Notes............... N/A(4) N/A(4) $20,000,000 $0(4)
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(1) Estimated solely for the purpose of computing the registration fee pursuant
to Rule 457(f), promulgated under the Securities Act of 1933.
(2) Represents the maximum number of units of assigned limited partner interests
(the "Units") issuable upon consummation of the transactions described
herein.
(3) The fee was paid with the filing of the registration statement on May 7,
1998.
(4) The maximum principal amount of the Variable Rate Junior Notes Callable On
or After the Date of Issuance and any Promissory Notes that may be issued in
lieu of fractional Notes (the "Notes") that will be issued is $20 million.
Investors whose securities are exchanged or cancelled will receive Units or
Notes. To the extent Notes are issued in lieu of Units, the proposed maximum
aggregate offering price of the Units will be proportionately reduced.
Accordingly, no further fee is due for the registration of the Notes.
THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR
DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT SHALL
FILE A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS REGISTRATION
STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8 OF THE
SECURITIES ACT OF 1933 OR UNTIL THE REGISTRATION STATEMENT SHALL BECOME
EFFECTIVE ON SUCH DATE AS THE COMMISSION, ACTING PURSUANT TO SAID SECTION 8, MAY
DETERMINE.
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The information in this prospectus/consent solicitation statement is not
complete and may be changed. We may not sell these securities until the
registration statement filed with the Securities and Exchange Commission is
effective. This prospectus/consent solicitation statement is not an offer to
sell these securities and it is not soliciting an offer to buy these securities
in any jurisdiction where the offer or sale is not permitted.
<PAGE>
SUBJECT TO COMPLETION
DATED JULY 21, 1999
CONSENT SOLICITATION STATEMENT OF
CAPITAL SOURCE L.P. AND CAPITAL SOURCE II L.P.-A
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THIS CONSENT SOLICITATION STATEMENT ALSO SERVES AS
THE PROSPECTUS OF AMERICA FIRST REAL ESTATE INVESTMENT PARTNERS, L.P.
7,765,772 UNITS REPRESENTING ASSIGNED LIMITED PARTNER INTERESTS AND UP TO $20
MILLION
IN AGGREGATE PRINCIPAL AMOUNT OF VARIABLE RATE JUNIOR NOTES CALLABLE ON OR AFTER
THE DATE OF ISSUANCE
As described in detail in this prospectus/consent solicitation statement, we
are proposing a merger of Capital Source L.P. and Capital Source II L.P.-A,
which we refer to as the partnerships, with and into America First Real Estate
Investment Partners, L.P., a newly organized Delaware limited partnership, which
we refer to as the company. We, the general partners of the partnerships, are
soliciting your consent to this transaction. In the transaction, the company
will distribute units of assigned limited partner interests, and in some
situations cash, promissory notes and Variable Rate Junior Notes Callable on or
After the Date of Issuance, or notes, to the partnerships in exchange for the
assets of the partnerships. After the transaction, you will be a unitholder or
noteholder, as the case may be, of the company and will no longer be a limited
partner, or BAC holder, in your respective partnership. We expect that the units
will be listed for trading on NASDAQ under the symbol " ". The notes will
not be listed for trading.
Through this prospectus/consent solicitation statement and the accompanying
supplements, we are asking you, as a BAC holder, to approve the transaction. BAC
holders holding in excess of 50% in interest of the outstanding BACs of each
partnership must vote "YES" in favor of the transaction on the enclosed consent
form in order for the transaction to be completed.
We have proposed the transaction to enhance the liquidity of your investment
and to increase the cash flow and net asset values of the partnerships. We plan
to accomplish this by listing the company's units on NASDAQ, by leveraging its
assets, by making equity investments primarily in multifamily residential
properties and by actively managing the makeup of its real estate portfolio. We
believe that the proposed transaction permits you to realize the value of your
investment in the partnerships, as opposed to liquidating your partnership or
continuing your partnership unchanged.
We, as the general partners of the partnerships, strongly recommend that you
vote "YES" in favor of the transaction.
THE TRANSACTION INVOLVES RISKS AND POSSIBLE DISADVANTAGES. YOU SHOULD
CONSIDER THE FACTORS BELOW AND THOSE DESCRIBED BEGINNING ON PAGES 4 AND 19 OF
THIS PROSPECTUS/CONSENT SOLICITATION STATEMENT.
- The units may trade at prices below the value of the company's assets and
the $10 per unit price arbitrarily assigned for the sole purpose of
allocating the units in the transaction. We do not expect a public market
for the notes to develop. If the notes are sold, they may sell at prices
substantially below their issuance price.
- We initiated and participated in the structuring of the transaction and
have conflicts of interests with respect to its completion.
- There can be no guarantee of the level of the company's future cash
distributions.
- The company is newly formed and has no operating history.
- If you vote "NO" against the transaction, but your partnership approves
it, you do not have any appraisal or other dissenters' rights under
Delaware law and none will be offered in the transaction.
- There are alternatives to the transaction. By approving the transaction,
you will effectively preclude the pursuit of some of the alternatives.
- The company intends to use debt financing to increase its real estate
asset portfolio. An increase in debt may increase the possibility of
default on the company's obligations. This could affect the company's
ability to pay distributions to you.
- If your partnership approves the transaction, you will be bound even if
you vote "NO" against the transaction.
- If you choose to receive notes, you will not hold an equity interest in
the company and will not be able to participate in the company's growth
or benefit from any increases in the value of the units. The notes are
unsecured obligations of the company and may be redeemed before maturity
at the company's option.
THIS SOLICITATION OF CONSENTS EXPIRES AT 5:00 P.M., EASTERN TIME ON
, 1999, UNLESS EXTENDED.
--------
Neither the Securities and Exchange Commission nor any state securities
commission has approved or disapproved of these securities or determined if this
prospectus/consent solicitation statement is truthful or complete. Any
representation to the contrary is a criminal offense.
--------
The date of the prospectus/consent solicitation statement is , 1999.
<PAGE>
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ALL QUESTIONS AND INQUIRIES SHOULD BE DIRECTED TO AMERICA FIRST INVESTOR
SERVICES DEPARTMENT, 1004 FARNAM STREET, SUITE 400, OMAHA, NEBRASKA 68102, OR
CALL (800) 239-8787 AND SELECT OPTION 2. YOU MAY E-MAIL INVESTOR SERVICES AT
[email protected].
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TABLE OF CONTENTS
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PAGE
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SUMMARY.................................................................................................... 3
The Transaction.......................................................................................... 3
Summary Risk Factors..................................................................................... 4
Benefits of the Transaction.............................................................................. 5
Fairness................................................................................................. 6
Our Recommendation; Fairness Determination............................................................... 6
Appraisals............................................................................................... 6
Contacts Regarding Fairness Opinions, Valuations and Other Reports....................................... 7
The Units................................................................................................ 7
The Notes................................................................................................ 7
Voting Procedures........................................................................................ 8
Communicating With Other Investors....................................................................... 9
No Dissenters' Rights.................................................................................... 9
The Company.............................................................................................. 9
Background and Reasons for the Transaction............................................................... 10
Exchange Values.......................................................................................... 10
Consideration of Alternatives............................................................................ 10
Conflicts of Interests and Benefits to Insiders.......................................................... 12
Compensation, Reimbursements and Distributions to the Cap Source General Partners........................ 13
Federal Income Tax Consequences.......................................................................... 14
Accounting Treatment..................................................................................... 14
Ratio of Earnings to Fixed Charges....................................................................... 14
Organizational Structure................................................................................. 15
Comparison of BACs and Units............................................................................. 18
RISK FACTORS............................................................................................... 19
Risks Associated with the Transaction.................................................................... 19
No prior market for the units; Market price may decrease after the transaction......................... 19
No prior market for the notes; Price may decrease after the transaction................................ 19
Conflicts of interest of the Cap Source General Partners............................................... 19
Possible lower distributions........................................................................... 20
Lack of operating history.............................................................................. 20
No dissenters' rights.................................................................................. 20
Possible alternatives to the transaction will not be pursued........................................... 20
A majority in interest will bind all investors in each partnership..................................... 20
Notes are unsecured obligations of the company......................................................... 20
Contingent or undisclosed liabilities.................................................................. 20
Investors who elect to receive notes could receive units............................................... 21
Risks Associated with the Company's Business............................................................... 21
Leveraging strategy.................................................................................... 21
No assurance of successful implementation of new business plan......................................... 21
Real estate investments................................................................................ 21
Dependence on available investments.................................................................... 22
Competition............................................................................................ 22
Illiquidity of real estate............................................................................. 22
Unspecified acquisitions............................................................................... 22
Title defects.......................................................................................... 22
Environmental laws may impose additional liability..................................................... 22
Registration under the Investment Company Act.......................................................... 23
Potential liability under the Americans with Disabilities Act.......................................... 23
Regulatory and Legislative Risks........................................................................... 23
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PAGE
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BENEFITS OF, AND BACKGROUND AND REASONS FOR, THE TRANSACTION............................................... 24
History of the Partnerships.............................................................................. 24
The Decision to Pursue the Transaction................................................................... 26
Preparation for and Chronology of Events Leading to the Transaction...................................... 27
Restructuring of the Transaction to a Publicly Traded Partnership........................................ 29
Alternatives Considered.................................................................................. 29
Reasons for, and Benefits of, the Transaction............................................................ 31
Consequences if Transaction Not Completed................................................................ 33
THE TRANSACTION............................................................................................ 33
General.................................................................................................. 33
Terms of the Merger Agreement............................................................................ 33
Issuance of Units and Notes of the Company............................................................... 34
No Fractional Units...................................................................................... 34
Fractional Notes......................................................................................... 34
Transaction Expenses..................................................................................... 34
Accounting Treatment..................................................................................... 35
Regulatory Matters....................................................................................... 35
Recommendation of the Cap Source General Partners........................................................ 36
Amendments to the Partnership Agreements................................................................. 36
Effect of the Transaction on Dissenting Investors........................................................ 36
Effective Time........................................................................................... 36
Conflicts of Interest and Benefits to Insiders........................................................... 36
Legal Proceedings........................................................................................ 37
FAIRNESS................................................................................................... 38
Belief as to Fairness.................................................................................... 38
Material Factors Underlying Belief as to Fairness........................................................ 38
Alternatives to the Transaction.......................................................................... 40
Comparison of Alternatives to the Transaction............................................................ 42
The Cap Source General Partners' Analysis for the Transaction............................................ 44
APPRAISALS................................................................................................. 45
General.................................................................................................. 45
Summary of Methodology................................................................................... 45
The Cost Approach........................................................................................ 46
The Sales Comparison Approach............................................................................ 46
The Income Approach...................................................................................... 46
Conclusions as to Value.................................................................................. 47
Assumptions, Limitations and Qualifications of Appraisals................................................ 48
Compensation and Material Relationships.................................................................. 50
EXCHANGE VALUES............................................................................................ 50
COMPARISON OF BACS AND UNITS............................................................................... 52
Business................................................................................................. 52
Duration of Existence.................................................................................... 52
Investment Objectives and Policies....................................................................... 52
Borrowing Policies....................................................................................... 52
Management............................................................................................... 52
Compensation, Fees and Expenses.......................................................................... 53
Voting Rights............................................................................................ 54
THE COMPANY................................................................................................ 55
Overview................................................................................................. 55
The General Partner...................................................................................... 55
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ii
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PAGE
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Investment Strategy...................................................................................... 57
Financing Strategies..................................................................................... 57
Operating Restrictions................................................................................... 58
Policy with Respect to Certain Activities................................................................ 58
MANAGEMENT OF THE GENERAL PARTNER.......................................................................... 58
General.................................................................................................. 58
Indemnification.......................................................................................... 60
PRIOR PARTNERSHIPS......................................................................................... 60
VOTING..................................................................................................... 62
Solicitation by the Cap Source General Partners.......................................................... 62
Voting Procedures........................................................................................ 62
Record Date and Outstanding BACs......................................................................... 64
Solicitation of Votes; Solicitation Expenses............................................................. 64
Revocability of Consent.................................................................................. 65
Communicating With Other Investors....................................................................... 65
No Right of Appraisal.................................................................................... 65
FIDUCIARY RESPONSIBILITIES................................................................................. 65
PRO FORMA FINANCIAL INFORMATION............................................................................ 66
THE PARTNERSHIPS........................................................................................... 81
Cap Source I............................................................................................. 81
Cap Source II............................................................................................ 82
SECONDARY MARKET AND OWNERSHIP OF PARTNERSHIP BACS......................................................... 85
Sale Prices of BACs...................................................................................... 85
BAC Holders.............................................................................................. 87
Partnership Distributions................................................................................ 88
Third Party Tender Offers................................................................................ 89
SELECTED FINANCIAL DATA OF THE PARTNERSHIPS................................................................ 90
DESCRIPTION OF THE UNITS................................................................................... 91
General.................................................................................................. 91
Units Eligible for Future Sale........................................................................... 92
THE NOTES.................................................................................................. 92
General.................................................................................................. 92
Allocation of Notes...................................................................................... 92
Notes.................................................................................................... 93
FEDERAL INCOME TAX CONSEQUENCES............................................................................ 96
General.................................................................................................. 96
Opinions of Counsel...................................................................................... 97
Certain Tax Differences Between the Ownership of BACs and the Units...................................... 97
Tax Treatment of the Transaction......................................................................... 97
Taxation of the Company Subsequent to the Transaction.................................................... 100
Taxation of Unitholders.................................................................................. 101
Considerations for Tax-Exempt Unitholders................................................................ 103
Considerations for Non-U.S. Unitholders.................................................................. 103
Tax Issues Associated with Notes......................................................................... 104
General Partner Liabilities.............................................................................. 106
Termination of Trade Processing.......................................................................... 107
EMPLOYEE RETIREMENT INCOME SECURITY ACT.................................................................... 107
INDEPENDENT PUBLIC ACCOUNTANTS............................................................................. 108
LEGAL MATTERS.............................................................................................. 108
AVAILABLE INFORMATION...................................................................................... 109
</TABLE>
iii
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PAGE
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INDEX TO FINANCIAL STATEMENTS.............................................................................. FS-1
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APPENDIX A FORM OF AGREEMENT AND PLAN OF MERGER AMONG THE COMPANY AND THE
PARTNERSHIPS
APPENDIX B PRIOR PARTNERSHIPS PERFORMANCE TABLES
APPENDIX C FORM OF AMENDED AND RESTATED AGREEMENT OF LIMITED PARTNERSHIP OF
AMERICA FIRST REAL ESTATE INVESTMENT PARTNERS, L.P.
iv
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SUMMARY
THIS SUMMARY HIGHLIGHTS INFORMATION CONTAINED ELSEWHERE IN THIS
PROSPECTUS/CONSENT SOLICITATION STATEMENT AND THE ACCOMPANYING SUPPLEMENTS. IN
THIS PROSPECTUS/CONSENT SOLICITATION STATEMENT WE REFER TO CAPITAL SOURCE L.P.
AS CAP SOURCE I, AND CAPITAL SOURCE II L.P.-A AS CAP SOURCE II, OR BOTH TOGETHER
AS THE PARTNERSHIPS. UNLESS OTHERWISE INDICATED, THE TERMS "WE," "US," AND "OUR"
REFER TO THE GENERAL PARTNERS OF THE PARTNERSHIPS. WE REFER TO AMERICA FIRST
REAL ESTATE INVESTMENT PARTNERS, L.P., THE SURVIVING ENTITY IN THE TRANSACTION,
AS THE COMPANY. TO FULLY UNDERSTAND THE TRANSACTION AND FOR A MORE COMPLETE
DESCRIPTION OF THE TERMS OF AND RISKS RELATED TO THE TRANSACTION, YOU SHOULD
READ CAREFULLY THIS ENTIRE PROSPECTUS/CONSENT SOLICITATION STATEMENT AND THE
ACCOMPANYING SUPPLEMENTS.
THE TRANSACTION
This prospectus/consent solicitation statement relates to the proposed
merger, or the transaction, of Cap Source I and Cap Source II with and into the
company. The company is a newly organized Delaware limited partnership formed to
facilitate the transaction. We are proposing the transaction in accordance with
an agreement and plan of merger among the partnerships and the company. The form
of the merger agreement is attached to this prospectus/consent solicitation
statement as Appendix A. In connection with the transaction, the company will
distribute the securities described below to the partnerships in exchange for
all of the assets of the partnerships. The partnerships in turn will distribute
the securities to you in proportion to the number of beneficial assignment
certificates representing assigned limited partner interests in the
partnerships, or BACs, you hold as provided in the merger agreement. After the
transaction, you will no longer be a BAC holder or limited partner in your
partnership and the separate existence of the partnerships will cease. You will
instead become either a (a) unitholder or (b) noteholder of the new company, as
the case may be.
We are asking you to approve the transaction as described in this
prospectus/consent solicitation statement. In connection with the transaction,
you will receive, at your election, with some limitations, certificates
representing assigned limited partner interests in the company, referred to as
units, or the company's Variable Rate Junior Notes Callable On or After the Date
of Issuance, referred to as notes. Even if you vote "NO" against the
transaction, you as a dissenting investor, will receive, at your election,
either units or notes in connection with the transaction if it is completed. The
company may, at its option, pay cash instead of issuing notes. See "THE NOTES."
We will hold a 1% interest in the company as its general partner, which
continues our 1% interest in the partnerships. We will receive this 1% interest
in exchange for the transfer of some of our assets to the company in connection
with the transaction. We expect the units to be listed on NASDAQ under the
symbol " ."
We are proposing the transaction in an effort to increase the value of your
investment while offering substantially enhanced liquidity. To achieve these
objectives, we are proposing to restructure the business of the partnerships by
merging the partnerships with and into the company as provided in the merger
agreement. After the transaction, the company's primary business objective will
be to increase cash flow and net asset value by making equity investments
primarily in multifamily residential properties and actively managing the makeup
of its real estate portfolio. See "THE COMPANY." There can be no assurance,
however, that any or all of these objectives will be met.
There are conditions to the transaction. The transaction will not occur
unless, among other things: (1) both partnerships participate in the
transaction, and (2) dissenting investors elect to receive less than the maximum
amount of notes issuable in connection with the transaction. Participation in
the transaction requires approval of a majority in interest of investors in each
partnership. The maximum amount of notes that may be issued in the transaction
is $20 million. If the transaction is not completed, the partnerships will
continue to operate as separate legal entities with their own assets and
liabilities, and their respective investment objectives, policies and
restrictions will not change.
3
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To comply with the rules and regulations of the Securities and Exchange
Commission governing the transaction and to facilitate the transaction, we have
amended the limited partnership agreement of each partnership to allow a record
date to be set and notice of the consent to be given up to 120 days before the
time at which the consent of the investors is being solicited and to provide for
the exchange of BACs for units or notes based solely on the books and records of
each partnership. For a detailed description of these amendments, see "THE
TRANSACTION--Amendments to the Partnership Agreements." If you vote "YES" in
favor of the transaction, you will be deemed to have voted in favor of ratifying
these amendments and any other actions taken by us to facilitate the
transaction.
SUMMARY RISK FACTORS
The following is a summary of some of the potential disadvantages, adverse
consequences and risks of the transaction. This summary is not complete. You
should also carefully consider the more detailed discussion in the section
entitled "RISK FACTORS" contained in this prospectus/consent solicitation
statement.
- We cannot predict the prices at which the units will trade after the
transaction. The price of the units may decrease after the transaction due
to the potentially large number of units that may be sold immediately by
unitholders. Thus, the units may trade at prices substantially below the
estimated liquidation value of the company's assets and the $10 per unit
price we arbitrarily assigned for the sole purpose of allocating the units
in the transaction.
- We do not expect a public market for the notes to develop. If the notes
are sold, they may sell at prices substantially below their issuance
price. Investors who receive notes are likely to receive the full face
amount of the notes only if they hold the notes to maturity or if the
company repays or refinances the notes at or before maturity. The maturity
date of the notes is approximately eight years after the transaction.
- We initiated and participated in the structuring of the transaction and
have conflicts of interests with respect to its completion. We will
receive economic benefits as a result of the transaction. We will hold a
1% interest in the company as its general partner, which continues our 1%
interest in the partnerships. We will also receive management and other
fees from the company as its general partner following the transaction.
See "THE TRANSACTION--Conflicts of Interest and Benefits to Insiders" and
"MANAGEMENT OF THE GENERAL PARTNER."
- There can be no guarantee of the level of the company's future
distributions. Regardless of the initial level, distributions could
decline in the future so that you may receive distributions that are lower
than the distributions you currently receive as an investor in the
partnerships. The company may also reinvest cash generated by the sale of
existing assets or from operations to acquire additional assets. This
could cause cash distributions to be lower than the distributions made by
the partnerships in some cases.
- The company was recently organized and has no operating history. As a
result, there can be no assurance that any of the company's planned future
activities will be successful.
- If you vote "NO" against the transaction, but your partnership approves
the transaction, you will not be entitled to receive cash based on an
appraisal of your BACs or any other dissenters' rights under Delaware law,
nor will you be given any similar rights in the transaction. You will have
the right to exchange your BACs for notes if you so elect, with some
limitations. See "THE NOTES."
- There are alternatives to the transaction. If you approve the transaction,
you will effectively preclude the pursuit of some of the alternatives. See
"BENEFITS OF, AND BACKGROUND AND REASONS FOR, THE
TRANSACTION--Alternatives Considered."
4
<PAGE>
- The company intends to use debt financing to increase its real estate
asset portfolio. Although the notes will be issued under an indenture that
creates debt limitations, the company's organizational documents do not
limit the amount of debt the company may incur. The company will therefore
be more leveraged than either of the partnerships. This use of debt
financing may increase the possibility of default on the company's
obligations, which could adversely affect the company's earnings and its
ability to pay expected distributions to you.
- If the investors holding a majority in interest of the BACs of each
partnership approve the transaction, your partnership will be merged with
and into the company. You will be bound by this approval even if you vote
"NO" against the transaction or abstain from voting.
- The notes are prepayable at any time, unsecured obligations of the company
and, as a practical matter, will be junior to all other debt of the
company. The notes will bear interest at a variable rate that may be lower
than rates on other variable rate debt instruments that may be perceived
as having comparable or lower risks than the notes. If you choose and
receive notes, you will not hold an equity interest in the company and
therefore will not be able to participate in the company's growth or
benefit from any increases in the value of the units.
- The company may be liable for unknown, undisclosed or contingent
liabilities of the partnerships, which could adversely affect the
liquidity of the company and its ability to pay expected distributions to
you.
- If dissenting investors elect to receive notes in excess of the maximum
note limitation, the transaction will not be completed. If this does not
occur, but the total amount of notes allocable to all investors who elect
to receive notes exceeds the maximum note limitation, notes will be
allocated first to dissenting investors who elected to receive notes and
then, on a pro rata basis, to investors who abstained from voting or who
voted "YES" in favor of the transaction. Thus, you could choose notes but
receive units instead. To be assured of receiving notes, you must vote
"NO" with respect to the transaction and elect to receive notes.
BENEFITS OF THE TRANSACTION
The following is a summary of the principal benefits of the transaction.
This summary is not complete. You should also consider the more detailed
discussion in the section entitled "BENEFITS OF, AND BACKGROUND AND REASONS FOR,
THE TRANSACTION" contained in this prospectus/consent solicitation statement:
- The transaction will provide for liquidity of investment because the BACs
will be converted into publicly traded units of the new company. There is
currently no established public trading market for the BACs. Secondary
sales activity for the BACs has been limited and sporadic at prices which
we believe are generally below fair value. If you elect to receive units,
the transaction will offer you liquidity through the public trading
expected to result from the listing of the units on NASDAQ.
- The company will be afforded significant growth and profit opportunities
from new real estate investments. The company will have the potential for
enhanced access to and flexibility in obtaining additional equity and debt
financing. In particular, the company will have the ability to fund future
portfolio growth through the issuance of additional publicly traded
securities and the raising of funds from borrowing under secured and
unsecured debt obligations.
- If the transaction is completed, some of our affiliates have agreed to
permanently waive amounts which may be payable to them by some of the
operating partnerships in which Cap Source I and/or Cap Source II are
limited partners. These amounts may be payable under the terms of the
partnership agreements of these operating partnerships. As of December 31,
1998, these amounts totalled $3,228,405.
5
<PAGE>
- If the transaction is competed, the general partner plans to eliminate the
mortgage insurance on some of the GNMA and FHA loans that are secured by
the real estate held by the operating partnerships because of their
significant operating history. This will result in cost savings to those
operating partnerships.
- Combining the partnerships into a single entity will create an investment
portfolio larger and more diversified than the portfolio of an individual
partnership. The increased size of the portfolio spreads the risk of your
investment over a broader group of assets and reduces the dependence of
your investment upon the performance of any particular asset or group of
assets.
- Combining the partnerships into a single entity will also allow the
consolidation of administration and management of the partnerships.
Eliminating duplication of these activities will afford the company cost
savings on general and administrative expenses.
For a discussion of the potential benefits of the alternatives to the
transaction and the reasons we rejected these alternatives, see "BENEFITS OF,
AND BACKGROUND AND REASONS FOR, THE TRANSACTION--Alternatives Considered,"
below, and "FAIRNESS--Comparison of Alternatives to the Transaction." The
transaction will require you to forego some of the alternatives to the
transaction.
FAIRNESS
We reasonably believe the terms of the transaction are fair as a whole, to
each partnership and to you. We have based our determination as to the fairness
of the transaction on the following material factors: (1) the terms and
conditions of the transaction will result in limited changes to the structure of
the partnerships and limited changes to the business and investment objectives
of the partnerships; (2) the opportunity for you to object to the transaction
and the requirement that the transaction be approved by investors holding a
majority in interest of the outstanding BACs of each partnership; (3) the form
and amount of consideration offered to you; (4) the method of allocating the
units and notes among the partnerships in the transaction and the exchange
values used in connection with this allocation; (5) the independent appraisals
prepared by Valuation Research Corporation, which were used in part in the
determination of the exchange values; (6) the lack of material differences with
respect to the assets of the partnerships and the consistent valuation
methodology applied to the assets; and (7) the fact that all investors,
including dissenting investors, will be given the opportunity to elect to
receive notes, with some limitations. For a more detailed discussion of our
belief as to the fairness of the transaction, see "FAIRNESS."
OUR RECOMMENDATION; FAIRNESS DETERMINATION
We have determined that the transaction is in your best interests and that
it is fair to you, the partnerships, to the investors in each of the
partnerships and as a whole. Accordingly, we have approved the transaction and
the merger agreement and recommend that you vote "YES" in favor of the
transaction and the adoption of the merger agreement. We believe the transaction
is the most attractive alternative for providing you with the possibility of
increasing the value of your investment while offering substantially enhanced
liquidity. See "THE TRANSACTION--Recommendation of the Cap Source General
Partners" and "FAIRNESS."
APPRAISALS
In connection with the transaction, Valuation Research, an independent full
service appraisal firm, rendered its opinion as to the fair market value of the
real estate held by the operating partnerships, or the properties. In its
appraisal of the properties, Valuation Research considered the cost approach,
the direct sales comparison approach and the income approach to market value,
and relied upon the income approach as its primary appraisal technique, using
the direct sales comparison approach as a basis for checking the reasonableness
of the results obtained using the income approach. See "APPRAISALS."
6
<PAGE>
CONTACTS REGARDING FAIRNESS OPINIONS, VALUATIONS AND OTHER REPORTS
We conducted interviews with four firms regarding the possibility of
advising us with respect to the transaction and issuing a fairness opinion for
the transaction. The firms were Sutro & Co., Inc., Valuation Research, J.C.
Bradford & Co. and Schroders. We also contacted Robert A. Stanger & Co., Inc.
regarding a fairness opinion and E&Y Kenneth Leventhal Real Estate Group
regarding valuation of the properties for the transaction, but did not pursue
extensive discussions. After conducting interviews with these firms, we
determined that obtaining an independent opinion as to the fairness of the
transaction was not necessary. We made this determination based upon (1) the
terms and conditions of the transaction will result in limited changes to the
structure of the partnerships and limited changes to the business and investment
objectives of the partnerships; (2) the opportunity for you to object to the
transaction and the requirement that the transaction be approved by investors
holding a majority in interest of the outstanding BACs of each partnership; (3)
the form and amount of consideration offered to you; (4) the method of
allocating the units and notes between the partnerships in the transaction; (5)
the lack of material differences with respect to the assets of the partnerships
and the consistent valuation methodology applied to the assets; (6) the
independent appraisals prepared by Valuation Research, which were used in part
in the determination of the exchange values; and (7) the fact that you, even if
you vote against the transaction, will be given the opportunity to elect to
receive notes, with some limitations.
Other than Valuation Research, Robert A. Stanger & Co., Inc. and E&Y Kenneth
Leventhal Real Estate Group, we did not make any other contacts with outside
parties regarding the valuation of the properties or other partnership assets or
commission any other report with respect to the transaction. See "BENEFITS OF,
AND BACKGROUND AND REASONS FOR, THE TRANSACTION--Preparation for and Chronology
of Events Leading to the Transaction."
THE UNITS
In connection with the transaction, the company will issue to the
partnerships up to an aggregate of 7,765,772 units. The total number of units
allocated to the partnerships is based upon the investor exchange value for each
partnership. It was derived by taking 99% of the total exchange value for each
partnership to reflect the fact that we will hold a 1% interest in the company.
This number was then divided by $10, which is an arbitrary price per unit we
chose for the sole purpose of allocating the units. We will not receive any
units or notes in connection with the transaction. Instead, we will hold a 1%
interest in the company as its general partner, which continues our 1% interest
in the partnerships. As general partner of the company, we will receive this 1%
interest in exchange for transferring some of our assets to the company in
connection with the transaction.
THE NOTES
All investors, including dissenting investors, will be given the opportunity
to elect to receive notes instead of units, with the limitations discussed
below. The notes will be Variable Rate Junior Notes Callable On or After the
Date of Issuance and will be unsecured obligations of the company. The company
may issue additional debt that is senior to the notes, which may be secured, in
compliance with the covenants of the indenture for the issuance of senior debt.
The notes will bear interest at a floating rate equal to 120% of the annual
applicable federal rate for debt instruments with a term of not over three years
as determined under the Internal Revenue Code of 1986, or the Code, and
applicable regulations thereunder. The interest rate on the notes will be
adjusted and paid annually. The notes will mature on , 2007 and may
be redeemed at any time by the company at its option. This optional redemption
may prevent the sale of the notes at prices above their face value and limit the
term the notes will be outstanding. See "THE NOTES."
The company may, at its option, pay cash instead of issuing the notes. If
the company elects to pay cash to investors otherwise entitled to receive notes,
it will pay these investors an amount equal to the
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<PAGE>
principal amount of notes these investors would have received plus interest
accrued to the date of payment at a rate determined as shown above.
The total amount of notes to be issued is limited by the maximum note
limitation, which is equal to $20 million. See "THE NOTES."
VOTING PROCEDURES
We will not hold a meeting of the investors to consider the transaction, but
instead are seeking your written consent as provided in Article X of the
partnership agreements. Each BAC you own entitles you to one vote. You may only
vote with respect to the transaction if you hold BACs of record at the close of
business on , 1999, the record date. A consent card is included with
this prospectus/consent solicitation statement and we are asking you to
complete, date and sign the consent card and return it to in the
enclosed envelope as soon as possible. To be valid, consents must be received by
by 5:00 p.m. Eastern Time on , 1999, the approval date,
unless we extend this date, which we may do in our sole discretion. See
"VOTING."
We are asking you to consider the following elections with respect to the
transaction:
"YES," I approve of my partnership's participation in the transaction.
or
"NO," I do not approve of my partnership's participation in the transaction.
You may also abstain from voting.
You will receive units representing equity ownership in the new company
unless you elect to receive notes representing debt. You may elect to receive
notes regardless of whether you vote "YES" or "NO" with respect to the
transaction. An otherwise valid consent card will be deemed to grant consent to
the transaction if it is not marked "NO" or to abstain. See "VOTING."
If you do not approve of your partnership's participation in the
transaction, you may either vote "NO" or abstain from voting. If you vote "NO"
and your partnership approves the transaction, you will receive units, unless
you elect to receive notes as indicated on the consent card. If you abstain from
voting, you will also receive units if the transaction is approved by your
partnership, unless you elect to receive notes as indicated on the consent card.
If you do not return your consent card, you will receive units if the
transaction is completed. You may withdraw or revoke your consent at any time
before the approval date. See "VOTING--Revocability of Consent."
If you sign and return your consent card without indicating a vote, it will
be deemed to be voted "YES" in favor of the transaction. In which case, and if
you vote "YES" in favor of the transaction, you will also be deemed to have
voted in favor of ratifying the amendments to the partnership agreements and any
other actions taken by us to facilitate the transaction. For a description of
the amendments see "THE TRANSACTION--Amendments to the Partnership Agreements."
In addition, if you are a Cap Source II investor who signs and returns the
consent card without indicating your vote or you vote "YES" in favor of the
transaction, you will also be deemed to have voted in favor of consenting to the
sale of the Cap Source II general partner interest owned by one of the Cap
Source II general partners. For a description of this sale, see "THE
COMPANY--The General Partner."
WE BELIEVE THAT THE TERMS OF THE TRANSACTION ARE FAIR AND IN YOUR AND THE
PARTNERSHIPS' BEST INTERESTS AND RECOMMEND THAT YOU VOTE "YES" IN FAVOR OF THE
TRANSACTION.
8
<PAGE>
COMMUNICATING WITH OTHER INVESTORS
Under Rule 14a-7 of the Securities Exchange Act of 1934, each partnership,
upon written request from you, will deliver to you (1) a statement of the
approximate number of investors in your partnership and (2) the estimated cost
of mailing proxy materials or similar communications to the investors of your
partnership. In addition, under the rule, you have the right, at your option, to
have your partnership (a) mail, at your expense, any proxy materials which you
desire to deliver to the other investors of your partnership in connection with
the transaction or (b) to have your partnership deliver, within five business
days of the receipt of your request, a reasonably current list of the names and
addresses of the investors of your partnership as of the record date. The
partnerships may require you to pay the reasonable cost of duplicating and
mailing the investor list. The partnerships may also require you to affirm that
you will not use the list information for any purpose other than to solicit
investors in your partnership with respect to the transaction and that you will
not disclose the list information to any other person. Any requests should be
sent to America First Investor Services Department, 1004 Farnam Street, Suite
400, Omaha, Nebraska, 68102.
NO DISSENTERS' RIGHTS
If you do not want to participate in the transaction, you are not entitled
to receive cash based on an appraisal of your BACs or other dissenters' or
appraisal rights under the partnership agreements or Delaware law, nor will any
similar rights be provided by the partnerships or the company. You do, however,
have the right to elect to exchange your BACs for notes rather than units, with
some limitations. If you vote against the transaction but do not elect to
receive notes, you will receive units. See "VOTING--No Right of Appraisal."
THE COMPANY
The company was organized under the laws of the State of Delaware on June
18, 1999, to facilitate the transaction. As a result of the transaction, the
company will succeed to the assets and liabilities of the partnerships. In
addition, we will transfer some of our assets to the company as a capital
contribution in connection with the transaction.
Following the transaction, the company's primary business objective will be
to increase cash flow and net asset value and to increase the liquidity and
market value of your BACs. The company expects to achieve this objective by
listing the units on NASDAQ and by making equity investments primarily in
multifamily residential properties. There can be no assurance, however, that the
company's business objectives will be met.
In connection with the transaction, your partnership's assets will be
transferred to the company. The company will also have the ability to acquire
additional multifamily residential properties. The company will have the ability
to more actively manage the makeup of its real estate portfolio as compared to
your partnership. The company's investment strategy will be funded initially
from available cash and short-term investments and from (1) borrowing against or
sale of the existing properties, (2) borrowing against or sale of the
mortgage-backed securities guaranteed as to principal and interest by GNMA, or
the GNMA certificates, and first mortgage loans on multifamily housing
properties insured as to principal and interest by the FHA, or FHA loans, and
(3) borrowing against the additional properties acquired by the company
following the transaction. The company may also use additional sources of
financing, both debt and equity, to further its business objectives and
investment strategies.
We will manage the company as its general partner following the transaction.
See "THE COMPANY" and "MANAGEMENT OF THE GENERAL PARTNER" below. The principal
executive offices of the company are located at 1004 Farnam Street, Suite 400,
Omaha, Nebraska 68102, and its telephone number is (402) 444-1630.
9
<PAGE>
BACKGROUND AND REASONS FOR THE TRANSACTION
Cap Source I was formed in 1985 and Cap Source II was formed in 1986. Both
partnerships were formed to make debt and equity investments in multifamily
rental complexes. The partnerships were organized and sponsored by persons not
affiliated with the company, us or our affiliates. America First Companies
L.L.C., our parent entity, acquired ownership of two of the Cap Source general
partners in 1991, and ownership of the other two Cap Source general partners in
1997. Therefore, we were only able to restructure the partnerships after 1997
and we reviewed several alternatives, including this proposal.
We have proposed the transaction in an effort to, among other things,
increase the value of your investment while offering you substantially enhanced
liquidity, and to provide you with increased distributions if you elect to
receive units. To achieve these objectives, we are proposing to restructure the
business of the partnerships by merging them with and into company. The company
will then pursue its business objectives and will list the units on NASDAQ. See
"THE COMPANY" and "BENEFITS OF, AND BACKGROUND AND REASONS FOR, THE
TRANSACTION."
EXCHANGE VALUES
You will receive units or notes based upon the exchange values shown in the
table below. Approximately 92.7% of the partnerships' combined assets are in the
form of (1) cash, (2) the GNMA certificates, which are collateralized by first
mortgage loans on multifamily housing properties, and (3) the FHA loans. The
exchange values, which we determined, are based on (a) the principal amount of
GNMA certificates and the FHA loans as shown in the partnerships' audited
financial statements for the period ended December 31, 1998, (b) the value of
the partnerships' limited partnership interests in the operating partnerships,
and (c) the market value of the partnerships' remaining net assets as shown in
the partnerships' audited financial statements for the period ended December 31,
1998. The fair market value of the real estate held by the operating
partnerships, as determined by Valuation Research, was the value assigned to the
real estate for the purpose of determining the exchange values. For a more
detailed description of how the exchange values were determined, see "EXCHANGE
VALUES."
The following table shows the exchange values attributable to the
partnerships for purposes of the transaction.
EXCHANGE VALUES
<TABLE>
<CAPTION>
INVESTOR EXCHANGE VALUE
INVESTOR PER $1,000
TOTAL EXCHANGE ORIGINAL INVESTMENT
PARTNERSHIP EXCHANGE VALUE VALUE(1) BY INVESTORS(2)
- ------------------------------------------------------- -------------- ---------------- -------------------------
<S> <C> <C> <C>
Cap Source I........................................... $ 47,569,968 $ 47,094,268 $ 698
Cap Source II.......................................... 30,872,167 30,563,445 381
-------------- ----------------
Total................................................ $ 78,442,135 $ 77,657,713
-------------- ----------------
-------------- ----------------
</TABLE>
- ---------------
(1) The investor exchange value was derived by taking 99% of the total exchange
value to reflect the fact that we will hold a 1% interest in the company as
its general partner.
(2) Since the initial investment by investors, the Cap Source I investors have
received a return of capital of $83, per $1,000 original investment, and the
Cap Source II investors have received a return of capital of $381, per
$1,000 original investment.
CONSIDERATION OF ALTERNATIVES
In addition to the proposed transaction, we also considered the following
options: (1) continued management of the partnerships as currently structured,
(2) separately listing the BACs of each partnership on a national securities
exchange or automated quotation system; (3) merging the partnerships into a
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<PAGE>
single corporation and listing that corporation's common stock on a national
securities exchange or automated quotation system; (4) merging the partnerships
together to form a single REIT; (5) qualifying each partnership as an individual
REIT; and (6) liquidating the partnerships through entire portfolio sales or
sales of individual properties. For the reasons listed under "BENEFITS OF, AND
BACKGROUND AND REASONS FOR, THE TRANSACTION--Alternatives Considered," we
rejected each of the alternatives in favor of the transaction.
CONTINUATION OF THE PARTNERSHIPS. An alternative to the transaction is to
continue each partnership under its own existing business plan and partnership
agreement. Continuing the partnerships without change has the following
benefits: (1) each partnership would remain a separate entity, with its own
assets and liabilities, and would remain under an obligation to pursue its
original investment objectives, consistent with its partnership agreement; (2)
the partnership's performance would not be affected by the performance of the
other partnership, including the investment objectives, interests and intentions
of the investors in the other partnership; (3) the partnerships would not incur
any expenses in connection with the transaction; and (4) the partnerships would
avoid the risks inherent in the transaction. See "RISK FACTORS."
However, maintaining the partnerships as separate entities has the following
disadvantages, among others: (1) illiquidity of investment on a current basis
due to the lack of a large and established secondary market; (2) inability to
raise new capital or make new investments, thus limiting growth of the
partnerships' capital to that inherent in the existing partnership investments;
(3) less flexibility and control in actively managing the portfolio; (4)
duplication among the partnerships in reporting, filing and other costly
administrative services; and (5) the declining value of the mortgage investments
due to amortization and subsequent distribution of these amounts.
LISTING THE PARTNERSHIP BACS. Another alternative to the transaction is to
separately list the BACs of each partnership on a national securities exchange
or an automated quotation system in an attempt to increase the liquidity of the
BACs. We believe that this alternative would result in substantial duplication
of general and administrative expenses. Furthermore, we believe that pursuing
this alternative would substantially diminish the partnerships' ability to grow
compared to the transaction. As a publicly traded partnership with a base of
assets greater than a single partnership, the company expects to be able to
issue additional debt and equity securities with greater ease and on more
attractive terms than would be available to a partnership individually. We
therefore concluded that the potential negatives of this alternative outweigh
any advantages it may have over the transaction.
MERGER RESULTING IN A SINGLE TAXABLE CORPORATION. Instead of participating
in the transaction, the partnerships could be merged together to form a single
corporation with the common stock of the new corporation listed on a national
securities exchange or quoted on an automated quotation system. We originally
structured a transaction involving a merger of the partnerships into a single
corporation that would have been subject to federal income tax at customary
corporate tax rates. However, we decided to abandon this merger due to changes
in the capital markets for real estate investments, which began in the Fall of
1998. See "BENEFITS OF, AND BACKGROUND AND REASONS FOR, THE
TRANSACTION--Restructuring of the Transaction to a Publicly Traded Limited
Partnership." The major disadvantage of this alternative is that a corporation
will not have the tax advantaged status that a limited partnership has. To
overcome this disadvantage, a corporation has to generate a much higher return
on investment than a limited partnership, which can only be achieved by making
investments that have a higher degree of risk. We believe that the current
capital markets for real estate investments are emphasizing higher asset
qualities and safer investments. Therefore, we believe this alternative is less
advantageous to you when compared to the transaction.
SINGLE REIT. We considered merging the partnerships into a single entity
which would elect REIT status but determined that it is a less attractive
alternative to the transaction. We concluded that the resulting REIT would be
too small in terms of total capitalization to compete with existing REITs having
11
<PAGE>
similar investment objectives. Furthermore, due to restrictions in the Code
relating to distributions of net taxable income and limitations on sales of
assets, as a REIT, the new company will not be able to pursue the business plan
described in this prospectus/consent solicitation statement which involves the
ability to retain cash flow for investment purposes and to regularly sell assets
after the achievement of goals set for those assets.
INDIVIDUAL REIT. We considered converting each partnership into an
individual REIT, but determined that it is a less attractive alternative than
the transaction for the same reasons discussed above for listing the partnership
BACs and the single REIT alternatives. The issues cited above as reasons for the
lack of attractiveness of a new company as a single REIT are magnified when
applied to each partnership as an individual REIT due to the significantly
smaller size of each partnership as a stand alone entity.
LIQUIDATION. Although the investment objectives and policies of the
partnerships do not require the commencement of the liquidation of the
partnerships at any specific time, we assessed the possibility of commencing the
orderly liquidation of the partnerships and distributing the net proceeds from
the liquidation to you. We concluded that liquidation would be costly and
time-consuming and would not be as beneficial to you as the transaction.
We determined that an attempt to liquidate the partnerships' investments at
the current time would likely result in you not achieving the full potential
benefits from an investment in the partnerships. We concluded that liquidation
would not be the best option to realize the optimum return on an investment in
the partnerships because although the partnerships' investments in mortgage
loans could likely be sold at or slightly above their face value in a short
period of time, most of the partnerships' equity positions in the operating
partnerships are not attractive to buyers. Liquidation of most of the equity
positions may require either (1) a protracted period of negotiations with some
of the various general partners of the operating partnerships which could
potentially create both substantial transaction costs and additional costs to
the partnerships of continuing operations during the negotiation period, and/or
(2) the partnerships' accepting substantial discounts in value. In addition,
there may be additional costs associated with representations, warranties, and
indemnifications that purchasers generally require and which may result in
additional escrow costs and a delay in final distributions to you. Furthermore,
the liquidation of the partnerships would involve transaction costs, for
example, legal fees and various other closing costs and the cost of
administering the partnerships during the liquidation period, which would
further reduce the amount of net proceeds available for distribution.
Liquidation would also deprive you of the potential increase in value which may
result from the restructuring of the partnerships and the refinancing of the
partnerships' assets.
On the other hand, in a liquidation of the partnerships, you would benefit
by avoiding the risks of continuing your ownership of the partnerships and those
associated with the transaction. Liquidation would provide for the final
liquidation of your investment and a likely substantial distribution of cash
equal to net liquidation proceeds, though not in an amount that would give you a
full return of your original investment. In addition, you would have the
potential to reinvest the net proceeds received in the liquidation in similar or
different investments.
CONFLICTS OF INTERESTS AND BENEFITS TO INSIDERS
We participated in the initiation and structuring of the transaction and are
expected to receive benefits as a result of its completion. First, in connection
with the transaction, we will hold a 1% interest in the company as its general
partner, which continues our 1% interest in the partnerships. We will receive
this interest in exchange for the transfer of some of our assets to the company
in connection with the transaction. In addition, we will manage the company as
its general partner and will be entitled to receive management and other fees
from the company as provided in the company's limited partnership agreement.
Further, Michael B. Yanney, who is a member and manager of America First
Companies, the entity that controls us, will also serve as Chairman of the Board
of Managers of the company's general partner.
12
<PAGE>
See "MANAGEMENT OF THE GENERAL PARTNER" and "THE TRANSACTION--Conflicts of
Interests and Benefits to Insiders."
COMPENSATION, REIMBURSEMENTS AND DISTRIBUTIONS TO THE CAP SOURCE GENERAL
PARTNERS
The following table compares the cash distributions, fees and reimbursements
we currently receive from the partnerships and the fees that we, as general
partner of the company, would have received from the company had the transaction
occurred before the periods indicated.
COMPARISON OF COMPENSATION,
REIMBURSEMENTS AND DISTRIBUTIONS TO
CAP SOURCE GENERAL PARTNERS
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31, THREE MONTHS
---------------------------------- ENDED
1996 1997 1998 MARCH 31, 1999
---------- ---------- ---------- --------------
<S> <C> <C> <C> <C>
ACTUAL AMOUNTS PAID TO CAP SOURCE GENERAL PARTNERS
Capital Source I
1% Share of Cash Distributions(1)........................ $ 34,424 $ 34,424 $ 34,425 $ 8,606
Asset Management and Partnership Administrative Fee(2)... 0 0 0 0
Reimbursements(3)........................................ 192,896 243,973 319,874 106,077
---------- ---------- ---------- --------------
Subtotal............................................... $ 227,320 $ 278,397 $ 354,299 $ 114,683
---------- ---------- ---------- --------------
Capital Source II
1% Share of Cash Distributions(1)........................ $ 32,818 $ 32,818 $ 26,741 $ 4,558
Asset Management and Partnership Administrative Fee(4)... 166,000 166,000 50,000 12,500
Reimbursements(3)........................................ 175,922 225,782 266,946 80,125
---------- ---------- ---------- --------------
Subtotal............................................... $ 374,740 $ 424,600 $ 343,687 $ 97,183
---------- ---------- ---------- --------------
Total.................................................... $ 602,060 $ 702,997 $ 697,986 $ 211,866
---------- ---------- ---------- --------------
---------- ---------- ---------- --------------
COMPANY--FEES PAYABLE TO THE GENERAL PARTNER
1% Share of Cash Distributions $ 67,242 $ 67,242 $ 61,166 $ 13,164
Acquisition Fee(5)......................................... 0 0 0 0
Administrative Fee(6)...................................... 100,000 100,000 100,000 25,000
Reimbursements(7).......................................... 368,818 469,755 586,820 186,202
---------- ---------- ---------- --------------
Total.................................................... $ 536,060 $ 636,997 $ 747,986 $ 224,366
---------- ---------- ---------- --------------
---------- ---------- ---------- --------------
</TABLE>
- ---------------
(1) The respective partnership agreements provide that 1% of cash available for
distribution will be allocated to the Cap Source general partners.
(2) The Cap Source I general partners are entitled to receive an asset
management and partnership administrative fee equal to 0.5% of invested
assets per annum, payable only during years that an 8% return has been paid
to investors on a noncumulative basis. Any unpaid amounts will accrue and be
payable only after a 13% annual return to investors has been paid on a
cumulative basis and the investors have received the return of their capital
contributions.
(3) The Cap Source general partners are paid or reimbursed for some costs and
expenses incurred in connection with the operation of the partnership. The
increase in historical reimbursements to the Cap Source general partners
from 1996 to 1998 is primarily the result of an increase in salaries and
related expenses. Starting in 1996, additional management time was incurred
in exploring various options available to the partnerships to improve total
returns. For a description of the fee structure of the general partner, see
"COMPARISON OF BACS AND UNITS--Compensation, Fees and Expenses."
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<PAGE>
(4) The Cap Source II general partners are entitled to receive an asset
management and partnership administrative fee equal to 0.5% of invested
assets per annum, the first $50,000 of which shall be paid each year with
the balance payable only during years that a 6.5% annual return has been
paid to investors on a noncumulative basis. An additional fee of 0.5% of
invested assets will be paid in those years that an 11.5% annual return has
been paid to investors on a cumulative basis. Any unpaid amounts will accrue
and be payable only after an 11.5% annual return to investors has been paid
on a cumulative basis and the investors have received the return of their
capital contributions.
(5) No acquisition fees would have been paid because no new assets were
purchased or permitted to be purchased in the years 1996 to 1998. Since the
company will be permitted to acquire new assets, this fee will increase in
future years if the transaction is completed.
(6) Calculated based on the fees described in more detail under "COMPARISON OF
BACS AND UNITS--Compensation, Fees and Expenses."
(7) The general partner is entitled to be reimbursed for some of its costs and
expenses incurred in connection with the operation of the company.
FEDERAL INCOME TAX CONSEQUENCES
The company will not recognize any gain or loss as a result of the
transaction. If you are an investor in Cap Source II, you will be required to
include in income a share of income or gain recognized by Cap Source II as a
result of the receipt by Cap Source II of notes or cash, even if you receive
units in connection with the transaction. See "FEDERAL INCOME TAX
CONSEQUENCES--Tax Treatment of the Transaction." If the maximum amount of notes
are issued in connection with the transaction, the maximum potential gain that
Cap Source II could recognize will be approximately $2 million, or approximately
$.50 per Cap Source II BAC. If you are a Cap Source I investor, you will only
recognize gain to the extent the fair market value of the notes or the amount of
cash you actually receive in the transaction exceeds your adjusted basis in your
BACs. The company will be characterized as a partnership for federal income tax
purposes. Therefore, the company will not be subject to federal income taxation
and, instead, each unitholder is required to take into account his or her share
of income, deductions or loss of the company regardless of whether any cash is
distributed. The character of income to each unitholder will be dependent upon
its character to the company. See "FEDERAL INCOME TAX CONSEQUENCES--Taxation of
Unitholders." For the purposes of Section 469 of the Code, the company will be
deemed a publicly traded partnership. Therefore, passive income, gain and losses
from the company may only be applied against other items of income, gain or loss
from the company.
Income of the company may be generated by debt-financed property. Therefore,
distributions of the company may constitute unrelated business taxable income to
tax-exempt unitholders. See "FEDERAL INCOME TAX CONSEQUENCES--Considerations for
Tax-Exempt Unitholders" and "--Taxation of Unitholders."
ACCOUNTING TREATMENT
The transaction will be accounted for using the purchase method of
accounting under generally accepted accounting principles, or GAAP. Cap Source I
will be deemed to be the acquirer of Cap Source II under the purchase method
because its investors will be allocated the largest number of units.
Accordingly, the transaction will result, for financial accounting purposes, in
the effective purchase by Cap Source I of all of the BACs of Cap Source II. As
the surviving entity for financial accounting purposes, the assets and
liabilities of Cap Source I will be recorded by the company at their historical
cost and the assets and liabilities of Cap Source II will be recorded at their
estimated fair values.
RATIO OF EARNINGS TO FIXED CHARGES
The ratio of earnings to fixed charges for Cap Source I and Cap Source II
was not applicable for the five fiscal years ending December 31, 1998, because
Cap Source I and Cap Source II had no fixed charges for these periods.
14
<PAGE>
Chart depicting the organizational structure of Cap Source I before the
Transaction, including the General Partners.
15
<PAGE>
Chart depicting the organizational structure of Cap Source II before the
Transaction, including the General Partners.
16
<PAGE>
The following diagram shows the organizational structure of the company
after the transaction. The total number and percent of units refer to the units
issued in connection with the transaction assuming no notes are issued.
[CHART]
17
<PAGE>
COMPARISON OF BACS AND UNITS
The following is a summary of some of the attributes of your ownership of
BACs and a unitholder's ownership of units of the company following the
transaction. The following summary descriptions are not complete and do not
purport to be complete discussions of these matters. For a complete description
you should read the company's Amended and Restated Agreement of Limited
Partnership and your partnership's partnership agreement. The company's
partnership agreement is included as Appendix C to this prospectus/consent
solicitation statement. You are also encouraged to review carefully the more
detailed comparison regarding the BACs, the units and the notes discussed in
"COMPARISON OF BACS AND UNITS" and elsewhere in this prospectus/consent
solicitation statement for additional comparisons.
<TABLE>
<CAPTION>
CHARACTERISTICS BACS UNITS
- ------------------ ----------------------------------- -----------------------------------
<S> <C> <C>
Liquidity - Illiquid--no established market - Traded on NASDAQ
- Transfers may be limited - Transfers may be limited
Property Portfolio - Static portfolio - Investment flexibility
- Larger portfolio
Duration - Up to 40 to 49 years from - Approximately 40 years
formation
Borrowing - New borrowing generally not - Generally permitted
permitted
Management - Vested in two Cap Source General - Vested in one General Partners
Partner
</TABLE>
18
<PAGE>
RISK FACTORS
THIS PROSPECTUS/CONSENT SOLICITATION STATEMENT AND THE ACCOMPANYING
SUPPLEMENTS INCLUDE "FORWARD LOOKING STATEMENTS" WITHIN THE MEANING OF SECTION
27A OF THE SECURITIES ACT OF 1933 AND SECTION 21E OF THE SECURITIES EXCHANGE ACT
INCLUDING IN PARTICULAR THE STATEMENTS ABOUT THE COMPANY'S PLANS, STRATEGIES AND
PROSPECTS. ALTHOUGH WE BELIEVE THE COMPANY'S PLANS, INTENTIONS AND EXPECTATIONS
REFLECTED IN OR SUGGESTED BY THESE FORWARD LOOKING STATEMENTS ARE REASONABLE, WE
CAN GIVE NO ASSURANCE THAT THESE PLANS, INTENTIONS OR EXPECTATIONS WILL BE
ACHIEVED. WE HAVE INCLUDED BELOW AND ELSEWHERE IN THIS PROSPECTUS/CONSENT
SOLICITATION STATEMENT AND THE ACCOMPANYING SUPPLEMENTS IMPORTANT FACTORS THAT
COULD CAUSE ACTUAL RESULTS TO DIFFER MATERIALLY FROM THE FORWARD LOOKING
STATEMENTS. WE QUALIFY THESE FORWARD LOOKING STATEMENTS BY THE CAUTIONARY
STATEMENTS INCLUDED BELOW, AS WELL AS GENERAL ECONOMIC, BUSINESS AND MARKET
CONDITIONS, CHANGES IN FEDERAL AND LOCAL LAWS AND REGULATIONS, COSTS OR
DIFFICULTIES RELATING TO THE TRANSACTION AND INCREASED COMPETITIVE PRESSURES
THAT COULD HAVE AN ADVERSE AFFECT UPON THE COMPANY.
You should read this entire prospectus/consent solicitation statement,
including all appendices and supplements hereto, and consider carefully the
following factors in evaluating the transaction, the company and its business
before completing the accompanying consent card. The risks and other adverse
factors described below are materially the same for the investors of each of the
partnerships.
RISKS ASSOCIATED WITH THE TRANSACTION
NO PRIOR MARKET FOR THE UNITS; MARKET PRICE MAY DECREASE AFTER THE
TRANSACTION. There has been no public market for the units before transaction.
Even though we plan to list units on NASDAQ, we cannot give any assurance that
an active trading market will develop or be sustained. There is substantial
uncertainty as to the prices at which the units will trade. The possibility
exists that the trading price of the units may be lower than the exchange value
estimated for each unit. The price of the units, which we arbitrarily assigned
for the sole purpose of allocating the units in the transaction, may decrease
after the transaction due to the potentially large number of units that may be
sold immediately by investors who elect to receive units. The market value of
the units could also be substantially affected by numerous factors, for example:
governmental regulatory action; changes in tax laws; the market's perception of
the company and its ability to maintain or increase distribution levels; the
size of the company in terms of assets and market capitalization; the degree to
which the company's general partner's interests are perceived to be aligned with
the interests of the unitholders; the degree to which leverage is used in the
company's capital structure; the historical performance of the partnerships; and
external factors, for example, market interest rates and conditions of the
mortgage investment and stock markets.
NO PRIOR MARKET FOR THE NOTES; PRICE MAY DECREASE AFTER THE
TRANSACTION. The notes will not be listed on a national securities exchange or
quoted on an automated quotation system. Therefore, we do not expect that an
orderly and active trading market for the notes will develop. There is
substantial uncertainty as to the prices at which the notes will trade following
the transaction. Since the notes may be redeemed at any time by the company for
an amount equal to the outstanding principal balance thereon plus accrued
interest, the notes may never trade at a price above their face value.
Noteholders are likely to receive the full face amount of the notes only if they
hold the notes to maturity, which is eight years after the transaction, unless
the notes are redeemed earlier by the company. See "THE NOTES--Notes." There can
be no guarantee, however, that the company will not default on the notes.
CONFLICTS OF INTEREST OF THE CAP SOURCE GENERAL PARTNERS. We initiated and
participated in the structuring of the transaction and have conflicts of
interest with respect to its completion. We will receive economic benefits as a
result of the transaction. We will hold a 1% interest in the company as its
general partner, which continues our 1% interest in the partnerships. We will
receive this 1% interest in the company in exchange for transferring some of our
assets to the company as a capital contribution in connection with the
transaction. In addition, as general partner of the company, we will be entitled
to receive management and other fees from the company following the transaction.
We are a subsidiary of America First
19
<PAGE>
Companies. Further, Michael B. Yanney, who is a member and manager of America
First Companies, will also serve as our Chairman of the Board of Managers
following the transaction. See "THE TRANSACTION--Conflicts of Interest and
Benefits to Insiders."
POSSIBLE LOWER DISTRIBUTIONS. There is no guarantee of the level of the
company's future cash distributions. Regardless of the initial level of
distributions, they could decline in the future to a level at which you would
receive distributions lower than the distributions you currently receive as an
investor in the partnerships. The company may also reinvest cash generated by
the sale of existing assets or from operations to acquire additional assets,
potentially causing cash distributions to be lower than the distributions made
by the partnerships in some cases.
LACK OF OPERATING HISTORY. The company is newly organized and has no
operating history. The company's results of operations, financial condition and
liquidity depend, to a material extent, on the ability of the company to
successfully carry out its business plan. There can be no assurance that any of
the company's business objectives or planned future activities will be
successful.
NO DISSENTERS' RIGHTS. If you vote "NO" against the transaction, you will
have no appraisal, dissenters' or similar rights under Delaware law in
connection with the transaction, and no similar rights will be afforded to you
by the partnerships or the company. Therefore, you will not be entitled to
receive cash payment for the fair value of your BACs if you do not vote in favor
of the transaction and the transaction is approved and completed.
POSSIBLE ALTERNATIVES TO THE TRANSACTION WILL NOT BE PURSUED. Alternatives
to the transaction include (1) continued management of the partnerships as
currently structured, (2) separately listing the BACs of each partnership on a
national securities exchange or automated quotation system; (3) merging the
partnerships into a single corporation and listing the common stock on a
national securities exchange or automated quotation system; (4) merging the
partnerships together to form a single REIT; (5) qualifying each partnership as
an individual REIT; and (6) liquidating the partnerships through entire
portfolio sales or sales of individual properties. While the completion of the
transaction does not preclude the company from electing REIT status in the
future, it does effectively preclude the pursuit of the other alternatives
listed above.
A MAJORITY IN INTEREST WILL BIND ALL INVESTORS IN EACH PARTNERSHIP. Under
the partnership agreements and the requirements of the Delaware Revised Uniform
Limited Partnership Act, or the Delaware Partnership Law, a partnership may
participate in the transaction if its general partners and a majority in
interest of its investors consent to the transaction. If your partnership
approves the transaction, you will be bound by the decision of the majority,
even if you vote against the transaction or abstain from voting.
NOTES ARE UNSECURED OBLIGATIONS OF THE COMPANY. The notes, which will be
prepayable at any time, are junior unsecured obligations of the company. They
will be, as a practical matter, junior to all other debt, other than trade
payables, of the company. The notes will bear interest at a variable rate that
may be lower than rates on other variable rate debt instruments that may be
perceived as having comparable or lower risks than the notes. In addition, there
is no guarantee that the company will not default on the notes. See "THE NOTES."
CONTINGENT OR UNDISCLOSED LIABILITIES. Under the merger agreement, the
company will, as of the effective date of the transaction, succeed to all assets
and liabilities of the partnerships. Each partnership will deliver to the
company its financial statements disclosing all known material liabilities and
reserves, if any, set aside for contingent liabilities as of the effective date.
We will represent and warrant that, to the best of our knowledge, the financial
statements fairly present the financial position of each partnership, as if
there is no liability or obligation to be shown or reserved against in the
financial statements based upon generally accepted accounting principles. The
accuracy and completeness of these representations are conditions to the closing
of the transaction and if, on or before the effective date, these
representations and warranties
20
<PAGE>
are shown to be inaccurate, there may be adjustments to the consideration paid
by the company or the company may elect not to proceed to close the transaction.
INVESTORS WHO ELECT TO RECEIVE NOTES COULD RECEIVE UNITS. If dissenting
investors elect to receive notes in excess of the maximum note limitation, the
transaction will not be completed. If this does not occur, and the total amount
of notes allocable to all investors electing to receive notes would exceed the
maximum note limitation, then notes will be allocated among those who elected to
receive notes, based on how they voted with respect to the transaction, in the
following order of priority: first to dissenting investors who elected to
receive notes and then, on a pro rata basis, to investors who mark "ABSTAIN" on
their consent card or vote "YES" in favor of the transaction. Thus, it is
possible that a consenting investor who elects to receive notes may receive
units instead of notes. To be assured of receiving notes, you must vote "NO"
with respect to the transaction and elect to receive notes. See "THE
NOTES--Allocation of Notes."
RISKS ASSOCIATED WITH THE COMPANY'S BUSINESS
LEVERAGING STRATEGY. The company will employ a strategy to increase the
size of its real estate asset portfolio by bank borrowing or other credit
arrangements used to finance the acquisition of real estate investments.
Therefore, these assets may not be available to you in the event of the
liquidation of the company except to the extent that the market value of the
assets exceeds the amounts due to creditors. The company's limited partnership
agreement does not limit the amount of debt the company can incur.
Substantial leverage incurred by the company may involve the following
risks: (1) the company could lose its interests in assets given as collateral
for secured borrowing if the required principal and interest payments are not
made when due; (2) the company's cash flow from operations may not be sufficient
to retire these obligations as they mature, making it necessary for the company
to either refinance these obligations before maturity or to raise additional
debt and/or equity for the company or dispose of some of the company's assets to
retire the obligations, which could have an adverse effect on the amount of
funds available for distributions to you; (3) no assurance can be given as to
the availability, or the terms and conditions, of any financing needed by the
company to refinance borrowing; and (4) debt incurred by the company may be at
interest rates that adjust based on prevailing market interest rates, and an
increase in the prevailing market interest rates would adversely affect the
company's earnings and could reduce the amount of funds available for
distributions to you.
NO ASSURANCE OF SUCCESSFUL IMPLEMENTATION OF NEW BUSINESS PLAN. The
profitability of the company depends on the successful development and
implementation of the company's business plan. To achieve its objective, the
company will need to develop effective investment and operating policies and
strategies in connection with the implementation of its business plan. There can
be no assurance that the company will be successful in developing the necessary
investment and operating policies or that it will be able to effectively
implement its business plan.
REAL ESTATE INVESTMENTS. The ultimate performance of the company's proposed
investments under its new business plan will depend upon the varying degrees of
risk generally associated with the ownership and operation of the underlying
real property. The ultimate value of the company's security in the underlying
real property depends upon the owners' ability to operate the real property in a
manner sufficient to maintain or increase revenues in excess of operating
expenses and debt service. Revenues may be adversely affected by adverse changes
in national economic conditions, adverse changes in local market conditions due
to changes in general or local economic conditions and neighborhood
characteristics, competition from other properties offering the same or similar
services, changes in interest rates and in the availability, cost and terms of
mortgage funds, the impact of present or future environmental legislation and
compliance with environmental laws, the ongoing need for capital improvements
(particularly in older structures), changes in real estate tax rates and other
operating expenses, adverse changes in governmental rules and fiscal policies,
civil unrest, acts of God, including earthquakes, hurricanes and other natural
disasters (which may result in uninsured losses), acts of war, adverse changes
in zoning laws, and other
21
<PAGE>
factors which are beyond the control of the real property owners and the
company. In the event that any of the properties underlying the company's
investments experience any of the foregoing events or occurrences, the value of
and return on these investments would be negatively impacted.
DEPENDENCE ON AVAILABLE INVESTMENTS. The results of the company's future
operations under the new business plan will be dependent upon the availability
of, as well as our ability to identify, complete and realize, real estate
investment opportunities. In general, the availability of desirable investment
opportunities and the results of the company's operations will be affected by
the level and volatility of interest rates, by conditions in the financial
markets, and general economic conditions. No assurances can be given that the
company will be successful in finding and then acquiring economically desirable
assets or that the assets, once acquired, will maintain their economic
desirability.
COMPETITION. The company is engaged in a highly competitive business. The
company will be competing for investments with many recent entrants into the
business, including numerous public and private real estate investment vehicles,
including financial institutions like mortgage banks, pension funds and REITs,
and other institutional investors, as well as individuals. In addition, the
company's competitors may seek to establish relationships with the financial
institutions and other firms from whom the company intends to purchase assets.
Many of the company's anticipated competitors are significantly larger than the
company, have established operating histories and procedures, may have access to
greater capital and other resources, may have management personnel with more
experience than the officers of the company, and may have other advantages over
the company in conducting businesses and providing services.
ILLIQUIDITY OF REAL ESTATE. Real estate investments are relatively
illiquid. Illiquidity limits the ability of the company to vary its portfolio of
proposed and current investments in response to changes in economic and other
conditions. Illiquidity may result from the absence of an established market for
investments as well as the legal or contractual restrictions on their resale by
the company. In addition, illiquidity may result from the decline in value of a
property securing an investment by the company. No assurances can be given that
the fair market value of any of the real property serving as security will not
decrease in the future leaving the company's investment under-collateralized or
not collateralized at all. It would be difficult to sell an under-collateralized
investment, and if the company needed to do so, assuming it were even able to do
so given its typically subordinated lien position, it is likely that the
investment would be sold at a loss.
UNSPECIFIED ACQUISITIONS. Any decision to pursue real estate acquisition
opportunities will be in our discretion as the company's general partners and
may be completed without prior notice to or approval from you. In which case,
you will be relying on us to assess the relative benefits and risks associated
with any acquisition.
TITLE DEFECTS. At the time the properties were developed or acquired by the
operating partnerships, each of the operating partnerships obtained title
insurance policies under which a successor in interest by operation of law to
the operating partnerships will become the insured under the policies. We are
generally not aware of any exceptions to title that may have been created by
third parties during the operating partnerships' ownership of the properties. We
have no actual knowledge of any actions or liens of third parties which would
have a material adverse effect upon the transaction or the financial condition
of the company.
ENVIRONMENTAL LAWS MAY IMPOSE ADDITIONAL LIABILITY. Under various federal,
state, and local environmental laws, ordinances, and regulations, a current or
previous owner or operator of real property may be liable for the costs of
removal or remediation of hazardous or toxic substances on, under, or in the
property. These laws often impose liability whether or not the owner or operator
knew of, or was responsible for, the presence of the hazardous or toxic
substances. In addition, the presence of hazardous or toxic substances, or the
failure to properly remediate the property, may adversely affect the owner's
ability to borrow using the real property as collateral. There are environmental
laws that impose liability for release of asbestos-containing materials, or ACMs
into the air, and third parties may seek recovery
22
<PAGE>
from owners or operators of real properties for personal injury associated with
ACMs. In connection with the ownership, direct or indirect, operation,
management, and development of real properties, the company may be liable for
removal or remediation costs, as well as other potential costs which could
relate to the hazardous or toxic substances or ACMs, including governmental
fines and injuries to persons and property.
REGISTRATION UNDER THE INVESTMENT COMPANY ACT. The company at all times
intends to conduct its business so as not to become regulated as an investment
company under the Investment Company Act of 1940. The Investment Company Act
exempts entities, among other possible exemptions, that are "primarily engaged
in the business of purchasing or otherwise acquiring mortgages and other liens
on and interests in real estate," also referred to as qualifying interests.
Under current interpretation of the staff of the Commission, to quality for this
exemption, the company must maintain at least 55% of its assets directly in
qualifying interests. If the company fails to qualify for exemption from
registration as an investment company, its use of leverage would be
substantially reduced and it would be unable to conduct its business as
described in this prospectus/consent solicitation statement and could have a
material adverse effect on the company.
POTENTIAL LIABILITY UNDER THE AMERICANS WITH DISABILITIES ACT. All of the
properties were required to be in compliance with the Americans With
Disabilities Act, or the ADA. The ADA generally requires that places of public
accommodation be made accessible to people with disabilities to the extent
readily achievable. Compliance with the ADA requirements could require removal
of access barriers, and non-compliance could result in imposition of fines by
the federal government, an award of damages to private litigants and/or a court
order to remove access barriers. Because of the limited history of the ADA, the
impact of its application to the company's properties, including the extent and
timing of required renovations, is uncertain. Consequently, the company will be
required to cover the costs associated with compliance, if any, with funds from
operations, established reserves or bank borrowings.
REGULATORY AND LEGISLATIVE RISKS
The company's business is governed by numerous federal, state and consumer
laws and regulations, which among other things: (1) require the company to
obtain and maintain licenses, certifications, registrations and qualifications;
(2) require the company to post a bond in some states; (3) limit the interest
rates, fees and other charges the company is allowed to charge; (4) limit or
prescribe other terms and conditions of the company's contracts; and (5) require
the company to provide specified disclosures.
The company's business is regulated, supervised and licensed by the federal,
state and local government authorities and must comply with various laws and
judicial administrative decisions imposing requirements and restrictions on a
substantial portion of its operations. Failure to comply with these requirements
can cause the termination or suspension of rights of recision for mortgage
loans, class action law suits and administrative enforcement actions. Although
the company believes that it has systems and procedures to facilitate compliance
with these requirements and believes that it is in compliance with all material
aspects with applicable local, state and federal laws, rules and regulations,
there can be no assurance that more restrictive laws, regulations or rules will
not be adopted in the future that could make compliance more difficult or
expensive.
23
<PAGE>
BENEFITS OF, AND BACKGROUND AND REASONS FOR, THE TRANSACTION
HISTORY OF THE PARTNERSHIPS
FORMATION. Cap Source I was formed in 1985, and Cap Source II was formed in
1986. Both partnerships were formed to make debt and equity investments in
multifamily rental complexes (the "Complexes"). The partnerships' combined debt
and equity investments are intended to provide investors with regular
distribution of cash derived from principal and interest payments on insured
mortgages, as well as the benefits of ownership of the Complexes, including any
tax losses and income from operations.
CAP SOURCE I GENERAL PARTNERS' MANAGEMENT OF CAP SOURCE I. Cap Source I's
original general partners were TIG Insured Mortgage Equities Inc. (the "TIG
General Partner") and Hutton Insured Mortgage Equities Inc. (the "Hutton General
Partner"). All of the issued and outstanding stock of the TIG General Partner
was purchased by TIG I Holdings, Inc. ("TIG Holdings") pursuant to a stock
purchase agreement dated June 10, 1991. Thereafter, TIG Holdings merged into the
TIG General Partner with the TIG General Partner being the surviving
corporation. The TIG General Partner subsequently changed its name to America
First Capital Source I Inc. All of the issued and outstanding capital stock of
America First Capital Source I Inc. was transferred to America First Companies
L.L.C. ("America First Companies") as of March 1, 1994. America First Capital
Source I Inc. was subsequently converted from a Delaware corporation to a
Delaware limited liability company and changed its name to America First Capital
Source I L.L.C.
Lehman Brothers, Inc. ("Lehman"), the successor to E.F. Hutton & Company
Inc., acquired all of the interests in the Hutton General Partner. The Hutton
General Partner changed its name to Insured Mortgage Equities Inc. Subsequently,
on May 16, 1997, Lehman sold all of the shares of capital stock of Insured
Mortgage Equities Inc. to America First Companies.
Thus, Insured Mortgage Equities Inc. and America First Capital Source I
L.L.C. are the current general partners of Cap Source I (the "Cap Source I
General Partners"). The Cap Source I General Partners are both wholly owned by
America First Companies.
Cap Source I's limited partnership agreement provides that the Cap Source I
General Partners manage Cap Source I and are entitled to receive management fees
and reimbursements from Cap Source I and 1% of the distributions from Cap Source
I.
CAP SOURCE II GENERAL PARTNERS' MANAGEMENT OF CAP SOURCE II. Cap Source
II's original general partners were TIG Insured Mortgage Equities II Inc. (the
"TIG II General Partner") and Hutton Insured Mortgage Equities II L.P. (the
"Hutton II General Partner"). All of the issued and outstanding stock of the TIG
II General Partner was purchased by TIG II Holdings, Inc. ("TIG II Holdings")
pursuant to a stock purchase agreement dated June 10, 1991. Thereafter, TIG II
Holdings merged into the TIG II General Partner with the TIG II General Partner
being the surviving corporation. The TIG II General Partner subsequently changed
its name to America First Capital Source II Inc. All of the issued and
outstanding capital stock of America First Capital Source II Inc. was
transferred to America First Companies as of March 1, 1994. America First
Capital Source II Inc. was subsequently converted from a Delaware corporation to
a Delaware limited liability company and changed its name to America First
Capital Source II L.L.C.
The sole general partner of the Hutton II General Partner was CS Housing II
Inc. Lehman, the successor to E.F. Hutton & Company Inc., acquired all of the
interests in CS Housing II Inc. The Hutton II General Partner changed its name
to Insured Mortgage Equities II L.P. Subsequently, on May 16, 1997, Lehman sold
all of the shares of capital stock of CS Housing II Inc. to America First
Companies.
Thus, Insured Mortgage Equities II L.P. and America First Capital Source II
L.L.C. are the current general partners of Cap Source II (the "Cap Source II
General Partners" and together with the Cap Source I General Partners the "Cap
Source General Partners"). The Cap Source II General Partners are both
controlled by America First Companies. America First Companies owns 100% of
America First
24
<PAGE>
Capital Source II L.L.C. and owns 100% of CS Housing II Inc., the sole general
partner of Insured Mortgage Equities II L.P.
Cap Source II's partnership agreement provides that the Cap Source II
General Partners manage Cap Source II and are entitled to receive management
fees and reimbursements from Cap Source II and 1% of the distributions from Cap
Source II.
HISTORICAL INFORMATION AND ACHIEVEMENT OF OBJECTIVES. Cap Source I has paid
quarterly distributions at the same level since March 31, 1993. Cap Source II
paid distributions at the same level from June 30, 1993, until August of 1998.
As of March 31, 1999, Cap Source I has distributed to its investors an aggregate
of approximately $57,906,945, and Cap Source II has distributed to its investors
an aggregate of approximately $58,266,509. Cap Source II was making a portion of
its distributions to investors from reserves. As a result, Cap Source II's
reserves have been substantially decreased. Therefore, the Cap Source II General
Partners reduced the monthly distribution rate to $.45 per unit on an annual
basis, beginning with the distribution for the month of August 1998, which
distribution was paid in October 1998.
The table below provides a comparison of the capital raised and
distributions made by the partnerships as of March 31, 1999:
HISTORICAL INFORMATION CONCERNING THE PARTNERSHIPS
<TABLE>
<CAPTION>
DATE OF
DISTRIBUTIONS DISTRIBUTIONS TO LAST
TO INVESTORS INVESTORS IN ADMISSION
TOTAL INVESTOR THROUGH MOST OF ORIGINAL
PARTNERSHIP CAPITAL RAISED 3/31/99 RECENT QUARTER INVESTORS
- ---------------------------------------------- -------------- -------------- ---------------- -----------
<S> <C> <C> <C> <C>
Cap Source I.................................. $ 67,484,440 $ 57,906,945 $ 851,991 5/13/86
Cap Source II................................. 62,372,621(1) 58,266,509 451,249 1/04/88
-------------- -------------- ----------------
Total....................................... $ 129,857,061 $ 116,173,454 $ 1,303,240
-------------- -------------- ----------------
-------------- -------------- ----------------
</TABLE>
- ---------------
(1) Total capital contributions for Cap Source II were $80,222,020, of which
$62,372,621 was invested in accordance with the partnership's original
investment objectives, and the remaining $17,849,399 was returned to
investors as a return of capital.
To the best knowledge of the Cap Source General Partners, 100% of the net
proceeds of the original offerings of Cap Source I was invested in a manner
consistent with the partnership's original investment objectives. To the best
knowledge of the Cap Source General Partners, 77.75% of the net proceeds of the
original offerings of Cap Source II was invested in a manner consistent with the
partnership's original investment objectives.
The following information shows the original objectives of the partnerships
and the extent to which the Cap Source General Partners believe the objectives
have been met.
CAP SOURCE I. The original investment objectives of Cap Source I are to:
(a) achieve long-term capital appreciation through increases in the value of Cap
Source I's equity investments in the Cap Source I Operating Partnerships (as
defined below); (b) provide quarterly cash distributions to Cap Source I
investors; (c) provide Cap Source I investors with federal income tax deductions
that may offset, in part, taxable cash distributions subsequent to two years
after the initial closing on Cap Source I BACs purchased by Cap Source I
investors; (d) provide the potential for increases in cash distributions from
income from the Cap Source I Operating Partnerships and sale of the Complexes;
and (e) preserve and protect Cap Source I's capital. Cap Source I originally
intended to qualify its BACs for quotation on NASDAQ within 24 to 36 months
after it commenced operations to make the BACs freely transferable. However, at
a Special Meeting of investors on May 17, 1990, an amendment to the Cap Source I
partnership agreement was approved to only allow limited transferability of BACs
to preserve the tax status of the partnership as a partnership under the Code
and avoid being designated as a "publicly traded partnership." Based upon the
original capital raised from the Cap Source I investors of $67,484,440,
distributions of $57,906,945 as of
25
<PAGE>
March 31, 1999, and a net asset value of $47,569,968, the Cap Source I General
Partners believe that objectives (b), (c) and (e) above were substantially met
and objectives (a) and (d) were not met.
The Cap Source I Operating Partnerships are Bluff Ridge Associates Limited
Partnership, Waters Edge Limited Partnership, Interstate Limited Partnership
(also known as Highland Park), Cypress Landings II, Ltd. (also known as Misty
Springs), Oyster Cove Limited Partnership (also known as Waterman's Crossing),
Fox Hollow, Ltd. and Ponds at Georgetown Limited Partnership (collectively the
"Cap Source I Operating Partnerships").
CAP SOURCE II. The original investment objectives of Cap Source II are to:
(a) preserve and protect Cap Source II's capital by investing in federally
insured mortgages and Cap Source II Operating Partnership (as defined below)
interests; (b) provide quarterly cash distributions to Cap Source II investors
from income from federally insured mortgages; and (c) achieve increasing current
income and long-term capital appreciation through increases in the income from
Cap Source II's equity investments in the Cap Source II Operating Partnerships.
Originally, there was a fourth investment objective which was to make the Cap
Source II BACs freely transferable 24 to 36 months after the partnership
commenced operations by qualifying the BACs for quotation on NASDAQ. However, at
a Special Meeting of Cap Source II investors on December 17, 1990, amendments to
the Cap Source II partnership agreement were approved to allow limited
transferability of BACs to preserve the tax status of the partnership as a
partnership under the Code and avoid being designated as a "publicly traded
partnership." Based upon the original capital raised from the Cap Source II
investors of $62,372,621 (net of capital returned), distributions of $58,266,509
as of March 31, 1999, and a net asset value of $30,872,167 the Cap Source II
General Partners believe that objective (a) and (b) above were substantially met
and that objective (c) above was not met.
The Cap Source II Operating Partnerships are Crane's Landing Partners, Ltd.,
Delta Crossing Limited Partnership, Centrum Monticello Limited Partnership and
Ponds at Georgetown Limited Partnership (collectively the "Cap Source II
Operating Partnerships," and together with the Cap Source I Operating
Partnerships, the "Operating Partnerships").
The following table shows, with respect to each partnership, the age of the
partnership relative to the original term of the partnership as stated in the
applicable partnership agreement:
LEGAL LIFE OF THE PARTNERSHIPS
<TABLE>
<CAPTION>
COMMENCED LEGAL ORIGINAL REMAINING
OPERATIONS TERMINATION DURATION LIFE
PARTNERSHIP (MO./YR.) (MO./YR.) (YEARS) (YEARS)
- ---------------------------------------------------------------- --------------- ------------- ------------- ---------------
<S> <C> <C> <C> <C>
Cap Source I.................................................... 8/85 12/30 45 31
Cap Source II................................................... 8/86 12/35 49 36
</TABLE>
THE DECISION TO PURSUE THE TRANSACTION
As the Cap Source General Partners reviewed the original investment
objectives of the partnerships and began to explore options to increase the
value of the investments made by investors in the partnerships, the Cap Source
General Partners concluded that the partnerships had failed to achieve two of
their original investment objectives, namely liquidity and growth.
The Cap Source General Partners have been concerned about the lack of
meaningful liquidity available for investors in the partnerships. The lack of a
formal secondary market for the BACs limits the ability of investors to increase
or decrease their investment in the partnerships in response to changing
personal circumstances or the performance of the partnerships. This concern has
recently increased as unrelated third parties have made tender offers and other
offers to purchase the BACs at prices which the Cap Source General Partners
believe do not fairly represent the underlying value of the BACs. Liquidity was
further decreased by the suspension of trading of partnership interests on the
Chicago Partnership
26
<PAGE>
Board by action of the Commission. The Cap Source General Partners concluded
that it was in the best interest of investors to develop a transaction which
would provide substantially better liquidity and will permit investors the
opportunity to increase or decrease their individual investment at prices more
directly related to their underlying value.
The operations of the partnerships were adversely affected in their early
years by weaknesses in the real estate markets throughout the United States.
This adversely impacted the operating results of the partnerships' real estate
investments and led to decreases in distributions to investors. However, in
recent years, the real estate markets nationwide have generally improved, in
some cases significantly, and the Cap Source General Partners have been
concerned with the failure of those national trends to translate into improved
operating results for the partnerships, and hence increased distributions to
their investors. In analyzing this situation, the Cap Source General Partners
decided that there were two primary reasons for the lack of improvement in the
operations of the partnerships. First, the partnerships' portfolios have been
fixed since original acquisition. Therefore, the partnerships have been unable
to acquire new investments irrespective of potential investment return, have
been unable to trade poorly performing assets for assets with better profit
potential, and have been unable to increase the overall size of their portfolios
to take advantage of improving markets. Second, the majority of the
partnerships' assets are fixed income GNMA securities (the "GNMA Certificates")
or FHA insured loans (the "FHA Loans"), which by their nature do not participate
in improvements in the real estate markets. Consequently, the Cap Source General
Partners decided that the best way to improve total returns to the investors was
to develop a transaction that would broaden the investment limitations of the
current partnerships so as to allow more flexibility in the type of assets
acquired and their investment management and to allow overall portfolio growth
as market conditions warrant.
The Cap Source General Partners evaluated a number of alternative
transactions to achieve these objectives. Each of these alternatives appeared to
have some advantages and disadvantages, and might be in the best interest of
some investors but not others. The Cap Source General Partners consequently
concluded that on balance the proposed transaction was the best alternative for
the investors of each partnership and as a whole.
PREPARATION FOR AND CHRONOLOGY OF EVENTS LEADING TO THE TRANSACTION
The events leading to the transaction may be divided into two general
phases, which overlap somewhat: (1) general investigation and consideration of
alternate transactions; and (2) events directly leading to the structuring and
implementation of the transaction.
GENERAL INVESTIGATION AND CONSIDERATION OF ALTERNATE TRANSACTIONS. Since
assuming management of each of the partnerships, the Cap Source General Partners
have been evaluating each partnership's business prospects, especially with
respect to the feasibility of providing liquidity to the investors and
increasing distributions to investors. As the Cap Source General Partners
reviewed the original investment objectives of the partnerships and began to
explore options, the Cap Source General Partners concluded that the partnerships
had failed to achieve two of their original investment objectives, which were
liquidity and growth. The Cap Source General Partners thus began to explore
options like the transaction and alternatives to the transaction. See "--The
Decision to Pursue the Transaction" above.
Beginning in September 1997, representatives of the Cap Source General
Partners contacted legal counsel, investment bankers and appraisal firms to
discuss options available to the partnerships. The Cap Source General Partners
contacted the law firms of Kutak Rock in Denver and Skadden, Arps, Slate,
Meagher & Flom in New York, New York. In addition, the Cap Source General
Partners contacted Sutro & Co. in Los Angeles and Robert A. Stanger & Co., Inc.
in New Jersey, Valuation Research in New York and E&Y Kenneth Leventhal Real
Estate Group regarding valuations and fairness opinions for the transaction.
27
<PAGE>
Originally, a merger of Cap Source I and Cap Source II with and into a newly
organized corporation, which would have been subject to federal income tax at
customary corporate tax rates, was selected as the most favorable alternative,
in light of current market conditions, considered by the Cap Source General
Partners. This structure was subsequently abandoned by the Cap Source General
Partners. See "--Restructuring of the Transaction to a Publicly Traded
Partnership" below. In connection with this proposed corporate merger, the Cap
Source General Partners formed a special committee of two of the outside
independent directors of America First Companies, the entity that controls the
Cap Source General Partners, to represent the investors in the structuring and
negotiation of the terms of the proposed corporate merger. From November 1997,
to November 1998, the special committee met on numerous occasions and had
numerous telephone conferences with financial and legal advisors to the
committee, as well as other representatives of the Cap Source General Partners
and its counsel regarding the proposed corporate merger. Upon conclusion of the
special committee's review of the proposed corporate merger, it determined that
the proposed corporate merger was fair as a whole to, and in the best interests
of, the investors, and recommended that the Cap Source General Partners and the
investors approve the proposed corporate merger.
A registration statement relating to the proposed merger of the partnerships
into a newly organized corporation was originally filed on May 7, 1998, on Form
S-4 with the Commission, and was subsequently amended on July 21, 1998, and
November 3, 1998.
In November 1998, the Cap Source General Partners determined that the
proposed corporate merger was no longer in the best interests of investors and
decided to abandon the proposed corporate merger. See "--Restructuring of the
Transaction to a Publicly Traded Partnership."
STRUCTURING AND IMPLEMENTATION OF THE TRANSACTION
On January 15, 1999, representatives of the Cap Source General Partners met
with representatives of Kutak Rock to discuss and review preliminary issues
related to the transaction. At the time, various alternatives and structures for
the transaction were discussed.
On January 22, 1999, the transaction was selected as the most favorable
alternative, in light of current market conditions, considered by the Cap Source
General Partners. See "--Reasons for, and Benefits of, the Transaction" below.
In January, 1999, Valuation Research was retained to update the Appraisals
it had provided to the partnerships relating to the value of the real estate
owned by the Operating Partnerships as of December 31, 1997.
On April 14 and 15, 1999, representatives of the Cap Source General Partners
met with representatives of Kutak Rock to discuss various issues related to the
transaction. At this time, the Cap Source General Partners concluded that the
expense of forming a special committee to review the transaction outweighed any
benefits to the investors that might result from independent representation. The
Cap Source General Partners believed that a special committee was not necessary
because they believed that (1) there are no material differences with respect to
the assets of the partnerships and the valuation methodology applied to the
assets was consistent between the two partnerships, (2) the method of
determining the exchange values for the partnerships and the allocation of the
units and the notes in the transaction are the same as the method used in the
previously proposed merger, which method the special committee determined was
fair to the investors and as a whole, and (3) the revised structure and
investment objectives for the company as the successor to the partnerships in
the transaction are substantially similar to the current investment objectives
and structure of the partnerships.
On July 21, 1999, the company filed with the Commission Pre-Effective
Amendment No. 3 to the Registration Statement on Form S-4 relating to the
transaction.
28
<PAGE>
RESTRUCTURING OF THE TRANSACTION TO A PUBLICLY TRADED PARTNERSHIP
Before pursuing the transaction, the Cap Source General Partners had
structured a merger of Cap Source I and Cap Source II with and into a newly
organized corporation, with the corporation being the surviving entity, as is
reflected in the company's original filings with the Commission. The common
stock of the corporation was to be listed on a national securities exchange
after completion of the proposed corporate merger. Under the proposed corporate
merger, the corporation was to make opportunistic real estate investments with a
focus on investments with high growth potential. The corporation planned to use
high amounts of leverage and invest in real estate assets that had the potential
to generate higher than average returns. These real estate assets would have
also carried with them a significant increase in risk when compared to the
planned investment objectives of the company.
The Cap Source General Partners believe there was, and continues to be, a
fundamental change in the capital markets for real estate investments since the
structuring of the proposed corporate merger. The Cap Source General Partners
believe the current capital markets for real estate investments have changed
their focus to place greater importance on high asset qualities and low amounts
of risk. Due to this change, the proposed corporate merger was abandoned. The
Cap Source General Partners then began considering alternatives to the proposed
corporate merger. See "--Alternatives Considered." The Cap Source General
Partners concluded that the transaction is the best alternative for investors.
The Cap Source General Partners believe that the investment objectives of the
company are better suited to the current capital markets and are not a
significant change from the original investment objectives of the partnerships.
The investment objectives of both the company and the partnerships are to invest
primarily in multifamily residential properties. In addition, the Cap Source
General Partners believe that continuing the businesses of the partnerships as a
single publicly traded partnership offers more advantages to the investors. See
"--Reasons for, and Benefits of, the Transaction" below.
ALTERNATIVES CONSIDERED
Before deciding to recommend the transaction, the Cap Source General
Partners considered alternatives to the proposed transaction in an effort to
achieve maximum investor return and substantially enhance liquidity. In addition
to the proposed transaction, the Cap Source General Partners considered the
following options: (1) continued management of the partnerships as currently
structured, (2) listing the BACs of each partnership on a national securities
exchange or automated quotation system; (3) merging the partnerships into a
single corporation and listing the resulting common stock on a national
securities exchange or automated quotation system; (4) merging the partnerships
together to form a single REIT; (5) qualifying each partnership as an individual
REIT; and (6) liquidating the partnerships through entire portfolio sales or
sales of individual properties. For a quantitative comparison of the
alternatives to the transaction, see "FAIRNESS."
CONTINUATION OF PARTNERSHIPS. An alternative to the transaction would be to
continue each of the partnerships under its own existing business plan. If the
partnerships were to continue in their current form, they would remain separate
legal entities governed by their respective partnership agreements, with their
own assets and liabilities. Investors in favor of this option should consider
voting against the transaction. Continuing the partnerships without change has a
number of benefits, including the following:
- each partnership would remain a separate entity, with its own assets,
liabilities and original investment objectives, consistent with the
guidelines, restrictions and safeguards in its partnership agreement;
- there would be no change in the nature of the investors' investments, and
the partnership's performance would not be affected by the performance of
the other partnership, including the investment objectives, interests and
intentions of the investors in the other partnership;
- the partnerships would not incur any expenses in connection with the
transaction; and
29
<PAGE>
- the partnerships would avoid the risks inherent in the transaction.
Maintaining the partnerships as separate entities may have the following
potentially negative results when compared with the benefits the Cap Source
General Partners believe may be derived from the transaction:
- illiquidity of investment on a current basis due to the lack of a large
and established secondary market;
- inability to raise new capital or make new investments, thus limiting
growth of the partnerships' capital to that inherent in the existing
partnership investments;
- no flexibility or control in actively managing the portfolio in response
to changing conditions in real estate markets;
- the declining value of the mortgage investments due to amortization of
principal and subsequent distributions of these amounts; and
- duplication among the partnerships in reporting, filing and other costly
administrative services.
LISTING PARTNERSHIP BACS. Another alternative to the transaction would be
to list the BACs of each partnership on a national securities exchange or on an
automated quotation system in an attempt to increase the liquidity of the BACs.
The Cap Source General Partners believe that this alternative would result in
substantial duplication of general and administrative expenses. Furthermore, the
Cap Source General Partners believe that pursuing this alternative would
substantially diminish the partnerships' ability to grow compared to the
transaction. As a publicly traded company with a base of assets greater than a
single partnership, the company expects to be able to issue additional debt and
equity securities with greater ease and on more attractive terms than would be
available to a partnership individually. For the reasons described above, as
well as for some of the reasons above with respect to continuation of the
partnerships, the Cap Source General Partners concluded that the potential
negatives of this alternative outweigh any advantages it may have over the
transaction.
MERGER RESULTING IN A SINGLE TAXABLE CORPORATION. Instead of participating
in the transaction, the partnerships could be merged together to form a single
corporation with the common stock of the new corporation listed on a national
securities exchange or quoted on an automated quotation system. The Cap Source
General Partners originally structured a transaction involving the merger of the
partnerships into a single corporation that would have been subject to federal
income tax at customary corporate tax rates, but decided to abandon that merger
due to changes in the capital markets for real estate investments. See
"--Restructuring of the Transaction to a Publicly Traded Partnership." The major
disadvantage of this alternative is that the company would have been taxed as a
corporation. A corporation is taxed both at the corporate level on the
corporation's income, and again at the investor level where, in many cases,
dividends are taxed as income to the investor. On the other hand, distributions
from a partnership are only taxed once at the investor level, with some
qualifications. See "FEDERAL INCOME TAX CONSEQUENCES--Taxation of the Company
After the Transaction" and "--Taxation of Unitholders." To overcome this
disadvantage, a corporation would have to generate a much higher return on
investment than would a limited partnership, which could only be achieved by
making investments that have higher risk. The Cap Source General Partners
believe that the current real estate market is emphasizing higher asset
qualities and safer investments. Therefore, the Cap Source General Partners
believe this alternative would be less advantageous to the investors than the
transaction.
SINGLE REIT. The Cap Source General Partners considered merging the two
partnerships into a single entity which would elect REIT status but determined
that it was a less attractive alternative to the transaction. The Cap Source
General Partners concluded that the resulting REIT would be too small in terms
of total capitalization to compete with existing REITs having similar investment
objectives. Furthermore, due to restrictions in the Code relating to
distributions of net taxable income (which would require
30
<PAGE>
the company to distribute each year at least 95% of its net taxable income,
excluding capital gains) and limitations on sales of assets, as a REIT the
company would not be able to pursue the business plan described in this
prospectus/consent solicitation statement which involves the ability to retain
cash flow for investment purposes and to sell assets regularly after the
achievement of goals set for those assets.
INDIVIDUAL REITS. The Cap Source General Partners considered converting
each partnership into an individual REIT, but determined that it was a less
attractive alternative than the transaction for the same reasons discussed above
for listing partnership BACs and the single REIT alternatives. The issues cited
above as reasons for the lack of attractiveness of a new company as a single
REIT would be magnified when applied to each partnership as an individual REIT
due to the significantly smaller size of each partnership as a stand alone
entity.
LIQUIDATION. Although the investment objectives and policies of the
partnerships do not contemplate the commencement of the liquidation of the
partnerships at any specific time, the Cap Source General Partners assessed the
possibility of commencing the orderly liquidation of the partnerships and
distributing the net proceeds from the liquidation to the investors and the Cap
Source General Partners. The Cap Source General Partners concluded that
liquidation would be costly and time consuming and would not be as beneficial to
investors as the transaction.
The Cap Source General Partners determined that an attempt to liquidate the
partnerships' investments at the current time would likely result in the
investors not achieving the full potential benefits from an investment in the
partnerships. They concluded that liquidation would not be the best option to
realize the optimum return on an investment in the partnerships because although
the partnerships' investments in mortgage loans could likely be sold at or
slightly above their face value in a short period of time, most of the
partnerships' equity positions in the Operating Partnerships are not attractive
to buyers. Liquidation of most of the equity positions may require either (1) a
protracted period of negotiations with some of the various general partners of
the Operating Partnerships which could potentially create both substantial
transaction costs and additional costs to the partnerships of continuing
operations during the negotiation period, and/or (2) the partnerships' accepting
substantial discounts in value. In addition, there may be additional costs
associated with representations, warranties, and indemnifications that
purchasers generally require and which may result in additional escrow costs.
Liquidation would also deprive investors of the potential increase in value
which may result from the restructuring of the partnerships and the refinancing
of the partnerships' assets.
On the other hand, in a liquidation of the partnerships, investors would
benefit by avoiding the risks of continuing their ownership of the partnerships
and those associated with the transaction. Liquidation would provide for the
final liquidation of the investors' investments and a likely substantial
distribution of cash equal to net liquidation proceeds, though not at a level
that would allow investors to realize their original investment. In addition,
the investors would have the potential to reinvest the net proceeds received in
the liquidation in similar or different investments.
REASONS FOR, AND BENEFITS OF, THE TRANSACTION
In deciding whether to recommend the transaction to the investors, and in
structuring its terms, the Cap Source General Partners considered the benefits
to be derived as a result of the transaction. The following is a brief
discussion of the primary benefits the transaction is expected to generate for
the investors.
SUBSTANTIALLY ENHANCED LIQUIDITY POTENTIAL. The BACs are not currently
listed or regularly traded on a national securities exchange or quoted in the
automated quotation system of any registered securities association or other
over-the-counter market. Following the transaction, the anticipated listing of
the units on the NASDAQ and the company's larger size and growth strategy should
enhance the liquidity of investments held by investors. The Cap Source General
Partners therefore believe the transaction offers
31
<PAGE>
investors a faster and more efficient means of liquidating their investment than
if the partnerships were to attempt to liquidate their portfolios through
conventional property sales.
POTENTIAL FOR COMPANY GROWTH; ENHANCED ACCESS TO CAPITAL. The company will
expand the investment objectives and policies of the partnerships. Following the
transaction, the company will have the potential for enhanced access to and
flexibility in obtaining additional equity and debt financing. In particular,
the company will have the ability to fund future portfolio growth through the
issuance of additional publicly traded securities and the raising of funds from
borrowing under secured and unsecured debt obligations. The partnerships are
currently limited under their respective partnership agreements in their ability
to raise additional capital. Following the transaction, the company will not
have the same capital-raising limitations. In addition, the size and structure
of the company should provide financing alternatives presently not available to
the partnerships. The Cap Source General Partners believe that the larger total
size of the company, as compared to those of the individual partnerships, will
encourage additional and continuing investment.
WAIVER BY AFFILIATES OF THE CAP SOURCE GENERAL PARTNERS OF AMOUNTS
POTENTIALLY PAYABLE BY CERTAIN OPERATING PARTNERSHIPS. If the transaction is
completed, affiliates of the Cap Source General Partners have agreed to
permanently waive amounts which may be payable by some of the Operating
Partnerships to those affiliates. As of December 31, 1998, these amounts totaled
$3,228,405 as reflected in the partnerships' financial statements. These amounts
may be payable under the terms of the partnership agreements for the respective
Operating Partnerships.
DIVERSIFICATION OF ASSETS. By combining the partnerships into a single
ownership entity, the transaction will create an investment portfolio
substantially larger and more diversified than the portfolio of an individual
partnership. This increased size and the resulting combination of operations
spreads the risk of the investment over a broader group of assets and reduces
the dependence of the investors' investment upon the performance of any
particular asset or group of assets, any specific geographic area, or any
particular large tenant or tenants.
The Cap Source General Partners also considered: (1) that the effects of the
transaction may differ with each investor and may be disadvantageous to some
investors, depending on their individual circumstances and investment
objectives; and (2) negative factors relating to the transaction. The following
is a list of all material negative factors considered by the Cap Source General
Partners: (a) the uncertainty as to the prices at which the units will trade and
the possibility that the trading price of the units may be lower than the value
assigned to them for purposes of the transaction; (b) the company is newly
formed, with no operating history; (c) potential conflicts facing the company
following the transaction, including, among other things, the fees payable to
the General Partner under the company's limited partnership agreement; (d) the
payment of expenses relating to the transaction will reduce the net worth of the
company following the transaction; and (e) there can be no assurance the company
will be able to achieve the benefits of the transaction and successfully
implement its business plan as described in this prospectus/consent solicitation
statement. The Cap Source General Partners did not believe that the negative
factors were sufficient, either individually or collectively, to outweigh the
advantages of the transaction. See "RISK FACTORS" and "THE
TRANSACTION--Conflicts of Interest and Benefits to Insiders."
For a discussion of the potential benefits of the alternatives to the
transaction and the reasons those alternatives were rejected by the Cap Source
General Partners, see "--Alternatives Considered," above, and
"FAIRNESS--Comparison of Alternatives to the Transaction." While the transaction
does not preclude the company from electing REIT status in the future, it does
effectively preclude the pursuit of the other alternatives to the transaction.
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<PAGE>
CONSEQUENCES IF TRANSACTION NOT COMPLETED
If the transaction is not completed the partnerships will continue to
operate as separate legal entities with their own assets and liabilities. There
will be no change in their investment objectives, policies and restrictions.
THE TRANSACTION
GENERAL
The Cap Source General Partners have proposed the transaction in which (1)
the partnerships and the company will be merged together, (2) the separate
existence of the partnerships will cease and the company will be the surviving
entity and will succeed to all of the assets and liabilities of the
partnerships, and (3) investors will receive, at their election and with some
limitations, either units or notes based upon the exchange value assigned to
their respective partnership for purposes of the transaction. The company may,
at its option, pay cash instead of issuing notes. The Cap Source General
Partners will not receive any units or notes in connection with the transaction.
The Cap Source General Partners will hold a 1% interest in the company as its
general partner after the completion of the transaction, which continues their
1% interest in the partnerships, as consideration for the transfer of some of
the Cap Source General Partners' assets to the company. The transaction has been
proposed by the Cap Source General Partners in an effort to increase the value
of investments held by investors while offering substantially enhanced
liquidity.
The company and the partnerships have entered into the merger agreement and
will complete the transaction under its terms promptly after the receipt of
consents from investors holding a majority of the outstanding BACs of each of
the partnerships. If the consent of a majority in interest of the investors of
each of the partnerships is not received, or all other conditions to the
transaction are not satisfied, by , 1999, the merger agreement will
terminate. In addition, the merger agreement may be terminated by the General
Partner before or after the receipt of consents from investors at any time
before the effective date of the merger agreement.
TERMS OF THE MERGER AGREEMENT
The following is a summary of the material terms of the merger agreement.
This summary does not purport to be complete and is qualified in its entirety by
the terms of the merger agreement, a copy of which is included as Appendix A to
this prospectus/consent solicitation statement and is incorporated by reference
in this prospectus/consent solicitation statement.
EFFECT OF THE MERGER. Under the terms of the merger agreement (1) the
separate existence of the partnerships will cease and the company will be the
surviving entity and will succeed to all of the assets and liabilities of the
partnerships, and (2) investors will become unitholders or noteholders of the
company.
CONDITIONS TO COMPLETION OF THE TRANSACTION. The closing for the
transaction will take place promptly after the Cap Source General Partners have
received the consent to the transaction from the holders of a majority of the
outstanding BACs of each of the partnerships and the solicitation period
relating to the transaction has ended. The receipt of the consent by no later
than , 1999 (unless this date is extended by the Cap Source General
Partners in their sole discretion) is a condition to closing the transaction and
if it is not obtained, or all other conditions to closing are not satisfied or
waived, the merger agreement will terminate. Other conditions to closing include
(1) the declaration of effectiveness of the registration statement for the units
and notes of the company under the Securities Act; (2) the delivery of a tax
opinion acceptable to the Cap Source General Partners stating that for federal
income tax purposes the transaction will be an exchange subject to the
nonrecognition provisions of Section 721 of the Code, provided that for purposes
of the opinion the transaction shall include only the merger of the partnerships
into the company and the related transfer of assets by the partnerships to the
company; (3) the absence of any material adverse change in the overall business
of the partnerships from the date of this prospectus/consent solicitation
statement to the effective date; and (4) the approval of the units of the
company for listing on NASDAQ.
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<PAGE>
TERMINATION OF THE MERGER AGREEMENT. The merger agreement may be terminated
by the General Partner before or after the receipt of consents from investors at
any time before the effective time of the Certificate of Merger, which will be
filed with the Secretary of State of the State of Delaware relating to the
transaction.
ISSUANCE OF UNITS AND NOTES OF THE COMPANY
On the effective date, the BACs of both partnerships will be cancelled. At
that time, investors whose ownership is reflected on the books and records of
the partnerships on the record date will become either unitholders or
noteholders, as the case may be, on the books and records of the company, with
all the rights of a unitholder or noteholder of the company, as the case may be,
including the right to receive distributions or interest payments, as the case
may be. As soon as practicable after the effective date, the company will cause
to be mailed to the unitholders or noteholders, as the case may be, certificates
representing the number of units to which the unitholder is entitled or notes
which will be issued in denominations of $1,000 and any integral multiple of
$1,000. See "THE NOTES."
NO FRACTIONAL UNITS
No fractional units will be issued by the company in the transaction. Each
investor who would otherwise be entitled to a fractional unit (which entitlement
will be determined by combining the investor's allocation of units from each
partnership as to which the investor is receiving units) will instead receive a
cash payment equal to $10 multiplied by the fraction. See "THE NOTES."
FRACTIONAL NOTES
The principal balance of the notes to which an investor is entitled is
determined by multiplying the number of the investor's BACs by the exchange
value, per $1,000 original investment, assigned to the investor's partnership.
The application of this formula may result in the investor being entitled to a
fractional interest in a note (determined after combining the investor's
allocation of notes from each partnership as to which the investor is receiving
notes). The company will issue to each investor entitled to a fractional
interest a promissory note with an original principal balance equal to that
fraction times $1,000, subject to the company's right, at its option, to pay
cash instead of any portion of a promissory note. Apart from its principal
balance, this promissory note will be identical to the notes and will be issued
by the company under the indenture. No market is expected to develop for these
promissory notes and they will not be listed on any securities exchange.
TRANSACTION EXPENSES
GENERAL. The term "Transaction Costs" means all costs associated with the
transaction. Assuming the transaction is approved, the Transaction Costs are
estimated to be as follows:
SOLICITATION/COMMUNICATION COSTS
<TABLE>
<S> <C>
Information Agent......................................................... $ 35,000
Printing, postage and brochure............................................ 225,000
Marketing expenses........................................................ 20,000
---------
Subtotal................................................................ $ 280,000
---------
</TABLE>
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<PAGE>
PRECLOSING TRANSACTION COSTS
<TABLE>
<S> <C>
Legal Fees................................................................ $ 230,000
Appraisals (including fee and expenses)................................... 100,000
Registration, Listing and Filing Fees..................................... 125,000
Accounting................................................................ 25,000
Contingency............................................................... 25,000
---------
Subtotal................................................................ $ 505,000
---------
</TABLE>
CLOSING TRANSACTION COSTS
<TABLE>
<S> <C>
Transfer Fees, Taxes and Title............................................. $ 50,000
---------
</TABLE>
COSTS TO WIND UP AND DISSOLVE PARTNERSHIPS
<TABLE>
<S> <C>
Accounting................................................................ $ 20,000
---------
Total Transaction Costs................................................... $ 855,000
---------
---------
</TABLE>
ALLOCATION OF COSTS. If the transaction is approved, all Transaction Costs
will be paid by the partnerships and the company. If the transaction is
rejected, the general partners of each partnership will bear a percentage of all
Transaction Costs, excluding solicitation/communication costs, equal to the
total number of abstentions and "NO" votes cast by investors in that partnership
with respect to the transaction, divided by the total number of abstentions and
votes cast by investors in that partnership. In that event, the partnerships
will bear the remaining Transaction Costs. The solicitation/communication costs
listed above will be paid by the partnerships.
ACCOUNTING TREATMENT
The transaction will be accounted for using the purchase method of
accounting under generally accepted accounting principles ("GAAP"). Cap Source I
will be deemed to be the acquirer of Cap Source II under the purchase method
because its investors will be allocated the largest number of units.
Accordingly, the transaction will result, for financial accounting purposes, in
the effective purchase by Cap Source I of all of the BACs of Cap Source II. As
the surviving entity for financial accounting purposes, the assets and
liabilities of Cap Source I will be recorded by the company at their historical
cost and the assets and liabilities of Cap Source II will be recorded at their
estimated fair values.
REGULATORY MATTERS
The transaction will not be subject to the requirements of the
Hart-Scott-Rodino Antitrust Improvements Act of 1976. However, the transaction
is conditioned upon the completion or receipt by the Cap Source General Partners
of all necessary requirements and approvals by the United States Department of
Housing and Urban Development ("HUD"). These requirements include the filing by
principals and affiliates of a certificate regarding their previous
participation in HUD projects and clearance of the certificate by HUD. HUD may
also require the submission of information for a modified review of the
transaction. The Cap Source General Partners are not aware of any facts which
would cause HUD not to take the required action or approvals. Other than federal
proxy solicitation rules relating to the solicitation of investor consents and
state and federal regulations relating to the offering of the company's units
and notes, no other federal or state regulatory requirements must be complied
with and no approval thereunder must be obtained in connection with the
transaction.
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<PAGE>
RECOMMENDATION OF THE CAP SOURCE GENERAL PARTNERS
The Cap Source General Partners have determined that the transaction is in
the best interest of the investors and that it is fair to the partnerships, to
the investors in each of the partnerships and as a whole. Accordingly, the Cap
Source General Partners have approved the transaction and the merger agreement
and recommend that the investors vote "YES" in favor of the transaction and the
adoption of the merger agreement. The Cap Source General Partners believe the
transaction is the most attractive alternative, in light of current market
conditions, for providing investors with the possibility of increasing the value
of their investments while offering substantially enhanced liquidity. See
"FAIRNESS."
AMENDMENTS TO THE PARTNERSHIP AGREEMENTS
To eliminate the need for investors to locate and present to the Cap Source
General Partners certificates representing BACs to be exchanged in connection
with the transaction, the Cap Source General Partners amended Sections 7.01 and
7.02 of the partnership agreements to provide that ownership of the BACs be
evidenced solely by the books and records of the partnerships. To comply with
the rules and regulations of the Commission governing the transaction, which
require a solicitation period of at least 60 days, the Cap Source General
Partners also amended Sections 10.01(b) and 10.01(c) of the partnership
agreements to specifically provide for giving notice of a meeting and the
setting of a record date at least 10 but not more than 120 days before the final
date on which the solicitation of the consent of the investors takes place.
Investors voting in favor of the transaction will also have voted in favor of
ratifying these amendments to the partnership agreements and any other actions
taken by the Cap Source General Partners to facilitate the transaction.
EFFECT OF THE TRANSACTION ON DISSENTING INVESTORS
Investors who vote "NO" against the transaction and investors who abstain
from voting with respect to the transaction do not have a statutory right to
elect to be paid the appraised value of their interests in the partnership.
However, all investors, including dissenting investors, will be given the
opportunity to elect to receive notes instead of units for their BACs as
described under "THE NOTES." Noteholders are entitled to receive only the
principal and interest payments required under the notes. Unlike unitholders,
noteholders will have no right to participate in the company's earnings in
excess of operating expenses, debt service and other obligations, and will not
benefit from growth in the unitholders' equity that might result from future
financial performance of the company.
EFFECTIVE TIME
The effective time of the transaction will be at the time the Certificate of
Merger with respect to the merger of the partnerships and the Cap Source General
Partners with and into the company is filed with the Secretary of State of
Delaware, or at a later time as may be specified in the Certificate of Merger.
It is anticipated that the filings will be made as soon as practicable after the
requisite approval of the investors has been obtained and the other conditions
to the transaction have been satisfied or waived, if permitted under the merger
agreement.
CONFLICTS OF INTEREST AND BENEFITS TO INSIDERS
The Cap Source General Partners participated in the initiation and
structuring of the transaction and are expected to receive benefits as a result
of its completion. First, in connection with the transaction, the Cap Source
General Partners will hold a 1% interest in the company as its general partner,
which continues their 1% interest in the partnerships. The General Partner will
receive this interest in exchange for making a capital contribution to the
company of some of the Cap Source General Partners' assets following the
transaction. In addition, the General Partner will be entitled to receive
management and other fees from the company. See "COMPARISON OF BACS AND
UNITS--Compensation, Fees and Expenses." Further, Michael B. Yanney, who is a
member and manager of America First Companies, the entity which controls the Cap
Source General Partners, will also serve as Chairman of the Board of Managers of
the General Partner. See "MANAGEMENT OF THE GENERAL PARTNER."
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<PAGE>
LEGAL PROCEEDINGS
The Cap Source General Partners, the partnerships and the company may be
involved in litigation incidental to their businesses, but, except as described
below, no material litigation is currently pending or threatened against the
partnerships, their properties, the Cap Source General Partners or the company.
On February 3, 1999, Alvin M. Panzer and Sandra G. Panzer (the "Panzers")
brought a complaint against the company, the Cap Source General Partners,
(collectively the "America First Defendant") the partnerships, Paul L. Abbott
and Lehman Brothers, Inc. (the "Lehman Defendant") in the Court of Chancery of
New Castle County, Delaware, Civil Action No. 16929NC (the "Panzer Complaint").
The Panzers seek to certify the action as a class action on behalf of all other
investors in the partnerships. The Panzer Complaint alleges that (a) the America
First Defendants structured the transaction in a manner which conveys economic
benefit to themselves using unfair terms and coercion (b) the America First
Defendants intend to disseminate a false and misleading prospectus/consent
solicitation statement, (c) the transaction is not in the best interests of the
investors, and (d) the defendants have breached their fiduciary duties of
loyalty and good faith to the investors. The Panzer Complaint is based, in part,
upon a registration statement filed on November 3, 1998. The Cap Source General
Partners abandoned that registration statement and notified the investors of
their intent to pursue other alternatives on or about December 1, 1998, prior to
the date the Panzer Complaint was filed.
The Panzer Complaint alleges that the prospectus/consent solicitation
statement is materially deficient and misleading, and that the investors are
being coerced into approving the transaction by means of the allegedly deficient
prospectus/consent solicitation statement. The Panzer Complaint further alleges
that the Cap Source General Partners' interest in the partnerships was
transferred to the America First Defendants by the Lehman Defendant in breach of
the partnership agreements and Lehman's fiduciary duties. The Panzer Complaint
also alleges that the defendants have breached their fiduciary duties of loyalty
and good faith through mismanagement of the partnerships and by taking fees from
the partnerships not permitted by the partnership agreements.
The Panzer Complaint seeks an injunction against completion of the
transaction, the appointment of an independent representative of the investors
to investigate and obtain the best available alternative for the investors
including, if appropriate, dissolution of the partnerships and monetary damages.
The defendants deny all allegations of wrongdoing in the Panzer Complaint and
believe the allegations are without merit. The defendants intend to vigorously
defend the action. America First Companies, under a purchase agreement between
America First Companies and the Lehman Defendant dated May 16, 1997, has agreed
to indemnify the Lehman Defendant against any action arising out of the Lehman
Defendant's ownership of two of the Cap Source General Partners.
On July 12, 1999, the Panzers each brought a second complaint against the
Cap Source General Partners, the partnerships, and America First Companies
L.L.C. (the "Defendants") in the Court of Chancery of New Castle County,
Delaware, Civil Action No. 17292 and Civil Action No. 17293 (the "Second Panzer
Complaints"). The Second Panzer Complaints allege that the Defendants have
improperly denied the Panzers access to partnership information and documents.
The Second Panzer Complaints seek to have the Defendants furnish the requested
information to the Panzers and award damages. The Defendants deny all
allegations of wrongdoing in the Second Panzer Complaints and believe the
allegations are without merit. The Defendants intend to vigorously defend the
actions.
Insured Mortgage Equities, Inc., one of the Cap Source I General Partners,
and Insured Mortgage Equities II L.P., one of the Cap Source II General
Partners, are currently involved in litigation unrelated to the transaction
styled IN RE LEHMAN BROTHERS LIMITED PARTNERSHIPS LITIGATION, Consolidated
Action No. 14886, pending before the Court of Chancery for the State of Delaware
In and For New Castle County. This class action litigation was filed in 1996, on
behalf of the investors in several limited partnerships against the general
partners of those limited partnerships. The litigation relates to alleged breach
of fiduciary responsibilities, fraudulent mismanagement and self-dealing on the
part of the general partners. The plaintiffs seek injunctive relief, dissolution
of the partnerships if necessary, compensatory
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<PAGE>
damages, attorney fees and costs. Insured Mortgage Equities, Inc., Insured
Mortgage Equities II L.P. and the partnerships have been fully indemnified with
regard to these proceedings by Lehman Brothers, Inc.
FAIRNESS
BELIEF AS TO FAIRNESS
The Cap Source General Partners reasonably believe that the terms of the
transaction are fair as a whole, to the partnerships and to the investors in
each of the partnerships, regardless of whether an investor receives units or
notes. The material factors underlying the beliefs of the Cap Source General
Partners relating to the fairness of the transaction are discussed below under
"--Material Factors Underlying Belief as to Fairness." The Cap Source General
Partners did not obtain an independent opinion as to the fairness of the
transaction. The Cap Source General Partners did not obtain a fairness opinion
because they believed a fairness opinion was not necessary. They based this
belief on the same factors they based their determination as to the fairness of
the transaction as described in the following paragraph.
The Cap Source General Partners based their determinations as to the
fairness of the transaction on the following material factors: (1) the terms and
conditions of the transaction will result in limited changes to the structure of
the partnerships and limited changes to the business and investment objectives
of the partnerships; (2) the opportunity for each investor to object to the
transaction and the requirement that the transaction be approved by investors
holding a majority in interest of the outstanding BACs of each partnership; (3)
the form and amount of consideration offered to the investors; (4) the method of
allocating the units and notes between the partnerships in the transaction; (5)
the lack of material differences with respect to the assets of the partnerships
and the consistent valuation methodology applied to the assets; (6) the
independent Appraisals prepared by Valuation Research, which were used in part
in the determination of the exchange values; and (7) the fact that all
investors, including dissenting investors, will be given the opportunity to
elect to receive notes, with some limitations.
The Cap Source General Partners also considered the potential benefits of
the transaction compared to the alternatives in reaching their conclusion as to
the fairness of the transaction. The potential benefits include, but are not
limited to: (1) enhanced liquidity resulting from the anticipated listing of the
units on NASDAQ and the company's larger equity market capitalization; (2) the
company's potential for growth and enhanced access to capital; (3) a larger
combined investment portfolio that is more diversified than the portfolio of a
single partnership; and (4) the administrative cost savings resulting from
combining the administration and management of each partnership into one entity.
See "BENEFITS OF, AND BACKGROUND AND REASONS FOR, THE TRANSACTION."
MATERIAL FACTORS UNDERLYING BELIEF AS TO FAIRNESS
The following is a discussion of the material factors underlying the belief
of the Cap Source General Partners that the transaction is fair as a whole, to
the partnerships and to the investors in each of the partnerships.
LIMITED CHANGES IN STRUCTURE AND OBJECTIVES. The Cap Source General
Partners believe that the limited changes to the structure of the
partnerships and their business and investment objectives is fair to
investors. The organizational structures of the partnerships before the
transaction are, and the company following the transaction will be, limited
partnerships. In addition, the General Partner of the company will be the
successor by merger to the Cap Source General Partners, resulting in limited
changes to the managing entity of the partnerships. The business and
investment objectives of both the partnerships and the company are to invest
primarily in multi-family residential properties. Therefore, the overall
business objectives of the company will be substantially the same following
the transaction as the objectives of the partnership prior to the
transaction.
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<PAGE>
VOTING PROCEDURES AND OPPORTUNITY TO ELECT TO RECEIVE NOTES. The Cap
Source General Partners believe that the voting process and alternatives
presented to investors, including dissenting investors, are fair. Each
investor has the opportunity to make an investment decision by voting "YES,"
"NO" or "ABSTAIN" with respect to the transaction, and the transaction must
be approved by investors holding a majority in interest of the outstanding
BACs of each partnership. See "VOTING." All investors, including dissenting
investors, are also being given the opportunity to elect to receive notes
instead of units in exchange for their BACs, with some limitations. See "THE
NOTES."
CONSIDERATION OFFERED. The Cap Source General Partners believe that the
units and notes offered to the investors constitute fair value. In reaching
this conclusion, the Cap Source General Partners considered the fact that
investors will surrender their right to receive cash proceeds from the
liquidation of the partnerships at some time in the future. In this regard,
the Cap Source General Partners compared the amount of consideration to be
received in alternative transactions, including liquidation, to the
anticipated market value of the company's units. The Cap Source General
Partners believe the exchange values, which are based in part on the
Appraisals, adequately take into account the relative values of each of the
partnerships.
METHOD OF ALLOCATION. The Cap Source General Partners believe that it
is fair to allocate the units and notes between the partnerships in
accordance with their respective exchange value. In view of the similarities
between the partnerships in terms of their investment objectives and
policies as well as in their assets, the Cap Source General Partners believe
there is no material difference between the partnerships with respect to
determinations related to the allocation of units and notes between the
partnerships. A majority of the assets of both partnerships are GNMA
Certificates, FHA Loans, cash and cash equivalents. Further, all of the
properties owned by the Operating Partnerships are multifamily apartment
complexes. The Cap Source General Partners therefore believe that the
consistent valuation methodology applied to these assets and the lack of
material difference between the assets of each partnership support their
conclusion that the allocation of the units and principal allocation of
notes to be received by the investors is fair.
INDEPENDENT APPRAISALS. The Cap Source General Partners have relied
upon the Appraisals prepared by Valuation Research, an independent
appraiser, to establish the fair market value (the "Appraised Value") of the
properties. The Appraised Values were utilized, in part, in determining the
exchange values of the partnerships. In preparing the Appraisals, Valuation
Research was not engaged to represent the interests of the Cap Source
General Partners or any specific group of investors, but was engaged to
determine the fair market value of the properties in which the partnerships
hold an interest without taking into account the specific financial interest
of any person or group. The Cap Source General Partners believe that the use
of a single independent appraiser, applying consistent methodology and
criteria in assessing the value of each of the properties, increased the
likelihood that the value of each real property would be determined on a
fair, consistent and unbiased basis. The Cap Source General Partners
therefore believe their conclusion as to the fairness of the transaction is
supported by the Appraisals.
NOTES. The indenture for the notes contains specific covenants for the
benefit of the noteholders. These covenants include (1) a limitation on
company indebtedness, (2) restrictions on the sale or transfer of company
assets and (3) prohibitions against mergers or transactions involving the
company. See "THE NOTES." In addition, the notes are variable rate
obligations. The Cap Source General Partners believe the use of a variable
rate note, combined with these restrictive covenants, may improve the
likelihood that after the transaction the price of the notes will not fall
below their face value upon issuance. Although the aggregate principal
amount of notes to be issued may not exceed $20 million, the Cap Source
General Partners believe this limitation is procedurally fair because the
notes will be allocated first to dissenting investors, who will be able to
receive notes under any circumstances, whereas an abstaining or consenting
investor who wishes to receive notes will
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<PAGE>
receive units if the issuance of notes has reached $20 million. See "THE
NOTES--Allocation of Notes."
In addition to the foregoing material factors, the Cap Source General
Partners considered that the effects of the transaction may differ with respect
to each investor and may be disadvantageous to some investors, depending on
their individual circumstances and investment objectives. Further, the Cap
Source General Partners considered the following negative factors relating to
the transaction:
UNCERTAIN MARKET PRICE OF UNITS. There is substantial uncertainty as to
the prices at which the units will trade following the transaction.
Following the transaction, the market value of the units could be
substantially affected by numerous factors. Accordingly, the possibility
exists that the trading price of the units may be lower than the value
assigned to the units for purposes of the transaction.
LACK OF OPERATING HISTORY. The company will be newly organized, with no
operating history.
CONFLICTS OF INTEREST FACING THE CAP SOURCE GENERAL PARTNERS. There are
conflicts of interest facing the Cap Source General Partners with respect to
the completion of the transaction, including, as indicated above, that (1)
the Cap Source General Partners will hold a 1% interest in the company as
its General Partner, which continues their 1% interest in the partnerships,
and (2) the Cap Source General Partners will benefit from the completion of
the transaction by receiving fees as the company's general partner as
provided in the company's limited partnership agreement.
TRANSACTION EXPENSES. The payment of the expenses relating to the
transaction will reduce the net worth of the company following the
transaction.
NO ASSURANCE BENEFITS OF THE TRANSACTION WILL BE REALIZED. Because the
success of the company will depend on numerous factors, including the cost
of the company's borrowing, the cost and effectiveness of the company's risk
management strategies, changing conditions in the real estate markets,
reserve requirements and the operating expenses of the company, there can be
no assurance the company will be able to achieve the benefits of the
transaction and successfully implement its business plan.
The Cap Source General Partners did not believe that these negative factors
were sufficient, either individually or collectively, to outweigh the advantages
of the transaction.
The foregoing discussion of the information and factors considered by the
Cap Source General Partners includes material factors considered by the Cap
Source General Partners. The Cap Source General Partners did not assign relative
weights to the above factors. A determination of various weightings would, in
the view of the Cap Source General Partners, be impractical. Rather, the
determinations and recommendations of the Cap Source General Partners are based
on the totality of the information presented to, and considered by, them.
ALTERNATIVES TO THE TRANSACTION
Before concluding that the transaction should be proposed to investors and
to evaluate the fairness of the transaction, the Cap Source General Partners
examined the estimated values which could be derived from alternatives to the
transaction. The alternatives examined by the Cap Source General Partners were:
(1) continuation of the partnerships, and (2) liquidation of the partnerships.
To determine whether the transaction or one of these alternatives would be more
beneficial to investors, the Cap Source General Partners compared the potential
benefits and detriments of the transaction with the potential benefits and
detriments of each of the alternatives. Each of the transaction and its
alternatives have potential benefits and detriments not present in the other
alternatives. For the reasons listed below, the Cap Source General Partners
determined that the transaction is more beneficial to investors than either of
the alternatives to the transaction.
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CONTINUATION OF THE PARTNERSHIPS. In assessing the transaction, the Cap
Source General Partners considered the advantages and disadvantages of keeping
the partnerships intact and continuing to operate them under their own separate
partnership agreements and existing business plans. If the partnerships were to
continue in their current form, they would remain separate legal entities
governed by their respective partnership agreements. In managing the businesses
of the partnerships, the Cap Source General Partners would continue to take
whatever actions they deemed were appropriate in satisfying their fiduciary
obligations to the investors and the partnerships. Under this alternative,
investors would have continued to receive cash distributions in the future and,
ultimately, a liquidation distribution.
Continuing the partnerships without change has a number of benefits,
including (1) the partnerships would remain separate entities, with their own
assets and liabilities, and their original investment objectives, consistent
with the guidelines, restrictions and safeguards in their partnership
agreements; (2) the partnership's performance would not be affected by the
performance of the other partnership, including the investment objectives,
interests and intentions of the investors in the other partnership; (3) there
would be no change in the nature of the investors' investments; (4) the
partnerships would not incur any expenses in connection with the transaction;
and (5) the partnerships would avoid the risks inherent in the transaction. See
"RISK FACTORS."
The Cap Source General Partners concluded that maintaining the partnerships
as separate entities may have the following potentially negative results when
compared with the benefits that the Cap Source General Partners believe may be
derived from the transaction: (1) lower liquidity of investment due to the
illiquid nature of the market for BACs; (2) inability to raise new capital or
make new investments, thus limiting growth of the partnerships' capital to that
inherent in the existing partnership investments; (3) less flexibility and
control in actively managing the portfolio; and (4) duplicative general and
administrative expenses.
LIQUIDATION. Although the investment objectives and policies of the
partnerships do not require the commencement of the liquidation of the
partnerships at any specific time, the Cap Source General Partners assessed the
possibility of commencing the orderly liquidation of the partnerships and
distributing the net proceeds from the liquidation to the investors. The Cap
Source General Partners concluded that liquidation would be costly and time
consuming and would not be as beneficial to investors as the transaction.
The Cap Source General Partners determined that an attempt to liquidate the
partnerships' investments at the current time would likely result in the
investors not achieving the full potential benefits from an investment in the
partnerships. They concluded that liquidation would not be the best option to
realize the optimum return on an investment in the partnerships because although
the partnerships' investments in mortgage loans could likely be sold at or
slightly above their face value in a short period of time, most of the
partnerships' equity positions in the Operating Partnerships are not attractive
to buyers. Liquidation of most of the equity positions would require either (1)
a protracted period of negotiations with some of the various general partners of
the Operating Partnerships which could potentially create both substantial
transaction costs and additional costs to the partnerships of continuing
operations during the negotiation period, and/or (2) the partnerships accepting
substantial discounts in value. In addition, there may be additional costs
associated with representations, warranties, and indemnifications that
purchasers generally require and which may result in additional escrow costs.
Furthermore, the liquidation of the partnerships would involve transaction
costs, like legal fees and various other closing costs, which would further
reduce the amount of net proceeds available for distribution.
On the other hand, in a liquidation of the partnerships, investors would
benefit by avoiding the risks of continuing their ownership of the partnerships
and those associated with the transaction. Liquidation would provide for the
final liquidation of the investors' investments and a likely substantial
distribution of cash equal to net liquidation proceeds, though not at a level
that would give investors a full return of their
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<PAGE>
original investment. In addition, the investors would have the potential to
reinvest the net proceeds received in the liquidation in similar or different
investments.
Based upon this comparison of the potential benefits and detriments of the
transaction to the potential benefits and detriments of possible alternatives to
the transaction, the Cap Source General Partners have concluded that the
transaction is the more attractive alternative for investors.
Notwithstanding the belief of the Cap Source General Partners that the
assets of the partnerships cannot be liquidated on favorable terms and
conditions, the following table describes the estimated liquidation values of
the partnerships.
ESTIMATED LIQUIDATION VALUES
AS OF DECEMBER 31, 1998
<TABLE>
<CAPTION>
GNMA
CERTIFICATES PARTNERSHIP PARTNERSHIP NET OTHER ASSETS TOTAL
AND MORTGAGE EQUITY TERMINATION AND LIQUIDATION
LOANS(1) INTERESTS(2) COSTS(3) LIABILITIES(4) VALUES
------------- ------------ ----------- ---------------- -------------
<S> <C> <C> <C> <C> <C>
Cap Source I.......................... $ 35,237,858 $ 1,996,838 $(500,000) $ 9,351,781 $ 46,086,477
Cap Source II......................... $ 27,414,004 $ 2,453,973 $(500,000) $ 17,876 $ 29,385,853
</TABLE>
ESTIMATED LIQUIDATION VALUES
AS OF DECEMBER 31, 1998
PER $1000 INVESTMENT*
<TABLE>
<CAPTION>
GNMA
CERTIFICATES PARTNERSHIP PARTNERSHIP NET OTHER ASSETS INVESTOR
AND MORTGAGE EQUITY TERMINATION AND LIQUIDATION
LOANS(1) INTERESTS(2) COSTS(3) LIABILITIES(4) VALUES
--------------- --------------- --------------- ------------------- -------------
<S> <C> <C> <C> <C> <C>
Cap Source I............................. $ 517 $ 29 $ (7) $ 137 $ 676
Cap Source II............................ $ 338 $ 30 $ (6) $ 1 $ 363
</TABLE>
- ---------------
* Totals assume investors receive 99% of total liquidation value.
(1) GNMA Certificates and FHA Loans are reflected at an average premium over
their current principal balances equivalent to 1.5%.
(2) Derived by using the value of the properties as determined by the Appraisals
using the direct capitalization approach, then deducting 4% of these values
to account for the costs of sales of these properties, then subtracting
repayment of the current principal balances of the mortgages, then
allocating the remaining proceeds, if any, according to the limited
partnership agreements. These resulting equity values were then discounted
37.5% to reflect the subordinated nature of the limited partnership
interests being sold.
(3) An estimate of costs to terminate the partnership's business.
(4) Includes cash, cash equivalents, miscellaneous GNMA Certificates, interest
receivables and accounts payable.
COMPARISON OF ALTERNATIVES TO THE TRANSACTION
To assist investors in evaluating the fairness of the consideration offered
by the company in the transaction, the Cap Source General Partners have compared
the estimated market value of the units with: (1) estimates of the value of the
BACs assuming the continuation of the partnerships, and assuming that the
Operating Partnerships would be in existence until December 31, 2003, followed
by the immediate liquidation of all the Operating Partnerships for cash and the
immediate distribution of the available proceeds to the partnerships for further
distribution to the investors and Cap Source General Partners as provided in
their partnership agreements; (2) estimates of the value of the BACs under a
liquidation scenario, assuming that the partnerships' mortgages were sold at
their current market value, the limited
42
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partnership interests in the Operating Partnerships were sold at prices
reflecting discounts for the subordinated nature of the interests plus estimated
amounts, if any, to gain operating control of the Operating Partnerships, and
that these amounts together with cash, cash equivalents and other net assets of
the partnership are distributed to investors and Cap Source General Partners as
provided in their respective partnership agreements; and (3) prices at which the
BACs have been trading on the illiquid secondary market over the 12-month period
ended August 31, 1998, as compiled and reported to the Cap Source General
Partners by Service Data Corporation. These valuation estimates are subject to
significant uncertainties, since the value of the units, as well as the
comparative estimated values are based upon numerous estimates, variables,
assumptions and market conditions. Therefore, no assurance can be given that the
estimated values indicated could be realized, and actual realized values may be
higher or lower than the estimates of these values.
The results of this comparative analysis are summarized in the table
entitled "Summary of Comparative Valuation Alternatives" below. Investors should
consider that the estimated values assigned to the units and alternative forms
of consideration are based on a variety of assumptions that have been made by
the Cap Source General Partners. These assumptions relate, among other things,
to: (1) projections as to the partnerships' future income, expenses, cash flow
and other significant financial matters; (2) the capitalization rates that would
likely be used by prospective buyers if the partnerships' assets were
liquidated; (3) appropriate discount rates applied to expected cash flows in
computing the present value of the cash flows that may be received with respect
to the BACs; and (4) selling costs and other expenses, discounts and
contingencies attributable to the sale of assets and liquidation of the
partnerships. In addition, these estimates are based upon information available
to the Cap Source General Partners at the time the estimates were prepared, and
no assurance can be given that the same conditions will exist at the time of
closing of the transaction. The assumptions have been determined by the Cap
Source General Partners and, where appropriate, are based upon current
historical information regarding the partnerships and current real estate
markets, and have been highlighted below to the extent material to the Cap
Source General Partners' conclusions. While the Cap Source General Partners
believe they have a reasonable basis for the assumptions made, it is unlikely
that all of the assumptions used by the Cap Source General Partners will prove
to be accurate in all material respects, and some assumptions used by the Cap
Source General Partners as to future events have been deleted to simplify the
analysis and may not approximate the actual experience of the partnerships. The
estimated values of the units and alternative forms of consideration would have
been different had the Cap Source General Partners made different assumptions.
No assurance can be given that the consideration would have been realized
through any of the alternatives described.
SUMMARY OF COMPARATIVE VALUATION ALTERNATIVES
PER $1,000 OF ORIGINAL INVESTMENT*
<TABLE>
<CAPTION>
ESTIMATED MARKET ESTIMATED LIQUIDATION ESTIMATED MARKET
VALUE VALUE OF
VALUE OF OF BACS IF ASSETS BACS BASED ON
UNITS(1) ESTIMATED VALUE OF SOLD AT ADJUSTED NET WEIGHTED
-------------------- BACS ASSUMING ASSET VALUE(3) AVERAGE OF
HIGH LOW CONTINUATION OF THE ------------------------- SECONDARY MARKET
PARTNERSHIP VALUE VALUE PARTNERSHIPS(2) RANGE MIDPOINT TRADES(4)
- ------------------------------------ --------- --------- --------------------- ---------- ------------- -------------------
<S> <C> <C> <C> <C> <C> <C>
Cap Source I........................ $ 748 $ 643 $ 678 $ 669-684 676 $ 558
Cap Source II....................... $ 392 $ 330 $ 375 $ 356-369 363 $ 370
</TABLE>
- ---------------
* An original investment of $1,000 consists of 50 BACs in either Cap Source I
or Cap Source II.
(1) The Cap Source General Partners have determined the range of estimated
market values of the company based upon a division of the assets in each
partnership into three asset types. Asset Type A is the limited partnership
interests in the operating partnerships; Asset Type B is the mortgages and
Asset Type C is cash, cash equivalents and other net assets. On the low end
of estimated value, no value was assigned to Asset Type A. On the high end,
Funds from Operations ("FFO") attributable to the
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<PAGE>
limited partnership interests were valued using an FFO multiple of 9.3. The
FFO multiple of 9.3 was derived by taking the average 1998 estimated FFO
multiple from a peer group of equity REITs. For both the high and low
estimates, Asset Types B and C were valued at their face values as of
December 31, 1998. The values assigned to Asset Types A, B and C were added
together, reduced by estimated transaction costs and divided by the number
of original $1,000 investments to determine the value per original $1,000.
The Cap Source General Partners recognized that there is substantial
uncertainty as to the prices at which the units will trade following the
transaction, and it is possible that the units will trade below the values
reflected in this analysis.
(2) These values were derived from a discounted cash flow analysis at the
partnership level for the period from January 1, 1999 through December 31,
2003. The five-year period was used because it was a time period reasonably
determined by the Cap Source General Partners to obtain control of the
Operating Partnerships from non-affiliates of the Cap Source General
Partners, thus allowing the liquidation of the partnerships' assets on an
equivalent fee-simple basis. Cash flows from mortgages owned by the
partnerships were included at the fixed monthly amounts described in the
respective mortgage documents. To determine any cash flow to the
partnerships from the limited partnership interests in the Operating
Partnerships, estimated cash flows for 1999 were taken from the direct
capitalization method in the Appraisals prepared by Valuation Research, and
revenue and expenses in subsequent years were increased at the rates
included in the Appraisals. From net income in each year, debt service
payments and applicable fees were deducted to arrive at net cash flow
available for distribution by the Operating Partnerships. This cash is then
assumed to be distributed to the partners in the Operating Partnerships as
prescribed in the limited partnership agreements for each Operating
Partnership; any shortfalls are assumed to be funded by the partnerships.
Interest income and cash from principal repayments on miscellaneous GNMA
certificates are estimated based on a model of partnership level cash flow;
that model includes an estimate of annual administrative and operating
expenses which were increased annually by 4%. At the end of the final year
of analysis, the properties were assumed to be sold at prices derived by
capitalizing the following year's net income at a rate 25 basis points
higher than the current year capitalization rate applied to each property in
the Appraisals. Selling costs are assumed to be 4% of proceeds. Net proceeds
are first used to repay the then outstanding principal balance of any
mortgage loan, and remaining cash is distributed in accordance with the
respective partnership agreements. At the partnership level at the end of
the final year of analysis, proceeds from repayment of the mortgage loans,
cash received in respect of limited partnership interests in the operating
partnerships, and any other net assets, including cash and cash equivalents,
are then distributed to the investors and Cap Source General Partners in
accordance with the partnership agreement. Annual distributed cash flows,
inclusive of liquidating proceeds from the assets sales at the end of the
period, are discounted at a rate of 10% to arrive at an estimate of the
present value of each partnership on a "going concern" basis.
(3) The figures in this column represent the amount that would be available for
distribution to investors if the partnerships sold their assets as of
December 31, 1998, based on the following assumptions. Mortgages were sold
at their current market values which on the noted date would have been at
slight premiums to their current principal values. Premiums for the high
value are 2% and for the low value are 1%. These estimated premiums reflect,
to the best knowledge of the Cap Source General Partners, current pricing on
similar mortgage instruments which are generally prepayable with minimal or
no penalties. Limited partner interests in the Operating Partnerships were
sold at discounts to the values derived by using the value of the properties
as determined by the Appraisals using the direct capitalization approach,
then deducting 4% of these values to account for the cost of sales of these
properties, then subtracting repayment of the current principal balance of
the mortgages, then allocating the remaining proceeds, if any, according to
the limited partnership agreements. Discounts were determined by the Cap
Source General Partners by taking into account two factors. First, if the
Operating Partnership remains in the control of a non-affiliated general
partner, an amount was estimated that might be sufficient to acquire that
general partners' interest and was deducted from the derived value of the
limited partnership interest. Second, discounts of 37.5% were taken to
reflect the subordinated nature of the limited partnership interest being
sold, and thus the higher return requirement of a buyer. Cash and cash
equivalents were included at their current market values, along with any
other net assets. A deduction was made for estimated costs of winding up the
partnerships. The resulting amount was deemed to be distributed to the
investors and Cap Source General Partners in accordance with the partnership
agreements.
(4) Based on the weighted average, by BACs sold, of secondary market trades
during the period from January 1 through August 31, 1998, provided to the
Cap Source General Partners by Service Data Corporation. Service Data
Corporation's records may not reflect all trading activity for the BACs. In
accordance with the partnerships' limited partnership agreements, the Cap
Source General Partners suspended trading of the BACs on August 31, 1998, to
prevent the partnerships from becoming publicly traded partnerships taxed as
a corporation under the Code. Due to this suspension, there was no trading
of BACs after August 31, 1998, until trading resumed on January 1, 1999.
THE CAP SOURCE GENERAL PARTNERS' ANALYSIS FOR THE TRANSACTION.
The Cap Source General Partners' analysis for the transaction was based upon
a review of the alternatives to the transaction in comparison to the proposed
transaction. This analysis was based upon the assumptions and calculations for
the alternatives and the proposed transaction. Except as otherwise described,
there were no limitations for any analysis. In addition, as described under
"FAIRNESS-- Material Factors Underlying Belief as to Fairness," no relative
weight was assigned to any one factor.
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<PAGE>
With respect to the alternative of continued management, the assumptions are
under "FAIRNESS-- Comparison of Alternatives to the Transaction" in footnote 2
to the table entitled "Summary of Comparative Valuation Alternatives." The
resulting calculation is shown in this table.
With respect to the alternative of liquidating the partnerships, the
assumptions are included in the footnotes under tables entitled "Estimated
Liquidation Values as of December 31, 1998" and "Estimated Liquidation Values as
of December 31, 1998 per $1,000 Investment," under "--Comparison of Alternatives
to the Transaction." The resulting calculations are in these tables.
Other alternatives considered by the Cap Source General Partners include (1)
listing the BACs of each partnership on a national securities exchange or
automated quotation system; (2) merging the partnerships into a single
corporation and listing the corporation's common stock on a national securities
exchange or automated quotation system; (3) merging the partnerships together to
form a single REIT; and (4) qualifying each partnership as an individual REIT.
The General Partner's analysis did not quantify any of these alternatives or any
assumptions. A quantification of these alternatives was not done by the Cap
Source General Partners because it involved a quantification of the future
trading prices of the securities described in these alternatives. The Cap Source
General Partners concluded that using any assumption or group of assumptions
would result in a speculative valuation because of the limited capitalization,
market and trading assumptions.
APPRAISALS
GENERAL
Valuation Research was engaged by the partnerships to appraise the
multi-family apartment complexes owned by the partnerships through their
interest in the Operating Partnerships. Valuation Research delivered a written
summary of its analysis, based upon the review, analysis, scope and limitations
described in its written summary, as to the fair market value of these
properties as of December 31, 1998 (the "Appraisals"). The Cap Source General
Partners have relied, in part, upon these Appraisals to determine the ratios for
allocating the units and notes in the transaction. Some of the material
assumptions, qualifications, limitations and methods used in the Appraisals are
described below.
SUMMARY OF METHODOLOGY
Valuation Research evaluated each property based primarily upon the income
approach to valuation. Appraisers typically use up to three approaches in
valuing real property: the cost approach, the direct sales comparison approach
and the income approach. These approaches are based on the cost to replace
assets, market exchanges for comparable properties and the capitalization of
income.
The Appraisals take into account all three methods of valuation. However,
due to the income-producing nature of the properties and current market
conditions, the Appraisals place more emphasis on the income approach and use
the direct sales comparison approach as a check on the reasonableness of the
results obtained using the income approach.
The scope of the Appraisals included an inspection of each property in
December 1997, and an analysis of recent comparable sales and rental rates of
similar property in each of the subject's specific area.
The highest and best use of each property was also considered. Valuation of
a property is based on its most profitable likely use. The highest and best use
is arrived at by testing potential uses of the property, both as improved and as
though vacant, to find the use which meets the following criteria: physically
possible--the uses of vacant land which are possible after considering physical
characteristics of the land; legally permitted--uses that are permissible after
considering local, state and federal regulations and private restrictions;
financially feasible--those uses which are physically possible and legally
permitted which produce a positive return beyond operating expenses, financial
obligations, and capital amortization;
45
<PAGE>
and maximum productive use--the use that is physically possible, legally
permitted and financially feasible which produces the highest price or value,
which is the highest and best use. Valuation Research concluded that the highest
and best use of the properties is for multi-family residential development,
which is also the current use of the properties.
THE COST APPROACH
The cost approach is a valuation technique that uses the concept of
replacement as a value indicator. Reproduction or replacement cost is estimated
for the property being appraised and is then adjusted for losses in value
(appraised depreciation) due to a variety of factors. This process requires
valuing the site as if vacant, then adding the replacement cost new of
improvements based upon market derived costs for similarly constructed
properties. Then, accrued depreciation from physical deterioration and
obsolescence of all causes is estimated and subtracted from the replacement cost
new to arrive at the present value.
THE SALES COMPARISON APPROACH
The sales comparison approach is a valuation technique in which value is
estimated on the basis of market prices in actual transactions. The technique
consists of studying available market comparable information and adjusting for
differences. This process is essentially that of comparison and correlation.
Differences always exist between properties even though they may be almost
identical, and therefore adjustments for these differences must be made. Some
adjustments that may prove important are: (1) conditions of sale, (2) financing
terms, (3) market conditions (time), (4) location, (5) physical characteristics,
and (6) income characteristics. A minimum of three comparable sales were used to
form the basis for estimating the market value of the subject properties.
THE INCOME APPROACH
The income approach is a valuation technique that capitalizes the
anticipated income stream from the appraised assets. This approach is predicated
on developing either cash flow or income projections, which are then discounted
for risk and time value. Additionally, the present value of a projected residual
value is estimated and added to the present value of the income stream to derive
a total present value.
The income approach attempts to quantify expected, yet uncertain future
benefits. There are two accepted methods of applying the income approach: direct
capitalization and discounted cash flow analysis.
DIRECT CAPITALIZATION APPROACH. The direct capitalization approach is the
determination of a proper rental or revenue value that one would expect to be
able to obtain for the subject property based on actual historical operations
and a study of comparable leased properties with respect to rent levels,
location, and amenities offered. Adjustments are made for differences between
the subject and comparable properties to derive an estimated current economic
rent. A similar analysis of operating expenses aids in constructing an operating
statement. The end result is a net operating income ("NOI") for the first year
income that can be converted into an indicated property value through the
overall capitalization process.
The direct capitalization approach begins with an estimate of the subject's
market rent potential based on an analysis of comparable properties and their
current rental rates and an analysis of the actual rentals in place on the
subject property. The unit of comparison is typically the rent per unit. From
this is deducted an amount estimated to reflect the operating expenses
attributable to the subject property. This operating expense deduction is based
on published market surveys and actual historical data.
To arrive at an appropriate market rent, Valuation Research analyzed several
similar apartments in the immediate area of each subject. Gross potential rent
was derived from the historical revenue trends of the subject property, as well
as from the market surveys mentioned above. The market area for each subject was
also analyzed with respect to current and future apartment rental trends. This
information,
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<PAGE>
taken together with the historical vacancy and collection loss experience of the
subject property based on discussions with the operating manager and published
data, was used to estimate the appropriate vacancy and collection loss over the
projection period.
Effective gross income for each property was estimated based on the
historical income information provided and the market rental information.
Operating expenses were estimated based upon information published by the
Institute of Real Estate Management ("IREM") along with the actual historical
experience of the subject property. A management fee of 5% of effective gross
income, including miscellaneous income, is generally charged for properties like
the subject properties, and was used most often in Valuation Research's
analysis. A reserve for replacement was also included in the analysis.
Net operating income was calculated by taking potential gross rental income,
less vacancy and collection loss, less operating expenses, less a management fee
and less reserves for replacement. The relationship between NOI and value can be
expressed in its overall rate of return, or capitalization rate. Capitalization
rates were abstracted from market surveys conducted by reputable national firms
for each of the major metropolitan areas in which the subject properties are
located, as well as reports by The National Real Estate Index for the Fourth
Quarter, 1998, KORPACZ REAL ESTATE INVESTOR SURVEY in its Fourth Quarter 1998
report and the American Council of Life Insurance reports. The indicated value
for each property was derived from the NOI for each property divided by the
capitalization rate.
DISCOUNTED CASH FLOW METHOD. The discounted cash flow method has two
components. The first component equals the sum of the present value of cash
flows over a selected holding period. Valuation Research used a ten year holding
period in its analysis. The second component, a residual, equals the present
value of a perpetuity paying income equal to net income in year eleven and
capitalized with the appropriate capitalization rate. The residual reflects the
property's ongoing potential after the tenth year.
The income and expense projections for each property were based on
historical operating data, information provided by local lessors, and published
data sources. Income and expense statements, furnished by the building
management, were reviewed and adjusted, where necessary, to reflect more typical
market expenses as reported by IREM. These operating results were cross-checked
for reasonableness with market information obtained from area lessors, leasing
agents and brokers who also provided data relating to current rental rates,
vacancy levels, and typical lease terms.
The anticipated earnings received in the future must be discounted to a
present value using a discount rate derived from current market rates for
alternative investments. To determine the current discount rate applicable for
real estate investment, Valuation Research reviewed market surveys of large
institutional real estate investors. Using this market derived data, and
adjusting it based on the specific risks involved with investing in each of the
subject properties, a unique discount rate was estimated and used to discount
the projected cash flows to determine an estimated present value for each
property.
CONCLUSIONS AS TO VALUE
Based on the valuation methodology described above, Valuation Research
assigned a value to each individual property as shown in the following table:
47
<PAGE>
PROPERTY/VALUE RANGE SCHEDULE
<TABLE>
<CAPTION>
CAPITAL SOURCE I VALUE RANGE
- ------------------------------------------ ----------------------------
<S> <C>
Bluff Ridge (108 units) $3,000,000--$3,800,000
Jacksonville, North Carolina
Waterman's Crossing (260 units) $12,750,000--$13,500,000
Newport News, Virginia
Water's Edge (108 units) $5,500,000--$6,500,000
Lake Villa, Illinois
Highland Park (252 units) $9,500,000--$10,500,000
Reynoldsburg, Ohio
Fox Hollow (184 units) $7,150,000--$8,300,000
High Point, North Carolina
Misty Springs (128 units) $4,000,000--$4,750,000
Daytona Beach, Florida
CAPITAL SOURCE II VALUE RANGE
- ------------------------------------------ ----------------------------
Crane's Landing (252 units) $11,500,000--$12,500,000
Winter Park, Florida
Delta Crossing (178 units) $7,500,000--$8,000,000
Charlotte, North Carolina
Monticello (106 units) $6,250,000--$7,200,000
Southfield, Michigan
CAPITAL SOURCE I AND II VALUE RANGE
- ------------------------------------------ ----------------------------
The Ponds at Georgetown (134 units) $7,000,000--$8,500,000
Ann Arbor, Michigan
</TABLE>
ASSUMPTIONS, LIMITATIONS AND QUALIFICATIONS OF APPRAISALS
Valuation Research utilized assumptions to determine the appraised value of
the properties under the income approach. The Appraisals reflect Valuation
Research's valuation of the properties as of December 31, 1998, in the context
of information available on that date. Events occurring after December 31, 1998,
and before the effective date could affect the properties or assumptions used in
preparing the Appraisals. Valuation Research will not deliver any additional
written summary of the analysis.
Financial statements and other related information provided by the Cap
Source General Partners in the course of the investigation was accepted, without
further verification, as fully and correctly reflecting the partnership's
business conditions and operating results for the respective periods, except as
specifically noted in the report. Public information and industry and
statistical information was obtained from sources Valuation Research deemed to
be reliable; however, Valuation Research made no representation as to the
accuracy or completeness of this information, and accepted the information
without further verification.
The conclusions of value are based upon the assumption that the current
level of management expertise and effectiveness would continue to be maintained
and that the character and integrity of the enterprise through any sale,
reorganization, exchange, or diminution of the owners' participation would not
be materially or significantly changed. Valuation Research did not render any
opinion as to title, which was assumed by Valuation Research to be marketable.
The Cap Source General Partners conducted an
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<PAGE>
independent review of title to the properties. Valuation Research also assumed
that the properties will be responsibly owned and properly maintained.
Valuation Research did not make a land survey of the properties. The
boundaries used in the report were taken from records believed to be accurate.
Valuation Research assumed that there were no hidden or unapparent conditions of
the properties, subsoil, or structures which would render the properties more or
less valuable. Any information furnished by others and included in the Appraisal
report is from sources deemed by Valuation Research to be reliable and believed
to be true and accurate; however, no responsibility was assumed for its
accuracy.
It was assumed that there was full compliance with all applicable federal,
state, and local environmental regulations and laws unless noncompliance was
stated, defined and considered in the appraisal report. Valuation Research is
not an environmental consultant or auditor, and it did not take responsibility
for any actual or potential environmental liabilities. Valuation Research did
not conduct or provide environmental assessments. Valuation Research asked the
managers of the apartment complexes whether they were subject to any present or
future liability relating to environmental matters (including but not limited to
CERCLA/Superfund liability). Valuation Research did not determine independently
whether any of the apartment complexes or their owners were subject to any of
these liabilities, nor the scope of any of these liabilities. The Appraisal did
not take these liabilities into account except as they were reported expressly
to Valuation Research by the managers of the apartment complexes, and then only
to the extent that the liability was reported to Valuation Research in an actual
or estimated dollar amount. These matters are noted in the report. To the extent
the information was reported, Valuation Research relied on it without
verification and offered no warranty or representation as to its accuracy or
completeness.
It was assumed that all applicable zoning and use regulations and
restrictions were complied with, unless a nonconformity was stated, defined, and
considered in the appraisal report. It was also assumed that all required
licenses, certificates of occupancy, consents, or other legislative or
administrative authority from any local, state, or national government or
private entity or organization was or could be obtained or renewed for any use
on which the value estimate contained in the appraisal report is based.
Valuation Research did not make a specific compliance survey or analysis of
the subject properties to determine whether they were subject to or in
compliance with the ADA and the opinion did not consider the impact, if any, of
noncompliance in estimating the value of the property. Finally, Valuation
Research did not investigate the year 2000 compliance of the management or
ownership of the properties or the compliance of their customers or suppliers
and the effect, if any, that the year 2000 issue might have on these entities.
SUMMARY OF VALUATION RESEARCH ASSUMPTIONS
<TABLE>
<CAPTION>
REVENUE EXPENSE
GROWTH GROWTH CURRENT YEAR
PROPERTY RATE RATE CAPITALIZATION RATE
- -------------------------------------------------------------------------- ------------- ------------- ---------------------
<S> <C> <C> <C>
Bluff Ridge............................................................... 3.5% 3.0% 9.75%
Waterman's Crossing....................................................... 3.0 2.0 9.25
Misty Springs............................................................. 3.0 3.0 9.50
Waters Edge............................................................... 3.0 3.0 9.25
Highland Park............................................................. 2.5 3.5 9.50
Ponds at Georgetown....................................................... 2.5 2.5 9.25
Crane's Landing........................................................... 3.0 3.0 9.25
Delta Crossing............................................................ 2.5 3.0 9.00
Monticello................................................................ 3.0 2.5 9.00
Fox Hollow................................................................ 3.0 3.0 9.75
</TABLE>
49
<PAGE>
COMPENSATION AND MATERIAL RELATIONSHIPS
Neither Valuation Research nor any of its employees have a present or
intended material financial interest in the company, the partnerships or the
properties, nor has there been a material relationship between Valuation
Research or any of its affiliates and the company, the partnerships, the Cap
Source General Partners or any of their respective affiliates during the past
two years.
The partnerships paid Valuation Research aggregate fees of $100,000 plus
expenses to prepare the Appraisals. The fees paid to Valuation Research in
connection with the preparation of the Appraisals were determined through
arm's-length negotiations between Valuation Research and the Cap Source General
Partners. Investors may obtain a copy of the Appraisal reports prepared by
Valuation Research upon written request directed to: America First Investor
Services Department, 1004 Farnam Street, Suite 400, Omaha, Nebraska 68102.
EXCHANGE VALUES
Investors in the partnerships will receive units or notes based upon an
exchange value described below. The exchange values were determined by the Cap
Source General Partners.
The exchange values are based upon (1) the principal amount of GNMA
Certificates and the FHA Loans as shown in the partnership's audited financial
statements for the period ended December 31, 1998, (2) the value of the
partnership's limited partner interests in the Operating Partnerships, and (3)
the market value of the partnerships' remaining net assets as shown in the
partnerships' audited financial statements for the period ended December 31,
1998.
To determine the value of each partnership's limited partner interest in an
Operating Partnership, the Cap Source General Partners started with the values
provided by Valuation Research in its Appraisal of the Operating Partnership's
properties using the direct capitalization approach, then deducting 4% of these
values to account for the costs of sales of the properties. See "APPRAISALS."
The liabilities of the Operating Partnership, including amounts required to pay
off the insured mortgage on the property and amounts owed to the general partner
of the Operating Partnership, were then subtracted from the mean value. The net
value after these adjustments was then apportioned among the general partner and
limited partners of the Operating Partnership according to each Operating
Partnership's limited partnership agreement. In valuing the Operating
Partnerships, the Cap Source General Partners did not take into account amounts
that may be payable by some of the Operating Partnerships to affiliates of the
Cap Source General Partners that will be waived if the transaction is completed.
See "BENEFITS OF, AND BACKGROUND AND REASONS FOR, THE TRANSACTION--Reasons for,
and Benefits of, the Transaction--WAIVER BY AFFILIATES OF THE CAP SOURCE GENERAL
PARTNERS OF AMOUNTS POTENTIALLY PAYABLE BY CERTAIN OPERATING PARTNERSHIPS."
The exchange values were determined as of December 31, 1998. As of the date
of this prospectus/ consent solicitation statement, the Cap Source General
Partners and the General Partner of the company do not know of any material
change in the partnerships which would affect the exchange values.
The following tables show the exchange values attributable to the
partnerships for purposes of the transaction, as well as the allocation of units
based on the exchange values. The tables assume that no notes are issued in
connection with the transaction.
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<PAGE>
EXCHANGE VALUES
FOR ALLOCATION OF UNITS
<TABLE>
<CAPTION>
TOTAL NUMBER
TOTAL INVESTOR OF UNITS PERCENT OF
EXCHANGE VALUE EXCHANGE VALUE(1) TO INVESTORS TOTAL UNITS
-------------- ----------------- ------------- -------------
<S> <C> <C> <C> <C>
PARTNERSHIPS
Cap Source I..................................... $ 47,569,968 $ 47,094,268 4,709,427 60.6%
Cap Source II.................................... 30,872,167 30,563,445 3,056,345 39.4
-------------- ----------------- ------------- -----
Total.......................................... $ 78,442,135 $ 77,657,713 7,765,772 100.0%
-------------- ----------------- ------------- -----
-------------- ----------------- ------------- -----
</TABLE>
<TABLE>
<CAPTION>
PER $1,000
ORIGINAL INVESTMENT BY INVESTORS
--------------------------------------
INVESTOR
EXCHANGE VALUE(1) NUMBER OF UNITS
------------------- -----------------
<S> <C> <C>
PARTNERSHIPS
Cap Source I............................................................... $ 698 69.79
Cap Source II.............................................................. $ 381 38.10
</TABLE>
- ---------------
(1) The investor exchange value was derived by taking 99% of the total exchange
value to reflect the fact that the General Partner will hold a 1% interest
in the company as its general partner.
CALCULATION OF EXCHANGE VALUES. The following table shows the components of
the exchange values for the partnerships.
CALCULATION OF EXCHANGE VALUES
<TABLE>
<CAPTION>
GNMA NET OTHER
CERTIFICATES PARTNERSHIP ASSETS TOTAL
AND MORTGAGE EQUITY AND EXCHANGE
LOANS(1) INTERESTS(2) LIABILITIES VALUE
------------- ------------ ------------ -------------
<S> <C> <C> <C> <C>
Cap Source I........................................... $ 35,023,246 $ 3,194,941 $ 9,351,781 $ 47,569,968
Cap Source II.......................................... 27,044,343 3,809,948 17,876 30,872,167
</TABLE>
- ---------------
(1) GNMA Certificates and FHA Loans are included at their outstanding principal
balances as of December 31, 1998.
(2) Partnership equity interests are derived by using the value of the
properties as determined by the Appraisals using the direct capitalization
approach then deducting 4% of these values to account for the costs of sales
of these properties, then subtracting the current principal balances of the
mortgages, then allocating the remaining proceeds, if any, according to the
limited partnership agreements.
NET OTHER ASSETS AND LIABILITIES TABLE. The following table shows the
components of net other assets and liabilities.
NET OTHER ASSETS AND LIABILITIES TABLE
FOR PARTNERSHIPS
<TABLE>
<CAPTION>
NET OTHER
CASH & CASH MISC. GNMA ASSETS & DISTRIBUTIONS
EQUIVALENTS CERTIFICATES(1) LIABILITIES(2) PAYABLE TOTAL
------------ ------------- ------------ ------------ ------------
<S> <C> <C> <C> <C> <C>
Cap Source I............................. $9,304,694 $ 879,182 $ 28,502 $ (860,597) $ 9,351,781
Cap Source II............................ 432,999 0 (111,252) (303,871) 17,876
</TABLE>
- ---------------
(1) These assets are classified for reporting purposes as "available for sale"
and, are therefore reported at fair value.
(2) Generally, interest receivable less accounts payable.
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<PAGE>
COMPARISON OF BACS AND UNITS
BUSINESS
THE PARTNERSHIPS. The partnership agreements limit the business of the
partnerships to originating, acquiring, holding, selling, disposing of and
otherwise dealing with insured mortgages on multi-family rental housing
complexes and to acquiring, holding, selling, disposing of and otherwise dealing
with limited partnership interests in operating partnerships which construct and
operate multi-family rental housing complexes. The partnership agreements do not
permit the partnerships to raise new capital.
THE COMPANY. The company will make equity investments primarily in
multifamily residential properties. The company's limited partnership agreement
will permit the company to borrow funds and raise new capital.
DURATION OF EXISTENCE
THE PARTNERSHIPS. The partnership agreements provide that the partnerships
may exist for terms ranging up to 40 to 49 years and that the partnerships have
a limited existence. In furtherance of this objective, the partnership
agreements generally provide that the proceeds from the sale, financing,
refinancing or other disposition of any property owned by the partnerships will
not be reinvested but will be distributed to the investors to the extent the
proceeds exceed the partnerships' other cash requirements.
THE COMPANY. The company's limited partnership agreement provides that the
company may exist for a term up to 40 years. The company may, however, reinvest
funds from the sale, financing, refinancing or other disposition of property
owned by the company. The company may also invest cash flow from operations in
real estate assets.
INVESTMENT OBJECTIVES AND POLICIES
THE PARTNERSHIPS. The principal investment objectives of the partnerships
are substantially the same: to preserve invested capital, to maximize the
potential for appreciation in property values and to provide for partially tax
deferred cash distributions throughout a finite life. Under the partnership
agreements, the partnerships are not permitted to reinvest cash from sales in
new properties, except in limited circumstances. The partnerships will
automatically dissolve in 2030, for Cap Source I and 2035, for Cap Source II,
unless dissolved earlier. The partnerships have no present intention to
liquidate or to sell or finance their properties.
THE COMPANY. The company's investment objectives will be to provide
unitholders with increased distributions, enhanced liquidity and an increase in
net asset value, which are similar to those of the partnerships. However, the
company will be permitted to reinvest cash from sales in new properties. The
company will dissolve in 2039, unless dissolved earlier.
BORROWING POLICIES
THE PARTNERSHIPS. The partnerships are not authorized to incur borrowings
or are restricted in the amount and nature of borrowings. The partnerships do
not incur borrowings in the ordinary course of business.
THE COMPANY. The company is not restricted in the amount and nature of the
funds it can borrow, except as provided in the indenture. See "THE
NOTES--Notes--Limitation on Indebtedness."
MANAGEMENT
THE PARTNERSHIPS. The partnerships are managed by the Cap Source General
Partners, which have exclusive authority over the partnerships' operations, with
some limitations contained in the partnership agreements. Under Delaware law,
the Cap Source General Partners are accountable to the partnerships and the
limited partners as fiduciaries. The limited partners may not participate in
management of the partnerships. The Cap Source General Partners have general
liability for all partnership obligations. The
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<PAGE>
partnership agreements provide generally that the Cap Source General Partners
are indemnified from losses relating to acts performed or omitted to be
performed in good faith and in the best interests of the partnerships, provided
the conduct did not constitute negligence, misconduct, breach of a fiduciary
duty or a breach of obligations under the partnership agreements. The Cap Source
General Partners may be removed by a vote of a majority of partnership interests
in the respective partnerships.
THE COMPANY. The company will be managed by the General Partner, which will
have exclusive authority over the company's operations, with some limitations
contained in the company's limited partnership agreement. Under Delaware law,
the General Partner is accountable to the company and the unitholders as a
fiduciary. The unitholders may not participate in management of the company. The
General Partner has general liability for all partnership obligations. The
company's limited partnership agreement provides generally that the General
Partner is indemnified from losses relating to acts performed or omitted to be
performed in good faith and in the best interests of the company, provided the
conduct did not constitute fraud, gross negligence, willful misconduct, breach
of a fiduciary duty or a breach of obligations under the company's limited
partnership agreement. The General Partner may be removed by a vote of a
majority of partnership interests in the company. If the General Partner is
removed without cause, the General Partner is entitled to receive termination
fees. See "--Compensation, Fees and Expenses--THE COMPANY."
COMPENSATION, FEES AND EXPENSES
THE PARTNERSHIPS.
CASH DISTRIBUTIONS
The partnership agreements generally provide that the Cap Source General
Partners are entitled to an amount not to exceed 1% of cash distributions in
each year.
ASSET MANAGEMENT COMPENSATION
The Cap Source I General Partners are entitled to receive an asset
management and partnership administrative fee equal to 0.5% of invested assets
per annum, payable only during years that an 8% return has been paid to
investors on a noncumulative basis. Any unpaid amounts will accrue and be
payable only after a 13% annual return to Cap Source I investors has been paid
on a cumulative basis and investors have received the return of their capital
contributions. The Cap Source II General Partners are entitled to receive an
asset management and partnership administrative fee equal to 0.5% of invested
assets per annum, the first $50,000 of which is paid each year with the balance
payable only during years that a 6.5% annual return has been paid to Cap Source
II investors on a noncumulative basis. An additional fee of 0.5% of invested
assets will be paid in years that an 11.5% annual return has been paid to Cap
Source II investors on a cumulative basis. Any unpaid amounts will accrue and be
payable only after an 11.5% annual return to investors has been paid on a
cumulative basis and the investors have received the return of their capital
contributions. The Cap Source General Partners also receive 1% of the net
proceeds from any sale of partnership assets. The Cap Source General Partners
will receive a termination fee equal to 3% of all sales proceeds less actual
costs incurred in connection with all sales transactions, payable only after the
investors have received a return of their capital contributions and a 13% annual
return on a cumulative basis with respect to Cap Source I or an 11.5% annual
return on a cumulative basis with respect to Cap Source II. The Cap Source
General Partners will also receive a fee equal to 9.1% of all cash available for
distribution and sales proceeds (after deducting from cash available or sales
proceeds any termination fee paid therefrom) after investors have received a
return of their capital contributions and a 13% annual return on a cumulative
basis with respect to Cap Source I or an 11.5% annual return on a cumulative
basis with respect to Cap Source II.
REIMBURSEMENT OF EXPENSES
The partnership agreements provide that all of the partnerships' expenses,
including legal, auditing and accounting expenses, will be billed directly to
and paid by the partnerships. Under the partnership agreements, the Cap Source
General Partners are reimbursed for their expenses for services performed for
the partnerships, for example, legal, accounting, transfer agent, data
processing and duplicating services.
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THE COMPANY.
CASH DISTRIBUTIONS
The company's limited partnership agreement generally provides that the
General Partner is entitled to an amount not to exceed 1% of cash distributions
in each year.
ASSET MANAGEMENT COMPENSATION
The General Partner will be paid a property acquisition fee in an amount
equal to 1.25% of the aggregate purchase price paid by the company for the
properties. The General Partner will also be paid an administrative fee each
month in an amount equal to 0.5%, on an annual basis, of the sum of (1) the fair
market value on the merger date of the partnerships' assets that are then still
owned by the company, plus (2) the purchase price paid by the company for new
assets acquired after the merger date that are then still owned by the company.
The first $100,000 of the administrative fee shall be payable each year, with
the balance payable only during years that funds from operations ("FFO"),
calculated before administrative fees, exceeds 7% of the unit holders' average
capital for that year. FFO represents net income (or loss) (computed in
accordance with GAAP), excluding gains (or losses) from debt restructuring and
sales of properties, plus real estate-related depreciation and amortization
(excluding amortization of deferred financing costs and depreciation of non-real
estate assets) and after adjustments for unconsolidated partnerships and joint
ventures.
REIMBURSEMENT OF EXPENSES
The company's limited partnership agreement provides that all of the
company's expenses, including legal, auditing and accounting expenses, may be
billed directly to and paid by the company, the General Partner or America First
Companies. Under the company's limited partnership agreement, the General
Partner and America First Companies are reimbursed for some of their expenses
for services performed for the company, for example, legal, accounting, transfer
agent, data processing and duplicating services. The General Partner and America
First Companies will also be reimbursed for an allocable portion of the salaries
and fringe benefits of their employees who provide services for the company. In
addition, the company will reimburse the General Partner and America First
Companies for all costs associated with the evaluation of potential new assets
acquired by the company, insurance premiums, the cost of compliance with all
state and federal regulatory requirements, securities exchange or NASDAQ listing
fees and charges or payments to third parties for services rendered to the
company.
TERMINATION COMPENSATION
The company's limited partnership agreement provides that if the General
Partner is removed without cause, the successor general partner, or the company,
if it so elects, will have the obligation to purchase the partnership interest
of the General Partner for fair market value. The fair market value is to be
equal to the sum of (1) the present value of all future asset management fees
and net operating income which would be paid to the General Partner if the
removal had not occurred and (2) the amount the General Partner would receive
upon dissolution and termination of the company, assuming that the dissolution
or termination occurred on the date of removal and the assets of the company
were sold for their then fair market value.
VOTING RIGHTS
THE PARTNERSHIPS. The investors are entitled to vote only as provided under
the Delaware Partnership Law and the respective partnership agreements.
Generally, an investor may vote on: (1) material amendments to the partnership
agreement; (2) the approval of the disposition of substantially all of the
partnership's assets; (3) an election to dissolve the partnership; (4) the
determination to remove the general partner; (5) the approval of the partnership
incurring material additional amounts of indebtedness;
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(6) the determination to terminate a contract between the partnership and the
general partner or one of their affiliates; and (7) the approval of a successor
general partner. Under the Delaware Partnership Law and the partnership
agreements, decisions relating to the operation and management of the
partnerships are made by the general partners of each partnership. There are no
provisions for annual meetings of investors in the partnership agreements. If a
limited partner were granted additional voting rights, the possibility exists
under the Code that the partnership structure and the terms of the applicable
partnership agreement would be disregarded. In which case, the partnership may
be taxed as an association for tax purposes and thus would be incur double
taxation similar to a corporation.
THE COMPANY. The unitholders will be entitled to vote only as provided
under the Delaware Partnership Law and the company's limited partnership
agreement. Generally, a unitholder may vote on: (1) material amendments to the
company's limited partnership agreement; (2) the determination to remove the
General Partner; (3) the approval of a successor General Partner; and (4) the
determination to dissolve the company or sell substantially all of the company's
assets. Under the Delaware Partnership Law and the company's limited partnership
agreement, decisions relating to the operation and management of the company are
made by the General Partner. There are no provisions for annual meetings of
unitholders in the company's limited partnership agreement. If a limited partner
were granted additional voting rights, the possibility exists under the Code
that the partnership structure and the terms of the company's limited
partnership agreement would be disregarded. In which case, the company may be
taxed as an association for tax purposes and thus would incur double taxation
similar to a corporation.
THE COMPANY
OVERVIEW
The company was organized under the laws of the State of Delaware on June
18, 1999, for the purpose of acquiring, holding, operating, selling and
otherwise dealing primarily with multifamily residential properties, including
the acquisition of debt and equity securities of entities engaged in similar
activities. As a result of the transaction, the company will succeed to the
assets and liabilities of the partnerships.
Following the transaction, the company's primary business objective will be
to provide unitholders with increased distributions, an increase in net asset
value and to increase the liquidity and market value of the units. The company
expects to achieve this objective by listing the units on NASDAQ and by making
primarily equity investments in multifamily residential properties. There can be
no assurance, however, that the company's business objectives will be met.
In connection with the transaction, the partnerships' assets will be
transferred to the company. The company will also have the ability to acquire
additional multifamily residential properties. The company will have the ability
to more actively manage the makeup of its real estate portfolio as compared to
the partnerships. The company's investment strategy will be funded initially
from available cash and short-term investments and from (1) borrowing against or
sale of the existing properties, (2) borrowing against or sale of the GNMA
certificates and the FHA loans, and (3) borrowing against the additional
properties acquired by the company following the transaction. The company may
also use additional sources of financing, both debt and equity, to further its
business objectives and investment strategies.
The principal executive offices of the company are located at 1004 Farnam
Street, Suite 400, Omaha, Nebraska 68102, and its telephone number is (402)
444-1630.
THE GENERAL PARTNER
The company will be managed by its general partner. The General Partner,
America First Capital Source I L.L.C., is a Delaware limited liability company
that was originally organized as a corporation under the laws of the State of
Delaware on July 22, 1985, to serve as a general partner of Cap Source I. In
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connection with the transaction, Insured Mortgage Equities II L.P., a Cap Source
II General Partner, will sell its general partner interest in Cap Source II to
the other Cap Source II General Partner, America First Capital Source II L.L.C.
Then, America First Capital Source II L.L.C. and the Cap Source I General
Partners will be merged together with the General Partner being the surviving
entity. In return for providing services to the company, the General Partner
will be entitled to receive management and acquisition fees as provided in the
company's limited partnership agreement. See "COMPARISON OF BACS AND
UNITS--Compensation, Fees and Expenses--THE COMPANY." Cap Source II investors
voting in favor of the transaction will also be deemed to have consented to the
sale of Insured Mortgage Equities II L.P.'s general partner interest in Cap
Source II to America First Capital Source II L.L.C.
To estimate the fees payable to the General Partner during the initial years
of operations of the company, the Cap Source General Partners made the following
assumptions: (1) the beginning base of assets upon which the Asset Management
Fee is computed is $78,442,000, which is approximately equal to the total
exchange value, (2) the company will initially have $40,000,000 available to
invest from internal sources including borrowing secured by the GNMA
Certificates and FHA Loans, (3) no other source of cash is available for
investment and all cash flows generated by the investments are distributed to
unitholders in the form of distributions, (4) the company will invest
$30,000,000 each year for a two year total of $60,000,000, (5) all of the
amounts invested will be on a leveraged basis using 50% leverage, (6) total
assets at the end of year 1 are $108,000,000, (7) total assets at the end of
year 2 are $138,000,000, (8) no assets are sold, (9) there is no appreciation or
depreciation of asset values, and (10) reimbursable expenses remain constant and
are 25% less than the historical reimbursements in 1998 due to consolidation of
management and administration of the partnerships. The following table shows the
estimated fees and reimbursements payable to the General Partner for the first
two years of operations of the company based solely upon the above assumptions.
ESTIMATED FEES AND REIMBURSEMENTS PAYABLE TO THE GENERAL PARTNER(1)
<TABLE>
<CAPTION>
YEAR 1 YEAR 2
------------ ------------
<S> <C> <C>
Administrative Fee................................................ $ 465,000 $ 615,000
Acquisition Fee................................................... 375,000 375,000
Reimbursement of Expenses......................................... 440,000 440,000
------------ ------------
Total............................................................. $ 1,280,000 $ 1,430,000
------------ ------------
------------ ------------
</TABLE>
- ------------
(1) These fees are estimates based solely on the assumptions made by the Cap
Source General Partners listed above. There can be no assurance that the
fees payable to the General Partner will not be greater than these
estimates. The General Partner will also be entitled to receive 1% of the
cash distributions of the company in accordance with the company's limited
partnership agreement. This table does not include an estimate of these
amounts because the Cap Source General Partners believe that estimating and
quantifying future cash flows and distributions would require numerous
assumptions and be misleading to investors.
For a description of the fee structure of the General Partner see
"COMPARISON OF BACS AND UNITS--Compensation, Fees and Expenses--THE COMPANY."
The General Partner will not receive any units or other compensation in
connection with the transaction.
Under the terms of the company's limited partnership agreement, the General
Partner will manage the investments of the company, formulate investment
criteria, represent the company in connection with the acquisition and
disposition of real estate assets, develop and implement strategies to improve
the performance of the company's investments, administer the day-to-day
operation of the company, communicate with and maintain relations with the
investors of the company, and perform other services as contemplated by the
company's limited partnership agreement. The company's limited partnership
agreement provides that the General Partner will receive compensation in the
form of an Acquisition Fee and an Asset Management Fee, as more particularly
described under "COMPARISON OF BACS AND UNITS--
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Compensation, Fees and Expenses--THE COMPANY." The General Partner may engage
its affiliates to provide other services to the company, as provided in the
company's limited partnership agreement.
INVESTMENT STRATEGY
In furtherance of its business objectives, the company intends to acquire
additional multifamily residential properties. The company will only acquire a
multifamily residential property if there is a positive spread between the
current net rental revenue being generated by the property and the interest
payments that the company will incur on the mortgage issued to finance the
acquisition of the property. In addition, the company will authorize the General
Partner to take other steps to create a larger and more homogeneous asset base
which the General Partner believes will be more attractive to potential buyers
and which may provide unitholders with a greater potential for appreciation in
the value of their units.
The company will focus its acquisition efforts on established multifamily
properties in stable markets. In particular, the company will seek out
properties that it believes have the potential for increased revenues through
more effective management. In connection with each potential property
acquisition, the company will review many factors, including the following: (1)
the location of the property; (2) the construction quality, condition and design
of the property; (3) the current and projected cash flow generated by the
property and the potential to increase cash flow through more effective
management; (4) the potential for capital appreciation of the property; (5) the
potential for rental rate increases; (6) the economic situation and any
potential changes in the economic situation in the community in which the
property is located; (7) the occupancy and rental rates at competing properties;
and (8) the potential for liquidity through financing or refinancing of the
property or the ultimate sale of the property.
The company intends to hold and operate its properties as long-term
investments. In that regard, the company's business strategies are to (1)
maintain high occupancy and increase rental rates through effective leasing,
reducing turnover rates and providing quality maintenance and services to
maximize resident satisfaction, (2) manage operating expenses and achieve cost
reductions through operating efficiencies and economies of scale generally
inherent in the management of a portfolio of multiple properties, and (3)
emphasize regular programs of repairs, maintenance and property improvements to
enhance the competitive advantage and value of its properties in their
respective market areas.
After the transaction, the company will own limited partnership interests in
ten limited partnerships owning multifamily properties. The company will conduct
a detailed evaluation of each of the properties to determine the best strategy
to maximize their value to the company. These strategies could include
rehabilitation, refinancing and disposition. Those efforts may be adversely
impacted by the fact that the company has limited control over most of the
partnerships. Consequently, the company will evaluate purchasing the interest of
the existing general partner interests to permit it to control the properties
and maximize their value to the company.
FINANCING STRATEGIES
The company intends to fund its new investments first by using its initial
cash and short-term investments, which are expected to be approximately $10
million at the completion of the transaction. Thereafter the company intends to
(1) borrow against or sell the existing properties, (2) borrow against or sell
the GNMA certificates and FHA loans by entering into "reverse repo agreements",
and (3) borrow against the additional properties acquired by the company
following the transaction.
The company will also consider entering into a line-of-credit or similar
corporate financing agreement, the issuance of additional securities either
directly in the market or to sellers of assets, or other ways to meet its
investment objectives.
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OPERATING RESTRICTIONS
The company at all times intends to conduct its business so as not to become
regulated as an investment company under the Investment Company Act. The
Investment Company Act exempts, among other possible exemptions, entities that
are "primarily engaged in the business of purchasing or otherwise acquiring
mortgages and other liens on and interest in real estate" (these mortgages and
liens being referred to as "Qualifying Interests"). Under current interpretation
of the staff of the Commission, to qualify for this exemption, the company must
maintain at least 55% of its assets directly in Qualifying Interests. In
addition, unless securities relating to federally insured mortgages ("Mortgage
Securities") represent all the certificates issued with respect to an underlying
pool of mortgages, these Mortgage Securities may be treated as securities
separate from the underlying mortgage loans and, thus, may not be considered
Qualifying Interests for purposes of the 55% requirement. The company will
closely monitor its compliance with this requirement and intends to maintain its
exempt status.
Except as provided under "THE NOTES," the company will have no restriction
on the ratio of debt to equity investments it holds and expects to use leverage
to achieve its objective. This leverage can be achieved by a combination of
direct borrowings by the company, borrowings secured by real estate, and through
investing in securities of issuers who themselves employ leverage.
POLICY WITH RESPECT TO CERTAIN ACTIVITIES
Other than the restrictions and policies in the company's limited
partnership agreement, the company does not have any policies or limitations
with respect to the following activities: (1) issuing senior securities, (2)
borrowing money, (3) making loans to other persons, (4) engaging in the purchase
and sale (or turnover) of investments, (5) offering securities in exchange for
property, and (6) repurchasing or otherwise reacquiring the company's own units
or other securities. In addition, the company does not have a specific policy
with regard to the amount of the company's assets that may be invested in any
particular type of investment or any one investment. The company does not plan
to invest in the securities of other issuers for the purpose of exercising
control or plan to underwrite securities of other issuers.
MANAGEMENT OF THE GENERAL PARTNER
GENERAL
Under the terms of the company's limited partnership agreement, the General
Partner is responsible for the management of the company and the management and
disposition of its property, and is responsible for the general supervision of
the company's activities. The General Partner will be managed by its sole
member, America First Companies L.L.C. Therefore, the General Partner will not
have any directors, officers or employees. The following individuals are
managers and executive officers of America First Companies and each serves for a
term of one year:
<TABLE>
<CAPTION>
NAME AGE POSITION WITH THE GENERAL PARTNER
- ----------------------------------------- --- --------------------------------------------
<S> <C> <C>
Michael B. Yanney........................ 65 Chairman of the Board, President, Chief
Executive Officer and Manager
Michael Thesing.......................... 44 Vice President, Secretary, Treasurer and
Manager
William S. Carter, M.D................... 72 Manager
Martin A. Massengale..................... 65 Manager
Alan Baer................................ 76 Manager
Gail Walling Yanney...................... 62 Manager
Mariann Byerwalter....................... 38 Manager
</TABLE>
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The business experience during the past five (5) years of each of the
current managers and executive officers is as follows:
MICHAEL B. YANNEY, Chairman, America First Companies, L.L.C. Since 1984, Mr.
Yanney has served as the Chairman and Chief Executive Officer of America First
Companies L.L.C. and its predecessors. America First Companies is a financial
services firm located in Omaha, Nebraska, that manages public investment funds
which have raised over $1.5 billion. Mr. Yanney has been Chairman of the general
partner of a number of publicly traded master limited partnerships including
America First Guaranteed Mortgage Funds I and II; America First Tax Exempt
Mortgage Funds I and II; America First Participating/ Preferred Equity Mortgage
Fund and America First PREP Fund 2; and America First Financial Fund 1987-A. He
currently serves as Chairman of the general partner of America First Apartment
Investors, L.P., America First Tax Exempt Investors, L.P., and of America First
Capital Source Funds I and II. He also serves as Chairman of the board of
advisors for America First Mortgage Investments, Inc. Mr. Yanney formed, and
serves as Chairman of the management companies of three private limited
partnerships, Agribusiness Partners International, L.P.; Rosewood Communities,
L.P. and The Linden Fund L.P. Mr. Yanney also serves as a member of the boards
of directors of Burlington Northern Santa Fe Corporation, Level 3
Communications, Inc., Forest Oil Corporation, RCN Corp., and Freedom
Communications, Inc.
MICHAEL THESING has been Vice President and Chief Financial Officer of
affiliates of America First Companies since July 1984. He serves as President of
America First Investment Advisors L.L.C. and is a member of the Board of
Managers of America First Companies. From January 1984 until July 1984 he was
employed by various companies controlled by Mr. Yanney. He was a certified
public accountant with Coopers & Lybrand from 1977 through 1983.
WILLIAM S. CARTER, M.D., has been a member of the Board of Managers of
America First Companies since 1994. Dr. Carter is a retired physician. Dr.
Carter practiced medicine for 30 years in Omaha, Nebraska, specializing in
otolaryngology (disorders of the ears, nose and throat).
MARTIN A. MASSENGALE has been a member of the Board of Mangers of America
First Companies since 1994. Dr. Massengale is President Emeritus of the
University of Nebraska, Director of the Center for Grassland Studies and
Foundation Distinguished Professor. Prior to becoming President in 1991, he
served as Interim President from 1989, as Chancellor of the University of
Nebraska Lincoln from 1981 until 1990 and as Vice Chancellor for Agriculture and
Natural Resources from 1976 to 1981. Prior to that time, he was a professor and
associate dean of the College of Agriculture at the University of Arizona. Dr.
Massengale currently serves on the board of directors of Woodmen Accident & Life
Insurance Company and IBP, Inc. and is a member of the Board of Trustees of the
Great Plains Funds, Inc.
ALAN BAER has been a member of the Board of Mangers of America First
Companies since 1994. Mr. Baer is presently Chairman of Alan Baer & Associates,
Inc., a management company located in Omaha, Nebraska. He is also Chairman of
Lancer Hockey, Inc., Baer Travel Services, Wessan Telemarketing, Total Security
Systems, Inc. and several other businesses. Mr. Baer is the former Chairman and
Chief Executive Officer of the Brandeis Department Store chain which, before its
acquisition, was one of the larger retailers in the Midwest. Mr. Baer has also
owned and served on the board of directors of several banks in Nebraska and
Illinois.
GAIL WALLING YANNEY has been a member of the Board of Mangers of America
First Companies since 1996. Dr. Walling is a retired physician. Dr. Walling
practiced anesthesia and was most recently the Executive Director of the
Clarkson Foundation until October of 1995. In addition, she was a director of
FirsTier Bank, N.A., Omaha prior to its merger with First Bank, N.A. Dr. Walling
is the wife of Michael B. Yanney.
MARIANN BYERWALTER has been a member of the Board of Mangers of America
First Companies since 1997. Ms. Byerwalter is Vice President of Business Affairs
and Chief Financial Officer of Stanford University. Ms. Byerwalter was Executive
Vice President of America First Eureka Holdings, Inc.
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("AFEH") and EurekaBank from 1988 to January 1996. Ms. Byerwalter was Chief
Financial Officer and Chief Operating Officer of AFEH, and Chief Financial
Officer of EurekaBank from 1993 to January 1996. She was an officer of
BankAmerica Corporation and its venture capital subsidiary from 1984 to 1987.
She served as Vice President and Executive Assistant to the President of Bank of
America and was a Vice President in the bank's Corporate Planning and
Development Department. Ms. Byerwalter currently serves on the board of
directors of Redwood Trust, Inc.
There are no arrangements or understandings between or among any of the
officers or managers and any other person pursuant to which any officer or
manager of America First Companies was selected as an officer or manager. Except
for Michael B. Yanney and Gail Walling Yanney, there are no family relationships
among any managers and officers of America First Companies.
A significant employee of the company will be its portfolio manager. The
portfolio manager will be responsible for identifying, evaluating and acquiring
additional properties for the company. The company's current portfolio manager
is Mr. Joseph N. Grego.
Mr. Grego, 52, has been employed by America First Companies since 1989 and
is responsible for the acquisition and management of various real estate and
mortgage investments, including office, apartment and retirement properties.
From 1980 to 1989, Mr. Grego held several positions with E.F. Hutton and
Shearson Lehman Hutton, including president and director of Hutton Real Estate
Services, Inc., where he was responsible for the asset management of 74
properties nationwide consisting of 3.6 million square feet of commercial real
estate and 8,300 apartment units. From 1974 to 1980 Mr. Grego held positions
with Levitt Corporation and Cavanaugh Communities Corporation, both real estate
development companies.
The company will reimburse the General Partner for an allocable portion of
the salaries and fringe benefits of employees of the General Partner's
affiliates. For a description of other expenses of the General Partner that will
be reimbursed by the company see "COMPARISON OF BACS AND UNITS-- Compensation,
Fees and Expenses--THE COMPANY."
INDEMNIFICATION
Subject to applicable law, the company's limited partnership agreement
requires the company to indemnify the General Partner against judgments, costs
and attorney's fees and amounts expended in settlement of any claims of
liability, loss or damage, to which the General Partner was made a party by
reason of being or having been the General Partner, provided that the General
Partner's conduct did not constitute fraud, gross negligence, willful misconduct
or breach of fiduciary duty.
PRIOR PARTNERSHIPS
America First Companies, an affiliate of the Cap Source General Partners,
has formed eleven prior public limited partnerships since 1984. These prior
public partnerships have raised approximately $1.3 billion in capital, from
approximately 93,000 investors. Three of the prior public partnerships were
merged with and into a newly formed corporation. Only four of the other prior
programs continue in existence. Although none of these prior public partnerships
had investment objectives similar to those of the company, some of the prior
public partnerships did invest in designated classes of real estate assets. See
"Appendix B" for detailed information about the performance of seven of these
prior public partnerships that invested in real estate assets. Information was
not provided regarding income tax because there have been substantial changes in
the tax laws during the period for which the information was presented. Prior
performance information was not included for four of the public programs because
those programs did not invest in real estate. In addition, information has not
been provided for prior programs that were not public. The eleven prior public
limited partnerships organized by America First Companies are:
AMERICA FIRST FEDERALLY GUARANTEED MORTGAGE FUND LIMITED PARTNERSHIP
("AFFGMF") commenced its offering in November 1984 and closed in January 1985,
and raised $200 million from approximately 11,000
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investors. The purpose of this partnership was to acquire "deep discount"
FHA-insured mortgage loans on multifamily housing projects. This partnership
ceased operations and was liquidated in 1986.
AMERICA FIRST FEDERALLY GUARANTEED MORTGAGE FUND 2 LIMITED PARTNERSHIP
("AFFGMF2") commenced its offering in April 1985 and closed in October 1985, and
raised approximately $200 million with sales to approximately 14,000 investors.
The purpose of this partnership was to acquire "deep discount" FHA-insured
mortgage loans on multifamily housing projects. This partnership ceased
operations and was liquidated in 1992.
AMERICA FIRST TAX EXEMPT MORTGAGE FUND LIMITED PARTNERSHIP ("AFTEMF")
commenced its offering in October 1985 and closed in December 1985, and raised
approximately $200 million with sales to approximately 10,000 investors. The
purpose of this partnership was to acquire tax-exempt mortgages on multifamily
housing projects.
AMERICA FIRST TAX EXEMPT MORTGAGE FUND 2 LIMITED PARTNERSHIP ("AFTEMF2")
commenced its offering in September 1986 and closed in October 1986, and raised
$105 million with sales to approximately 5,000 investors. The purpose of this
partnership was to acquire tax-exempt mortgages on multifamily housing projects.
AMERICA FIRST PARTICIPATING/PREFERRED EQUITY MORTGAGE FUND LIMITED
PARTNERSHIP ("AFPPEMF") commenced its offering in October 1986 and closed in
June 1987, and raised approximately $120 million with sales to approximately
7,000 investors. This partnership was formed to originate and acquire
FHA-insured mortgage loans and mortgage-backed securities guaranteed by GNMA,
FNMA and FHLMC and participating equity or debt interests in the multifamily
housing projects financed by these loans or securities.
AMERICA FIRST FINANCIAL FUND 1987-A LIMITED PARTNERSHIP commenced its
offering in April 1987 and closed in August 1987, and raised approximately $120
million with sales to approximately 11,000 investors. This partnership was
formed for the purpose of acquiring and operating one or more savings and loan
associations or other types of financial institutions.
AMERICA FIRST PREP FUND 2 LIMITED PARTNERSHIP ("AFPF2") commenced its
offering in October 1987 and closed in October 1988, and raised approximately
$34 million from approximately 1,900 investors. This partnership was formed to
originate and acquire FHA-insured mortgage loans and mortgage-backed securities
guaranteed by GNMA, FNMA and FHLMC and participating equity or debt interests in
the multifamily housing projects financed by these loans or securities.
AMERICA FIRST PREP FUND 2 PENSION SERIES LIMITED PARTNERSHIP ("AFPF2PS")
commenced its offering in March 1988 and closed in December 1988, and has raised
approximately $18 million with sales to approximately 850 investors. This
partnership was formed to originate and acquire FHA-insured mortgage loans and
mortgage-backed securities guaranteed by GNMA, FNMA and FHLMC and participating
equity or debt interests in the multifamily housing projects financed by these
loans or securities.
AMERICA FIRST FINANCIAL FUND 1988 A LIMITED PARTNERSHIP commenced its
offering in September 1988 and closed in May 1989, and raised approximately $295
million from approximately 30,000 investors. This partnership was formed for the
purpose of acquiring and operating one or more savings and loan associations or
other types of financial institutions. This partnership ceased operations and
was liquidated in 1991.
AMERICA FIRST MORTGAGE SERVICING COMPANY L.P. I commenced its offering in
June 1991 and closed in September 1991, and raised approximately $18 million
from approximately 604 investors. The purpose of this partnership was to acquire
mortgage servicing rights.
AMERICA FIRST MORTGAGE SERVICING COMPANY L.P. II commenced its offering in
March 1992 and closed in April 1992, and raised approximately $9.9 million from
approximately 2,500 investors. The purpose of this partnership was to acquire
mortgage servicing rights. This partnership ceased operations and was liquidated
in 1995.
61
<PAGE>
On April 10, 1998, AFPPEMF, AFPF2 and AFPF2PS were merged with and into
America First Mortgage Investments, Inc. The trading price of shares of common
stock of America First Mortgage Investments, Inc. has declined from 9 1/8 on
April 13, 1998, the initial day of trading, to on July , 1999. America
First Mortgage Investments, Inc. is a REIT which invests primarily in real
estate mortgages, and consequently its operations and business are not similar
to those of the company.
The Cap Source General Partners will provide, upon request and without
charge, the latest Form 10-K filed with the Commission by the prior public
partnerships within the last twenty-four months, if any, and will provide upon
request, for a reasonable fee, the exhibits to each Form 10-K. Any request for
information described in this paragraph should be in writing to America First
Investor Services Department, 1004 Farnam Street, Suite 400, Omaha, Nebraska
68102. The information contained in these Form 10-Ks should not be construed as
implying that the company will realize results similar to any prior partnership.
VOTING
THE MATTER TO WHICH THE INVESTORS ARE REQUESTED TO CONSENT IS OF GREAT
IMPORTANCE TO THE PARTNERSHIPS AND THE INVESTORS. ACCORDINGLY, INVESTORS ARE
URGED TO READ AND CAREFULLY CONSIDER THE INFORMATION PRESENTED IN THIS
PROSPECTUS/CONSENT SOLICITATION STATEMENT AND TO COMPLETE, DATE, SIGN AND
PROMPTLY RETURN THE ENCLOSED CONSENT CARD IN THE ENCLOSED POSTAGE-PAID ENVELOPE.
SOLICITATION BY THE CAP SOURCE GENERAL PARTNERS
The Cap Source General Partners are seeking the consent of the investors of
the partnerships to the transaction. The Cap Source General Partners will not
hold a meeting of the investors to consider the transaction, but instead are
seeking the written consent of investors as provided in Article X of the
partnership agreements. Under the terms of the partnership agreements, the
transfer of all the assets of the partnerships in a single transaction and the
dissolution of the partnerships requires the consent of the holders of a
majority of the outstanding BACs. Accordingly, the transaction may not be
completed without the consent of the holders of a majority of the outstanding
BACs of each of the partnerships. This prospectus/consent solicitation statement
constitutes the solicitation of the approval of the investors to the
transaction.
VOTING PROCEDURES
We will not hold a meeting of the investors to consider the transaction, but
instead are seeking your written consent as provided in Article X of the
partnership agreements. Each BAC you own entitles you to one vote. You may only
vote with respect to the transaction if you hold BACs of record at the close of
business on , 1999, the record date. A consent card is included with
this prospectus/consent solicitation statement and we are asking you to
complete, date and sign the consent card and return it to in the
enclosed envelope as soon as possible. To be valid, consents must be received by
by 5:00 p.m. Eastern Time on , 1999, the approval date,
unless we extend this date, which we may do in our sole discretion. See
"VOTING."
Each investor is being asked by the Cap Source General Partners to consider
the following elections with respect to the transaction:
"YES," I approve of my partnership's participation in the transaction and
the adoption of the Amendments to the partnership agreement.
or
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<PAGE>
"NO," I do not approve of my partnership's participation in the transaction
or the adoption of the Amendments to the partnership agreement.
Investors may also abstain from voting.
You will receive units representing equity ownership in the new company
unless you elect to receive notes representing debt. You may elect to receive
notes regardless of whether you vote "YES" or "NO" with respect to the
transaction. An otherwise valid consent card will be deemed to grant consent to
the transaction if it is not marked "NO" or to abstain. See "VOTING."
If you do not approve of your partnership's participation in the
transaction, you may either vote "NO" or abstain from voting. If you vote "NO"
and your partnership approves the transaction, you will receive units, unless
you elect to receive notes as indicated on the consent card. If you abstain from
voting, you will also receive units if the transaction is approved by your
partnership, unless you elect to receive notes as indicated on the consent card.
If you do not return your consent card, you will receive units if the
transaction is completed. You may withdraw or revoke your consent at any time
before the approval date. See "VOTING--Revocability of Consent."
Investors, including dissenting investors and investors who abstain from
voting with respect to the transaction by indicating their abstention on the
consent card, will receive units if the transaction is completed unless each
investor elects to receive notes as indicated on the consent card. An investor
may elect to receive notes regardless of whether he votes "YES" or "NO" with
respect to the transaction. An investor who does not return the consent card
will receive units if the transaction is completed. If dissenting investors
elect to receive notes in excess of the maximum note limitation, the transaction
will not be completed. If this does not occur, but the total amount of notes
allocable to all investors who elect to receive notes exceeds the maximum note
limitation, notes will be allocated first to dissenting investors who elected to
receive notes and then, on a pro rata basis (in denominations of $1,000), to
investors who elected to receive notes and either abstained from voting or voted
"YES" in favor of the transaction. Thus, an investor could choose notes but
receive units instead. To be assured of receiving notes, an investor must vote
"NO" with respect to the transaction and elect to receive NOTES. See
"NOTES--Allocation of Notes." An otherwise valid consent card will be deemed to
grant consent to the transaction if it is not marked "NO" or to abstain.
Each partnership agreement provides that the partnership's initial limited
partner (the "Initial Limited Partner") holds legal title to the limited partner
interests in the partnership. The rights and benefits of the limited partner
interests of the partnerships have been assigned by the Initial Limited Partners
to the investors. Each investor will be entitled to direct its Initial Limited
Partner to vote on the approval date (and the Initial Limited Partner is
required to vote as directed by the investor) the number of BACs, which
represent the assigned limited partner interests, held by the investor. A
REFERENCE IN THIS PROSPECTUS/CONSENT SOLICITATION STATEMENT TO A CONSENT OR VOTE
WITH RESPECT TO BACS SHALL REFER TO THE DIRECTIONS GIVEN TO THE INITIAL LIMITED
PARTNER BY THE INVESTORS OF THE BACS BY A PROPERLY EXECUTED CONSENT CARD OR
SUBSEQUENT REVISION TO A PROPERLY EXECUTED CONSENT CARD. The Cap Source General
Partners have no right to vote with respect to transaction. Each investor
reflected on the books and records of each partnership at the close of business
on the record date will be entitled to vote its BACs with respect to the
transaction.
A consent card is included with this prospectus/consent solicitation
statement and investors are asked to complete, date and sign the consent card
and return it to in the enclosed envelope as soon as possible.
INVESTORS SHOULD NOT SEND THE CERTIFICATES FOR THEIR BACS WITH THE CONSENT CARD.
Investors who sign and return the consent card without indicating a vote will be
deemed to have voted "YES" in favor of the transaction. These investors and
investors voting "YES" in favor of the transaction will also be deemed to have
voted in favor of ratifying the amendments and any other actions taken by the
Cap Source General Partners to facilitate the transaction. For a description of
the amendments, see "THE TRANSACTION--Amendments to the Partnership Agreements."
In addition, Cap Source II investors who sign and
63
<PAGE>
return the consent card without indicating a vote and those voting "YES" in
favor of the transaction will also be deemed to have voted in favor of
consenting to the sale of the Cap Source II general partner interest owned by
one of the Cap Source II General Partners. For a description of this sale, see
"THE COMPANY--The General Partner."
To be valid, consents must be received by by the approval date,
which is 5:00 p.m. Eastern Time on , 1999, which date may be extended by
the Cap Source General Partners in their sole discretion. Consent cards should
be returned in the enclosed envelope to at the following address:
.
Abstentions and broker nonvotes will have the same effect as a vote against
the transaction. Investors who vote against the transaction or abstain from
voting will have no right to require the partnerships to purchase their BACs or
any other rights similar to those available to dissenting shareholders of
corporations under Delaware law. See "--No Right of Appraisal" below.
The vote of the investors with respect to the transaction will be tabulated
by on , 1999, unless this date is extended by the Cap Source
General Partners in their sole discretion. is not affiliated with
the company or the Cap Source General Partners.
THE CAP SOURCE GENERAL PARTNERS BELIEVE THAT THE TERMS OF THE TRANSACTION
ARE FAIR AND IN THE BEST INTERESTS OF THE PARTNERSHIPS AND ALL OF THE INVESTORS
AND RECOMMEND APPROVAL OF THE TRANSACTION BY THE INVESTORS.
RECORD DATE AND OUTSTANDING BACS
Only investors holding BACs of record at the close of business on
, 1999, will be entitled to receive this notice and to vote with
respect to the transaction. Under the terms of the partnership agreements,
investors are entitled to one vote for each BAC they hold as of the record date.
As of the record date, there was a total of 3,374,222 Cap Source I BACs and
4,011,101 Cap Source II BACs outstanding. Therefore, the affirmative vote of the
holders of 1,687,112 Cap Source I BACs is required to approve the transaction,
and the affirmative vote of the holders of 2,005,551 Cap Source II BACs is
required to approve the transaction. As of the record date, no BACs were
beneficially owned by the Cap Source General Partners, America First Companies
or any of the officers or managers of America First Companies.
SOLICITATION OF VOTES; SOLICITATION EXPENSES
Votes of investors may be solicited by the management of the Cap Source
General Partners. Costs of solicitation will be allocated as shown under "THE
TRANSACTION--Transaction Expenses." Certain officers and employees of the Cap
Source General Partners and affiliates may solicit consents without additional
compensation, other than reimbursement for actual and reasonable out-of-pocket
expenses incurred by these persons in connection with the solicitation.
Brokerage firms, fiduciaries, nominees and others will be reimbursed for
out-of-pocket expenses incurred by them in connection with forwarding consent
materials to beneficial holders of BACs held in their names. In addition to the
use of the mails, consents may be solicited by officers and regular employees of
the Cap Source General Partners and affiliates, who will not be specifically
compensated for these services, by means of personal calls upon or telephonic
communications with investors or their representatives. Moreover, the Cap Source
General Partners may engage the services of a professional proxy solicitation
firm in connection with the solicitation of consents. No party will receive any
compensation contingent upon solicitation of a favorable vote. Proxies voted
against the transaction will not be used by the Cap Source General Partners to
vote for adjournment of the meeting to solicit more votes pursuant to
discretionary authority.
If any material conditions to the transaction are waived, the consent of the
investors to the transaction will be resolicited.
64
<PAGE>
REVOCABILITY OF CONSENT
Investors may withdraw or revoke their consent at any time before the
approval date. To be effective, a written, telegraphic or telex notice of
revocation or withdrawal of the consent card must be received by no
later than the approval date, addressed as follows: . A notice of
revocation or withdrawal must specify the investor's name and the name of the
partnership to which the revocation or withdrawal relates.
COMMUNICATING WITH OTHER INVESTORS
Under Rule 14a-7 of the Securities Exchange Act, each partnership, upon
written request from an investor, will deliver to the investor (1) a statement
of the approximate number of investors of the partnership and (2) the estimated
cost of mailing proxy materials or similar communications to the investors of
the partnership. In addition, under this rule, an investor has the right, at his
or her option, to have his or her partnership (a) mail, at the investor's
expense, any of these materials which the investor desires to deliver to the
other investors of the partnership in connection with the transaction or (b) to
have the partnership deliver, within five business days of the receipt of the
request, a reasonably current list of the names and addresses of the investors
of the partnership as of the record date. The partnerships may require a
requesting investor to pay the reasonable cost of duplicating and mailing the
investor list. Any requests should be sent to America First Investor Services
Department, 1004 Farnam Street, Suite 400, Omaha, Nebraska, 68102.
NO RIGHT OF APPRAISAL
Neither dissenting investors nor investors who abstain from voting with
respect to the transaction will be entitled to dissenters' or appraisal rights
under the partnership agreements, the Delaware Partnership Law or the Delaware
GCL. These rights, when they exist, give the holders of securities the right to
surrender the securities for an appraised value in cash if the securityholder
opposes a merger or similar reorganization. No rights like these will be
provided by the partnerships or the company. Dissenting investors do, however,
have the right to exchange their BACs for notes rather than units. If a
dissenting investor votes against the transaction but does not elect to receive
notes, the dissenting investor will receive units if the transaction is
completed.
FIDUCIARY RESPONSIBILITIES
Under Delaware law, the General Partner is accountable to the company and
the unitholders as a fiduciary and consequently must exercise good faith and
integrity in handling the company's affairs. Under Delaware law, the Cap Source
General Partners are accountable to the partnerships and the investors as
fiduciaries and consequently must exercise good faith and integrity in handling
the partnerships' affairs. Investors who have questions concerning the duties of
the General Partner with respect to the company or the duties of the Cap Source
General Partners with respect to either of the partnerships should consult their
counsel.
The partnership agreements provide for indemnification of the Cap Source
General Partners for losses arising out of any act or omission, provided that it
was determined in good faith that the conduct was in the best interest of the
partnership and that the conduct did not constitute negligence, misconduct or a
breach of fiduciary obligations to the investors.
The rights of unitholders against the general partner of the company in some
circumstances are more limited than the rights of investors against the Cap
Source General Partners.
The company's limited partnership agreement provides for indemnification of
the General Partner for losses arising out of any act or omission, provided that
it was determined in good faith that the conduct was in the best interest of the
company and that the conduct did not constitute fraud, gross negligence, willful
65
<PAGE>
misconduct or a breach of fiduciary obligations to the unitholders. To the
extent that the foregoing provisions concerning indemnification apply to actions
arising under the Securities Act, the company has been advised that, in the
opinion of the Commission, these provisions are contrary to public policy and
therefore are not enforceable.
PRO FORMA FINANCIAL INFORMATION
The following unaudited pro forma statements of operations and cash flows
for the year ended December 31, 1998, and for the three months ended March 31,
1999, have been prepared to reflect the transactions and related adjustments and
assumptions described in the accompanying notes as if the transactions occurred
on January 1, 1998. The pro forma balance sheet has been prepared assuming the
transaction occurred on March 31, 1999. The pro forma financial information is
based on the historical financial statements of each of the partnerships and
should be read in conjunction with the financial statements and notes included
in the separately bound supplement delivered with this prospectus/consent
solicitation statement. In the opinion of management, all adjustments necessary
to reflect the effects of the transaction have been made.
To assist investors in analyzing the transaction, two presentations of pro
forma financial statements have been prepared. The first presentation of pro
forma financial statements assumes the company will not issue any notes. The
second presentation of pro forma financial statements assumes the company will
issue the maximum amount of notes. Investors should bear in mind that the
assumptions regarding the issuance of notes to investors in connection with the
transaction are not necessarily the company's or the Cap Source General
Partners' expectations regarding the outcome of the transaction.
Since the transaction will be accounted for using the purchase method of
accounting, the pro forma financial statements have been prepared using this
method. Under the purchase method, Cap Source I will be deemed to be the
acquirer of Cap Source II because Cap Source I investors will be allocated the
largest number of units of the company. As the surviving entity, Cap Source I's
assets and liabilities will be recorded by the company at their historical cost,
and the assets and liabilities of Cap Source II will be recorded at their
estimated fair market values.
The pro forma financial statements are based upon available information and
upon assumptions, as stated in the notes to the pro forma consolidated financial
statements, that the Cap Source General Partners believe are reasonable in the
circumstances. The pro forma information is unaudited and is not necessarily
indicative of the results which actually would have occurred if the transaction
had been completed on these dates or at the beginning of the periods, nor does
it purport to represent the financial position or results of operations for
future periods.
66
<PAGE>
AMERICA FIRST REAL ESTATE INVESTMENT PARTNERS, L.P.
PRO FORMA BALANCE SHEET
MARCH 31, 1999
(UNAUDITED)
WITHOUT NOTES ISSUED
<TABLE>
<CAPTION>
CAP SOURCE I CAP SOURCE II PRO FORMA PRO FORMA
(HISTORICAL) (HISTORICAL) ADJUSTMENTS COMBINED
------------- ------------- ------------ -------------
<S> <C> <C> <C> <C> <C>
ASSETS
Cash and temporary cash investments, at cost
which approximates market value............ $ 8,919,955 $ 364,577 $ (887,410) (A) $ 8,397,122
Investment in FHA Loans...................... 12,407,952 6,497,238 23,988 (B) 18,929,178
Investment in GNMA Certificates.............. 23,370,123 20,466,193 221,027 (B) 44,057,343
Investment in Operating Partnerships......... -- -- 3,809,948 (B) 3,809,948
Interest receivable.......................... 303,399 195,002 -- 498,401
Other assets................................. 275,264 124,040 (82,856) (B) 848,894
532,446 (A)
------------- ------------- ------------ -------------
$ 45,276,693 $ 27,647,050 $ 3,617,143 $ 76,540,886
------------- ------------- ------------ -------------
------------- ------------- ------------ -------------
LIABILITIES AND PARTNERS' CAPITAL (DEFICIT)
Liabilities
Accounts payable........................... $ 197,832 $ 227,035 $ -- $ 424,867
Distributions payable...................... 860,597 303,871 -- 1,164,468
------------- ------------- ------------ -------------
1,058,429 530,906 -- 1,589,335
------------- ------------- ------------ -------------
------------- ------------- ------------ -------------
Partners' Capital (Deficit)
General Partners........................... (173,476) (295,296) 39,721 (B) (429,051)
Limited Partners........................... 44,391,740 27,411,440 3,932,386 (B) 75,380,602
(354,964) (A) --
------------- ------------- ------------ -------------
44,218,264 27,116,144 3,617,143 74,951,551
------------- ------------- ------------ -------------
$ 45,276,693 $ 27,647,050 $ 3,617,143 $ 76,540,886
------------- ------------- ------------ -------------
------------- ------------- ------------ -------------
</TABLE>
See accompanying Notes to Pro Forma Financial Statements
67
<PAGE>
AMERICA FIRST REAL ESTATE INVESTMENT PARTNERS, L.P.
PRO FORMA STATEMENTS OF INCOME
FOR THE YEAR ENDED DECEMBER 31, 1998
(UNAUDITED)
WITHOUT NOTES ISSUED
<TABLE>
<CAPTION>
CAP SOURCE I CAP SOURCE II PRO FORMA PRO FORMA
(HISTORICAL) (HISTORICAL) ADJUSTMENTS COMBINED
------------ ------------- ----------- ------------
<S> <C> <C> <C> <C> <C>
Income
Mortgage-backed securities income.............. $3,262,922 $ 2,426,356 $ -- $ 5,689,278
Interest income on temporary cash
investments.................................. 530,396 42,339 -- 572,735
Equity in income (losses) of Operating
Partnerships................................. (186,942) (407,218) 22,084 (D) (572,076)
Other income................................... 6,300 4,750 -- 11,050
Gain on sale of mortgage-backed securities..... -- 35,101 35,101
------------ ------------- ----------- ------------
Total Income................................. 3,612,676 2,101,328 22,084 5,736,088
------------ ------------- ----------- ------------
------------ ------------- ----------- ------------
Expenses
Operating and administrative................... 1,710,173 1,220,213 (62,376) (E) 1,747,663
100,000 (F)
(1,233,847) (G)
13,500 (H)
------------ ------------- ----------- ------------
1,710,173 1,220,213 (1,182,723) 1,747,663
------------ ------------- ----------- ------------
Net income....................................... $1,902,503 $ 881,115 $ 1,204,807 $ 3,988,425
------------ ------------- ----------- ------------
------------ ------------- ----------- ------------
Net income per unit.............................. $ 0.56 $ 0.22 $ 0.51
------------ ------------- ------------
------------ ------------- ------------
Weighted average number of units outstanding
during the period.............................. 3,374,222 4,011,101 7,765,772
------------ ------------- ------------
------------ ------------- ------------
</TABLE>
See accompanying Notes to Pro Forma Financial Statements
68
<PAGE>
AMERICA FIRST REAL ESTATE INVESTMENT PARTNERS, L.P.
PRO FORMA STATEMENTS OF CASH FLOWS
FOR THE YEAR ENDED DECEMBER 31, 1998
(UNAUDITED)
WITHOUT NOTES ISSUED
<TABLE>
<CAPTION>
CAP SOURCE I CAP SOURCE II PRO FORMA PRO FORMA
(HISTORICAL) (HISTORICAL) ADJUSTMENTS COMBINED
------------- ------------- ------------- -------------
<S> <C> <C> <C> <C>
Cash flows from operating activities:
Net income.......................................... $ 1,902,503 $ 881,115 $ 1,204,807 $ 3,988,425
Adjustments to reconcile net income to net cash
provided by operating activities:
Equity in losses of Operating Partnerships.......... 186,942 407,218 (22,084) 572,076
Amortization........................................ -- -- (48,876) (48,876)
Amortization of discount on mortgage-backed
securities........................................ (2,287) (1,471) -- (3,758)
Gain on sale of mortgage-backed securities.......... -- (35,101) -- (35,101)
Decrease (increase) in interest receivable.......... 14,826 17,584 32,410
Decrease (increase) in other assets................. (77,354) 22,950 (54,404)
Increase (decrease) in accounts payable............. 285,943 19,933 305,876
Other non-cash adjustments.......................... -- -- (1,133,847) (1,133,847)
------------- ------------- ------------- -------------
Net cash provided by operating activities......... 2,310,573 1,312,228 -- 3,622,801
------------- ------------- ------------- -------------
Cash flows from investing activities
FHA Loan and GNMA Certificate principal payments
received.......................................... 2,635,396 271,807 -- 2,907,203
Disposition of mortgage-backed securities........... -- 5,046,437
Proceeds from sale of available-for-sale
mortgage-backed securities........................ -- 915,012 -- 915,012
Acquisition of GNMA Certificate..................... (2,422,519) (5,029,094) -- (7,451,613)
Investment in Operating Partnerships................ (186,942) (407,218) -- (594,160)
------------- ------------- ------------- -------------
Net cash provided by investing activities......... 25,935 796,944 -- (4,223,558)
------------- ------------- ------------- -------------
Cash flow used in financing activities
Distributions....................................... (3,442,378) (2,917,165) -- (6,359,543)
------------- ------------- ------------- -------------
Net cash used in financing activities............. (3,442,378) (2,917,165) -- (6,359,543)
------------- ------------- ------------- -------------
Net increase in cash and temporary cash
investments..................................... (1,105,870) (807,993) -- (6,960,300)
Cash and temporary cash investments at beginning of
period.............................................. 10,410,564 1,240,992 (887,410) 10,764,146
------------- ------------- ------------- -------------
Cash and temporary cash investments at end of
period.............................................. $ 9,304,694 $ 432,999 $ (887,410) $ 3,803,846
------------- ------------- ------------- -------------
------------- ------------- ------------- -------------
Distributions--income................................. $ 3,686,205
Distributions--return of capital...................... 2,673,338
-------------
$ 6,359,543
-------------
-------------
</TABLE>
See accompanying Notes to Pro Forma Financial Statements
69
<PAGE>
AMERICA FIRST REAL ESTATE INVESTMENT PARTNERS, L.P.
PRO FORMA STATEMENTS OF INCOME
FOR THE THREE MONTHS ENDED MARCH 31, 1999
(UNAUDITED)
WITHOUT NOTES ISSUED
<TABLE>
<CAPTION>
CAP SOURCE I CAP SOURCE II PRO FORMA PRO FORMA
(HISTORICAL) (HISTORICAL) ADJUSTMENTS COMBINED
------------ ------------- ----------- ------------
<S> <C> <C> <C> <C>
Income
Mortgage-backed securities income.................. $ 807,466 $ 580,957 $ -- $ 1,388,423
Interest income on temporary cash investments...... 104,026 4,151 -- 108,177
Equity in income (losses) of Operating
Partnerships..................................... (50,000) -- 8,077(D) (41,923)
Other income....................................... 2,000 400 -- 2,400
------------ ------------- ----------- ------------
Total Income..................................... 863,492 585,508 8,077 1,457,077
------------ ------------- ----------- ------------
Expenses
Operating and administrative....................... 144,121 133,446 (15,594)(E) 290,348
25,000(F)
3,375(H)
------------ ------------- ----------- ------------
144,121 133,446 12,781 290,348
------------ ------------- ----------- ------------
Net income........................................... $ 719,371 $ 452,062 $ (4,704) $ 1,166,729
------------ ------------- ----------- ------------
------------ ------------- ----------- ------------
Net income per unit.................................. $ 0.21 $ 0.11 $ 0.15
------------ ------------- ------------
------------ ------------- ------------
Weighted average number of units outstanding during
the period......................................... 3,374,222 4,011,101 7,765,772
------------ ------------- ------------
------------ ------------- ------------
</TABLE>
See accompanying Notes to Pro Forma Financial Statements
70
<PAGE>
AMERICA FIRST REAL ESTATE INVESTMENT PARTNERS, L.P.
PRO FORMA STATEMENTS OF CASH FLOWS
FOR THE THREE MONTHS ENDED MARCH 31, 1999
(UNAUDITED)
WITHOUT NOTES ISSUED
<TABLE>
<CAPTION>
CAP SOURCE I CAP SOURCE II PRO FORMA PRO FORMA
(HISTORICAL) (HISTORICAL) ADJUSTMENTS COMBINED
------------ ------------- ----------- -------------
<S> <C> <C> <C> <C>
Cash flows from operating activities:
Net income........................................... $ 719,371 $ 452,062 $ (4,704) $ 1,166,729
Adjustments to reconcile net income to net cash
provided by operating activities:
Equity in losses of Operating Partnerships........... 50,000 -- (8,077) 41,923
Amortization......................................... -- -- (12,219) (12,219)
Amortization of discount on mortgage-backed
securities......................................... (628) (77) -- (705)
Decrease (increase) in interest receivable........... 3,260 438 -- 3,698
Decrease (increase) in other assets.................. (63,336) 15,164 -- (48,172)
Increase (decrease) in accounts payable.............. (292,253) (120,411) -- (412,664)
Other non-cash adjustments........................... -- -- 25,000 25,000
------------ ------------- ----------- -------------
Net cash provided by operating activities.......... 416,414 347,176 -- 763,590
------------ ------------- ----------- -------------
Cash flows from investing activities
FHA Loan and GNMA Certificate principal payments
received........................................... 109,444 40,209 -- 149,653
Investment in Operating Partnerships................. (50,000) -- -- (50,000)
------------ ------------- ----------- -------------
Net cash provided by investing activities.......... 59,444 40,209 -- 99,653
------------ ------------- ----------- -------------
Cash flow used in financing activities................. --
Distributions........................................ (860,597) (455,807) -- (1,316,404)
------------ ------------- ----------- -------------
Net cash used in financing activities.............. (860,597) (455,807) -- (1,316,404)
------------ ------------- ----------- -------------
Net increase in cash and temporary cash
investments...................................... (384,739) (68,422) -- (453,161)
Cash and temporary cash investments at beginning of
period............................................... 9,304,694 432,999 (887,410) 8,850,283
------------ ------------- ----------- -------------
Cash and temporary cash investments at end of period... $8,919,955 $ 364,577 $(887,410) $ 8,397,122
------------ ------------- ----------- -------------
------------ ------------- ----------- -------------
Distributions--income.................................. $ 1,091,174
Distributions--return of capital....................... 225,230
-------------
$ 1,316,404
-------------
-------------
</TABLE>
See accompanying Notes to Pro Forma Financial Statements
71
<PAGE>
AMERICA FIRST REAL ESTATE INVESTMENT PARTNERS, L.P.
NOTES TO PRO FORMA FINANCIAL STATEMENTS
WITHOUT NOTES ISSUED
<TABLE>
<C> <S>
A Represents the following adjustments to record remaining transaction costs expected to
be incurred: (i) a decrease in cash for anticipated transaction costs remaining to be
incurred of $887,410; (ii) goodwill of $532,446 resulting from Cap Source 1's share of
the remaining transaction costs; and (iii) a reduction to partners' capital for Cap
Source II's share of the remaining transaction costs.
B The historical balance sheet of Cap Source II has been adjusted to reflect the impact
of applying the purchase method of accounting to this transaction. The net assets of
Cap Source II are being adjusted to their estimated fair value. The fair value is based
on: (i) the amount the Partnership would receive under the terms of the Operating
Partnerships' limited partnership agreements if the underlying properties were sold for
an amount equal to net realizable value (which is based on the appraised value of the
properties underlying the Operating Partnerships); (ii) the market value of the GNMA
Certificates and FHA Loan based on market prices; (iii) any undistributed cash and
other assets; less (iv) any outstanding liabilities owed by the Partnership.
The application of purchase accounting results in the following adjustments: (i) the
investment in the FHA Loan and GNMA Certificates and the investment in Operating
Partnerships has been adjusted to fair value as described above; (ii) intangible items
have been eliminated as these items were assigned no value; and (iii) the net effect of
those changes to the assets and liabilities has been applied to the partners' capital
account.
C Not used
D Represents the adjustment to record Cap Source II's share of the equity in income
(losses) of Operating Partnerships as a result of applying the purchase method of
accounting and recording the Cap Source II Operating Partnerships at their estimated
fair value (which is greater than zero).
E Represents the elimination of historical amortization of the initial advisory fee for
Cap Source II as these items were assigned no value in adjusting to fair value in
applying the purchase method of accounting.
F Represents the administrative fee payable to the General Partner pursuant to the terms
of the Partnership Agreement. The administrative fee is .50% per annum of the sum of
(i) the fair market value on the merger date of the original assets that are then still
owned by the Partnership, plus (ii) the purchase price paid by the Partnership for new
assets that are then held by the Partnership. The first $100,000 of the administrative
fee shall be payable each year, with the balance payable only during years that funds
from operations ("FFO"), calculated before administrative fees, exceeds 7% of the unit
holders' average capital for that year. FFO represents net income (or loss) (computed
in accordance with GAAP), excluding gains (or losses) from debt restructuring and sales
of properties, plus real estate-related depreciation and amortization (excluding
amortization of deferred financing costs and depreciation of non-real estate assets)
and after adjustments for unconsolidated partnerships and joint ventures. Such
administrative fee will be paid on a monthly basis. The administrative fee is limited
to $100,000 annually for all periods presented.
G Represents the elimination of non-recurring costs of $1,233,847 for the year ended
December 31, 1998 and $0 for the quarter ended March 31, 1999 incurred in connection
with the proposed merger under consideration in 1997 and 1998.
H Represents the amortization of goodwill using the straight line method over a period of
40 years.
</TABLE>
72
<PAGE>
AMERICA FIRST REAL ESTATE INVESTMENT PARTNERS, L.P.
SUPPLEMENTAL PRO FORMA PER UNIT DATA(A)
WITHOUT NOTES ISSUED
<TABLE>
<CAPTION>
DISTRIBUTIONS NET INCOME DISTRIBUTIONS
BOOK VALUE THREE MONTHS THREE MONTHS YEAR ENDED
EXCHANGE AS OF ENDED ENDED DEC. 31,
VALUE MARCH 31, 1999 MARCH 31, 1999 MARCH 31, 1999 1998
----------- -------------- -------------- -------------- ------------
<S> <C> <C> <C> <C> <C>
Pro forma--the Company (Per Unit)............... $ 10.00 $9.65 $ 0.1695 $0.15 $ 0.7876
Historical--Cap Source I (Per Unit)............. $13.16 $ 0.2525 $0.21 $ 1.0100
Equivalent pro forma--Cap Source I
(Per Unit).................................... $ 13.96 $13.47 $ 0.2366 $0.21 $ 1.0993
Historical--Cap Source II (Per Unit)............ $6.83 $ 0.1125 $0.11 $ 0.6600
Equivalent pro forma--Cap Source II
(Per Unit).................................... $ 7.62 $7.35 $ 0.1292 $0.11 $ 0.6002
<CAPTION>
NET INCOME
YEAR ENDED
DEC. 31, 1998
-------------
<S> <C>
Pro forma--the Company (Per Unit)............... $ 0.51
Historical--Cap Source I (Per Unit)............. $ 0.56
Equivalent pro forma--Cap Source I
(Per Unit).................................... $ 0.71
Historical--Cap Source II (Per Unit)............ $ 0.22
Equivalent pro forma--Cap Source II
(Per Unit).................................... $ 0.39
</TABLE>
<TABLE>
<C> <S> <C> <C>
A Equivalent pro forma data has been calculated by multiplying the
Company's pro forma amounts by the exchange ratio (below) for each
Partnership, so that the Partnership per unit pro forma amounts are
equated to the respective values for one unit of the respective
Partnership.
Exchange Values
(1 unit of Partnership = X units of Company)
Cap Source I.................................... 1.3957
Cap Source II................................... 0.7620
</TABLE>
73
<PAGE>
AMERICA FIRST REAL ESTATE INVESTMENT PARTNERS, L.P.
PRO FORMA BALANCE SHEET
MARCH 31, 1999
(UNAUDITED)
WITH NOTES ISSUED
<TABLE>
<CAPTION>
CAP SOURCE I CAP SOURCE II PRO FORMA PRO FORMA
(HISTORICAL) (HISTORICAL) ADJUSTMENTS COMBINED
------------- ------------- ------------------ -------------
<S> <C> <C> <C> <C>
ASSETS
Cash and temporary cash investments, at cost
which approximates market value............. $ 8,919,955 $ 364,577 $ (887,410)(A) $ 8,397,122
Investment in FHA Loans....................... 12,407,952 6,497,238 23,988(B) 18,929,178
Investment in GNMA Certificates............... 23,370,123 20,466,193 221,027(B) 44,057,343
Investment in Operating Partnerships.......... -- -- 3,809,948(B) 3,809,948
Interest receivable........................... 303,399 195,002 498,401
Other assets.................................. 275,264 124,040 (82,856)(B) 848,894
532,446(A)
------------- ------------- ------------------ -------------
$ 45,276,693 $ 27,647,050 $ 3,617,143 $ 76,540,886
------------- ------------- ------------------ -------------
------------- ------------- ------------------ -------------
LIABILITIES AND PARTNERS' CAPITAL (DEFICIT)
Liabilities
Accounts payable............................ $ 197,832 $ 227,035 $ -- $ 424,867
Distributions payable....................... 860,597 303,871 -- 1,164,468
Notes payable............................... 20,000,000(C) 20,000,000
------------- ------------- ------------------ -------------
1,058,429 530,906 20,000,000 21,589,335
------------- ------------- ------------------ -------------
Partners' Capital (Deficit)
General Partners............................ (173,476) (295,296) 39,721(B) (429,051)
Limited Partners............................ 44,391,740 27,411,440 3,932,386(B) 55,380,602
(354,964)(A)
(20,000,000)(C)
------------- ------------- ------------------ -------------
44,218,264 27,116,144 (16,382,857) 54,951,551
------------- ------------- ------------------ -------------
$ 45,276,693 $ 27,647,050 $ 3,617,143 $ 76,540,886
------------- ------------- ------------------ -------------
------------- ------------- ------------------ -------------
</TABLE>
See accompanying Notes to Pro Forma Financial Statements
74
<PAGE>
AMERICA FIRST REAL ESTATE INVESTMENT PARTNERS, L.P.
PRO FORMA STATEMENTS OF INCOME
FOR THE YEAR ENDED DECEMBER 31, 1998
(UNAUDITED)
WITH NOTES ISSUED
<TABLE>
<CAPTION>
CAP SOURCE I CAP SOURCE II PRO FORMA PRO FORMA
(HISTORICAL) (HISTORICAL) ADJUSTMENTS COMBINED
------------ ------------- ----------------- ------------
<S> <C> <C> <C> <C>
Income
Mortgage-backed securities income................ $3,262,922 $ 2,426,356 $ -- $ 5,689,278
Interest income on temporary cash investments.... 530,396 42,339 -- 572,735
Equity in income (losses) of Operating
Partnerships................................... (186,942) (407,218) 22,084(D) (572,076)
Other income..................................... 6,300 4,750 -- 11,050
Gain on sale of mortgage-backed securities....... -- 35,101 35,101
------------ ------------- ----------------- ------------
Total Income................................... 3,612,676 2,101,328 22,084 5,736,088
------------ ------------- ----------------- ------------
------------ ------------- ----------------- ------------
Expenses
Operating and administrative..................... 1,710,173 1,220,213 (62,376)(E) 2,949,663
100,000(F)
(1,233,847)(G)
13,500
1,202,000(H)
------------ ------------- ----------------- ------------
1,710,173 1,220,213 19,277(I) 2,949,663
------------ ------------- ----------------- ------------
Net income......................................... $1,902,503 $ 881,115 $ 2,807 $ 2,786,425
------------ ------------- ----------------- ------------
------------ ------------- ----------------- ------------
Net income per unit................................ $ 0.56 $ 0.22 $ 0.48
------------ ------------- ------------
------------ ------------- ------------
Weighted average number of units outstanding during
the period....................................... 3,374,222 4,011,101 5,765,772
------------ ------------- ------------
------------ ------------- ------------
</TABLE>
See accompanying Notes to Pro Forma Financial Statements
75
<PAGE>
AMERICA FIRST REAL ESTATE INVESTMENT PARTNERS, L.P.
PRO FORMA STATEMENTS OF CASH FLOWS
FOR THE YEAR ENDED DECEMBER 31, 1998
(UNAUDITED)
WITH NOTES ISSUED
<TABLE>
<CAPTION>
CAP SOURCE I CAP SOURCE II PRO FORMA PRO FORMA
(HISTORICAL) (HISTORICAL) ADJUSTMENTS COMBINED
------------- ------------- ----------- -------------
<S> <C> <C> <C> <C>
Cash flows from operating activities:
Net income.......................................... $ 1,902,503 $ 881,115 $ 2,807 $ 2,786,425
Adjustments to reconcile net income to net cash
provided by operating activities:
Equity in losses of Operating Partnerships.......... 186,942 407,218 (22,084) 572,076
Amortization........................................ -- -- (48,876) (48,876)
Amortization of discount on mortgage-backed
securities........................................ (2,287) (1,471) -- (3,758)
Gain on sale of mortgage-backed securities.......... -- (35,101) -- (35,101)
Decrease (increase) in interest receivable.......... 14,826 17,584 -- 32,410
Decrease (increase) in other assets................. (77,354) 22,950 -- (54,404)
Increase (decrease) in accounts payable............. 285,943 19,933 -- 305,876
Other non-cash adjustments.......................... -- -- 68,153 68,153
------------- ------------- ----------- -------------
Net cash provided by operating activities......... 2,310,573 1,312,228 -- 3,622,801
------------- ------------- ----------- -------------
Cash flows from investing activities
FHA Loan and GNMA Certificate principal payments
received.......................................... 2,635,396 271,807 -- 2,907,203
Disposition of mortgage-backed securities........... -- 5,046,437 --
Proceeds from sale of available-for-sale
mortgage-backed securities........................ -- 915,012 -- 915,012
Acquisition of GNMA Certificate..................... (2,422,519) (5,029,094) -- (7,451,613)
Investment in Operating Partnerships................ (186,942) (407,218) -- (594,160)
------------- ------------- ----------- -------------
Net cash provided by investing activities......... 25,935 796,944 -- (4,223,558)
------------- ------------- ----------- -------------
Cash flow used in financing activities
Distributions....................................... (3,442,378) (2,917,165) -- (6,359,543)
------------- ------------- ----------- -------------
Net cash used in financing activities............. (3,442,378) (2,917,165) -- (6,359,543)
------------- ------------- ----------- -------------
Net increase in cash and temporary cash
investments..................................... (1,105,870) (807,993) -- (6,960,300)
Cash and temporary cash investments at beginning of
period.............................................. 10,410,564 1,240,992 (887,410) 10,764,146
------------- ------------- ----------- -------------
Cash and temporary cash investments at end of
period.............................................. $ 9,304,694 $ 432,999 $(887,410) $ 3,803,846
------------- ------------- ----------- -------------
------------- ------------- ----------- -------------
Distributions--income................................. $ 2,484,205
Distributions--return of capital...................... 3,875,338
-------------
$ 6,359,543
-------------
-------------
</TABLE>
See accompanying Notes to Pro Forma Financial Statements
76
<PAGE>
AMERICA FIRST REAL ESTATE INVESTMENT PARTNERS, L.P.
PRO FORMA STATEMENTS OF INCOME
FOR THE THREE MONTHS ENDED MARCH 31, 1999
(UNAUDITED)
WITH NOTES ISSUED
<TABLE>
<CAPTION>
CAP SOURCE I CAP SOURCE II PRO FORMA PRO FORMA
(HISTORICAL) (HISTORICAL) ADJUSTMENTS COMBINED
------------ ------------- ---------------- ------------
<S> <C> <C> <C> <C>
Income
Mortgage-backed securities income................. $ 807,466 $ 580,957 $ -- $ 1,388,423
Interest income on temporary cash investments..... 104,026 4,151 -- 108,177
Equity in income (losses) of Operating
Partnerships.................................... (50,000) -- 8,077(D) (41,923)
Other income...................................... 2,000 400 -- 2,400
------------ ------------- ---------------- ------------
Total Income.................................... 863,492 585,508 8,077 1,457,077
------------ ------------- ---------------- ------------
Expenses
Operating and administrative........................ 144,121 133,446 (15,594)(E) 590,848
25,000(F)
3,375(H)
300,500(I)
------------ ------------- ---------------- ------------
144,121 133,446 313,281 590,848
------------ ------------- ---------------- ------------
Net income.......................................... $ 719,371 $ 452,062 $ (305,204) $ 866,229
------------ ------------- ---------------- ------------
------------ ------------- ---------------- ------------
Net income per share................................ $ 0.21 $ 0.11 $ 0.15
------------ ------------- ------------
------------ ------------- ------------
Weighted average number of units outstanding during
the period........................................ 3,374,222 4,011,101 5,765,772
------------ ------------- ------------
------------ ------------- ------------
</TABLE>
See accompanying Notes to Pro Forma Financial Statements
77
<PAGE>
AMERICA FIRST REAL ESTATE INVESTMENT PARTNERS, L.P.
PRO FORMA STATEMENTS OF CASH FLOWS
FOR THE THREE MONTHS ENDED MARCH 31, 1999
(UNAUDITED)
WITH NOTES ISSUED
<TABLE>
<CAPTION>
CAP SOURCE I CAP SOURCE II PRO FORMA PRO FORMA
(HISTORICAL) (HISTORICAL) ADJUSTMENTS COMBINED
------------ ------------- ----------- -------------
<S> <C> <C> <C> <C>
Cash flows from operating activities:
Net income........................................... $ 719,371 $ 452,062 $(305,204) $ 866,229
Adjustments to reconcile net income to net cash
provided by operating activities:
Equity in losses of Operating Partnerships........... 50,000 -- (8,077) 41,923
Amortization......................................... -- -- (12,219) (12,219)
Amortization of discount on mortgage-backed
securities......................................... (628) (77) -- (705)
Decrease (increase) in interest receivable........... 3,260 438 -- 3,698
Decrease (increase) in other assets.................. (63,336) 15,164 -- (48,172)
Increase (decrease) in accounts payable.............. (292,253) (120,411) -- (412,664)
Other non-cash adjustments........................... -- -- 325,500 325,500
------------ ------------- ----------- -------------
Net cash provided by operating activities.......... 416,414 347,176 -- 763,590
------------ ------------- ----------- -------------
Cash flows from investing activities
FHA Loan and GNMA Certificate principal payments
received........................................... 109,444 40,209 -- 149,653
Investment in Operating Partnerships................. (50,000) -- -- (50,000)
------------ ------------- ----------- -------------
Net cash provided by investing activities.......... 59,444 40,209 -- 99,653
------------ ------------- ----------- -------------
Cash flow used in financing activities
Distributions........................................ (860,597) (455,807) -- (1,316,404)
------------ ------------- ----------- -------------
Net cash used in financing activities.............. (860,597) (455,807) -- (1,316,404)
------------ ------------- ----------- -------------
Net increase in cash and temporary cash
investments...................................... (384,739) (68,422) -- (453,161)
Cash and temporary cash investments at beginning of
period............................................... 9,304,694 432,999 (887,410) 8,850,283
------------ ------------- ----------- -------------
Cash and temporary cash investments at end of period... $8,919,955 $ 364,577 $(887,410) $ 8,397,122
------------ ------------- ----------- -------------
------------ ------------- ----------- -------------
Distributions--income.................................. $ 790,674
Distributions--return of capital....................... 525,730
-------------
$ 1,316,404
-------------
-------------
</TABLE>
See accompanying Notes to Pro Forma Financial Statements
78
<PAGE>
AMERICA FIRST REAL ESTATE INVESTMENT PARTNERS, L.P.
NOTES TO PRO FORMA FINANCIAL STATEMENTS
WITH NOTES ISSUED
A Represents the following adjustments to record remaining transaction costs
expected to be incurred: (i) a decrease in cash for anticipated transaction
costs remaining to be incurred of $887,410; (ii) goodwill of $532,446
resulting from Cap Source 1's share of the remaining transaction costs; and
(iii) a reduction to partners' capital for Cap Source II's share of the
remaining transaction costs.
B The historical balance sheet of Cap Source II has been adjusted to reflect
the impact of applying the purchase method of accounting to this
transaction. The net assets of Cap Source II are being adjusted to their
estimated fair value. The fair value is based on: (i) the amount the
Partnership would receive under the terms of the Operating Partnerships'
limited partnership agreements if the underlying properties were sold for an
amount equal to net realizable value (which is based on the appraised value
of the properties underlying the Operating Partnerships); (ii) the market
value of the GNMA Certificates and FHA Loan based on market prices; (iii)
any undistributed cash and other assets; less (iv) any outstanding
liabilities owed by the Partnership.
The application of purchase accounting results in the following adjustments:
(i) the investment in the FHA Loan and GNMA Certificates and the investment
in Operating Partnerships has been adjusted to fair value as described
above; (ii) intangible items have been eliminated as these items were
assigned no value; and (iii) the net effect of those changes to the assets
and liabilities has been applied to the partners' capital account.
C Represents the maximum issuance of notes by the Company to investors electing
to receive notes. The issuance of the notes results in an increase in notes
payable and a reduction of partners' capital. The notes mature on 2007
and bear interest at 120% of the annual applicable federal rate for debt
instruments with a term of not over three years (assumed to be 6.01%).
D Represents the adjustment to record Cap Source II's share of the equity in
income (losses) of Operating Partnerships as a result of applying the
purchase method of accounting and recording the Cap Source II Operating
Partnerships at their estimated fair value (which is greater than zero).
E Represents the elimination of historical amortization of the initial advisory
fee for Cap Source II as these items were assigned no value in adjusting to
fair value in applying the purchase method of accounting.
F Represents the administrative fee payable to the General Partner pursuant to
the terms of the Partnership Agreement. The administrative fee is .50% per
annum of the sum of (i) the fair market value on the Merger Date of the
Original Assets that are then still owned by the Partnership, plus (ii) the
purchase price paid by the Partnership for New Assets that are then held by
the Partnership. The first $100,000 of the administrative fee shall be
payable each year, with the balance payable only during years that funds
from operations ("FFO"), calculated before administrative fees, exceeds 7%
of the unit holders' average capital for that year. FFO represents net
income (or loss) (computed in accordance with GAAP), excluding gains (or
losses) from debt restructuring and sales of properties, plus real
estate-related depreciation and amortization (excluding amortization of
deferred financing costs and depreciation of non-real estate assets) and
after adjustments for unconsolidated partnerships and joint ventures. Such
administrative fee will be paid on a monthly basis. The administrative fee
is limited to $100,000 annually for all periods presented.
G Represents the elimination of non-recurring costs of $1,233,847 for the year
ended December 31, 1998 and $0 for the quarter ended March 31, 1999 incurred
in connection with the proposed merger under consideration in 1997 and 1998.
H Represents the amortization of goodwill using the straight line method over a
period of 40 years.
I Represents interest on the notes at an assumed rate of 6.01%.
79
<PAGE>
AMERICA FIRST REAL ESTATE INVESTMENT PARTNERS, L.P.
SUPPLEMENTAL PRO FORMA PER UNIT DATA (A)
WITH NOTES ISSUED
<TABLE>
<CAPTION>
DISTRIBUTIONS NET INCOME
BOOK VALUE THREE MONTHS THREE MONTHS DISTRIBUTIONS NET INCOME
EXCHANGE AS OF ENDED ENDED YEAR ENDED YEAR ENDED
VALUE MARCH 31, 1999 MARCH 31, 1999 MARCH 31, 1999 DEC. 31, 1998 DEC. 31, 1998
----------- --------------- --------------- ----------------- ------------- ---------------
<S> <C> <C> <C> <C> <C> <C>
Pro forma--the Company
(Per Unit)..................... $ 10.00 $ 9.53 $ 0.2283 $ 0.15 $ 1.0608 $ 0.48
Historical--Cap Source I
(Per Unit)..................... $ 13.16 $ 0.2525 $ 0.21 $ 1.0100 $ 0.56
Equivalent pro forma--
Cap Source I (Per Unit)........ $ 13.96 $ 13.30 $ 0.3186 $ 0.21 $ 1.4806 $ 0.67
Historical--Cap Source II
(Per Unit)..................... $ 6.83 $ 0.1125 $ 0.11 $ 0.6600 $ 0.22
Equivalent pro forma--
Cap Source II (Per Unit)....... $ 7.62 $ 7.26 $ 0.1740 $ 0.11 $ 0.8083 $ 0.37
</TABLE>
A Equivalent pro forma data has been calculated by multiplying the Company's
pro forma amounts by the exchange ratio (below) for each Partnership, so
that the Partnership per unit pro forma amounts are equated to the
respective values for one unit of the respective Partnership.
Exchange Values
(1 unit of Partnership = X units of Company)
<TABLE>
<S> <C>
Cap Source I..................................................... 1.3957
Cap Source II.................................................... 0.7620
</TABLE>
80
<PAGE>
THE PARTNERSHIPS
CAP SOURCE I
HISTORY. Cap Source I, a Delaware limited partnership, was formed August
22, 1985. The general partners of Cap Source I are Insured Mortgage Equities,
Inc. and America First Capital Source I L.L.C. The Initial Limited Partner of
Cap Source I, H/T Corp., a Delaware corporation wholly owned by the Cap Source I
General Partners, assigned some of the ownership attributes of the limited
partner interests to the Cap Source I investors, including rights to a
percentage of Cap Source I's income, gain, losses, deductions, credits and
distributions. H/T Corp. has agreed to vote the limited partner interests as
directed by the Cap Source I investors. The Cap Source I investors hold
beneficial assignment certificates, which represent beneficial assignments of
the limited partner interests in Cap Source I.
Cap Source I was formed to invest principally in federally insured mortgages
on multifamily housing property (the "Cap Source I Mortgage Securities") and to
acquire, hold, sell and otherwise deal with limited partnership interests (the
"Cap Source I Partnership Equity Interests") in the Cap Source I Operating
Partnerships. The Cap Source I partnership agreement originally provided that
the BACs would be listed on NASDAQ for trading. The investors voted by proxy not
to list the BACs on NASDAQ.
Cap Source I's assets originally consisted of debt and equity financing for
eight multifamily rental housing properties. Cap Source I's investments in these
properties consisted of: (a) approximately 85% in the form of permanent
mortgages and/or construction loans, each of which was insured or guaranteed, in
an amount substantially equal to the face amount of the mortgage, by the FHA or
GNMA; and (b) the balance to purchase up to a 99% limited partner interest in
limited partnerships which developed, constructed, own and operate these
properties.
The original Cap Source I Operating Partnerships were structured with the
developer of the respective property serving as the general partner (the "Cap
Source I Operating General Partner") with a 1% interest, Cap Source I as the
limited partner with a 98.99% interest and CS Properties I, Inc., a corporation
wholly owned by the Cap Source I General Partners, as the special limited
partner (the "Cap Source I Special Limited Partner") with a .01% interest. The
Cap Source I Special Limited Partner has the power, among other things, to
remove the Cap Source I Operating General Partners under certain circumstances
and to consent to the sale of the Cap Source I Operating Partnerships' Assets.
In the only exception to the above-described original structuring, in one of the
Cap Source I Operating Partnerships, the Ponds at Georgetown L.P., Cap Source I
is a limited partner with a 30.29% interest and Cap Source II is a limited
partner with a 68.7% interest.
Since inception, Cap Source I has been repaid by GNMA on one of its Cap
Source I Mortgage Securities, and, as a result, it no longer holds a Cap Source
I Partnership Equity Interest in the Cap Source I Operating Partnership which
owned the property collateralizing the repaid mortgage, Falcon Point. It has
also been repaid by FHA on another of its Cap Source I Mortgage Securities but
continues to own its Cap Source I Partnership Equity Interest in the Cap Source
I Operating Partnership, Fox Hollow. Three of the Cap Source I Operating
Partnerships, Fox Hollow, Misty Springs and Waterman's Crossing, have been
restructured with CS Properties I, Inc. succeeding to the general partner 1%
interest.
As a result of the foregoing, at December 31, 1998, Cap Source I held debt
and/or equity investments in seven properties. These investments consist of (1)
four mortgage-backed securities guaranteed as to principal and interest by GNMA,
collateralized by first mortgage loans insured as to principal and interest by
FHA on multifamily housing properties located in Virginia, Florida, Illinois and
Michigan; (2) two first mortgage loans insured as to principal and interest by
FHA on multifamily housing properties located in North Carolina and Ohio; and
(3) Cap Source I Partnership Equity Interests in seven limited partnerships. Cap
Source I also holds reserve investments in the form of cash and cash equivalents
and investments in GNMA securities backed by pools of single family mortgages
(the "Cap Source I Reserve Investments").
81
<PAGE>
The Cap Source I Mortgage Securities provide Cap Source I with monthly
payments of principal and interest which are guaranteed either by GNMA or FHA.
The Cap Source I Partnership Equity Interests were intended to be sufficient to
cover all costs not covered by the Cap Source I Mortgage Securities until the
Cap Source I Operating Partnerships' income was sufficient to cover their
expenses, including debt service on the Cap Source I Mortgage Securities, as
well as a return to Cap Source I on its investment during the period. The
current return to Cap Source I on its Cap Source I Partnership Equity Interests
is a function of the net cash flow generated by the properties and is dependent
on the rental and occupancy rates and on the level of expenses at the
properties.
The FHA Loans and GNMA Certificates owned by Cap Source I are guaranteed as
to principal and interest by FHA and GNMA, respectively. The obligations of FHA
and GNMA are backed by the full faith and credit of the United States
government. The Cap Source I Partnership Equity Interests, however, are not
insured or guaranteed. The value of these investments is a function of the value
of the real estate owned by the Cap Source I Operating Partnerships.
The following FHA Loans and GNMA Certificates associated with the Operating
Partnerships were owned by Cap Source I at December 31, 1998.
<TABLE>
<CAPTION>
AGGREGATE
GUARANTEED OR PRINCIPAL AMOUNT
PROPERTY NAME INSURED BY INTEREST RATE MATURITY DATE OUTSTANDING
- -------------------------------------------------- ------------- ------------- ------------- ----------------
<S> <C> <C> <C> <C>
Bluff Ridge Apartments............................ FHA 8.72% 11/15/2028 $ 3,487,222
Highland Park Apartments.......................... FHA 8.75 11/01/2028 8,942,263
Misty Springs Apartments.......................... GNMA 8.75 6/15/2029 4,246,682
The Ponds at Georgetown........................... GNMA 7.50 12/15/2029 2,438,761
Waterman's Crossing............................... GNMA 10.00 9/15/2028 10,873,980
Water's Edge Apartments........................... GNMA 8.75 12/15/2028 5,035,088
</TABLE>
The following table shows the occupancy levels and effective rental rates of
the properties financed by Cap Source I in 1998:
<TABLE>
<CAPTION>
AVERAGE
EFFECTIVE
PERCENTAGE OF ANNUAL RENTAL
NUMBER OF UNITS RATE
PROPERTY NAME LOCATION UNITS OCCUPIED PER UNIT
- ---------------------------------------- ---------------------- ----------------- --------------- ---------------
<S> <C> <C> <C> <C>
Bluff Ridge Apartments.................. Jacksonville, NC 108 99% $ 6,644
Fox Hollow Apartments................... High Point, NC 184 96 6,480
Highland Park Apartments................ Columbus, OH 252 94 6,392
Misty Springs Apartments................ Daytona Beach, FL 128 98 6,509
The Ponds at Georgetown................. Ann Arbor, MI 134 99 10,362
Waterman's Crossing..................... Newport News, VA 260 100 7,535
Water's Edge Apartments................. Lake Villa, IL 108 97 9,274
-----
1,174
-----
</TABLE>
In the opinion of the Cap Source I General Partners, each of the properties
is adequately covered by insurance.
CAP SOURCE II
HISTORY. Cap Source II, a Delaware limited partnership, was formed August
22, 1986. The general partners of Cap Source II are Insured Mortgage Equities,
II L.P. and America First Capital Source II L.L.C. The Initial Limited Partner
of Cap Source II, H/T Corp. II-A, a Delaware corporation wholly owned by the Cap
Source II General Partners, assigned some of the ownership attributes of the
limited partner interests to the Cap Source II investors, including rights to a
percentage of Cap Source II's income,
82
<PAGE>
gain, losses, deductions, credits and distributions. H/T Corp. II-A has agreed
to vote the limited partner interests as directed by the Cap Source II
investors. The Cap Source II investors hold beneficial assignment certificates,
which represent beneficial assignments of the limited partner interests in Cap
Source II.
Cap Source II was formed to invest principally in federally insured
mortgages on multifamily housing property (the "Cap Source II Mortgage
Securities") and to acquire, hold, sell and otherwise deal with limited
partnership interests (the "Cap Source II Partnership Equity Interests") in the
Cap Source II Operating Partnerships. The Cap Source II partnership agreement
originally provided that the BACs would be listed on NASDAQ for trading. The
investors voted by proxy not to list the BACs on NASDAQ.
Cap Source II's assets originally consisted of debt and equity financing for
five multifamily rental housing properties. Cap Source II's investments in these
properties consisted of: (a) approximately 85% in the form of permanent
mortgages and/or construction loans, each of which was insured or guaranteed, in
an amount substantially equal to the face amount of the mortgage, by the FHA or
GNMA; and (b) the balance to purchase up to a 99% limited partner interest in
limited partnerships which developed, constructed, own and operate these
properties.
The Cap Source II Operating Partnerships were structured with the developer
of the respective property serving as the general partner (the "Cap Source II
Operating General Partner") with a 1% interest, Cap Source II as the limited
partner with a 98.99% interest and CS Properties II, Inc., a corporation wholly
owned by the Cap Source II General Partners, as the special limited partner (the
"Cap Source II Special Limited Partner") with a .01% interest. The Cap Source II
Special Limited Partner has the power, among other things, to remove the Cap
Source II Operating General Partners under certain circumstances and to consent
to the sale of the Cap Source II Operating Partnerships' Assets. In the only
exception to the above-described original structuring, in one of the Cap Source
II Operating Partnerships, the Ponds at Georgetown L.P., Cap Source II is a
limited partner with a 68.7% interest and Cap Source I, is a limited partner
with a 30.29% interest.
Since inception, Cap Source II has been repaid by GNMA on one of its Cap
Source II Mortgage Securities, and, as a result, it no longer holds a Cap Source
II Partnership Equity Interest in the Cap Source II Operating Partnership which
owned the property collateralizing the repaid mortgage.
As a result of the foregoing, at December 31, 1998, Cap Source II held debt
and/or equity investments in four properties. These investments consist of (1)
three mortgage-backed securities guaranteed as to principal and interest by
GNMA, collateralized by first mortgage loans insured as to principal and
interest by FHA on multifamily housing properties located in Michigan and
Florida; (2) one first mortgage loan insured as to principal and interest by FHA
on a multifamily housing property located in North Carolina; and (3) Cap Source
II Partnership Equity Interests in four limited partnerships. Cap Source II also
holds reserve investments in the form of cash and cash equivalents and
investments in GNMA securities backed by pools of single family mortgages (the
"Cap Source II Reserve Investments").
The Cap Source II Mortgage Securities provide Cap Source II with monthly
payments of principal and interest which are guaranteed either by GNMA or FHA.
The Cap Source II Partnership Equity Interests were intended to be sufficient to
cover all costs not covered by the Cap Source II Mortgage Securities until the
Cap Source II Operating Partnerships' income was sufficient to cover their
expenses, including debt service on the Cap Source II Mortgage Securities, as
well as a return to Cap Source II on its investment during the period. The
current return to Cap Source II on its Cap Source II Partnership Equity
Interests is a function of the net cash flow generated by the properties and is
dependent on the rental and occupancy rates and on the level of expenses at the
properties.
The FHA Loan and GNMA Certificates owned by Cap Source II are guaranteed as
to principal and interest by FHA and GNMA, respectively. The obligations of FHA
and GNMA are backed by the full faith and credit of the United States
government. The Cap Source II Partnership Equity Interests, however, are
83
<PAGE>
not insured or guaranteed. The value of these investments is a function of the
value of the real estate owned by the Cap Source II Operating Partnerships.
The following FHA Loan and GNMA Certificates were owned by Cap Source II at
December 31, 1998. Interest income from the FHA Loan and GNMA Certificates is
the primary source of cash available for distribution to investors.
<TABLE>
<CAPTION>
AGGREGATE
GUARANTEED OR PRINCIPAL AMOUNT
PROPERTY NAME INSURED BY INTEREST RATE MATURITY DATE OUTSTANDING
- -------------------------------------------------- ------------- --------------- ------------- ----------------
<S> <C> <C> <C> <C>
Crane's Landing................................... GNMA 8.75% 12/15/2030 $ 10,176,802
Delta Crossing.................................... FHA 9.10 10/01/2030 6,505,857
Monticello Apartments............................. GNMA 8.75 11/15/2029 5,298,123
The Ponds at Georgetown........................... GNMA 7.50 12/15/2029 5,062,811
</TABLE>
The following table shows the occupancy levels and effective rental rates of
the properties financed by Cap Source II in 1998:
<TABLE>
<CAPTION>
AVERAGE EFFECTIVE
NUMBER OF PERCENTAGE OF ANNUAL RENTAL RATE
PROPERTY NAME LOCATION UNITS UNITS OCCUPIED PER UNIT
- ---------------------------------------------- ------------------ ------------- ----------------- ------------------
<S> <C> <C> <C> <C>
Crane's Landing............................... Winter Park, FL 252 96% $ 7,577
Delta Crossing................................ Charlotte, NC 178 94 7,457
Monticello Apartments......................... Southfield, MI 106 98 9,627
The Ponds at Georgetown....................... Ann Arbor, MI 134 99 10,362
---
670
---
---
</TABLE>
In the opinion of the Cap Source II General Partners, each of the properties
is adequately covered by insurance.
84
<PAGE>
SECONDARY MARKET AND OWNERSHIP OF PARTNERSHIP BACS
SALE PRICES OF BACS
The BACs are not listed on any national or regional securities exchange or
quoted on any automated quotation system, and there is no established public
trading market for the BACs. Secondary sales activity for the BACs has been
limited and sporadic. The Cap Source General Partners monitor transfers of the
BACs (1) because the admission of the transferee as a substitute investor
requires the consent of the Cap Source General Partners under each of the
partnership agreements, and (2) to track compliance with safe harbor provisions
to avoid treatment of the partnerships as "publicly traded partnerships" for
federal income tax purposes.
Shown in the tables that follow is information regarding sale transactions
in the BACs. The information was obtained from the sources indicated. The
transactions reflected in the tables below represent only some of the sale
transactions in the BACs. There may have been other secondary sale transactions
in the BACs, although specific information regarding the transactions is not
readily available to the Cap Source General Partners. Because the information
regarding sale transactions in the BACs included in the tables below is provided
without verification by the Cap Source General Partners and because the
information provided does not reflect sufficient activity to cause the prices
shown to be representative of the values of the BACs, the information should not
be relied upon as indicative of the ability of investors to sell their BACs in
secondary sale transactions or as to the prices at which the BACs may be sold.
Therefore, the information presented should not necessarily be relied upon by
investors in determining whether or not to tender their BACs in the transaction.
The Cap Source General Partners do not believe that the secondary sale
prices of the BACs accurately reflect the value of the assets of the
partnerships because secondary sale prices are adversely affected by a variety
of factors unrelated to the value of the assets of a limited partnership.
Limited partner interests are generally traded on a sporadic basis. Sale prices
can vary dramatically based on the number of interests sold at once or over
time. Additionally, the Tax Reform Act of 1986 contained provisions which
eliminated some federal income tax advantages associated with investments in
limited partnerships and which caused limited partnerships to place restrictions
on transfers of interests to avoid taxation of income at the partnership and
partner levels. Accordingly, limited partnerships have not been well received by
investors and secondary sale prices have been adversely affected.
While the Cap Source General Partners receive some information regarding the
prices of secondary sales transactions of the BACs, the Cap Source General
Partners do not receive or maintain comprehensive information regarding all
activities of all broker/dealers and others known to facilitate secondary sales
of the BACs. The Cap Source General Partners estimate, based solely on the
transfer records of the partnerships, that the number of BACs transferred in
sale transactions (i.e., excluding transactions believed to be between related
parties, family members or the same beneficial owner) was as follows:
85
<PAGE>
SECONDARY MARKET PARTNERSHIP NET BAC PRICES
FROM JANUARY 1, 1997 THROUGH DECEMBER 31, 1997
CAPITAL SOURCE L.P.
<TABLE>
<CAPTION>
ADJUSTED
CAPITAL
BAC SALES PRICE PER ORIGINAL
PER $1,000 ORIGINAL $1,000
INVESTMENT INVESTMENT PRICE VERSUS ADJUSTED CAPITAL NUMBER
------------------------------- AS OF --------------------------------- OF
MONTH WEIGHTED HIGH LOW 12/31/96 WEIGHTED HIGH LOW BACS
- -------------------- --------- --------- --------- ------------ ----------- --------- --------- -----------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
January............. $ 565.00 $ 568.00 $ 563.50 $ 917.50 (38.4)% (38.1)% (38.6)% 1,183
February............ 568.50 583.00 463.00 917.50 (38.0) (36.5) (49.5) 1,602
March............... 542.00 545.00 529.50 917.50 (40.9) (40.6) (42.3) 2,130
April............... 541.50 550.00 537.50 917.50 (41.0) (40.1) (41.4) 300
May................. 476.50 537.50 450.00 917.50 (48.1) (41.4) (51.0) 1,860
June................ N/A N/A N/A 917.50 N/A N/A N/A N/A
July................ 410.00 537.50 387.50 917.50 (55.3) (41.4) (57.8) 5,865
August.............. 454.00 537.50 374.50 917.50 (50.5) (41.4) (59.2) 914
September........... 568.50 606.00 482.50 917.50 (38.0) (34.0) (47.4) 2,740
October............. 588.50 625.00 512.50 917.50 (35.9) (31.9) (44.1) 6,355
November............ 405.00 405.00 405.00 917.50 (55.9) (55.9) (55.9) 1,875
December............ N/A N/A N/A 917.50 N/A N/A N/A N/A
</TABLE>
SECONDARY MARKET PARTNERSHIP NET BAC PRICES
FROM JANUARY 1, 1998 THROUGH AUGUST 31, 1998
CAPITAL SOURCE L.P.
<TABLE>
<CAPTION>
ADJUSTED
CAPITAL
BAC SALES PRICE PER ORIGINAL
PER $1,000 ORIGINAL $1,000
INVESTMENT INVESTMENT PRICE VERSUS ADJUSTED CAPITAL NUMBER
------------------------------- AS OF --------------------------------- OF
MONTH WEIGHTED HIGH LOW 8/31/98 WEIGHTED HIGH LOW BACS
- -------------------- --------- --------- --------- ------------ ----------- --------- --------- -----------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
January............. $ 514.06 $ 617.50 $ 405.00 $ 917.50 (44.0)% (32.7)% (55.9)% 15,773
February............ 513.77 565.00 405.00 917.50 (44.0) (38.4) (55.9) 19,948
March............... 421.00 605.00 405.00 917.50 (54.1) (34.1) (55.9) 6,283
April............... 604.00 637.50 500.00 917.50 (34.2) (30.5) (45.5) 3,400
May................. 608.00 705.50 500.00 917.50 (33.7) (23.1) (45.5) 29,621
June................ 551.00 635.50 500.00 917.50 (39.9) (30.7) (45.5) 40,838
July................ 612.00 645.00 403.00 917.50 (33.3) (29.7) (56.1) 16,017
August.............. 604.00 630.00 500.00 917.50 (34.2) (31.3) (45.5) 5,692
</TABLE>
86
<PAGE>
SECONDARY MARKET PARTNERSHIP NET BAC PRICES
FROM JANUARY 1, 1997 THROUGH DECEMBER 31, 1997
CAPITAL SOURCE II L.P.-A
<TABLE>
<CAPTION>
ADJUSTED
CAPITAL
BAC SALES PRICE PER ORIGINAL
PER $1,000 ORIGINAL $1,000
INVESTMENT INVESTMENT PRICE VERSUS ADJUSTED CAPITAL NUMBER
------------------------------- AS OF --------------------------------- OF
MONTH WEIGHTED HIGH LOW 12/31/96 WEIGHTED HIGH LOW BACS
- -------------------- --------- --------- --------- ------------ ----------- --------- --------- -----------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
January............. $ 333.50 $ 342.50 $ 300.00 $ 619.50 (46.2)% (44.7)% (51.6)% 3,250
February............ 343.00 349.50 337.50 619.50 (44.6) (43.6) (45.5) 3,589
March............... 329.50 345.00 200.00 619.50 (46.8) (44.3) (67.7) 1,254
April............... 378.50 387.50 355.00 619.50 (38.9) (37.4) (42.7) 9,160
May................. 383.50 387.50 307.50 619.50 (38.1) (37.4) (50.4) 16,613
June................ 359.00 370.00 314.00 619.50 (42.1) (40.3) (49.3) 2,375
July................ 285.00 364.00 275.00 619.50 (54.0) (41.2) (55.6) 10,339
August.............. 338.50 350.00 334.00 619.50 (45.4) (43.5) (46.1) 850
September........... 372.00 407.00 362.50 619.50 (40.0) (34.3) (41.5) 4,636
October............. 363.50 368.00 225.50 619.50 (41.3) (40.6) (63.6) 3,350
November............ 387.50 387.50 387.50 619.50 (37.4) (37.4) (37.4) 1,000
December............ 305.00 305.00 305.00 619.50 (50.8) (50.8) (50.8) 250
</TABLE>
SECONDARY MARKET PARTNERSHIP NET BAC PRICES
FROM JANUARY 1, 1998 THROUGH AUGUST 31, 1998
CAPITAL SOURCE II L.P.-A
<TABLE>
<CAPTION>
ADJUSTED
CAPITAL
PER ORIGINAL
BAC SALES PRICE PER $1,000 $1,000
ORIGINAL INVESTMENT INVESTMENT PRICE VERSUS ADJUSTED CAPITAL NUMBER
------------------------------- AS OF --------------------------------- OF
MONTH WEIGHTED HIGH LOW 8/31/98 WEIGHTED HIGH LOW BACS
- -------------------- --------- --------- --------- ------------ ----------- --------- --------- -----------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
January............. $ 325.50 $ 325.50 $ 325.50 $ 619.50 (47.5)% (47.5)% (47.5)% 17,203
February............ 372.93 387.50 350.00 619.50 (39.8) (37.4) (43.5) 5,500
March............... 313.00 350.00 300.00 619.50 (49.5) (43.5) (51.6) 11,740
April............... 391.00 402.50 300.00 619.50 (36.9) (35.0) (51.6) 4,100
May................. 369.50 400.00 342.50 619.50 (40.4) (35.4) (44.7) 8,248
June................ 316.50 384.50 300.00 619.50 (48.9) (37.9) (51.6) 26,186
July................ 373.50 385.00 255.50 619.50 (39.7) (37.9) (58.8) 33,476
August.............. 341.50 385.00 300.00 619.50 (44.9) (37.9) (51.6) 1,992
</TABLE>
BAC HOLDERS
NUMBER OF BAC HOLDERS. As of the record date, Cap Source I had outstanding
3,374,222 BACs which were held of record by approximately investors.
Cap Source II had outstanding 4,011,101 BACs which were held of record by
approximately investors.
BENEFICIAL OWNERS OF MORE THAN 5% OF THE BACS. There are no persons known
by the Cap Source General Partners to be the beneficial owners of more than 5%
of the outstanding BACs in either of the partnerships.
87
<PAGE>
PARTNERSHIP DISTRIBUTIONS
Cap Source I made the following cash distributions per BAC for the two most
recent fiscal years and the interim period ended March 31, 1999:
<TABLE>
<CAPTION>
FOR THE THREE MONTHS
ENDED FOR THE YEAR ENDED FOR THE YEAR ENDED
MARCH 31, 1999 DECEMBER 31, 1998 DECEMBER 31, 1997
--------------------- ------------------ ------------------
<S> <C> <C> <C>
Regular quarterly distributions
Income....................................... $ .2111 $ .5582 $ .8952
Return of capital............................ .0414 .4518 .1148
------ ------- -------
$ .2525 $ 1.0100 $ 1.0100
------ ------- -------
------ ------- -------
Distributions
Paid out of cash flow........................ $ .2525 $ 1.0100 $ 1.0100
------ ------- -------
------ ------- -------
</TABLE>
Cumulative cash distributions as of March 31, 1999, totaled $17.28 and
$17.07 per original $20.00 BAC, depending on the initial closing date of the
investor's investment. These amounts include a $1.65 per BAC special return of
capital distribution paid to investors in 1993. Accordingly, current cash
distributions are based on an adjusted BAC value of $18.35.
Regular quarterly distributions to investors consist primarily of interest
on the FHA Loans and GNMA Certificates. Additional cash for distributions is
received from other temporary investments. Cap Source I is permitted to
replenish reserves with cash flows in excess of distributions paid. For the
three months ended March 31, 1999, a net amount of $18,218 of undistributed cash
flow was placed in reserves. The total amount held in reserves at March 31,
1999, was $9,146,979, of which $828,696 was invested in GNMA Certificates.
Cap Source II made the following cash distributions per BAC for the two most
recent fiscal years and the interim period ended March 31, 1999:
<TABLE>
<CAPTION>
FOR THE THREE MONTHS
ENDED FOR THE YEAR ENDED FOR THE YEAR ENDED
MARCH 31, 1999 DECEMBER 31, 1998 DECEMBER 31, 1997
--------------------- ------------------- -------------------
<S> <C> <C> <C>
Regular monthly distributions
Income....................................... $ .1116 $ .2175 $ .4082
Return of capital............................ .0009 .4425 .4018
------ ------ ------
$ .1125 $ .6600 $ .8100
------ ------ ------
------ ------ ------
Distributions
Paid out of cash flow........................ $ .1125 $ .4005 $ .5172
Paid out of reserves......................... $ -- .2595 .2928
------ ------ ------
$ .1125 $ .6600 $ .8100
------ ------ ------
------ ------ ------
</TABLE>
Cumulative cash distributions as of March 31, 1999, totaled $19.28 and
$18.31 per original $20.00 BAC, depending on the initial closing date of the
investor's investment. These amounts include a $7.61 per BAC special return of
capital distribution paid to investors in 1993. Accordingly, current cash
distributions are based on an adjusted BAC value of $12.39.
Regular monthly distributions to investors consist primarily of interest on
the FHA Loan and the GNMA Certificates. Additional cash for distributions is
received from other temporary investments. Cap Source II is permitted to
replenish its reserves with cash flows in excess of distributions paid. For the
three
88
<PAGE>
months ended March 31, 1999, $52,058 was placed into reserves for cash flow in
excess of distributions paid.
Following completion of the transaction, investors may receive a final
distribution from their partnership for the period commencing on the first day
following the end of the last fiscal quarter for which distributions are made
and ending on the effective date.
THIRD PARTY TENDER OFFERS
The Cap Source General Partners are aware of the following unsolicited
tender offers made by parties unaffiliated with the Cap Source General Partners
to purchase BACs in Cap Source I and Cap Source II between July of 1996 and May
of 1999. The Cap Source General Partners recommended that investors in each
partnership reject these offers because they were below what the Cap Source
General Partners believed was fair value for the BACs when the offers were made.
CAPITAL SOURCE L.P.
TENDER OFFERS AS OF MAY 1999
<TABLE>
<CAPTION>
DATE OF PER BAC
TENDER OFFER OFFER PRICE NUMBER OF BACS PARTY MAKING OFFER
- ------------ ----------- ---------------- ----------------------------------------------
<C> <C> <S> <C>
7/3/96 $ 6.00 Up to 150,000 Equity Resource Fund XIX
5/9/97 $ 8.00 Up to 4.9% First Trust Co., L.P.
9/4/97 $ 8.10 Up to 165,150 Maxwell Bay, LLC
9/4/97 $ 8.10 Up to 75,000 Sierra Fund 3
11/25/97 $ 8.10 Up to 142,600 Maxwell Bay, LLC
5/22/98 $ 10.00 Up to 140,000 Maxwell Bay, LLC
6/10/98 $ 11.00 Up to 50,000 Sierra Fund 3
7/24/98 $ 11.50 Up to 101,227 Everest Investors 8, LLC
5/13/99 $ 10.00 Up to 165,337 Madison Liquidity Investors 104, LLC
</TABLE>
CAPITAL SOURCE II L.P.-A
TENDER OFFERS AS OF MAY 1999
<TABLE>
<CAPTION>
DATE OF PER BAC
TENDER OFFER OFFER PRICE NUMBER OF BACS PARTY MAKING OFFER
- ------------ ------------- ---------------- ----------------------------------------------
<C> <C> <S> <C>
7/3/96 $ 4.00 Up to 180,000 Equity Resource Fund XIX
5/9/97 $ 5.50 Up to 4.9% First Trust Co., L.P.
8/11/97 $ 5.00 Up to 196,240 Maxwell Bay, LLC
11/25/97 $ 5.50 Up to 182,800 Maxwell Bay, LLC
5/22/98 $ 6.25 Up to 178,000 Maxwell Bay, LLC
5/13/99 $ 5.00 Up to 196,544 Madison Liquidity Investors 104, LLC
</TABLE>
89
<PAGE>
SELECTED FINANCIAL DATA OF THE PARTNERSHIPS
The following selected financial data of the partnerships has been derived
from, and should be read in conjunction with, the financial statements and
related notes for, and as of, the end of the period indicated, which are
contained in the separately bound supplement delivered with this
prospectus/consent solicitation statement. The financial statements as of
December 31, 1998 and 1997, and for each of the three years in the period ended
December 31, 1998, have been audited by KPMG LLP, independent public
accountants, whose reports thereon are included in the separately bound
supplement. The financial statements as of and for the three months ended March
31, 1998 and 1999, are unaudited.
Reference is made to the Pro Forma Financial Information which reflects the
historical financial statements of the company and the partnerships after giving
effect to the transaction under the assumptions and adjustments set forth in the
accompanying notes to the pro forma financial statements.
SELECTED FINANCIAL DATA
CAPITAL SOURCE L.P.
<TABLE>
<CAPTION>
THREE MONTHS ENDED
YEAR ENDED DECEMBER 31, MARCH 31,
---------------------------------------------------------- ----------------------
<S> <C> <C> <C> <C> <C> <C> <C>
1994 1995 1996 1997 1998 1998 1999
---------- ---------- ---------- ---------- ---------- ---------- ----------
Mortgage-backed securities
income.......................... $3,924,176 $3,895,475 $3,340,747 $3,302,727 $3,262,922 $ 820,292 $ 807,466
Interest income on temporary cash
investments and U.S. government
securities...................... 130,252 193,257 523,636 554,604 530,396 138,177 104,026
Equity in losses of Operating
Partnerships.................... (232,361) (255,500) (257,512) (178,550) (186,942) (10,000) (50,000)
Other income...................... 2,400 3,950 9,749 5,334 6,300 1,150 2,000
Operating and administrative
expenses........................ (359,592) (365,125) (429,313) (632,894) (1,710,173) (222,804) (144,121)
---------- ---------- ---------- ---------- ---------- ---------- ----------
Net income........................ $3,464,875 $3,472,057 $3,187,307 $3,051,221 $1,902,503 $ 726,815 $ 719,371
---------- ---------- ---------- ---------- ---------- ---------- ----------
---------- ---------- ---------- ---------- ---------- ---------- ----------
Net income, basic and diluted, per
BAC............................. $ 1.02 $ 1.02 $ 0.94 $ 0.90 $ 0.56 $ 0.21 $ 0.22
---------- ---------- ---------- ---------- ---------- ---------- ----------
---------- ---------- ---------- ---------- ---------- ---------- ----------
Cash distributions paid or accrued
per BAC......................... $ 1.0100 $ 1.0100 $ 1.0100 $ 1.0100 $ 1.0100 $ 0.2525 $ 0.2525
---------- ---------- ---------- ---------- ---------- ---------- ----------
---------- ---------- ---------- ---------- ---------- ---------- ----------
Investment in FHA Loans........... $12,716,874 $12,654,188 $12,585,755 $12,511,046 $12,429,485 $12,491,321 $12,407,952
---------- ---------- ---------- ---------- ---------- ---------- ----------
---------- ---------- ---------- ---------- ---------- ---------- ----------
Investment in GNMA Certificates... $31,770,666 $24,388,920 $23,937,795 $23,588,139 $23,454,411 $23,518,083 $23,370,123
---------- ---------- ---------- ---------- ---------- ---------- ----------
---------- ---------- ---------- ---------- ---------- ---------- ----------
Total assets...................... $47,448,997 $47,541,721 $47,248,776 $46,965,808 $45,707,177 $46,832,795 $45,276,693
---------- ---------- ---------- ---------- ---------- ---------- ----------
---------- ---------- ---------- ---------- ---------- ---------- ----------
</TABLE>
90
<PAGE>
SELECTED FINANCIAL DATA
CAPITAL SOURCE II L.P.--A
<TABLE>
<CAPTION>
THREE MONTHS ENDED
YEAR ENDED DECEMBER 31, MARCH 31,
---------------------------------------------------------- ----------------------
<S> <C> <C> <C> <C> <C> <C> <C>
1994 1995 1996 1997 1998 1998 1999
---------- ---------- ---------- ---------- ---------- ---------- ----------
Mortgage-backed securities
income.......................... $2,526,266 $2,561,901 $2,520,727 $2,499,844 $2,426,356 $ 621,444 $ 580,957
Interest income on temporary cash
investments and U.S. government
securities...................... 181,315 200,678 147,530 91,327 42,339 11,756 4,151
Equity in losses of Operating
Partnerships.................... (209,805) (109,900) -- (121,450) (407,218) -- --
Other income...................... 2,900 4,650 6,950 3,800 4,750 1,150 400
Gain on sale of mortgage-backed
securities...................... -- 15,670 -- -- 35,101 -- --
Operating and administrative
expenses........................ (479,388) (499,903) (552,170) (819,516) (1,220,213) (417,488) (133,446)
---------- ---------- ---------- ---------- ---------- ---------- ----------
Net income........................ $2,021,288 $2,173,096 $2,123,037 $1,654,005 $ 881,115 $ 216,862 $ 452,062
---------- ---------- ---------- ---------- ---------- ---------- ----------
---------- ---------- ---------- ---------- ---------- ---------- ----------
Net income, basic and diluted, per
BAC............................. $ 0.50 $ 0.54 $ 0.52 $ 0.41 $ 0.22 $ 0.06 $ 0.11
---------- ---------- ---------- ---------- ---------- ---------- ----------
---------- ---------- ---------- ---------- ---------- ---------- ----------
Cash distributions paid or accrued
per BAC......................... $ 0.8100 $ 0.8100 $ 0.8100 $ 0.8100 $ 0.6600 $ 0.2025 $ 0.1125
---------- ---------- ---------- ---------- ---------- ---------- ----------
---------- ---------- ---------- ---------- ---------- ---------- ----------
Investment in FHA Loan............ $6,619,989 $6,595,251 $6,568,139 $6,538,424 $6,505,857 $6,530,560 $6,497,238
---------- ---------- ---------- ---------- ---------- ---------- ----------
---------- ---------- ---------- ---------- ---------- ---------- ----------
Investment in GNMA Certificates... $22,799,369 $22,142,421 $21,895,675 $21,674,940 $20,497,706 $21,596,610 $20,466,193
---------- ---------- ---------- ---------- ---------- ---------- ----------
---------- ---------- ---------- ---------- ---------- ---------- ----------
Total assets...................... $33,589,321 $32,541,767 $31,340,155 $29,829,534 $27,771,206 $29,121,010 $27,647,050
---------- ---------- ---------- ---------- ---------- ---------- ----------
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</TABLE>
DESCRIPTION OF THE UNITS
GENERAL
The units represent assignments of limited partner interests by the Initial
Limited Partner of the company. Although unitholders will not be limited
partners of the company and have no right to be admitted as limited partners,
they will be bound by the terms of the company's limited partnership agreement
and will be entitled to the same economic benefits, including the same share of
income, gains, losses, deductions, credits and cash distributions, as if they
were limited partners of the company. A copy of the company's limited
partnership agreement is included as Appendix C to this prospectus/consent
solicitation statement.
There is currently no established trading market for the units, and before
the transaction, the units will not be listed on any national securities
exchange or quoted on an automated quotation system. Therefore, no sale or bid
price information is available with respect to the units. The units have been
approved for listing on NASDAQ under the symbol " ". However, there can be no
assurance that a public trading market for the units will develop. The company
will meet the market value standards established by NASDAQ.
A transfer or assignment of 50% or more of the outstanding units within a
12-month period may terminate the company for federal income tax purposes, which
may result in adverse tax consequences to unitholders. To protect against
termination, the company's limited partnership agreement permits the General
Partner to suspend or defer any transfers or assignments of units at any time
after it determines that 45% or more of all units may have been transferred, as
defined by the Code, within a 12-month period and that the resulting termination
of the company for tax purposes would adversely affect the economic interests of
the unitholders. Any deferred transfers will be effected, in chronological order
to the extent practicable, on the first day of the next succeeding period in
which transfers can be effected without
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causing a termination of the company for tax purposes or any adverse effects
from termination, as the case may be.
A purchaser of units will be recognized as a unitholder for all purposes on
the books and records of the company on the day on which the General Partner, or
other transfer agent appointed by the General Partner, receives satisfactory
evidence of the transfer of units. All unitholder rights, including voting
rights, rights to receive distributions and rights to receive reports, and all
allocations in respect of unitholders, including allocations of income and
expenses, will vest in, and be allocable to, unitholders as of the close of
business on such day. MAVRICC Management Systems, Inc. of Troy Michigan, has
been appointed by the General Partners to act as the registrar and transfer
agent for the units.
UNITS ELIGIBLE FOR FUTURE SALE
Units received by investors in the transaction will be freely transferable
without restriction or further registration under the Securities Act, except for
units acquired by "affiliates" of the company, as that term is defined in Rule
144 under the Securities Act, which sales will have the volume limitations and
other restrictions described below.
In general, under Rule 144 as currently in effect, a person, including a
person who may be deemed an "affiliate" of the company, who has held restricted
securities for at least one year may sell those securities, with some volume
limitations and other restrictions, without registering them under the
Securities Act. Rule 144 generally also permits sales of restricted securities,
without any volume limitations, by a person who has not been an "affiliate" of
the company for at least three months preceding the sale of the securities and
who has held those restricted securities for at least two years.
THE NOTES
GENERAL
If the investors holding a majority of outstanding BACs of a partnership
approve the transaction and the other conditions to the transaction are met, the
transaction will be completed and the approval will bind all investors in that
partnership, including those who abstain from voting, fail to return a completed
consent card or vote "NO" against the transaction. All investors will be given
the opportunity to elect to receive either units or notes. An investor who
failed to return a completed consent card will receive units of the company for
his BACs. Each investor will receive written instructions on the proper
procedures for completing and submitting the consent card. See "VOTING." Some of
the provisions of the notes and the indenture under which they will be issued
are summarized under "--Notes" below.
Neither the partnership agreements nor the Delaware Partnership Law give an
investor the right to demand any type of dissenter's rights or to elect to
receive the appraised value of his BACs in connection with the transaction. No
dissenter's rights will be given to dissenting investors by the partnerships or
the company in connection with the transaction. See "VOTING--No Right of
Appraisal."
ALLOCATION OF NOTES
The aggregate principal amount of notes to be issued by the company may not
exceed the maximum note limitation, which is $20 million. If dissenting
investors elect to receive notes in excess of the maximum note limitation, the
transaction will not be completed. In the event dissenting investors do not
elect to receive notes in excess of the maximum note limitation, but the total
amount of notes allocable to all investors who elect to receive notes exceeds
the limitation, notes will be allocated first to dissenting investors who
elected to receive notes and any remaining notes will be allocated on a pro rata
basis, in denominations of $1,000, to those investors who elected to receive
notes and either abstained from voting by indicating their abstention on the
consent card or voted "YES" in favor of the transaction. In this event, the
abstaining investors and consenting investors who elected to receive notes will
receive units in an
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amount equal to the difference between the exchange value allocable to these
investors and the amount of notes distributed to these investors.
NOTES
The following summaries describing provisions of the notes do not purport to
be complete and are qualified in their entirety by reference to all of the
provisions of the indenture, which is included as an exhibit to the Registration
Statement.
GENERAL. The notes, if any, will be junior, unsecured obligations of the
company callable on or after the date of issuance, issued under the indenture,
to be dated as of the first day of the month in which the notes are issued, by
and between the company and U.S. Bank Trust National Association, as Trustee.
The notes will be limited to $20 million aggregate principal amount and will be
designated as Variable Rate Junior Notes Callable On or After the Date of
Issuance. The Company may, at its option, pay cash instead of issuing notes.
The company may issue additional indebtedness, which may be secured, only in
compliance with the covenants of the notes for the issuance of senior debt.
On , 2007 (the "Maturity Date") the outstanding principal balance of
the notes, plus accrued but unpaid interest, will be payable in full. The notes
will be payable as follows:
(a) annual installments of accrued interest, payable on the fifteenth
day of each January (an "Interest Payment Date"), commencing on the first
Interest Payment Date following the issuance of the notes and continuing
until the entire interest on and principal of each note is paid in full; and
(b) the unpaid principal balance and accrued but unpaid interest on the
Maturity Date.
Payments under the notes will be paid to the persons in whose names the notes
are registered, with some exceptions, at the close of business on the last day
of the month preceding the applicable Interest Payment Date. The notes will be
issued in registered form without coupons in denominations of $1,000.
FRACTIONAL NOTES. Since the aggregate principal balance of the notes to
which an investor is entitled is determined by multiplying the number of the
investor's BACs by ten times the exchange ratio assigned to the investor's
partnership in the merger agreement, the investor may be entitled to a
fractional interest in a note. Rather than issue a fractional interest in a
note, the company will issue to each of these investors a promissory note with
an original principal balance equal to the fraction times $1,000, subject to the
company's right, at its option, to pay cash instead of any portion of a
promissory note. The promissory notes will be issued under the terms of the
indenture, but will not be listed on a national securities exchange.
INTEREST. For each period from and including an Interest Payment Date to
and including the day immediately preceding the next Interest Payment Date, the
notes will bear interest at a rate equal to 120% of the annual applicable
federal rate for debt instruments with a term of not over three years as
determined under the Code and applicable regulations thereunder. As of the date
of this prospectus/ consent solicitation statement, 120% of the annual
applicable federal rate for debt instruments with a term of not over three years
was %. Therefore, the interest rate on the notes as of the date of this
prospectus/ consent solicitation statement is %. The interest rate will remain
in effect until the first day of the calendar year following completion of the
transaction. Interest on the notes will be adjusted annually and computed on the
basis of a 360-day year for the actual number of days elapsed.
OPTIONAL REDEMPTION. The company may, at its option, redeem all or any
portion of the notes or promissory notes from time to time by giving written
notice of the proposed redemption to the holders of the notes or the promissory
notes, as the case may be. In the event less than all of the notes and
promissory notes are to be redeemed, the Trustee will select first the
promissory notes to be redeemed and then the
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notes to be redeemed by lot until all notes and promissory notes are paid in
full and redeemed. The redemption price will be 100% of the outstanding
principal balance of these notes or the promissory notes, as the case may be,
together with accrued interest to the date fixed for redemption. There will be
no sinking fund established to retire the notes or the promissory notes.
MANDATORY REDEMPTION. The indenture requires that the company use 80% of
the net proceeds from sales or refinancings of assets of the company that were
owned by a partnership prior to the transaction ("Designated Assets") to prepay
the notes. Net proceeds from sales or refinancings of Designated Assets
generally means the gross proceeds of all sales, exchanges or refinancings
received with respect to assets acquired by the company from each partnership in
the transaction, less all costs and expenses incurred by the company in
connection with these sales, exchanges or refinancings. Upon receipt by the
company, at least 80% of the net proceeds from sales or refinancings of
Designated Assets will be deposited into a segregated trust account established
under the indenture, and when the funds in the account equal or exceed $5
million, the proceeds will be used to redeem the notes as provided in the
indenture. Eighty percent of the net proceeds from sales or refinancings of Cap
Source I Designated Assets will be used to prepay the notes held by former Cap
Source I investors. Eighty percent of the net proceeds from sales or
refinancings of Cap Source II Designated Assets will be used to prepay the notes
held by former Cap Source II investors. In the event less than all of the notes
are to be redeemed under this provision, the Trustee will select the promissory
notes and the notes to be redeemed in the same manner as for an optional
redemption until all notes and promissory notes are paid in full and redeemed.
LIMITATION ON INDEBTEDNESS. The indenture prohibits the company from
incurring any indebtedness if the new indebtedness would cause the company's
aggregate principal amount of indebtedness then outstanding to exceed 70% of the
greater of (1) the value which is placed by an independent appraiser on all the
assets of the company as of the date of the transaction, and (2) the value
placed by an independent appraiser on all assets of the company as of the date
of determination.
TRANSACTION, CONVEYANCE OR TRANSFER. The company will not merge or
consolidate with or into, or sell, assign, transfer, lease or otherwise dispose
of all or substantially all of its properties and assets as an entirety to any
other entity or entities, and the company will not permit any of its wholly
owned subsidiaries to enter into any such transaction if, in the aggregate, the
transaction would result in a sale, assignment, transfer, lease or other
disposition of all or substantially all of the properties and assets of the
company and its subsidiaries on a consolidated basis to any other entity or
entities, unless at the time and after giving effect thereto (1) either (a) if
the transaction is a merger, the company shall be the surviving entity, or (b)
the entity formed by the transaction or into which the company or the subsidiary
is merged or to which the properties and assets of the company or the
subsidiary, as the case may be, substantially as an entirety, are transferred
shall be a corporation organized and existing under the laws of the United
States of America, any state thereof or the District of Columbia and shall
expressly assume by a supplemental indenture executed and delivered to the
Trustee, in form satisfactory to the Trustee, all the obligations of the company
under the notes and the indenture, and in each case, the indenture shall remain
in full force and effect; (2) immediately before and immediately after giving
effect to the transaction on a pro forma basis (including, without limitation,
any indebtedness incurred or anticipated to be incurred in connection with or in
respect of such transaction), no event of default shall have occurred and be
continuing and the company, or the surviving entity, as the case may be, after
giving effect to this transaction on a pro forma basis, could incur $1.00 of
additional indebtedness under "--LIMITATION ON INDEBTEDNESS" above; and (3)
immediately after giving effect to such transaction on a pro forma basis, the
consolidated net worth of the company, or the surviving entity, as the case may
be, is at least equal to the consolidated net worth of the company immediately
before such transaction.
EVENTS OF DEFAULT. A default will occur under the indenture with respect to
the notes if (1) the company defaults in the payment of the principal of any
note when the same becomes due and payable at maturity, upon redemption or
otherwise, (2) the company defaults in the payment of interest on any note when
the
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same becomes due and payable and the default continues for a period of 30 days,
(3) the company fails to comply with any of its other agreements contained in
the indenture or the notes for a period of 30 days after written notice thereof,
as provided in the indenture, (4) the company shall default under any agreement
relating to any other indebtedness of the company where the indebtedness exceeds
$5 million, or (5) certain events of bankruptcy, insolvency or reorganization
shall have occurred.
If an event of default specified in (1) through (4) above occurs and is
continuing, either the Trustee or the holders of not less than 25% in principal
amount of the notes then outstanding may declare all unpaid principal of and
interest accrued on the notes to be immediately due and payable. In the event of
a default specified in (5) above, all unpaid principal and accrued interest on
the notes shall be immediately due and payable without any declaration or other
act on the part of the Trustee or any noteholders. Upon specific conditions
these declarations may be annulled by the holders of a majority in principal
amount of the notes and past defaults may be waived (except a continuing default
in payment of principal of or interest on the notes) by the holders of a
majority in principal amount of the notes.
The holders of a majority in principal amount of the outstanding notes may
direct the time, method and place of conducting any proceeding for any remedy
available to the Trustee or exercising any trust or power conferred on the
Trustee, provided that the direction shall not be in conflict with any rule of
law or the indenture. Before proceeding to exercise any right or power under the
indenture at the direction of the holders, the Trustee shall be entitled to
receive from the holders reasonable security or indemnity against the costs,
expenses and liabilities which might be incurred by it in compliance with any
such direction.
The company will be required to furnish to the Trustee annually a statement
of certain officers of the company as to their knowledge of the company's
compliance with all conditions and covenants under the indenture. The indenture
requires the Trustee to give to all noteholders notice of any default by the
company, unless the default shall have been cured or waived; however, except in
the case of a default in the payment of principal of or interest on any
outstanding notes, the Trustee is entitled to withhold the notice if a trust
committee of directors or certain officers of the Trustee in good faith
determine that withholding the notice is in the interest of the holders of the
outstanding notes.
DEFEASANCE AND DISCHARGE. The indenture provides that the company will be
discharged from obligations in respect of the notes under the indenture
(excluding some obligations, like the obligation to pay principal of and
interest on the notes then outstanding, obligations of the company in the event
of acceleration following default in the payment of any installment of interest
on and, if applicable, principal of the notes and obligations to register the
transfer or exchange of the outstanding notes and to replace stolen, lost or
mutilated certificates), upon the irrevocable deposit, in trust, of cash or U.S.
government obligations which through the payment of interest and principal
thereof in accordance with their terms will provide cash in an amount sufficient
to pay any installment of principal of and interest on the outstanding notes on
the stated maturity of the installments in accordance with the terms of the
indenture and the outstanding notes, provided that the company has received an
opinion of counsel or a favorable ruling of the IRS stating that this type of a
discharge will not be deemed, or result in, a taxable event with respect to
holders of the outstanding notes and that other conditions are met.
CHANGE IN CONTROL. The indenture does not contain provisions requiring
redemption of the notes or promissory notes by the company, or adjustment to any
terms of the notes or promissory notes, upon any change in control of the
company.
LIMITED PROTECTION AGAINST DECLINE IN CREDIT QUALITY. The indenture does
not contain any provisions protecting noteholders against a sudden and dramatic
decline in credit quality of the notes or promissory notes resulting from
takeovers, restructuring, reorganizations or similar transactions involving the
company.
MODIFICATION OF THE INDENTURE. The company and the Trustee may amend or
supplement the indenture or the notes without the consent of the noteholders to:
(1) provide for uncertificated notes in addition to
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or in place of certificated notes, (2) add covenants and events of default for
the protection of the noteholders, (3) cure any ambiguity, defect or
inconsistency in the indenture or to make any other change that does not
adversely affect the rights of any noteholder, and (4) evidence the acceptance
of appointment by a successor trustee.
The indenture also contains provisions permitting the company and the
Trustee, with the consent of the holders of not less than a majority in
principal amount of the notes then outstanding, to add any provisions to, or
change in any manner or eliminate any of the provisions of, the indenture, or
modify in any manner the rights of the holders of the notes, provided that the
company and the Trustee may not, without the consent of the holder of each
outstanding note affected thereby, (1) reduce the amount of notes whose holders
must consent to an amendment, supplement or waiver; (2) reduce the rate of or
change the time for payment of interest on any note; (3) reduce the principal of
or change the fixed maturity of any note or alter the redemption provisions with
respect thereto; (4) waive a default in the payment of the principal of or
interest on any note; or (5) make any note payable in money other than that
stated in the note.
GOVERNING LAW. The notes, the promissory notes and the indenture will be
governed by and construed under the laws of the State of Delaware.
THE TRUSTEE. U.S. Bank Trust National Association (the "Trustee"), will be
the Trustee under the indenture. The Trustee does not serve as a trustee under
any other indenture relating to obligations of the company and has no prior
business relationship with the company, the Cap Source General Partners or any
of their affiliates.
PURCHASE OF NOTES IN SECONDARY MARKET. In addition to making partial
redemption of the notes, the company may purchase notes in the secondary market,
and these purchases may be at discounts from the outstanding principal balance
of the notes. These purchases have the effect of retiring the obligations, but
do not obligate the company to follow the procedures for partial redemption of
the notes described in the indenture.
FEDERAL INCOME TAX CONSEQUENCES
GENERAL
The following discussion describes the material federal income tax
considerations to the partnerships, the investors, the unitholders and the
company that may result from the transaction. This discussion is based upon the
provisions of the Internal Revenue Code of 1986, (the "Code"), applicable
Treasury Department regulations promulgated thereunder (the "Regulations"),
rulings of the Internal Revenue Service (the "Service") and applicable court
decisions.
There can be no assurance that provisions of the Code, Regulations or
rulings will not be changed by new legislation, Regulations or rulings, which
may or may not apply retroactively to transactions entered into or completed
prior to the date of the change, or that there will not be differences of
opinion as to the interpretation of provisions of the Code and Regulations and
their application to the partnerships, the investors, the unitholders, the
company and the holders of the notes.
This summary is directed primarily to investors who are individual residents
or citizens of the United States. This summary does not discuss federal income
tax consequences peculiar to insurance companies, banking institutions,
regulated investment companies, real estate investment trusts, or other persons
or entities to which special rules apply by virtue of the nature of their
specific activities. Specific consideration is given, however, to entities that
are exempt from federal income taxation in "--Considerations for Tax-Exempt
Unitholders" below. In addition, no representations are made as to state or
local tax consequences resulting from the transaction or an investment in the
company. In particular, investors who are nonresident aliens are urged to
contact their tax advisors concerning the potential effects of the
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relevant provisions of the Foreign Investment in Real Property Tax Act of 1980
to the transaction. ACCORDINGLY, THIS SUMMARY IS NOT INTENDED AS A SUBSTITUTE
FOR CAREFUL TAX PLANNING AND INVESTORS AND IN PARTICULAR TAX-EXEMPT INVESTORS,
SHOULD CONSULT WITH THEIR OWN TAX ADVISORS AS TO THEIR PARTICULAR CIRCUMSTANCES
IN RELATION TO THE TAX CONSIDERATIONS DESCRIBED IN THIS PROSPECTUS/CONSENT
SOLICITATION STATEMENT.
OPINIONS OF COUNSEL
Kutak Rock, counsel to the company, will render its opinion subject to
various assumptions and conditioned upon certain representations as to factual
matters, to the effect that, subject to the limitations described in this
prospectus/consent solicitation statement: (a) the transaction will be an
exchange subject to the nonrecognition provisions of Section 721 of the Code;
(b) the company will be characterized as a partnership for federal income tax
purposes; and (c) the discussion that follows fairly summarizes the material
federal income tax considerations associated with the transaction. It should be
noted that a ruling from the Service will not be requested and that the opinion
of counsel, unlike a ruling by the Service, is not binding on the Service or any
court. Therefore, no assurance can be given that the Service will not challenge
any views expressed in this discussion.
CERTAIN TAX DIFFERENCES BETWEEN
THE OWNERSHIP OF BACS AND THE UNITS
Investors are treated as limited partners of the partnerships for federal
income tax purposes. The partnerships are not subject to federal income taxation
and, instead, each investor is required to take into account his or her share of
income, deductions or loss of the partnership in which he or she invested,
regardless of whether any cash is distributed. The character of income to each
investor is dependent upon its character to the partnerships. Upon completion of
the transaction, the investors in Cap Source II will receive units in
liquidation of Cap Source II and, with respect to Cap Source I, the BACs of Cap
Source I investors will convert to units. Thereby, the investors become
unitholders of the company, which will be characterized as a partnership for
federal income tax purposes. Since the partnerships and the company are all
characterized as partnerships for federal income tax purposes, the taxation of
unitholders will, in most respects, be the same as the taxation of the
investors. See "--Taxation of Unitholders" and "--Taxation of The Company
Subsequent to the Transaction" below.
TAX TREATMENT OF THE TRANSACTION
OVERVIEW. The transaction will be completed as described in this
prospectus/consent solicitation statement under the laws of the State of
Delaware. For federal income tax purposes, however, the transaction shall be
treated as: (a) a contribution by Cap Source II of its assets to Cap Source I in
exchange for units, notes and the assumption of its liabilities; (b) the
distribution of the units and notes received in the transaction to the investors
in liquidation of Cap Source II; (c) the conversion of the BACs held by
investors in Cap Source I to units; and (d) the exchange of BACs in Cap Source I
for notes. In addition, the company will be considered a continuation of Cap
Source I for federal income tax purposes. See "--Tax Elections."
RECOGNITION OF GAIN OR LOSS AS A RESULT OF THE TRANSACTION. In general,
under Section 721 of the Code, no gain or loss is recognized as a result of a
contribution of property to a partnership in exchange for an interest in that
partnership. However, gain may be recognized by a contributor to the extent his
share of the liabilities of the partnership after the exchange is less than the
liabilities assumed or taken subject to by the partnership in connection with
the transfer. Similarly, if a contributor receives property other than
partnership interests, like the notes, then the transfer will be treated as, in
part, a sale and gain will be recognized as a result thereof. Each investor will
be required to include in income a share of any income
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recognized by the partnership of which he is a member even if he receives units
in connection with the transaction.
Section 721 of the Code will not apply and gain or loss will be recognized
if the transferee partnership would be treated as an investment company for
federal income tax purposes if it were a corporation. For this purpose, a
corporation would be treated as an investment company if the transfer results
directly or indirectly in the diversification of the transferors' interests and
the transferee is a corporation more than 80% of the value of the assets of
which are held for investment and are readily marketable stock or securities.
The Taxpayer Relief Act of 1997 changed the definition of an investment company
so that it includes certain partnerships if more than 80% of the value of their
assets consist of, among other things, readily marketable stock or securities,
money, stocks and other equity interests in corporations, evidences of
indebtedness, publicly traded partnership interests and interests in an entity
if substantially all of the assets of that entity are assets listed in this
sentence (the "Listed Assets"). The legislative history of the Taxpayer Relief
Act of 1997 indicates that even though money is treated as a Listed Asset, if
pursuant to a plan, money contributed to a partnership is used to acquire
assets, other than Listed Assets, the 80% test discussed above will be applied
immediately after that acquisition. In this regard, the General Partner has
represented that the cash to be contributed to the company will be used to
acquire assets, other than Listed Assets.
If there are two or more transferors in a Section 721 transaction, a
transferor may have taxable income in the event it receives interests in the
transferee with a value in excess of the property contributed by it. Thus, a
partnership, which receives units with a fair market value in excess of the fair
market value of the assets it contributes to the company, may recognize income
in amounts equal to this excess. Similarly, in the event the fair market values
of the assets of Cap Source II, the notes and the units are different from those
anticipated by the company, BAC holders of each partnership could recognize gain
as a result of the transaction.
The company (a) expects that, in addition to units, the partnerships will
receive, as a result of the transaction, notes, promissory notes or cash which
will be distributed to dissenting investors or, in some cases, investors (see
"THE NOTES"); (b) expects that more than 20% of the value of the assets of the
company, including for this purpose cash which pursuant to a plan will be
invested as described above, will be attributable to assets, other than Listed
Assets; and (c) expects that the value of the units each partnership receives
will not exceed the value of its assets contributed to the company. Based on the
foregoing, the company expects that the transaction will be treated as an
exchange subject to the nonrecognition provisions of Section 721 of the Code and
that gain will not be recognized except gain which may be recognized as a result
of the receipt of the notes or in the event the fair market value of the notes,
the assets of Cap Source II or the units is different from that anticipated by
the company.
It should be noted that the company will not request a ruling from the
Service that the transaction will be subject to the nonrecognition provisions of
Section 721 of the Code and that the opinion of counsel is based in part on
factual representations of the company. In addition, there is little guidance
regarding the interpretation of the foregoing provisions of the Taxpayer Relief
Act of 1997. Further, the valuation of the assets of the partnerships is subject
to uncertainty. As a result, there can be no assurance that the Service will
concur with the conclusions set forth in this prospectus/consent solicitation
statement.
FORMATION OF THE COMPANY. As discussed above, pursuant to the provisions of
Section 721 of the Code, the company expects that the partnerships will not
recognize gain or loss as a result of the contribution of assets to the company
in exchange for units, except as noted above. Each investor would be required to
include in income a share of any of this gain even if that investor did not vote
in favor of the transaction. The company does not expect to distribute cash to
investors which would correspond to any income recognized in connection with the
transaction. See "RISK FACTORS--Risks Associated with the Transaction--CERTAIN
FEDERAL INCOME TAX RISKS."
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The investors will be required to include in income a share of any gain
recognized in connection with the transaction. Any of this gain would be
characterized as capital gain, except for any portion of gain attributable to
the partnerships' recapture amounts. In general, an individual may only use up
to $3,000 of capital loss in excess of capital gains to offset ordinary income
in any taxable year. The amount of any of this gain recognized by an investor
would result in an increase in his adjusted basis in his BACs and a
corresponding increase in the adjusted basis of his units.
The basis of the company in assets acquired from Cap Source II will equal
Cap Source II's bases in these assets immediately prior to the transaction plus
any gain recognized by Cap Source II as a result of the transaction. The
company's holding period for assets contributed by Cap Source II will include
the period during which these assets were held by Cap Source II. The basis and
holding period of any assets of the company attributable to Cap Source I will
remain unchanged.
TERMINATION AND LIQUIDATION OF CAP SOURCE II. Section 708(b)(2)(A) of the
Code provides that in the case of a merger of two or more partnerships, the
merging partnership whose members own more than 50% of the capital and profits
of the resulting partnership is deemed to continue while the other merging
partnerships are deemed to terminate. The investors in Cap Source I will own
more than 50% of the interests in the capital and profits in the company after
the transaction. Therefore, although for state law purposes the company survives
the transaction, for federal income tax purposes, Cap Source I will be deemed to
survive the transaction and Cap Source II will terminate and distribute units in
liquidation.
As a general matter, a partner will recognize gain as a result of the
liquidation of a partnership only to the extent the amount of distributed cash
exceeds the basis of his or her partnership interest. For this purpose, some
marketable securities are treated as if they were cash. This provision will not,
however, apply to marketable securities received in a nonrecognition transaction
if: (1) the value of the marketable securities and cash exchanged by the
partnership in the nonrecognition transaction is less than 20% of all its assets
transferred in the exchange; and (2) the partnership distributes the marketable
securities acquired in the nonrecognition transaction within five years of their
acquisition. The general partners of Cap Source II do not expect that the
investors in Cap Source II will recognize gain or loss as a result of the deemed
liquidation under Section 708 of the Code.
Since Cap Source II will terminate upon completion of the transaction, the
taxable year for Cap Source II will end at that time and the Cap Source II
investors must report, in the taxable year of the transaction, their respective
share of all income, gain, loss, deduction and credits from Cap Source II
including, if any, their allocable share of gain resulting from the transaction.
An investor in Cap Source II whose taxable year differs from that of Cap Source
II may have a bunching of income because of the short taxable year.
UNITHOLDER'S BASES AND HOLDING PERIOD IN THEIR UNITS. The tax basis that
the investors will have in the units they receive as a result of the transaction
will equal the adjusted tax basis the investor had in his or her BACs prior to
the transaction increased by any taxable gain recognized as a result of the
transaction. For the purposes of calculating capital gain and loss on the sale
of units, the investors' holding period for the units will include the period
during which the investor held his or her BACs. Each unitholder will be required
to maintain a single aggregate basis for all units acquired in the company.
TAX ELECTIONS. For federal income tax purposes, the company will be deemed
a continuation of Cap Source I. See "--Tax Treatment of the
Transaction--TERMINATION AND LIQUIDATION OF CAP SOURCE II." Therefore, the
company will have the same tax elections as Cap Source I.
Some partnerships of more than 100 members may elect to apply simplified
procedures for the calculation and pass through of its income. The election is
in effect for the year for which it is made and all subsequent years, unless
revoked with the consent of the Secretary of the Treasury. Among other things,
if this election were made, partners of the electing large partnership would
include in income a share of the partnership's net capital gain. In addition, in
computing its taxable income, an electing large partnership
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would exclude 70% of its miscellaneous itemized deductions. Further, the
electing large partnership would not terminate as a result of the sale of 50% or
more of its interests. The General Partner may, in its discretion, make this
election on behalf of the company.
TAXATION OF THE COMPANY SUBSEQUENT TO THE TRANSACTION
The federal income tax consequences of owning units in the company described
in this prospectus/ consent solicitation statement are dependent upon
classification of the company as a partnership for federal income tax purposes
rather than as an association or publicly traded partnership taxable as a
corporation. For federal income tax purposes, a limited partnership, like the
company, will be treated as a partnership and its limited partners are treated
as partners therein if certain conditions, described below, are satisfied for
each of its taxable years. The General Partner believes that the partnerships
have satisfied those conditions for all of their taxable years prior to the
transaction and that the company will satisfy the conditions for all taxable
years subsequent to the transaction. Consequently, the company should be treated
as a partnership for federal income tax purposes and the federal income tax
treatment of a unitholder should be substantially similar to that of an
investor.
Upon completion of the transaction, counsel will issue its opinion to the
effect that, based upon certain representations, the company will be
characterized as a partnership for federal income tax purposes. However, no
ruling has been sought from the Service that the company will be treated as a
partnership for federal income tax purposes. The opinion will be based in part
on representations concerning the company's future operations and the sources of
its income. In the event the actual operations or income of the company differ
from that described in the representations, there can be no assurance that the
company will remain characterized as a partnership for federal income tax
purposes.
If for any reason the company were treated as an association or publicly
traded partnership taxable as a corporation for federal income tax purposes,
then: (a) the income, deductions and losses of the company would not
pass-through to the unitholders; (b) the company would be required to pay
federal income taxes on its taxable income at rates up to the maximum corporate
rate of 35%, thereby substantially reducing the amount of cash available for
distribution to unitholders; and (c) any distributions from the company would be
treated as dividends taxable as ordinary income to the extent of the current and
accumulated earnings and profits of the company.
In general, a partnership that otherwise qualifies as a partnership for
federal income tax purposes will be subject to taxation as a corporation if it
is characterized as a publicly traded partnership under Section 7704 of the
Code. A partnership will be characterized as a publicly traded partnership if
its partnership interests are traded on an established securities market like
NASDAQ. Notwithstanding the foregoing, a safe harbor provides that a publicly
traded partnership will not be taxable as a corporation, if for each of its
taxable years, at least 90% of its gross income is derived from certain passive
sources which include, among other things, rents from real property and
interest, provided that the partnership does not conduct a finance or insurance
business. The company believes that: (1) in all of the taxable years prior to
the transaction, the partnerships did not conduct a finance or insurance
business and that more than 90% of the gross income of the partnerships was
derived from real property rents or interest; and (2) subsequent to the
transaction, it will not operate a finance or insurance business and that more
than 90% of its gross income will be derived from real property rents and
interest. Therefore, the company believes that, although it may be characterized
as a publicly traded partnership, it is not and will not be subject to taxation
as a corporation for federal income tax purposes. However, in order to insure
that the company continues to qualify for the foregoing safe harbor,
restrictions will be placed on the types of activities the company may conduct
and the types of assets in which the company may invest.
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TAXATION OF UNITHOLDERS
GENERAL. For informational purposes, the company is required to report to
the Service each item of its income, gain, loss, deduction and items of tax
preference, if any. Although the company will be required to file this
informational return with the Service, the company will not be subject to any
federal income tax. Therefore, each unitholder will report on his or her
personal federal income tax return his or her distributive share of each item of
the company's income, gain, loss, deduction, credit and tax preference. Each
shareholder will be taxed on his or her distributive share of the company's
taxable income regardless of whether he or she has received or will receive any
cash distributions from the company. Moreover, a unitholder's distributive share
of the company's taxable income and the income tax payable by the unitholder
thereon, may exceed the cash actually distributed to him or her.
The income tax returns of the company may be audited by the Service, and
this audit may result in the audit of the individual returns of the unitholders.
As a result of an audit, various deductions claimed by the company on its return
could be disallowed in whole or in part, which would thereby increase a
unitholder's allocable share of taxable income or decrease a unitholder's share
of taxable loss.
Each unitholder is generally required to treat items of income, gain, loss,
deduction, credit or tax preference of the company in the same manner as
reported on the company's informational return. Failure to satisfy this
requirement could result in an adjustment to conform the unitholder's treatment
to that of the company and may cause the unitholder to be subject to penalties.
Audits of the company will be performed at the company level in a single
proceeding, rather than in separate proceedings with each unitholder.
Adjustments of the company's items of income, gain, loss, deduction, credits or
tax preference made on audit may be made by the tax matters partner. Suits
challenging a determination by the Service may be brought by the tax matters
partner. Only one such action may be litigated and all unitholders will
generally be bound by the court's final determination.
DISTRIBUTIONS. The company expects that distributions will be made in cash.
These distributions will be made to unitholders in proportion to the number of
units owned by a unitholder. A unitholder will recognize gain as a result of a
distribution of cash, or in some cases, marketable securities to the extent the
cash or marketable securities exceed the adjusted basis of his units.
Ordinarily, any of this gain will be treated as a gain from the sale or exchange
of units. See "--GAIN OR LOSS ON THE SALE OF UNITS."
PASSIVE INCOME AND LOSSES. Section 469 of the Code provides that losses or
deductions from passive trade or business activities in excess of income from
all such passive activities may not be deducted against wages, salaries,
portfolio income or other income. Similarly, credits from passive activities are
limited to tax allocable to these passive activities. Suspended losses and
credits may be carried forward and treated as deductions and credits against
income from passive trade or business activities in succeeding taxable years.
Moreover, suspended passive losses are allowed in full when the taxpayer
disposes of his entire interest in the passive activity in a fully taxable
transaction to an unrelated party.
Passive income, gain, losses and credits from publicly traded partnerships,
like the company, may only be applied against other items of income, gain or
loss from that publicly traded partnership. With respect to the passive loss
rules, the company will be deemed a publicly traded partnership. Therefore,
passive income, gain and losses from the company cannot be used to offset
passive income, gains and losses from other activities. In this regard, the
company will differ from the partnerships since the partnerships were not
characterized as publicly traded partnerships for federal income tax purposes.
Income of the company attributable to interest from mortgage loans likely
will be deemed portfolio income. Therefore, losses, if any, attributable to the
company's passive activities, like rental activities, cannot be offset against
this portfolio income. In addition, any passive income to be generated by the
company's rental activities may not be used to offset passive losses from other
sources.
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GAIN OR LOSS ON THE SALE OF UNITS. Under the IRS Restructuring and Reform
Act of 1998, in order to receive long-term capital gains rates, an individual
must now hold capital assets for 12 months. The maximum long-term capital gains
rate for individuals currently is 20%. However, an 18% maximum long-term capital
gains rate will apply to capital assets held for more than five years beginning
after December 31, 2000. In general, an individual may only use up to $3,000 of
capital loss in excess of capital gains to offset ordinary income, like wages
and interest income, in any taxable year. Assuming that a unitholder holds units
as a capital asset, and except to the extent attributable to the unitholder's
interest in the company's unrealized receivables or substantially appreciated
inventory, the sale of units will result in either capital gain or loss and be
subject to the foregoing rules.
INVESTMENT INTEREST. Investment interest (i.e., interest paid or accrued on
indebtedness incurred or continued to purchase or carry property held for
investment) is deductible by non-corporate taxpayers only to the extent it does
not exceed "net investment income" (i.e., investment income less investment
expenses). Investment income and investment interest do not include income from
or interest paid with respect to an investment that is a passive activity.
Investment interest which is not allowable as a deduction in one year pursuant
to this limitation may be carried over to subsequent years within certain
limits. Investors who borrowed to finance the purchase of their BACs should be
aware that interest on the borrowing may constitute investment interest and
would therefore be subject to the above-described limitations before and after
the transaction.
DEDUCTIBILITY OF FEES. All expenditures of the company must constitute
ordinary and necessary business expenses in order to be currently deductible,
unless the deduction for an item is otherwise expressly permitted by the Code.
The company intends to claim deductions for the disburseable cash fee and the
asset management compensation discussed in "COMPARISON OF BACS AND
UNITS--Compensation Fees and Expenses--THE COMPANY." The company believes that
these fees will be deductible as ordinary and necessary business expenses of the
company. However, because the determination as to deductibility is factually
sensitive, no assurance can be given that the deduction of any of these fees
will not be successfully challenged by the Service. If all or a portion of these
fees were disallowed as current deductions, the company's taxable income would
be increased or its losses reduced.
Section 67 of the Code limits the deductibility of an individual's
miscellaneous itemized deductions, including investment expenses, to the amount
by which the deductions exceed 2% of his or her adjusted gross income. Under
Regulation Section 1.67-2T(b) individual partners in a partnership are required
to separately take into account partnership deductions that would otherwise be
characterized as miscellaneous itemized deductions. Therefore, the unitholders
may be unable to deduct all or a portion of the company's fees and expenses.
TAX BASIS OF UNITS AND "AT-RISK" RULES. As discussed above, the investors
shall have a basis in the units they receive as a result of the transaction that
equals their adjusted basis in their BACs immediately prior to the transaction
plus any gain recognized as a result of the transaction. See "--Tax Treatment of
the Transaction--UNITHOLDER'S BASES AND HOLDING PERIOD IN THEIR UNITS."
Thereafter, each unitholder's basis in his or her units will be increased by the
amount of (a) his or her allocable share of items of income and gain of the
company and (b) any increase in his or her proportionate share of indebtedness
of the company and reduced, but not below zero, by (1) his or her allocable
share of losses and deductions of the company, (2) the amount of cash
distributions including reductions of his or her proportionate share of
liabilities, and (3) the company's basis in any property distributed by the
company.
The amount of losses of the company that may be deducted by a unitholder is
limited to the unitholder's adjusted basis in his or her units. Any excess is
carried over until the unitholder has sufficient basis to deduct the losses. The
"at-risk" rules of Section 465 of the Code further limit a unitholder's ability
to deduct losses by providing that a unitholder may not deduct losses from an
activity for a taxable year to the extent the losses exceed the aggregate amount
for which a unitholder is considered "at-risk" with respect to the activity. Any
amount in excess of this "at-risk" amount will be allowed in future taxable
years
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to the extent the unitholder has an "at-risk" amount. To the extent that any
borrowing by the company is deemed to be recourse debt or qualified nonrecourse
financing, the "at-risk" rules should not apply to the deductibility of company
losses. The company believes that all of its borrowings will be recourse debt or
qualified nonrecourse financings. Therefore, the company expects that the
"at-risk" rules will not apply to company losses.
CONSIDERATIONS FOR TAX-EXEMPT UNITHOLDERS
Unitholders that are tax-exempt entities, including charitable corporations,
pension, profit sharing or stock bonus plans, Keogh Plans, Individual Retirement
Accounts and some other employee benefit plans are subject to federal income tax
on unrelated business taxable income (i.e., net income derived from the conduct
of a trade or business regularly carried on by a tax-exempt entity or by a
partnership in which it is a partner).
A $1,000 special deduction is allowed in determining the amount of unrelated
business taxable income subject to tax. Tax-exempt entities taxed on their
unrelated business taxable income are also subject to the alternative minimum
tax for items of tax preference which enter into the computation of unrelated
business taxable income. Tax-exempt persons who are members of a partnership
will be deemed engaged in the trade or business of the partnership. Moreover,
each tax-exempt person who is a member of the company will recognize unrelated
business taxable income in the event the company incurs acquisition indebtedness
with respect to its assets. Investors who are tax-exempt entities for federal
income tax purposes are urged to consult with their tax advisors with respect to
the application of the federal income tax rules associated with unrelated
taxable business income.
In addition, income generated by debt-financed property will constitute
unrelated business taxable income to tax-exempt persons. In general, certain
types of income, like interest and real property rents, are excluded from the
calculation of unrelated business taxable income. However, notwithstanding the
foregoing, income, including interest and real property rents, derived from
debt-financed property will be included in unrelated business taxable income.
Debt-financed property includes, among other things, debt incurred to acquire or
improve property and debt incurred after the acquisition or improvement if the
debt would not have been incurred but for the acquisition and improvement and at
the time of acquisition the incurrence of the debt was foreseeable.
CONSIDERATIONS FOR NON-U.S. UNITHOLDERS
A non-U.S. partner that is deemed to be engaged in a U.S. trade or business
who has income that is effectively connected to the trade or business will be
subject to regular U.S. income tax thereon. Non-resident aliens, foreign
corporations, foreign partnerships and foreign estates that are partners in a
United States partnership are generally deemed to be non-U.S. partners. A
non-U.S. partner in a partnership that is engaged in a trade or business in the
United States will be considered to be engaged in the trade or business, even if
the non-U.S. partner is only a limited partner.
Leasing property, together with the provision of services to the lessee or
the maintenance of the leased properties, generally will be deemed a U.S. trade
or business. Interest income can be deemed to be effectively connected to a U.S.
trade or business if the instrument generating the income is used or held
primarily for the principal purpose of promoting the present conduct of a U.S.
trade or business.
The company believes that subsequent to the transaction, its rental
activities, which will be conducted through the operating partnerships, will be
deemed to be a U.S. trade or business and rental income therefrom will be deemed
to be effectively connected to the U.S. trade or business. In addition, interest
income from the loans Cap Source I and Cap Source II made to the operating
partnerships likely will be deemed to be effectively connected to the company's
U.S. trade or business since the loans were made principally to promote its real
estate rental business. Therefore, a unitholder that is a non-U.S. partner will
be required to file a U.S. income tax return and pay U.S. income taxes on his
distributive share of the company's taxable income at regular U.S. income tax
rates.
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Section 1446 of the Code provides that a partnership, like the company, must
withhold effectively connected income allocable to non-U.S. partners at the
highest rate of tax imposed under Section 1 of the Code, which is currently
39.6% for individuals. Non-U.S. partners will treat their respective shares of
the foregoing withholding payments as credits against their federal income tax
liability.
Since a unitholder that is a non-U.S. partner likely will be deemed to be
engaged in a U.S. trade or business, some types of income from some other
business transactions could also be attributed to the company's U.S. trade or
business. This could cause the other income to be subject to U.S. income
taxation. Furthermore, a unitholder that is a non-U.S. partner may be subject to
tax on his distributive share of company income and gain in his country of
nationality, residence or elsewhere. The system of taxation in any such
jurisdiction, if any, may vary considerably from the U.S. tax system.
It should be noted that a non-U.S. partner unitholder's distributive share
of some investment income, like some short term investment income, may not be
considered to be income effectively connected with a U.S. trade or business of
the company and the income would not be subject to the 39.6% withholding
discussed above. However, the company, depending upon the type of income, may be
obligated to withhold tax equal to 30% of a non-U.S. partner unitholder's
distributive share of this income.
If Cap Source II realizes gain as a result of the transaction, a Cap Source
II investor that is a non-U.S. partner will be subject to the 39.6% withholding
discussed above on his distributive share of this gain. A non-U.S. partner
investor in Cap Source I that receives notes instead of units likely will be
subject to 10% withholding to the extent of the investor's interest in U.S. real
estate assets of the partnership.
It is impossible to predict the impact of the above-described principles on
specific unitholders that are non-U.S. partners, or how the provisions of tax
treaties between the U.S. and foreign governments may affect the federal income
taxation of unitholders that are non-U.S. partners. Consequently, we urge
unitholders that may be non-U.S. partners to consult their tax advisors with
respect to all U.S. federal income tax issues and other tax issues associated
with the transaction and ownership or holding of the units.
TAX ISSUES ASSOCIATED WITH NOTES
STATED INTEREST. Under general federal income tax principles, holders of
notes must include stated interest in income in accordance with their method of
tax accounting. Accordingly, holders of notes using the accrual method of tax
accounting must include stated interest in income as it accrues and holders of
notes using the cash method of tax accounting must include stated interest in
income as it is actually or constructively received.
Payments of interest to taxable holders of notes will constitute portfolio
income for purposes of Section 469 of the Code and not passive activity income.
Accordingly, this income will not be subject to reduction by losses from passive
activities (e.g., any interest in a trade or business held as a limited partner
in which the holders of notes do not materially participate) of holders of notes
who are subject to the passive activity loss rules. However, income attributable
to interest payments may be offset by investment expense deductions, subject to
the limitation that individual investors may only deduct miscellaneous itemized
deductions, including investment expenses, to the extent these deductions exceed
two percent of the investor's adjusted gross income.
ORIGINAL ISSUE DISCOUNT. Original issue discount is generally defined as
the excess of a debt instrument's stated redemption price at maturity over its
issue price, subject to a statutorily-defined DE MINIMIS exception. This is
generally one-quarter of 1% of the debt instrument's stated redemption price at
maturity multiplied by the number of complete years to maturity from its issue
date. The "stated redemption price at maturity" of a debt instrument is
generally the sum of the debt instrument's stated principal amount plus all
other payments required thereunder, other than payments of "qualified stated
interest." Generally, this stated interest is unconditionally payable in cash or
in property at least annually at a single fixed rate. The
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"issue price" of a debt instrument that is not part of an issue of which a
substantial part is sold for money and is traded on an established securities
market is its fair market value when issued, or in the case of a debt instrument
that is not so traded, either (a) its stated principal amount, if the debt
instrument provides for "adequate stated interest" (generally, interest at the
applicable federal rate for the month of issuance) or (b) its "imputed principal
amount" (generally, the sum of the present value of all payments due under the
debt instrument, discounted at the applicable federal rate), if the debt
instrument does not provide for "adequate stated interest."
The Regulations have special rules applicable to debt instruments providing
for variable rates of interest. In general, if a debt instrument providing for
variable rates of interest qualifies as a variable rate debt instrument, then
the debt instrument generally would not be treated as issued with original issue
discount unless the debt instrument is issued at a price below its stated
principal amount, subject to the statutorily defined DE MINIMIS amount. A debt
instrument will qualify as a variable rate debt instrument under the Regulations
if (a) the issue price of the debt instrument does not exceed the total
noncontingent principal payments by more than a specified amount, (b) the debt
instrument provides for stated interest, paid or compounded at least annually,
at current values of (1) one or more qualified floating rates, (2) a single
fixed rate and one or more qualified floating rates, (3) a single objective
rate, or (4) a single fixed rate and a single objective rate that is a qualified
inverse floating rate. A qualified floating rate is any floating rate where
variations in the rate can reasonably be expected to measure contemporaneous
variations in the cost of newly borrowed funds, including some rates based on a
qualified floating rate. An objective rate is a rate that is not itself a
qualified floating rate but which is determined using a single formula that is
fixed throughout the term of the debt instrument and which is (A) based upon one
or more qualified floating rates, (B) based upon one or more rates where each
rate would be a qualified floating rate for a debt instrument denominated in a
currency other than the currency in which the debt instrument is denominated,
(C) based upon the price of some types of actively traded personal property, or
(D) a combination of (A), (B) or (C).
The company believes that the variable rates of interest on the notes will
be treated as providing for stated interest, paid at least annually, at one or
more qualified floating rates and that, as a result, the notes should qualify as
variable rate debt instruments under the Regulations. Accordingly, the notes are
not expected to be issued with original issue discount.
Alternatively, if the notes qualify as variable rate debt instruments under
the Regulations but the fair market value of the notes is less than their stated
principal amount by more than the statutorily-defined DE MINIMIS amount, then
the notes would be issued with original issue discount. In which case, the
holders of notes would be required to include in gross income on a constant
yield to maturity basis the sum of the daily portions of original issue discount
for the period during the taxable year the holders of notes held the notes even
though the holders of notes may not receive a payment representing the original
issue discount in that year. Any amount of original issue discount included in
income would increase a holder of notes' tax basis in the notes.
In addition, if, contrary to the company's expectations, the notes do not
qualify as variable rate debt instruments under the Regulations, then the notes
may be subject to some of the contingent payment provisions of the Regulations.
In this event, holders of notes would generally be required to include stated
interest on the notes in income in the taxable year in which the amount of the
interest payments become fixed, regardless of their method of tax accounting.
BOND PREMIUM AND MARKET DISCOUNT. Holders of notes should have a basis in
the notes received in liquidation of their interests in a partnership equal to
the adjusted basis in their BACs, which may be more or less than the face amount
of notes received. As a result, holders of notes may have bond premium or market
discount with respect to the notes.
If a noteholder's initial adjusted basis in the notes or their fair market
value immediately after the transaction, whichever is lower, exceeds the amount
payable at maturity of the notes, or in some cases, on
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an earlier call date, the holders of notes may be able to elect to deduct the
excess using a constant yield method over the remaining term of the notes as
amortizable bond premium under Section 171 of the Code provided the notes are
held as a capital asset. Except as provided in the Regulations, the amortizable
bond premium will be treated as an offset to interest income on the notes rather
than as a separate deduction item. An election under Section 171 of the Code
generally is binding once made and applies to all obligations owned or
subsequently acquired by the taxpayer.
The market discount provisions of the Code generally provide that, subject
to a statutorily-defined DE MINIMIS exception, if a holder of a debt instrument
acquires it at a market discount and thereafter recognizes gain on a disposition
of the debt instrument, including a gift, the lesser of the gain or the portion
of the market discount that accrued while the debt instrument was held by the
holder will be treated as ordinary interest income at the time of the
disposition. For this purpose, in the case of a debt instrument not issued with
original issue discount, an acquisition at a market discount includes an
acquisition, other than an acquisition at original issuance, resulting in a
basis in the debt instrument below the debt instrument's stated redemption price
at maturity. The market discount rules also provide that a holder who acquires a
debt instrument at a market discount, and who does not elect to include the
market discount in income on a current basis, may be required to defer a portion
of any interest incurred or maintained to purchase or carry the debt instrument
until the holder disposes of the debt instrument in a taxable transaction.
The notes provide that they may be redeemed, in whole or in part, before
maturity. If some or all of the notes are redeemed, each holder of a note
acquired at a market discount would be required to treat the principal payment
as ordinary interest income to the extent of any accrued market discount on the
notes.
A holder of a debt instrument may elect to have market discount accrue on a
constant interest rate basis, as opposed to a straight line basis. The current
inclusion election, once made, applies to all market discount obligations
acquired by the holder on or after the first day of the first taxable year to
which the election applies and may not be revoked without the consent of the
Service. If a noteholder elects to include market discount in income in
accordance with the preceding sentence, the foregoing rules with respect to the
recognition of ordinary income on a sale or select other dispositions of a note
and the deferral of interest deduction on indebtedness related to the note will
not apply.
DISPOSITION OF NOTES. In general, a holder of notes will recognize gain or
loss upon the sale, exchange, redemption or other taxable disposition of a note
measured by the difference between (a) the amount of cash and the fair market
value of property received, except, for cash method taxpayers, to the extent
attributable to the payment of accrued interest and (b) the holder's adjusted
basis in the note as increased by any original issue discount or market discount
previously included in income by the holder and decreased by any cash payments
received, other than payments constituting qualified stated interest, and any
amortizable bond premium deducted over the term of the note. Subject to the
market discount and bond premium rules discussed above, any of this gain or loss
will generally be long-term capital gain or loss, provided the note was a
capital asset in the hands of the holder and was held for more than one year.
GENERAL PARTNER LIABILITIES
Three of the Cap Source I operating partnerships currently have some
contingent liabilities which might in the future become payable to their
respective general partners which are affiliates of America First Companies
L.L.C. The contingent liabilities consist of:
(a) property development and management fees;
(b) asset management and partnership administration fees; and
(c) operating deficit and construction loans.
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The affiliates of America First Companies L.L.C. have agreed that the noted
liabilities should be waived if the transaction is completed. The Cap Source
General Partners believe that the forgiveness of these liabilities should not
give rise to any material amount of discharge of indebtedness income for federal
income tax purposes because there are conditions precedent to their payment. If
the forgiveness of these liabilities were characterized as discharge of
indebtedness income, however, the partnerships and the operating partnerships
would be required to recognize corresponding amounts of income. If this income
were recognized, no additional funds would be received by the partnerships and
distributed to the unitholders.
TERMINATION OF TRADE PROCESSING
In the event the Cap Source General Partners have reason to believe that a
requested sale, transfer or assignment of BACs would cause Cap Source I or Cap
Source II to be characterized as a publicly traded partnership for federal
income tax purposes, the Cap Source General Partners will, in accordance with
their powers under Section 5.09 of the partnership agreement, refuse to process
the requested sale, transfer or assignment unless the Cap Source General
Partners receive an unqualified opinion of counsel to the effect that the sale,
transfer or assignment of BACs, in conjunction with all other reasonably
expected sales, transfers or assignments of BACs, would not cause the
partnership to be characterized as a publicly traded partnership for federal
income tax purposes. Neither the Cap Source General Partners nor the
partnerships may be held liable for any losses resulting to a holder of BACs or
a purchaser of BACs as a result of a requested sale, transfer or assignment of
BACs not being processed due to these limitations.
The foregoing restrictions are intended to prevent the trading volume of
BACs from reaching a level that would cause the partnership to be characterized
as a publicly traded partnership under Section 7704 of the Code. In the event
the partnership were characterized as a publicly traded partnership, the
partnership could be subject to entity level taxation. In this event, amounts
otherwise distributable to holders of BACs would be used to satisfy federal
income tax liabilities of the partnership and, thus, amounts received by holders
of BACs would be less than anticipated.
EMPLOYEE RETIREMENT INCOME SECURITY ACT
The Employee Retirement Income Security Act of 1974, ("ERISA") applies to
investments by pension, profit sharing, stock bonus, Keogh and other employee
benefit plans, and by IRAs (collectively referred to as "Benefit Plans"). ERISA
does not prohibit Benefit Plans from investing in any specific type of
investment but does require that plan fiduciaries give appropriate consideration
to the facts and circumstances relevant to a particular investment, including
whether the investment is reasonably designed, as part of the investment
portfolio, to further the purposes of the Benefit Plan, taking into
consideration risk of loss and opportunity for gain. ERISA also requires
fiduciaries to take into account factors like composition of the portfolio with
regard to diversification, liquidity, current return relative to anticipated
cash flow requirements and projected return relative to funding objectives, and
the need to value plan assets annually. ERISA prohibits some transactions
between a Benefit Plan and a "party in interest" as defined by ERISA. Section
4975 of the Code imposes a 15% excise tax on any fiduciary or "disqualified
person" (as defined therein) who engages in transactions similar to those
transactions prohibited under ERISA. The excise tax may increase to 100% if
violations are not timely corrected after notice. A limited partnership, like
the company, will be subject to the foregoing rules restrictions and penalties
if its assets are deemed to be the assets of a Benefit Plan under ERISA. Whether
or not assets of the company will be deemed to be assets of a Benefit Plan for
purposes of ERISA or Section 4975 of the Code will be determined in accordance
with the "plan asset" regulations discussed below. It should be noted that
Benefit Plan fiduciaries should carefully consider whether an investment in the
company is consistent with their responsibilities under ERISA.
Under the Department of Labor plan assets regulations, the assets of a
pooled investment vehicle, the definition of which may include the company, will
not be plan assets of a Benefit Plan for ERISA purposes
107
<PAGE>
(and will not be subject to requirements regarding fiduciary responsibility and
the holding of plan assets in trust) if the issuer is an "operating company"
(i.e., "an entity that is primarily engaged in the production or sale of a
product or service other than the investment of capital") or if equity
participation in the entity by Benefit Plans is not significant (i.e., less than
25% of the value of any class of equity interests in an entity is held by
Benefit Plan investors). The company believes that it might be an operating
company and anticipates that ownership of units by Benefit Plans will be less
than 25%. There can be no absolute assurance, however, that the company will
meet the operating company exception or 25% test.
Alternatively, the plan assets regulations further provide that assets of a
limited partnership will not be treated as plan assets if equity interests in
the limited partnership are "publicly offered securities" (i.e., a security that
is widely held, freely transferable, either registered under the Securities
Exchange Act or sold pursuant to a registration statement under the Securities
Act and the class of securities is registered under the Securities Exchange Act
within 120 days after the end of the issuer's fiscal year during which the
public offering occurred). In general, the regulations provide that securities
are "widely held" only if they are part of a class of securities purchased and
held by 100 or more persons who are independent of the issuer and of one
another. The company expects that (1) it will have significantly more than 100
unitholders independent from it and one another; (2) the units will be freely
transferable; (3) the units are being offered pursuant to a registration
statement under the Securities Act; and (4) the company will be registered under
Section 12(g) of the Securities Exchange Act within the applicable period. Based
on these facts, the company believes that the units satisfy all criteria for the
"publicly offered securities exception." Accordingly, based on all the facts and
circumstances described above, the units will most likely be characterized as
"publicly offered securities" and the assets of the company will most likely not
be plan assets for ERISA purposes.
INDEPENDENT PUBLIC ACCOUNTANTS
The financial statements of Capital Source L.P. and Capital Source II L.P.-A
as of December 31, 1998 and 1997, and for each of the years in the three year
period ended December 31, 1998, and America First Real Estate Investment
Partners, L.P. as of June 25, 1999, have been included in the prospectus/consent
solicitation statement in reliance upon the reports of KPMG LLP, independent
certified public accountants appearing elsewhere in this prospectus/consent
solicitation statement, and upon the authority of said firm as experts in
accounting and auditing.
LEGAL MATTERS
Kutak Rock, a national law firm, has delivered an opinion stating that the
units offered by this prospectus/consent solicitation statement will be validly
issued, and that the notes offered by this prospectus/consent solicitation
statement will be binding obligations of the company. Kutak Rock has relied on
Richards, Layton & Finger as to matters of Delaware law. In addition, Kutak Rock
has delivered an opinion stating that the discussion under "FEDERAL INCOME TAX
CONSEQUENCES" fairly summarizes all of the material federal income tax
considerations for a holder of BACs who exchanges his or her BACs for units or
notes. Kutak Rock has previously performed legal services on behalf of the
partnerships, the Cap Source General Partners, the company and their affiliates.
The opinions of Kutak Rock are not attached as appendices to this
prospectus/consent solicitation statement; however, upon receipt of a written
request by an investor or representative so designated in writing, a copy of
these opinions will be sent by the Cap Source General Partners. All requests
should be directed to America First Investor Services Department, 1004 Farnam
Street, Suite 400, Omaha, Nebraska, 68102.
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AVAILABLE INFORMATION
The partnerships are subject to the informational requirements of the
Securities Exchange Act, and therefore file reports, proxy and information
statements and other information with the Commission as required by the
Securities Exchange Act. In addition, the company has filed with the Commission
a Registration Statement on Form S-4 of which this prospectus/consent
solicitation statement forms a part (including all amendments, exhibits, annexes
and schedules thereto, the "Registration Statement") pursuant to the Securities
Act and the rules and regulations promulgated thereunder, with respect to the
units and notes offered pursuant to this prospectus/consent solicitation
statement. This prospectus/consent solicitation statement, which is part of the
Registration Statement, does not contain all of the information set forth in the
Registration Statement and the exhibits and financial schedules thereto. For
further information with respect to the partnerships and the company, reference
is made to the reports of the partnerships filed under the Securities Exchange
Act and the company's Registration Statement and the exhibits and schedules,
copies of which may be examined without charge or obtained upon payment of
prescribed fees at the public reference facilities maintained by the Commission
at Room 1024, Judiciary Plaza, 450 Fifth Street, N.W., Washington, D.C. 20549,
and at the regional offices of the Commission at 7 World Trade Center, New York,
New York 10048 and Northwest Atrium Center, 500 West Madison Street, Suite 1400,
Chicago, Illinois 60661. The Commission maintains a site on the World Wide Web
at http://www.sec.gov that contains reports, proxy and other information
statements and other information regarding registrants that file electronically
with the Commission, including the electronic filings of the partnerships and
the company.
Statements contained in this prospectus/consent solicitation statement as to
the contents of any contract, agreement or other document are not necessarily
complete, and in each instance, reference is made to the copy of the contract,
agreement or other document filed as an exhibit to the Registration Statement,
each statement being qualified in all respects by each reference. The
information in this prospectus/consent solicitation statement concerning the
company, Cap Source I and Cap Source II has been furnished by the company, Cap
Source I and Cap Source II, respectively. For further information with respect
to the company, the partnerships and the units and notes offered hereby,
reference is made to the Registration Statement.
A separate supplement to this prospectus/consent solicitation statement has
been prepared for each partnership and will be delivered to each investor of the
partnership covered thereby. Upon receipt of a written request by an investor or
representative so designated in writing, the general partners of the investor's
partnership will send a copy of any supplement without charge. All requests
should be directed to America First Investor Services Department, 1004 Farnam
Street, Suite 400, Omaha, Nebraska 68102.
Upon completion of the transaction, the company will be required to file
reports and other information with the Commission pursuant to the Securities
Exchange Act. Unitholders and noteholders will receive annual reports containing
audited financial statements with a report thereon by the company's independent
public accountants, and quarterly reports containing unaudited financial
information for each of the first three quarters of each fiscal year. If the
transaction is not completed, the partnerships will continue to file reports and
other information with the Commission as required by law.
109
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INDEX TO FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
PAGE
---------
<S> <C>
INDEX TO FINANCIAL STATEMENTS OF
AMERICA FIRST REAL ESTATE INVESTMENT PARTNERS, L.P.
Report of Independent Accountants.......................................................................... FS-2
Balance Sheet at June 25, 1999............................................................................. FS-3
Notes to Balance Sheet..................................................................................... FS-4
</TABLE>
INDEX TO FINANCIAL STATEMENTS OF THE PARTNERSHIPS
Financial statements and related notes for each of the partnerships are
included in a separately bound volume provided with this prospectus/consent
solicitation statement. The index to the financial statements is included in the
separately bound volume.
FS-1
<PAGE>
REPORT OF INDEPENDENT ACCOUNTANTS
To the Unitholders
America First Real Estate Investment Partners, L.P.
We have audited the accompanying balance sheet of America First Real Estate
Investment Partners, L.P. as of June 25, 1999. This financial statement is the
responsibility of the partnership's management. Our responsibility is to express
an opinion on this financial statement based on our audit.
We conducted our audit in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statement is free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statement. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audit provides a reasonable basis for our opinion.
In our opinion, the balance sheet referred to above presents fairly, in all
material respects, the financial position of America First Real Estate
Investment Partners, L.P. as of June 25, 1999 in conformity with generally
accepted accounting principles.
KPMG LLP
Omaha, Nebraska
June 28, 1999
FS-2
<PAGE>
AMERICA FIRST REAL ESTATE INVESTMENT PARTNERS, L.P.
BALANCE SHEET
JUNE 25, 1999
<TABLE>
<S> <C>
Asset
Cash.............................................................................. $ 1,000
---------
---------
Partners' Capital
General Partner................................................................... $ 10
Limited Partner................................................................... 990
---------
$ 1,000
---------
---------
</TABLE>
The accompanying notes are an integral part of the balance sheet.
FS-3
<PAGE>
AMERICA FIRST REAL ESTATE INVESTMENT PARTNERS, L.P.
NOTES TO BALANCE SHEET
JUNE 25, 1999
1. ORGANIZATION
America First Real Estate Investment Partners, L.P. (the "Partnership") was
formed on June 17, 1999, under the Delaware Revised Uniform Limited Partnership
Act for the purpose of facilitating the proposed merger of Capital Source L.P.
and Capital Source II L.P.-A (collectively referred to as the "Capital Source
Funds"). The Partnership intends to issue up to 7,765,772 units of assigned
limited partnership interests to holders of Beneficial Assignment Certificates
(BACs) of the Capital Source Funds. The General Partner will hold a 1% interest
in the Partnership. The Company has not yet commenced operations.
2. RELATED PARTY TRANSACTIONS
The Partnership will pay the General Partner an acquisition fee in
connection with the identification, evaluation and acquisition of new assets and
the financing thereof in an amount equal to 1.25% of the aggregate purchase
price paid by the Partnership for such new assets. The acquisition fee with
respect to an acquisition of a new asset will be payable at the time of the
closing of the acquisition. The Partnership will also pay the General Partner an
administrative fee in connection with the ongoing administration of the business
of the Partnership in an amount equal to 0.50%, per annum, of the sum of (i) the
fair market value on the merger date of the original assets that are then still
owned by the Partnership, plus (ii) the purchase price paid by the Partnership
for new assets that are then held by the Partnership. The first $100,000 of the
administrative fee shall be payable each year, with the balance payable only
during years that funds from operations ("FFO"), calculated before
administrative fees, exceeds 7% of the unit holders' average capital for that
year. FFO represents net income (or loss) (computed in accordance with GAAP),
excluding gains (or losses) from debt restructuring and sales of properties,
plus real estate-related depreciation and amortization (excluding amortization
of deferred financing costs and depreciation of non-real estate assets) and
after adjustments for unconsolidated partnerships and joint ventures. Such
administrative fee will be paid on a monthly basis.
The Partnership may pay an affiliate of the General Partner a reasonable
property management fee in connection with the management of the Properties. The
property management fee paid with respect to any Property may not exceed 5% of
the gross revenues of such Property (in the case of residential property) or 6%
of the gross revenues of such Property (in the case of industrial or commercial
property); provided, however, that the property management fee shall not exceed
an amount that would be charged by unaffiliated parties rendering similar
services in the same geographic location and for comparable property.
The Partnership will reimburse the General Partner or its affiliates on a
monthly basis for the actual out-of-pocket costs of direct general and
administrative expenses.
FS-4
<PAGE>
APPENDIX A
FORM OF AGREEMENT AND PLAN OF MERGER
AMONG THE COMPANY AND
THE PARTNERSHIPS
This Agreement and Plan of Merger (this "Agreement") dated as of
, 1999, is by and among America First Real Estate Investment
Partners, L.P., a Delaware limited partnership (the "Company"); Capital Source
L.P., a Delaware limited partnership ("Cap Source I"); and Capital Source II
L.P.-A, a Delaware limited partnership ("Cap Source II" and together with Cap
Source I the "Partnerships" and individually, a "Partnership"). Capitalized
terms used and not otherwise defined herein shall have the meanings assigned in
Section 12.12 of this Agreement.
W I T N E S S E T H:
WHEREAS, the Company and the Partnerships desire to merge the Partnerships
with and into the Company, pursuant to Delaware law, with the Company being the
surviving entity (the "Merger"), as part of the merger by consolidation of the
Partnerships and the Company. The Company has filed a registration statement on
Form S-4, No. 333-52117, including all amendments thereto (the "Registration
Statement"), with the Securities and Exchange Commission (the "SEC") pursuant to
the Securities Act of 1933, as amended (the "Act") relating to the Transaction,
of which the prospectus/consent solicitation statement of the Company (the
"Prospectus/Consent Solicitation Statement") is a part; and
WHEREAS, Section 17-211 of the Delaware Revised Uniform Limited Partnership
Act (the "Partnership Act") authorizes the merger of Delaware limited
partnerships; and
WHEREAS, the Company's Limited Partnership Agreement permits, and
resolutions adopted by the Company's general partner authorize, this Agreement
and the consummation of the Merger.
NOW, THEREFORE, for good and valuable consideration, the receipt of which is
hereby acknowledged, the parties to this Agreement covenant and agree as
follows:
ARTICLE I
THE MERGER
Section 1.01. THE MERGER; SURVIVING LIMITED PARTNERSHIP. Subject to the
terms and conditions set forth in this Agreement, at the Effective Time (as
defined in Section 1.02 below), the Partnerships shall each be merged with and
into the Company, pursuant to Section 17-211(e) of the Partnership Act, and the
separate existence of each of the Partnerships shall cease. The Company shall be
the surviving entity (the "Surviving Limited Partnership") and shall continue to
be governed by the Partnership Act.
Section 1.02. EFFECTIVE TIME. In accordance with Section 17-211(e) of the
Partnership Act, the Merger shall become effective (the "Effective Time") upon
the filing of the certificate of merger (the "Certificate of Merger") with the
Secretary of State of the State of Delaware, or at such later time, not later
than five business days thereafter, as may be specified in the Certificate of
Merger. All other filings or recordings required by Delaware law in connection
with the Merger shall also be made.
Section 1.03. EFFECT OF THE MERGER. The Merger shall have the effects set
forth in Section 17-211 of the Partnership Act.
ARTICLE II
THE SURVIVING LIMITED PARTNERSHIP
Section 2.01. NAME. The name of the Surviving Limited Partnership shall be
America First Real Estate Investment Partners, L.P.
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<PAGE>
Section 2.02. LIMITED PARTNERSHIP AGREEMENT. The Amended and Restated
Limited Partnership Agreement of the Company as filed as Appendix C to the
Prospectus/Consent Solicitation Statement shall be the Amended and Restated
Limited Partnership Agreement (the "Limited Partnership Agreement") of the
Surviving Limited Partnership unless and until amended in accordance with its
terms and applicable law.
Section 2.03. THE GENERAL PARTNER. Upon consummation of the Merger America
First Capital Source I L.L.C. shall be the general partner of the Surviving
Limited Partnership and remain general partner until removed and its successor
is duly appointed or until its resignation in accordance with the Company's
Limited Partnership Agreement.
ARTICLE III
CONVERSION OF PARTNERSHIP INTERESTS
Section 3.01. CONVERSION OF LIMITED PARTNER INTERESTS.
(a) At the Effective Time, as a result of the Merger each BAC shall be
converted, in proportion to the capital accounts of each investor and
pursuant to the terms of the Partnership Agreements, into the number of
units (the "Units") of the Company representing assigned limited partner
interests in the Company, as follows:
<TABLE>
<CAPTION>
PARTNERSHIP NUMBER OF UNITS PER BAC
- -------------------------------------------------------------------- -------------------------
<S> <C>
Cap Source I........................................................ 1.3958
Cap Source II....................................................... 0.7620
</TABLE>
At the Effective Time, as a result of the Merger, each Initial Limited
Partner's Limited Partnership Interest shall be canceled and no
consideration shall be issued in respect thereof.
At the Effective Time, as a result of the Merger, the interests of the
Partnerships' general partners (the "Cap Source General Partners") in the
Partnerships shall be canceled.
Each of the Partnerships has one class of BACs and all such BACs are
held by the investors.
The number of Units per BAC to be issued as a result of the conversion
of BACs, as set forth in the above table, shall be multiplied by the number
of BACs held by an investor on the record date, as defined in the
Prospectus/Consent Solicitation Statement. No fractional Units will be
issued. Each investor who would otherwise be entitled to a fractional Unit
(which entitlement will be determined by combining such investor's
allocation of Units from each Partnership as to which such investor is
receiving Units) will instead receive cash equal to $10 multiplied by the
fraction.
(b) Notwithstanding subparagraph (a) above and subject to the
limitations described herein, investors who, in connection with the
Transaction, elected to receive the Company's Variable Rate Junior Notes
Callable On or After the Date of Issuance ("Notes"), will, except as
hereinafter provided, receive Notes. In the event investors elect to receive
Notes in the aggregate principal amount which exceeds $20 million, the Notes
will be allocated first to such investors who voted against the Transaction,
and any remaining Notes will be allocated on a pro rata basis (in
denominations of $1,000) to those investors who elected to receive Notes and
either abstained from voting by indicating their abstention on the consent
card or voted "YES" in favor of the Transaction. In such event, the
investors who voted for the Transaction or abstained from voting and who
elected to receive Notes will receive Units in an amount equal to the
difference between the exchange value allocable to such an investor and the
amount of Notes distributed to such an investor. Subject to the foregoing
limitations, each BAC held by an investor who elected to receive Notes shall
be converted into the Notes.
Section 3.02. TAX ASPECTS. For federal income tax purposes, the conversion
of the BACs pursuant to Section 3.01(a) of this Agreement shall be deemed (a) a
contribution by Cap Source II of its assets to Cap
A-2
<PAGE>
Source I in exchange for Units, Notes and the assumption of its liabilities; (b)
the distribution of the Units and Notes received in the transaction to the
investors in Cap Source II in liquidation of Cap Source II in accordance with
the capital accounts of such investors; (c) the conversion of the BACs held by
investors in Cap Source I to Units; and (d) the exchange of BACs in Cap Source I
for Notes. In addition, the Company will be considered a continuation of Cap
Source I for federal income tax purposes.
Section 3.03. ISSUANCE OF UNITS.
(a) The Company shall designate an exchange agent (the "Exchange Agent")
to act as such in connection with the issuance of certificates representing
Units and Notes pursuant to this Agreement.
(b) As soon as practicable after the Effective Time, the Company shall
cause the Exchange Agent to distribute to each investor who, in connection
with the Transaction, elected to receive Units, or who made no election with
respect to Units or Notes, certificates representing the number of Units to
which such investor is entitled pursuant to Section 3.01(a).
Section 3.04. ISSUANCE OF NOTES. As soon as practicable after the
Effective Time, the Company shall cause the Exchange Agent to distribute to each
investor who elected to receive Notes in connection with the Transaction, Notes
to which such investor is entitled pursuant to, and subject to the limitations
set forth in, Section 3.01(b) of this Agreement.
ARTICLE IV
TRANSFER AND CONVEYANCE OF ASSETS AND ASSUMPTION OF LIABILITIES
Section 4.01. TRANSFER, CONVEYANCE AND ASSUMPTION. At the Effective Time,
the Company shall continue in existence as the Surviving Corporation and without
further transfer, succeed to and possess all the rights, privileges and powers
of the Partnerships, and all the assets and property of whatever kind and
character of the Partnerships shall vest in the Company without further act or
deed. Thereafter, the Company, as the Surviving Limited Partnership, shall be
liable for all of the liabilities and obligations of the Partnerships, and any
claim or judgement against the Partnerships may be enforced against the Company,
as the Surviving Limited Partnership, in accordance with Section 17-211 of the
Partnership Act.
Section 4.02. FURTHER ASSURANCES. If at any time the Company shall
consider or be advised that any further assignment, conveyance or assurance is
necessary or advisable to vest, perfect or confirm of record in the Surviving
Limited Partnership the title to any property or right of the Partnerships, or
otherwise, to carry out the provisions hereof, the proper representatives of the
Partnerships as of the Effective Time shall execute and deliver any and all
proper deeds, assignments and assurances, and do all things necessary and proper
to vest, perfect or convey title to such property or right in the Surviving
Limited Partnership and otherwise to carry out the provisions hereof.
ARTICLE V
REPRESENTATIONS AND WARRANTIES OF THE PARTNERSHIPS
The Partnerships each severally represent and warrant to the Company and to
each other (with respect only to the Partnership making the representation and
warranty) as follows:
Section 5.01. VALIDITY OF ACTIONS. Each Partnership (a) is a limited
partnership duly formed, validly existing and in good standing under the laws of
the State of Delaware, (b) has the authority to conduct its business as
currently conducted and to own and operate the properties which it now owns and
operates, (c) is qualified to do business in all jurisdictions in which such
qualification is necessary, and (d) has full power and authority to enter into
this Agreement and to carry out all acts contemplated by it. This Agreement has
been duly executed and delivered on behalf of the Partnerships, and has received
all necessary authorization and is a legal, valid and binding obligation of the
Partnerships, enforceable against the Partnerships in accordance with its terms.
The execution and delivery of this Agreement and consummation of the
transactions contemplated by it will not violate any provision of the
Partnership
A-3
<PAGE>
Agreements nor violate, conflict with or result in any breach of any of the
terms, provisions or conditions of, or constitute a default or cause
acceleration of, any indebtedness under any agreement or instrument to which any
of the Partnerships are a party or by which they or their assets may be bound,
or cause a breach of any applicable federal or state law or governmental
regulation, or any applicable order, judgment, writ, award, injunction or decree
of any court or governmental instrumentality.
Section 5.02. PARTNERSHIPS' FINANCIAL STATEMENTS. The financial statements
and schedules of the Partnerships, together with related notes (the "Financial
Statements"), set forth in the Registration Statement of the Company, fairly
present, on the basis stated in the Registration Statement, the financial
position of the Partnerships at the date or for the periods specified in the
Registration Statement. The Financial Statements have been prepared in
accordance with generally accepted accounting principles applied on a consistent
basis ("GAAP"), except to the extent stated therein.
Section 5.03. NO MISSTATEMENTS. The representations of the Partnerships
contained in this Agreement and the information supplied by the Partnerships for
inclusion in the Registration Statement and the Prospectus/Consent Solicitation
Statement do not contain any untrue statement of a material fact or omit to
state any fact necessary to make such representations or information not
materially misleading.
Section 5.04. NO MATERIAL ADVERSE CHANGE. Since the respective dates as to
which information is given in the Registration Statement and the
Prospectus/Consent Solicitation Statement with respect to the Partnerships, and
except as described in the Registration Statement or the Prospectus/Consent
Solicitation Statement, there have been no changes in the business, operations,
properties, assets or the prospects or condition, financial or otherwise, of the
Partnerships which would, in the aggregate, have a material adverse effect on
the business, properties, prospects, profitability, assets or financial
condition of the Partnerships.
Section 5.05. TITLE TO ASSETS. Each Partnership has good and marketable
title to the assets reflected in the most recent balance sheet (the "Balance
Sheet") included in the Financial Statements with respect to such Partnership,
and will hold good and marketable title to such assets, and any assets acquired
by the Partnership prior to the Effective Time, as of the Effective Time, except
for assets disposed of in the ordinary course of business. Such assets, together
with the related goodwill and rights of each Partnership as a going concern,
tangible and intangible, are collectively referred to as the "Assets." Except as
otherwise disclosed in the Balance Sheet or related notes accompanying it, all
of the Assets are owned free and clear of any and all adverse claims, security
interests, charges or other encumbrances or restrictions of every nature, except
liens for current taxes not yet due and payable or landlords' liens as provided
for in the relevant leases or by applicable law.
Section 5.06. LIABILITIES OF THE PARTNERSHIPS. The Partnerships have no
material liabilities, including, without limitation, liabilities for state or
federal income, withholding or other taxes, except to the extent reflected,
reserved against, or provided for in the Balance Sheet, and except for any
material liabilities disclosed in the Prospectus/Consent Solicitation Statement
or any other obligations incurred after , 1999, in the ordinary course of
business which subsequently incurred obligations are of an amount and nature as
to be capable of being discharged from the operations of the Partnerships
without requiring additional equity or borrowing.
Section 5.07. REPRESENTATIONS AND WARRANTIES PERTAINING TO REAL
PROPERTY. For purposes of the following representations and warranties, "Real
Property" shall mean those parcels of real property of a Partnership or
Operating Partnership owned by a Partnership as listed in the Prospectus/Consent
Solicitation Statement and "Improvements" shall mean any building, structure or
other improvements situated on the Real Property. Each Partnership makes the
following representations and warranties only with respect to the Real Property
owned by it as specified in the Prospectus/Consent Solicitation Statement.
(a) To the best knowledge of each Partnership, all assumptions of the
appraisers of the Real Property (the "Appraisers") used by the Appraisers in
preparing the appraisals of the Real Property,
A-4
<PAGE>
as the same may have been revised (the "Appraisals"), are reasonable
assumptions. All information provided by each Partnership to the Appraisers
with respect to the Real Property was true and correct as of the date given.
(b) To the best knowledge of each Partnership, there is at present no
material violation of any law, ordinance, rule, requirement, resolution,
policy statement or regulation (including, without limitation, those
relating to land use, subdivision, zoning, environmental, occupational
health and safety, water, and building and fire codes) of any governmental
authority (collectively, "Governmental Regulations") applicable to the
construction, alteration, rehabilitation, maintenance, use, operation or
sale of any of the Real Property, which violation would have a material
adverse impact on the use of the Real Property or the Improvements. None of
the Partnerships have received notice or have knowledge that any
governmental authority, or any employee or agent thereof, considers the
operations, use or ownership of any of the Improvements to violate or have
violated in a material manner any Governmental Regulation, or that any
investigation has been commenced or is contemplated regarding such possible
violation.
(c) To the best knowledge of each Partnership, such Partnership has
neither received notice nor has knowledge of any plan or study of any
governmental authority which would materially adversely affect the use of
the Real Property or the Improvements for their intended uses, or result in
any public improvements which will result in any material charge being
levied against, or any material lien assessed upon, all or any portion of
such Real Property or Improvements.
(d) To the best knowledge of each Partnership, such Partnership has good
and marketable title to the Real Property and Improvements owned by it, free
and clear of all liens, encumbrances, claims, covenants, conditions and
restrictions, easements, rights of way, charges and any other exceptions to
or defects of title ("Encumbrances"), except for (i) those matters disclosed
in the Prospectus/Consent Solicitation Statement or the Title Insurance
Policy issued to each Partnership with respect to each Real Property
(collectively, the "Title Policies"), and (ii) those matters created by
third parties which are the liability of the lessee of such Real Property
and Improvements, or, in the absence of acceptance of responsibility by such
lessee, have been or will be resolved by the Partnership.
(e) Except as disclosed in the Prospectus/Consent Solicitation Statement
or the Title Policies, to the best knowledge of each Partnership, there are
no delinquent taxes, assessments, charges, debts, liabilities, claims or
obligations arising from the construction, design, development, ownership,
maintenance or operation of, or otherwise relating to, the Real Property or
the Improvements, which matters could give rise to any mechanic's or
materialmen's or other statutory or common law lien against such Real
Property or Improvements or any part thereof which, individually or in the
aggregate, would have a material adverse impact on the value of such Real
Property and Improvements.
(f) Except as disclosed in the Prospectus/Consent Solicitation
Statement, to the best knowledge of each Partnership, none of the Real
Property, which for purposes of this paragraph shall include, without
limitation, subsurface soil and ground water, contains any substance,
including, without limitation, any asbestos, formaldehyde, radioactive
substance, hydrocarbons, industrial solvents, flammables, explosives, and
any hazardous substance or toxic material, which could presently or at any
time in the future cause a material detriment to or materially impair the
value or beneficial use of the Real Property, or constitute or cause a
health, safety or environmental hazard on or relating to the Real Property
or to any person who may enter on the Real Property or require remediation
at the behest of any governmental agency (collectively, "Hazardous
Materials"). Except as disclosed in the Prospectus/Consent Solicitation
Statement, none of the Partnerships have received notice that the ownership,
operation, use and condition of any of the Real Property is in violation of
any federal, state or local law, ordinance or regulation pertaining to
industrial hygiene, Hazardous Materials or environmental protection. Except
as disclosed in the Prospectus/Consent Solicitation Statement, to
A-5
<PAGE>
the best knowledge of each Partnership, there is no proceeding or action
pending or, to its actual knowledge, threatened by any person or
governmental agency regarding the environmental condition of any of the Real
Property.
Section 5.08. INSURANCE. Either each Partnership, or, in the absence of
each Partnership so doing, the respective tenants of the Real Property and
Improvements owned by each Partnership, or, where applicable, each borrower from
each Partnership which holds a loan secured by real property owned by such
borrower, carries, to the extent deemed reasonable by the Partnerships under the
circumstances, comprehensive liability, fire, extended coverage and rental loss
insurance with respect to the Partnerships' properties with policy
specifications and insured limits customarily carried for similar properties.
All such policies are currently in effect and will remain in effect after the
Merger.
Section 5.09. TAXES. Each Partnership has filed timely all federal, state
and local tax returns which it is required to file, has provided to its
investors all required Form K-1's and such other tax forms as may be required by
federal, state or local authorities, and has no outstanding liability for any
federal, state or local taxes or interest or penalties thereon, whether disputed
or not, except taxes not yet payable which have been provided for in accordance
with GAAP and are disclosed in the Financial Statements.
Section 5.10. ACTIONS PENDING. Except as disclosed in the
Prospectus/Consent Solicitation Statement: (a) there are no actions, suits,
proceedings or claims pending or threatened against the Partnerships which, if
determined adversely to such Partnerships, could (i) have a material adverse
effect on the Partnerships, the Assets or the business of the Partnerships when
taken as a whole, or (ii) prevent or delay the consummation of any of the
transactions contemplated by this Agreement; (b) no Partnership, to the best of
its knowledge, is the subject of any pending or threatened investigation
relating to any aspect of such Partnership's operations by any federal, state or
local governmental agency or authority; and (c) each Partnership, to the best of
its knowledge, is not and has not been the subject of any formal or informal
complaint, investigation or inspection under the Equal Employment Opportunity
Act or the Occupational Safety and Health Act (or their state or local
counterparts) or by any other federal, state or local authority.
Section 5.11. APPRAISAL OF PARTNERSHIPS. To the best knowledge of each
Partnership, the information furnished by such Partnership to the appraisers
named in the Prospectus/Consent Solicitation Statement for the purposes of
determining the appraised value of the Partnerships is accurate and complete in
all material respects.
ARTICLE VI
REPRESENTATIONS AND WARRANTIES OF THE COMPANY
The Company represents and warrants to the Partnerships as follows:
Section 6.01. VALIDITY OF ACTIONS. The Company (a) is duly organized,
validly existing and in good standing under the laws of the State of Delaware,
(b) has the authority to conduct its business as currently conducted, (c) is
qualified to do business in all jurisdictions in which such qualification is
necessary, and (d) has full power and authority to enter into this Agreement and
to carry out all acts contemplated by it, and (e) has no commitment to sell or
otherwise transfer any of its assets except in the ordinary course of business.
This Agreement has been duly executed and delivered on behalf of the Company,
has received all necessary authorization and is a legal, valid and binding
obligation of the Company, enforceable against the Company in accordance with
its terms. The execution and delivery of this Agreement and consummation of the
transactions contemplated by it will not violate any provision of the Limited
Partnership Agreement of the Company nor violate, conflict with or result in any
breach of any of the terms, provisions or conditions of, or constitute a default
or cause acceleration of, any indebtedness under any agreement or instrument to
which the Company is a party or by which it or its assets may be bound, or cause
a breach of any applicable federal or state law or regulation, or any applicable
order, judgment, writ, award, injunction or decree of any court or governmental
instrumentality.
A-6
<PAGE>
Section 6.02. MISSTATEMENTS. The representations of the Company contained
in this Agreement and the information regarding the Company contained in the
Registration Statement and the Prospectus/ Consent Solicitation Statement do not
contain any untrue statement of a material fact or omit to state any fact
necessary to make such representations or information not materially misleading.
Section 6.03. INVESTMENT OF CASH. Upon consummation of the Merger, the
Company will invest the cash it receives from the Partnerships so that not more
than 80% of the Company's assets will consist of assets listed under Section
351(e)(1) of the Code.
ARTICLE VII
COVENANTS OF THE PARTIES
Section 7.01. PROHIBITED ACTS. Pending consummation of the Merger or prior
to termination of this Agreement, the Partnerships agree that, without prior
written consent of the Company, given in a letter which specifically refers to
this Section of the Agreement, the Partnerships shall:
(a) use their reasonable efforts so as not to perform any act, or omit
to take any action that would make any of their representations made above
or any information pertaining to them in the Registration Statement or the
Prospectus/Consent Solicitation Statement inaccurate or materially
misleading as of the Effective Time;
(b) not enter into any commitment, contract or other transaction in any
way affecting any of the Partnerships' business, except to carry out its
business in the ordinary course, and as contemplated by this Agreement or in
the Prospectus/Consent Solicitation Statement;
(c) not make any loans or advances to, or investments in, any other
corporation, partnership or other legal entity or to any other persons
except in the ordinary course of business;
(d) not borrow money for any purpose or agree to become contingently
liable, by guaranty or otherwise, for the obligations or indebtedness of any
other person other than in the ordinary course of business; and
(e) not mortgage, pledge, encumber, sell, lease or transfer any of the
Assets other than in the ordinary course of business.
Section 7.02. NOTICE. Pending the consummation of the Merger or prior to
termination of this Agreement, each party agrees that it will promptly advise
the other of the occurrence of any condition or event which would make any of
its representations contained in this Agreement or the Prospectus/Consent
Solicitation Statement inaccurate, incorrect, or materially misleading.
Section 7.03. ADDITIONAL DOCUMENTS. At the request of any party, each
party will execute and deliver any additional documents and perform in good
faith such acts as reasonably may be required to complete the transactions
contemplated by this Agreement.
ARTICLE VIII
CONDITIONS TO THE MERGER
The obligation of the Company, each Partnership and each General Partner to
consummate the Merger shall be subject to compliance with or satisfaction of the
following conditions:
Section 8.01. BRING DOWN. The representations and warranties set forth in
this Agreement shall be true and correct in all material respects at and as of
the Effective Time as if then made (except for those representations and
warranties made as of a given date, which shall continue to be true and correct
as of such given date), as evidenced by a certificate made by the general
partners of each Partnership and the general partner of the Company, as of the
Effective Time.
A-7
<PAGE>
Section 8.02. COMPLIANCE. The Company and each of the Partnerships shall
have complied with all of the covenants and agreements in this Agreement on its
part to be complied with as of or prior to the Effective Time.
Section 8.03. PARTNERSHIP APPROVALS. The investors holding a majority of
outstanding BACs of each of Cap Source I and Cap Source II shall have approved
the Transaction and the dissenting investors of the Partnerships have not
elected to receive Notes exceeding $20,000,000 in principal amount.
Section 8.04. STOCK EXCHANGE LISTING. At or before the Effective Time, the
Units to be issued in the Merger shall be approved for listing on the NASDAQ
National Market, subject to official notice of issuance.
Section 8.05. CONSENTS OBTAINED. All necessary consents, waivers,
approvals, authorizations or orders required to be obtained, and the making of
all filings required to be made by any party to the Merger for the
authorization, execution and delivery of this Agreement and the Certificate and
Plan of Merger between the Company and the Partnerships, and the consummation of
the transactions contemplated thereby on or before (and remain in effect at) the
Effective Time shall have been obtained or made.
Section 8.06. NO MATERIAL ADVERSE CHANGE. Since the respective dates as to
which information is given in the Registration Statement and the
Prospectus/Consent Solicitation Statement, there shall not have occurred or been
threatened any material adverse changes in the overall business or prospects of
the Partnerships or in the tax or other regulatory provisions applicable to the
Partnerships or the Company, and the Company shall not have become aware of any
facts that, in the sole judgment of the Company and the Cap Source General
Partners, have or may have a material effect, whether adverse or otherwise, on
the Partnerships, taken as a whole, the Transaction, or the value to the Company
of the properties of the Partnerships, taken as a whole.
Section 8.07. OPINIONS AND LETTERS. The Company shall have received, on or
prior to the Effective Time, an opinion of counsel, which shall not have been
withdrawn as of the Effective Time, to the effect that for federal income tax
purposes the Merger will be an exchange subject to the nonrecognition provisions
of Section 721 of the Code; provided, however, that for purposes of this Section
8.07, the Merger shall include only the merger of the Partnerships into the
Company.
Section 8.08. NO STATUTE, RULE OR REGULATION AFFECTING CONSUMMATION. At
the Effective Time, there shall be no statute, rule, regulation, injunction or
court order enacted or issued by the United States or any State, or by a court,
which prohibits or challenges the consummation of the Transaction.
Section 8.09. NO DECLARATIONS. At the Effective Time, there shall be no
declaration of suspension of trading in, or limitation on prices for, securities
generally on the NASDAQ National Market, declaration of a banking moratorium by
federal or state authorities or any suspension of payments by banks in the
United States (whether mandatory or not) or of the extension of credit by
lending institutions in the United States, or commencement of war, armed
hostility, or other international or national calamity directly or indirectly
involving the United States, which war, hostility or calamity, in the sole
judgment of the Company, would have a material adverse effect on the business
objectives of the Company, or, in the case of any of the foregoing existing on
the date of the Prospectus/Consent Solicitation Statement, any material
acceleration or worsening thereof.
Section 8.10. EFFECTIVENESS OF REGISTRATION STATEMENT. At or prior to the
Effective Time, the Registration Statement shall have been declared effective,
no stop order suspending the effectiveness of the Registration Statement shall
have been issued, no proceedings for such purpose shall have been initiated, and
all necessary approvals under state securities or blue sky laws shall have been
received.
A-8
<PAGE>
ARTICLE IX
OTHER AGREEMENTS
Section 9.01. WAIVER BY CAP SOURCE GENERAL PARTNERS. Immediately prior to
the Effective Time, the Cap Source General Partners shall waive all rights to
any fees not accrued to the Effective Time. The Cap Source General Partners each
further acknowledge that they have no rights to additional distributions of fees
or proceeds of sale or liquidation by the Partnerships. The parties to this
Agreement hereby acknowledge and agree that at the Effective Time, CS Properties
I Inc., an affiliate of the Cap Source I General Partners that serves as the
general partner of Oyster Cove Limited Partnership, Cypress Landings II, Ltd.,
[The Ponds at Georgetown L.P.] and Fox Hollow, Ltd., and CS Properties II Inc.,
an affiliate of the Cap Source II General Partners that also serves as a general
partner of [The Ponds at Georgetown L.P.] will waive all past due amounts, as
set forth in the Partnerships' audited financial statements for the fiscal year
ending December 31, 1998, as included in the Prospectus/Consent Solicitation
Statement, due to or potentially due to CS Properties I Inc. and CS Properties
II Inc. by these limited partnerships.
Section 9.02. INDEMNIFICATION.
(a) To the fullest extent permitted by law, the Partnerships (the
"Indemnifying Parties"), jointly and severally, agree to defend, indemnify
and hold harmless the Company and its general partner, employees and agents
(the "Indemnified Parties") from and against any losses, claims, damages or
liabilities (including, without limitation, attorneys' fees and
disbursements) to which such Indemnified Party may become subject under the
Act, the Securities Exchange Act of 1934, as amended, or otherwise, insofar
as such losses, claims, damages or liabilities (or actions with respect
thereof arise out of or are based upon an untrue statement or an alleged
untrue statement of a material fact contained in the Registration Statement,
the Prospectus/Consent Solicitation Statement, or any amendment or
supplement to such documents, or arise out of or are based upon the omission
or alleged omission to state therein a material fact required to be stated
therein or necessary to make the statements therein not misleading, or to
the extent that such losses, claims, damages or liabilities (including,
without limitation, attorneys' fees and disbursements) result from a breach
by an Indemnifying Party of the representations and warranties of the
Partnerships contained in Article V of this Agreement.
(b) The Indemnified Parties shall give (or cause to be given) to the
Indemnifying Parties notice of claim or matter for which indemnity is (or
will be) sought under this Section 9.02; such notice shall be given promptly
after the Indemnified Parties receive actual notice or knowledge of the
claim or matter that is subject to indemnification. With respect to any
claim asserted by a third party against any Indemnified Parties for which
indemnity is sought, the relevant Indemnifying Party shall have the right to
employ counsel reasonably acceptable to the relevant Indemnified Parties to
defend against such assertion, and such Indemnifying Parties shall have the
right to compromise or otherwise settle any such action or claim only with
the prior written consent of the relevant Indemnified Party, which shall not
be unreasonably withheld.
(c) This Section 9.02 shall survive the Merger for a period of three (3)
years from the Effective Time.
ARTICLE X
TERMINATION; AMENDMENT; WAIVER
Section 10.01. TERMINATION. This Agreement and the transactions
contemplated hereby may be terminated at any time prior to the filing of the
Certificate of Merger with the Secretary of State of the State of Delaware, (a)
by mutual consent of the general partner of the Company and the Cap Source
General Partners, (b) by action of the general partner of the Company in the
event of a failure of a condition to the obligations of the Company set forth in
Article VIII of this Agreement, (c) by action of the
A-9
<PAGE>
Cap Source General Partners in the event of a failure of a condition to the
obligations of the Partnerships set forth in Article VIII of this Agreement, or
(d) by action of the general partner of the Company or of the Cap Source General
Partners in the event that the Merger is not consummated prior to ,
1999, or such later date as the parties shall mutually agree in writing.
Section 10.02. EFFECT OF TERMINATION. If this Agreement is terminated
pursuant to Section 10.01, this Agreement shall become void and of no effect
with no liability on the part of any party hereto.
Section 10.03. AMENDMENT. The parties hereto may, by written agreement,
amend this Agreement at any time prior to the filing of the Certificate of
Merger with the Delaware Secretary of State, such amendment to be approved by
the parties hereto; provided that, after the approval of the Merger by the
investors holding a majority of the BACs of each Partnership no amendment shall
be made which alters or changes (a) the amount or kind of consideration which
the investors of each Partnership are entitled to receive upon conversion of the
BACs of each Partnership, (b) the Limited Partnership Agreement of the Company,
or (c) the terms and conditions of this Agreement if such alteration or change
would have an adverse effect on the investors of each Partnership or the
unitholders of the Company.
Section 10.04. WAIVER. At any time prior to the Effective Time, any party
to this Agreement may extend the time for the performance of any of the
obligations or other acts of any other party hereto, or waive compliance with
any of the agreements of any other party or with any condition to the
obligations hereunder, in each case only to the extent that such obligations,
agreements and conditions are intended for its benefit.
ARTICLE XI
MISCELLANEOUS
Section 11.01. EXPENSES. The expenses associated with the Merger shall be
paid as set forth in the Prospectus/Consent Solicitation Statement. Any
additional expenses associated with the Merger shall be paid by the Company.
Notwithstanding the foregoing, the Company shall have no obligation to pay any
personal expense of any beneficial owner of a Transferor or any expense of a
Transferor not a result of transactions contemplated under this Agreement.
Section 11.02. NOTICES. All notices or other communications required or
permitted under the terms of this Agreement by any party shall be made in
writing and shall be delivered by first class mail or by personal delivery,
postage or fees prepaid, to the other parties at America First Companies L.L.C.,
Attn: Michael B. Yanney, 1004 Farnam Street, Suite 400, Omaha, Nebraska, 68102,
with a copy to Kutak Rock, 717 17th Street, Suite 2900, Denver, Colorado 80202,
Attention: Paul E. Belitz, or to such other address as any of the parties hereto
may designate by notice to the others.
Section 11.03. NON-ASSIGNABILITY. This Agreement shall not be assignable
by any of the parties to this Agreement.
Section 11.04. ENTIRE AGREEMENT. This Agreement contains the parties'
entire understanding and agreement with respect to its subject matter, and any
and all conflicting or inconsistent discussions, agreements, promises,
representations and statements, if any, between the parties or their
representatives that are not incorporated in this Agreement shall be null and
void and are merged into this Agreement.
Section 11.05. COUNTERPARTS. This Agreement may be executed in one or more
counterparts, each of which shall constitute an original, but all of which
together shall constitute a single agreement.
Section 11.06. GOVERNING LAW. This Agreement shall be governed by and
construed in accordance with the laws of the State of Delaware, without giving
effect to conflicts of law principles.
Section 11.07. HEADINGS. The various section headings are inserted for
purposes of reference only and shall not affect the meaning or interpretation of
this Agreement or any provision hereof.
A-10
<PAGE>
Section 11.08. GENDER; NUMBER. All references to gender or number in this
Agreement shall be deemed interchangeably to have a masculine, feminine, neuter,
singular or plural meaning, as the sense of the context requires.
Section 11.09. SEVERABILITY. The provisions of this Agreement shall be
severable, and any invalidity, unenforceability or illegality of any provision
or provisions of this Agreement shall not affect any other provision or
provisions of this Agreement, and each term and provision of this Agreement
shall be construed to be valid and enforceable to the full extent permitted by
law.
Section 11.10. AUTHORIZATION. The Cap Source General Partners (a) shall be
authorized, at such time in their full discretion as they deem appropriate, to
execute, acknowledge, verify, deliver, file and record, for and in the name of
the Partnerships and, to the extent necessary, the Investors, any and all
documents and instruments, and (b) shall do and perform any and all acts
required by applicable law or which the Cap Source General Partners deem
necessary or advisable to effectuate the Merger.
Section 11.11. LIMITATIONS OF REMEDIES. If any party hereto becomes aware,
prior to the closing, of a breach of any representation, warranty or covenant
contained in this Agreement, the sole remedy of the nonbreaching party for such
breach shall be limited to termination of this Agreement.
Section 11.12. DEFINITIONS. The following terms used in this Agreement
have the meanings specified in this Section 11.12. Unless otherwise defined in
this Agreement, all other initially capitalized terms shall have the meanings
specified in the Partnership Agreements.
"INVESTOR" shall mean any person or entity who is either (i) a BAC holder or
(ii) a holder of a Limited Partner Interest, other than each Initial Limited
Partner.
"PARTNERSHIP AGREEMENT" shall mean the respective partnership agreement of
each Partnership, and such agreements are collectively referred to in this
Agreement as the "PARTNERSHIP AGREEMENTS."
"BAC" shall mean (i) a beneficial interest in a Limited Partner Interest
represented by a beneficial assignment certificate and (ii) a Limited
Partnership Interest, other than a Limited Partnership Interest held by an
Initial Limited Partner.
A-11
<PAGE>
IN WITNESS WHEREOF, the undersigned have caused this Agreement to be
executed by an officer duly authorized to do so, all as of the day and year
first above written.
<TABLE>
<S> <C> <C> <C> <C>
AMERICA FIRST REAL ESTATE
INVESTMENT PARTNERS, L.P.,
a Delaware limited partnership
By: AMERICA FIRST CAPITAL SOURCE I L.L.C.,
a Delaware limited liability company,
General Partner
By
---------------------------------------
, President
CAPITAL SOURCE L.P., a Delaware limited partnership
By: AMERICA FIRST CAPITAL SOURCE I L.L.C.,
a Delaware limited liability company,
General Partner
By
---------------------------------------
, President
By: INSURED MORTGAGE EQUITIES INC.,
a Delaware corporation, General Partner
By
---------------------------------------
, President
CAPITAL SOURCE II L.P.-A,
a Delaware limited partnership
By: AMERICA FIRST CAPITAL SOURCE II L.L.C.,
a Delaware limited liability company,
General Partner
By
---------------------------------------
, President
By: INSURED MORTGAGE EQUITIES II L.P.,
a Delaware limited partnership,
General Partner
By
---------------------------------------------
a Delaware corporation, General Partner
By
-----------------------------------
, President
</TABLE>
A-12
<PAGE>
APPENDIX B
PRIOR PARTNERSHIPS PERFORMANCE TABLES
The following tables set forth financial information regarding partnerships
sponsored by America First Companies, an affiliate of the Cap Source General
Partners. For a description of these partnerships, see "PRIOR PARTNERSHIPS."
TABLE I
EXPERIENCE IN RAISING AND UTILIZING FUNDS
Table I presents a summary of the funds raised by prior public real estate
programs sponsored by affiliates of America First and the manner in which such
funds were utilized as of December 31, 1998.
<TABLE>
<CAPTION>
AFFGMF AFFGMF2 AFTEMF AFTEMF2 AFPPEMF AFPF2 AFPF2PS
------------ ------------ ------------ ------------ ------------ ------------ ------------
<S> <C> <C> <C> <C> <C> <C> <C>
Dollar amount offered..... $200,000,000 $200,000,000 $300,000,000 $107,000,000 $200,000,000 $200,000,000 $100,000,000
Dollar amount raised
(100%).................. $200,000,000 $199,449,200 $199,582,560 $104,912,460 $119,450,540 $ 33,678,080 $ 18,119,480
Less offering expenses:
Selling commissions..... 4.00% 4.00% 5.00% 5.00% 5.00% 5.00% 5.00%
Organizational and
offering expenses..... 1.00% 1.00% 2.05% 1.80% 1.90% 2.17% 2.17%
Investment evaluation
fee................... 0.00% 0.00% 0.00% 0.00% 0.68% 0.68% 0.68%
Reserves.................. 4.52% 1.38% 2.50% 4.77% 1.00% 1.00% 1.00%
Percent available for
investment.............. 90.48% 93.62% 90.45% 88.43% 91.42% 91.15% 91.15%
Acquisition costs:
Purchase price of
mortgages acquired or
committed for
acquisition........... 90.48% 91.78% 88.75% 86.51% 83.22% 81.13% 81.12%
Percent leveraged......... 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00%
Date offering commenced... 11/30/84 4/1/85 10/28/85 8/28/86 10/2/86 10/10/87 3/3/88
Length of offering (in
months)................. 1.5 6.0 2.0 1.0 8.5 12.0 9.5
Months to invest 90% of
amount available for
investment.............. 7.5 8.0 2.0 10.5 10.0 17.0 15.0
</TABLE>
B-1
<PAGE>
TABLE II
COMPENSATION TO SPONSORS AND THEIR AFFILIATES
Table II summarizes the types and amounts of compensation paid to affiliates
of America First by prior programs sponsored by such affiliates for the period
from the date of commencement of operations through the date of liquidation or
December 31, 1998.
<TABLE>
<CAPTION>
AFFGMF2 AFTEMF AFTEMF2(1) AFPPEMF(2) AFPF2(2) AFPF2PS(2)
AFFGMF 1/2/85 7/8/85 TO 11/21/85 TO 10/17/86 TO 11/26/86 TO 3/25/88 TO 5/25/88 TO
TO 11/17/86 3/16/92 12/31/98 12/31/98 12/31/98 12/31/98 12/31/98
------------- ------------ ------------ ------------ ------------ ----------- -----------
<S> <C> <C> <C> <C> <C> <C> <C>
Date offering commenced... 1/30/84 4/1/85 10/28/85 8/28/86 10/2/86 10/10/87 3/3/88
Dollar amount raised...... $200,000,000 $199,449,200 $199,582,560 $104,912,460 $119,450,540 $33,678,080 $18,119,480
Amount paid to sponsor
from proceeds of
offering:
Selling commissions..... 8,000,000 7,977,968 9,979,128 5,245,623 5,972,527 1,683,904 905,974
Organizational and
offering expenses..... 2,000,000 1,994,492 4,091,442 1,888,425 2,299,423 732,499 394,099
Investment evaluation
fee................... 0 0 0 0 806,291 227,327 122,306
Dollar amount of cash
generated from
operations before
deducting payments to
sponsor................. 33,182,228 62,681,757 120,651,310 61,474,908 106,076,519 25,905,022 15,450,606
Amount paid to sponsor
from operations:
Mortgage evaluation fees
and syndication
costs................. 2,117,704 1,885,072 0 0 0 0 0
Administrative fees..... 1,058,562 2,802,432 1,673,662 2,298,424 2,779,844 714,677 425,245
Property management
fees.................. 0 0 1,700,291 2,702,941 732,823 325,824 158,560
Distributions........... 237,461 412,419 1,536,253 533,706 541,359 236,782 129,653
Dollar amount of property
sales before deducting
payments to sponsor..... 216,222,929 204,077,436 0 12,750,000 56,593,532 598,867 226,587
Stock received from
properties
transferred(3).......... 0 0 60,101,600 0 0 0 0
Amount paid to sponsor
from property sales..... 5,450,890 3,530,895 0 0 0 0 0
</TABLE>
- ---------------
(1) On August 20, 1996, AFTEMF2 merged with and into America First Apartment
Investors, L.P., a newly formed partnership. The operating results shown
above for AFTEMF2 include those of America First Apartment Investors, L.P.
subsequent to August 20, 1996.
(2) On April 10, 1998, AFPPEMF, AFPF2 and AFPF2PS merged with and into America
First Mortgage Investments, Inc. ("MFA"), a newly formed REIT.
(3) On June 1, 1993, AFTEMF transferred properties to America First REIT, Inc.,
a newly formed REIT, in exchange for all outstanding shares of the REIT's
common stock. Thereafter, all shares of the REIT's common stock were
distributed to investors.
B-2
<PAGE>
TABLE III
OPERATING RESULTS OF PRIOR PROGRAMS
Table III summarizes the operating results of seven prior public real estate
programs sponsored by affiliates of America First for the period from the date
of commencement of operations through the date of liquidation or December 31,
1998.
<TABLE>
<CAPTION>
AFFGMF2 AFTEMF AFTEMF2(1) AFPPEMF(2) AFPF2(2) AFPF2PS(2)
AFFGMF 1/2/85 7/8/85 TO 11/21/85 TO 10/17/86 TO 11/26/86 TO 3/25/88 TO 5/25/88 TO
TO 11/17/86 3/16/92 12/31/98 12/31/98 12/31/98 12/31/98 12/31/98
--------------- ------------ ----------- ------------ ------------ ---------- -----------
<S> <C> <C> <C> <C> <C> <C> <C>
Gross revenues................ $ 26,662,820 $ 60,664,437 $161,800,754 $98,358,431 $77,311,094 $15,562,498 $8,701,363
Profit on sale of
properties.................. 34,541,492 22,227,208 0 0 0 598,867 226,587
Less operating expenses,
interest & depreciation..... (2,916,959) (7,384,641) (86,822,444) (71,584,293) (36,766,311) (4,836,008) (2,507,504)
--------------- ------------ ----------- ------------ ------------ ---------- -----------
Net income.................... $ 58,287,353 $ 75,507,004 $72,978,310 $26,774,138 $40,544,783 $11,323,357 $6,420,448
--------------- ------------ ----------- ------------ ------------ ---------- -----------
--------------- ------------ ----------- ------------ ------------ ---------- -----------
Cash generated from
operations.................. $ 33,182,228 $ 59,879,325 $117,277,357 $56,473,543 1$02,564,052 $24,864,521 1$4,866,801
Cash generated from sales and
prepayments................. 216,222,929 204,077,436 0 12,750,000 56,593,532 598,867 226,587
Stock received from properties
transferred(3).............. 0 0 60,101,600 0 0 0 0
--------------- ------------ ----------- ------------ ------------ ---------- -----------
Cash generated from operations
and sales................... 249,405,157 263,956,761 177,378,957 89,223,543 159,157,584 25,463,388 15,093,388
Less distributions to
investors:
Cash from operating cash
flow...................... (30,826,963) (57,461,354) (133,854,402) (62,594,704) (80,563,201) (25,157,165) (13,283,839)
Cash from sales and
prepayments............... (210,772,039) (200,667,021) 0 (9,934,625) (24,159,992) (598,867) (226,587)
Stock from properties
transferred(3)............ 0 0 (60,101,600) 0 0 0 0
--------------- ------------ ----------- ------------ ------------ ---------- -----------
Cash generated after cash
distributions............... 7,806,155 5,828,386 (16,577,045) (3,305,786) 54,434,391 (292,644) 1,582,962
Less special items:
Amount withdrawn from (added
to) reserves.............. 0 0 18,113,298 3,839,492 (53,893,032) 529,426 (1,453,309)
Amount withheld from income
for payment of mortgage
evaluation fees and
syndication costs......... (2,117,704) (1,885,072) 0 0 0 0 0
Distribution to sponsor....... (5,688,451) (3,943,314) (1,536,253) (533,706) (541,359) (236,782) (129,653)
--------------- ------------ ----------- ------------ ------------ ---------- -----------
Cash generated after cash
distributions and special
items....................... $ 0 $ 0 $ 0 $ 0 $ 0 $ 0 $ 0
--------------- ------------ ----------- ------------ ------------ ---------- -----------
--------------- ------------ ----------- ------------ ------------ ---------- -----------
DISTRIBUTION DATA FOR $1,000
INVESTED
Cash distributions to
investors:
From operations:
Income.................... $ 106.96 $ 240.25 $ 413.20 $ 343.41 $ 387.31 $ 383.84 $ 419.21
Return of capital......... 47.20 32.99 257.47 253.23 287.14 369.09 313.92
From sales and prepayments:
Income.................... 145.45 94.34 0.00 0.00 3.10 17.78 12.51
Return of capital......... 908.39 911.76 0.00 94.69 199.16 0.00 0.00
From stock transferred:
Income.................... 0.00 0.00 0.00 0.00 0.00 0.00 0.00
Return of capital......... $ 0.00 $ 0.00 $ 301.14 $ 0.00 $ 0.00 $ 0.00 $ 0.00
--------------- ------------ ----------- ------------ ------------ ---------- -----------
--------------- ------------ ----------- ------------ ------------ ---------- -----------
Percentage of original total
acquisition cost of
properties remaining
invested at December 31,
1997...................... 0% 0% 40% 63% 36% 51% 50%
--------------- ------------ ----------- ------------ ------------ ---------- -----------
--------------- ------------ ----------- ------------ ------------ ---------- -----------
<CAPTION>
MFA(2)
4/10/98
TO
12/31/98
---------
<S> <C>
Gross revenues................ $9,228,036
Profit on sale of
properties.................. 0
Less operating expenses,
interest & depreciation..... (6,296,967)
---------
Net income.................... $2,931,069
---------
---------
Cash generated from
operations.................. $2,931,069
Cash generated from sales and
prepayments................. 0
Stock received from properties
transferred(3).............. 0
---------
Cash generated from operations
and sales................... 2,931,069
Less distributions to
investors:
Cash from operating cash
flow...................... (5,700,110)
Cash from sales and
prepayments............... 0
Stock from properties
transferred(3)............ 0
---------
Cash generated after cash
distributions............... (2,769,041)
Less special items:
Amount withdrawn from (added
to) reserves.............. 2,769,041
Amount withheld from income
for payment of mortgage
evaluation fees and
syndication costs......... 0
Distribution to sponsor....... 0
---------
Cash generated after cash
distributions and special
items....................... $ 0
---------
---------
DISTRIBUTION DATA FOR $1,000
INVESTED
Cash distributions to
investors:
From operations:
Income....................
Return of capital.........
From sales and prepayments:
Income....................
Return of capital.........
From stock transferred:
Income....................
Return of capital.........
---------
---------
Percentage of original total
acquisition cost of
properties remaining
invested at December 31,
1997......................
---------
---------
</TABLE>
- ---------------
(1) On August 20, 1996, AFTEMF2 merged with and into America First Apartment
Investors, L.P., a newly formed partnership. The operating results shown
above for AFTEMF2 include those of America First Apartment Investors, L.P.
subsequent to August 20, 1996.
(2) On April 10, 1998, AFPPEMF, AFPF2 and AFPF2PS merged with and into America
First Mortgage Investments, Inc. ("MFA"), a newly formed REIT.
(3) On June 1, 1993, AFTEMF transferred properties to America First REIT, Inc.,
a newly formed REIT, in exchange for all outstanding shares of the REIT's
common stock. Thereafter, all shares of the REIT's common stock were
distributed to investors.
B-3
<PAGE>
TABLE IV
RESULTS OF COMPLETED PROGRAMS
Table IV summarizes the results of two prior public real estate programs
sponsored by affiliates of America First which completed operations prior to
December 31, 1998. The results are for the period from the date of commencement
of operations through the date of dissolution.
<TABLE>
<CAPTION>
AFFGMF 1/2/85 TO AFFGMF2 7/8/85 TO
11/17/86 3/16/92
----------------- ------------------
<S> <C> <C>
Dollar amount raised....................................................... $ 200,000,000 $ 199,449,200
Number of mortgages purchased.............................................. 29 37
Date of closing of offering................................................ 1/2/85 11/1/85
Date of first mortgage sale................................................ 5/24/85 10/22/86
Date of final mortgage sale................................................ 10/22/86 1/30/92
DISTRIBUTION DATA FOR $1,000 INVESTED
Cash distributions to investors:
From operations:
Income................................................................. $ 106.96 $ 240.25
Return of capital...................................................... 47.20 32.99
From sales:
Income................................................................. 145.45 94.34
Return of capital...................................................... $ 908.39 $ 911.76
</TABLE>
B-4
<PAGE>
APPENDIX C
FORM OF
AMENDED AND RESTATED AGREEMENT OF LIMITED PARTNERSHIP OF
AMERICA FIRST REAL ESTATE INVESTMENT PARTNERS, L.P.
<PAGE>
AMERICA FIRST
REAL ESTATE INVESTMENT PARTNERS, L.P.
AMENDED AND RESTATED
AGREEMENT OF LIMITED PARTNERSHIP
<PAGE>
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
---------
<S> <C>
ARTICLE I
DEFINED TERMS............................................................................................. C-1
ARTICLE II
NAME, PLACE OF BUSINESS, PURPOSE AND TERM
Section 2.01. Name........................................................................................ C-5
Section 2.02. Principal Office and Name and Address of Registered Agent................................... C-5
Section 2.03. Purpose..................................................................................... C-5
Section 2.04. Term........................................................................................ C-5
ARTICLE III
PARTNERS AND CAPITAL
Section 3.01. General Partner............................................................................. C-5
Section 3.02. Limited Partners............................................................................ C-5
Section 3.03. Partnership Capital......................................................................... C-6
Section 3.04. Liability of Partners and Unit Holders...................................................... C-6
ARTICLE IV
DISTRIBUTIONS OF CASH; ALLOCATIONS OF INCOME AND LOSS
Section 4.01. Distributions of Net Operating Income....................................................... C-7
Section 4.02. Distributions of Net Sale Proceeds and of Liquidation Proceeds.............................. C-7
Section 4.03. Allocation of Income and Loss............................................................... C-7
Section 4.04. Determination of Allocations and Distributions Among Limited Partners and Unit Holders...... C-8
Section 4.05. Capital Accounts............................................................................ C-8
Section 4.06. Rights to Distributions..................................................................... C-8
ARTICLE V
RIGHTS, OBLIGATIONS AND POWERS OF THE GENERAL PARTNER
Section 5.01. Management of the Partnership............................................................... C-9
Section 5.02. Authority of the General Partner............................................................ C-9
Section 5.03. Authority of General Partner and Its Affiliates to Deal With the Partnership................ C-11
Section 5.04. General Restrictions on Authority of the General Partner.................................... C-12
Section 5.05. Compensation and Fees....................................................................... C-13
Section 5.06. Duties and Obligations of the General Partner............................................... C-14
Section 5.07. Delegation of Authority..................................................................... C-14
Section 5.08. Other Activities............................................................................ C-15
Section 5.09. Limitation on Liability of the General Partner and Initial Limited Partner;
Indemnification............................................................................... C-15
Section 5.10. Special Amendments to the Agreement......................................................... C-15
ARTICLE VI
CHANGES IN GENERAL PARTNERS
Section 6.01. Withdrawal of General Partner............................................................... C-16
Section 6.02. Admission of a Successor or Additional General Partner...................................... C-16
Section 6.03. Removal of a General Partner................................................................ C-16
Section 6.04. Effect of Incapacity of a General Partner................................................... C-17
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
PAGE
---------
<S> <C>
ARTICLE VII
TRANSFERABILITY OF UNITS AND LIMITED PARTNERS' INTERESTS
Section 7.01. Free Transferability of Units............................................................... C-18
Section 7.02. Restrictions on Transfers of Units and of Interests of Limited Partners Other Than the
Initial Limited Partner....................................................................... C-19
Section 7.03. Assignees of Limited Partners Other Than the Initial Limited Partner........................ C-19
Section 7.04. Joint Ownership of Interests................................................................ C-20
ARTICLE VIII
DISSOLUTION AND LIQUIDATION OF THE PARTNERSHIP
Section 8.01. Events Causing Dissolution.................................................................. C-20
Section 8.02. Liquidation................................................................................. C-21
ARTICLE IX
BOOKS AND RECORDS, ACCOUNTING, REPORTS, TAX ELECTIONS
Section 9.01. Books and Records........................................................................... C-21
Section 9.02. Accounting Basis, Fiscal Year and Tax Elections............................................. C-22
Section 9.03. Reports..................................................................................... C-22
Section 9.04. Designation of Tax Matters Partner.......................................................... C-22
Section 9.05. Expenses of Tax Matters Partner............................................................. C-22
ARTICLE X
MEETINGS AND VOTING RIGHTS OF LIMITED PARTNERS AND UNIT HOLDERS
Section 10.01. Meetings................................................................................... C-23
Section 10.02. Voting Rights of Limited Partners and Unit Holders......................................... C-24
Section 10.03. Other Activities........................................................................... C-25
ARTICLE XI
ASSIGNMENT OF LIMITED PARTNERSHIP INTERESTS TO UNIT
HOLDERS AND RIGHTS OF UNIT HOLDERS
Section 11.01. Assignment of Limited Partnership Interests to Unit Holders................................ C-25
Section 11.02. Rights of Unit Holders..................................................................... C-26
Section 11.03. Voting by the Initial Limited Partner on Behalf of Unit Holders............................ C-26
Section 11.04. Preservation of Tax Status................................................................. C-26
ARTICLE XII
MISCELLANEOUS PROVISIONS
Section 12.01. Appointment of the General Partner as Attorney-in-Fact..................................... C-27
Section 12.02. Signatures................................................................................. C-27
Section 12.03. Amendments................................................................................. C-28
Section 12.04. Binding Provisions......................................................................... C-28
Section 12.05. Applicable Law............................................................................. C-28
Section 12.06. Separability of Provisions................................................................. C-28
Section 12.07. Captions................................................................................... C-29
Section 12.08. Entire Agreement........................................................................... C-29
</TABLE>
ii
<PAGE>
AMERICA FIRST REAL ESTATE INVESTMENT PARTNERS, L.P.
AMENDED AND RESTATED
AGREEMENT OF LIMITED PARTNERSHIP
This Amended and Restated Agreement of Limited Partnership is made as of
, 1999 by and between America First Capital Source I L.L.C. (the
"General Partner") and H/T Corp. (the "Initial Limited Partner"), who by joining
in this Agreement agree to become partners in a limited partnership (the
"Partnership") under the laws of the State of Delaware.
ARTICLE I
DEFINED TERMS
The defined terms used in this Agreement shall, unless the context otherwise
requires, have the meanings specified in this Article I. The singular shall
include the plural and the masculine gender shall include the feminine and
neuter gender, and vice versa, as the context requires.
"Accountants" means such nationally recognized firm of independent public
accountants as shall be engaged from time to time by the General Partner on
behalf of the Partnership.
"Acquisition Fee" means the fee paid by the Partnership to the General
Partner pursuant to Section 5.05(b) hereof in connection with the
identification, evaluation and acquisition of New Assets by the Partnership.
"Act" means the Delaware Revised Uniform Limited Partnership Act, which
consists of Title 6, Chapter 17 of the Delaware Code Annotated, as it may be
amended or revised from time to time, or any other provision of Delaware law
which may, from time to time, supersede part or all of the Delaware Revised
Uniform Limited Partnership Act.
"Administrative Fee" means the fee paid by the Partnership to AFCSI pursuant
to Section 5.05(c) hereof for the administration of the Partnership and its
assets.
"AFCSI" means America First Capital Source I L.L.C., a Delaware limited
liability company, the general partner of the Partnership.
"Affiliate" means, when used with reference to a specified Person, (i) any
Person who directly or indirectly controls or is controlled by or is under
common control with the specified Person, (ii) any Person who is (or has the
power to designate) an officer of, general partner in or trustee of, or serves
(or has the power to designate a person to serve) in a similar capacity with
respect to, the specified Person, or of which the specified Person is an
officer, general partner or trustee, or with respect to which the specified
Person serves in a similar capacity, and (iii) any Person who, directly or
indirectly, is the beneficial owner of 10% or more of any class of equity
securities of the specified Person or of which the specified Person is directly
or indirectly the owner of 10% or more of any class of equity securities. An
Affiliate of the Partnership or the General Partner does not include any member
of the General Partner if such Person is not otherwise an Affiliate of the
Partnership or the General Partner.
"Agreement" means this Amended and Restated Agreement of Limited
Partnership, as originally executed and as amended from time to time.
"Bankruptcy" or "Bankrupt" as to any Person means the filing of a petition
for relief by such Person as debtor or bankrupt under the Bankruptcy Code of
1978 or like provision of law or insolvency of such Person as finally determined
by a court proceeding.
"Business Day" means any day other than a Saturday, Sunday or a day on which
banking institutions in either New York, New York or Omaha, Nebraska are
obligated by law or executive order to be closed.
C-1
<PAGE>
"Capital Account" means the capital account of a Partner or a Unit Holder as
described in Section 4.05 hereof.
"Capital Contribution" means the total amount contributed to the capital of
the Partnership by or on behalf of all Partners or any class of Partners or by
any one Partner, as the context may require, as discussed in Article III hereof.
"Cap Source I" means Capital Source L.P., a Delaware limited partnership.
"Cap Source II" means Capital Source II L.P.-A, a Delaware limited
partnership.
"Cause" means conduct which constitutes fraud, gross negligence, willful
misconduct or breach of fiduciary duty.
"Certificate" means the certificate of limited partnership filed pursuant to
Section 17-201 of the Act.
"Code" means the Internal Revenue Code of 1986, as amended, or any
corresponding provision or provisions of succeeding law.
"Consent" means either the consent given by a vote at a meeting called and
held in accordance with the provisions of Section 10.01 hereof or the written
consent, as the case may be, of a Person to do the act or thing for which the
consent is solicited, or the act of granting such consent, as the context may
require. Consent given after the act or thing is done with respect to which the
Consent is solicited shall be deemed to relate back to the date such act or
thing was done.
"Counsel" means the law firm representing the General Partner in connection
with the operation of the Partnership or the law firm, if any, selected by the
General Partner to represent the Partnership.
"Distribution Date" means a Business Day selected by the General Partner for
the distribution of Net Operating Income or Net Sale Proceeds with respect to a
Distribution Period, which Business Day shall be no later than 60 days following
the last day of the Distribution Period to which such Distribution Date relates.
"Distribution Period" means the period of time selected by the General
Partner for which the distribution of Net Operating Income or Net Sale Proceeds
is made, which period may be no longer than six calendar months.
"General Partner" means AFCSI or any Person or Persons who, at the time of
reference thereto, have been admitted as successors to the Partnership Interest
of AFCSI or as additional General Partners, in each such Person's capacity as a
General Partner.
"GNMA" or "GNMAs" means the mortgage-backed securities owned by the Prior
Partnerships immediately before the Merger Date that are guaranteed as to
principal and interest by the United States Government National Mortgage
Association or first mortgage loans insured by the Federal Housing
Administration.
"Incapacity" or "Incapacitated" means, as to any Person, death, the
adjudication of incompetency or insanity, Bankruptcy, dissolution, termination,
withdrawal pursuant to Section 6.01 or removal pursuant to Section 6.03, as the
case may be, of such Person.
"Income" means the taxable income and gain of the Partnership as determined
in accordance with the Partnership's method of accounting and computed under
Section 703 of the Code and any item of taxable income required to be separately
stated on the Partnership's federal income tax return pursuant to Section
703(a)(1) of the Code.
"Initial Limited Partner" means H/T Corp., a Delaware corporation, or any
Person or Persons who, at the time of reference thereto, have been admitted to
the Partnership, with the consent of the General Partner, as successors to the
Limited Partnership Interest of H/T Corp.
C-2
<PAGE>
"Investment Company Act" means the Investment Company Act of 1940, as
amended, and the rules and regulations promulgated thereunder.
"Limited Partner" means any Person who is a Limited Partner, including the
Initial Limited Partner, at the time of reference thereto, in such Person's
capacity as a Limited Partner of the Partnership. A Unit Holder is not a Limited
Partner and has no right to be admitted as a Limited Partner.
"Limited Partnership Interest" means the Partnership Interest held by a
Limited Partner, including the Limited Partnership Interests assigned to Unit
Holders.
"Liquidation Proceeds" means all cash receipts of the Partnership (other
than Operating Income and Sale Proceeds) arising from the liquidation of the
Partnership's assets in the course of the dissolution of the Partnership.
"Loss" means taxable losses of the Partnership, as determined in accordance
with the Partnership's method of accounting and computed under Section 703 of
the Code, any item of loss or expense required to be separately stated on the
Partnership's federal income tax return pursuant to Section 703(a)(1) of the
Code and any expenditures of the Partnership not deductible in computing its
taxable income and not properly treated as a capital expenditure.
"Merger" means the merger of the Partnership and the Prior Partnerships
pursuant to the Merger Agreement.
"Merger Agreement" means the Agreement of Merger, dated as of ,
1999, among the Partnership and the Prior Partnerships pursuant to which the
Partnership and the Prior Partnerships will be merged in accordance with the
provisions of the Act with the Partnership being the surviving partnership.
"Merger Date" means the effective date of the merger of the Partnership and
the Prior Partnerships specified in the Merger Agreement.
"Net Operating Income" means, with respect to any Distribution Period, all
Operating Income received by the Partnership during such Distribution Period,
plus any amounts previously set aside as Reserves from Operating Income which
the General Partner releases from Reserves as being no longer necessary to hold
as part of Reserves, less (i) expenses of the Partnership (including fees and
reimbursements paid to the General Partner but excluding any expenses of the
Partnership which are directly attributable to the sale of a Property) paid from
Operating Income during the Distribution Period (other than operating expenses
paid from previously established Reserves), (ii) all cash payments made from
Operating Income during such Distribution Period to discharge Partnership
indebtedness, and (iii) all amounts from Operating Income set aside as Reserves
or used to acquire additional Properties during such Distribution Period.
"Net Sale Proceeds" means, with respect to any Distribution Period, all Sale
Proceeds received by the Partnership during such Distribution Period, plus any
amounts previously set aside as Reserves from Sale Proceeds which the General
Partner releases from Reserves as being no longer necessary to hold as part of
Reserves, less (i) all expenses of the Partnership which are directly
attributable to the sale of a Property, (ii) all cash payments made from Sale
Proceeds during such Distribution Period to discharge Partnership indebtedness
and (iii) all amounts from Sale Proceeds set aside as Reserves or used to
acquire additional Properties during such Distribution Period or held by the
Partnership to acquire additional Properties in future Distribution Periods.
"New Assets" means any and all Properties and Securities acquired by the
Partnership after the Merger Date.
"Notice" means a writing, containing the information required by this
Agreement to be communicated to any Person, personally delivered to such Person
or sent by registered, certified or regular mail, postage prepaid, to such
Person at the last known address of such Person.
C-3
<PAGE>
"Operating Income" means all cash receipts of the Partnership with respect
to any period (including any interest payments received on Original Assets)
except for (i) Capital Contributions, (ii) Sale Proceeds or (iii) the proceeds
of any loan to the Partnership or the refinancing of any loan.
"Operating Partnerships" means the limited partnerships in which the
Partnership is a partner that own real estate of the type described in Section
2.03 hereof.
"Original Assets" means the assets contributed to the Partnership on the
Merger Date.
"Partner" means the General Partner or any Limited Partner.
"Partnership" means the limited partnership created by this Agreement and
known as "America First Real Estate Investment Partners, L.P.", as said limited
partnership may from time to time be constituted.
"Partnership Interest" means the entire ownership interest of a Partner in
the Partnership at any particular time, including the right of such Partner to
any and all benefits to which a Partner may be entitled under this Agreement,
together with the obligations of such Partner to comply with all the terms and
provisions of this Agreement and the Act.
"Person" means any individual, partnership, corporation, trust, association
or other legal entity.
"Predecessor Limited Partner" means a limited partner in a Prior
Partnership.
"Prior General Partner" means a general partner of a Prior Partnership.
"Prior Partnership" or "Prior Partnerships" means Cap Source I and/or Cap
Source II.
"Property" or "Properties" means the real property, including land and the
buildings thereon, in which the Partnership holds an ownership interest, either
directly or indirectly, including interests in Operating Partnerships,
participating loans and joint ventures.
"Quarterly Record Date" means the last day of a calendar quarter.
"Regulations" means the United States Treasury Regulations promulgated or
proposed under the Code.
"REIT" means the classification for federal tax purposes as a real estate
investment trust pursuant to Part II, Subchapter M of Chapter 1 of Subtitle A of
the Code, as now enacted or hereafter amended, including successor statutes and
regulations promulgated thereunder.
"Reserve" means such amount of funds as shall be withheld from Operating
Income or Sale Proceeds by the General Partner from time to time in order to
provide working capital for the Partnership and which may be used for any
purpose relating to the operation of the Partnership and its Properties,
including the acquisition of additional Properties.
"Sale Proceeds" means all amounts received by the Partnership upon the sale
of a Property or other Partnership asset or from the repayment of all or a
portion of the principal of any Original Asset.
"Schedule A" means the schedule, as amended from time to time, of Partners'
names, addresses and Capital Contributions, which schedule, in its initial form,
is attached to and made a part of this Agreement.
"Security" or "Securities" means a debt or equity security issued by an
entity that is a REIT or other entity that engages in a similar business that
invests in or otherwise deals with real estate assets.
"Tax Matters Partner" means the Partner designated as the Tax Matters
Partner of the Partnership by the General Partner pursuant to Section 9.04.
"Unit" means a Limited Partnership Interest which is credited to the Initial
Limited Partner on the books and records of the Partnership and assigned by the
Initial Limited Partner to a Unit Holder.
C-4
<PAGE>
"Unit Holder" means any Person who has been assigned one or more Limited
Partnership Interests by the Initial Limited Partner pursuant to Section 11.01.
A Unit Holder is not a Limited Partner and will have no right to be admitted as
a Limited Partner.
ARTICLE II
NAME, PLACE OF BUSINESS, PURPOSE AND TERM
SECTION 2.01. NAME. The Partners have caused the formation of a limited
partnership pursuant to the Act under the name of "America First Real Estate
Investment Partners, L.P." The Partners and Unit Holders have entered into this
Agreement in order to set forth their respective rights and liabilities as such,
subject to the provisions of the Act unless otherwise provided herein.
SECTION 2.02. PRINCIPAL OFFICE AND NAME AND ADDRESS OF REGISTERED
AGENT. The address of the principal office and place of business of the
Partnership, unless hereafter changed by the General Partner, shall be 1004
Farnam Street, Suite 400, Omaha, Nebraska 68102. Notification of any change in
the Partnership's principal office and place of business shall be promptly given
by the General Partner to the Limited Partners and Unit Holders. The name and
address of the initial registered agent of the Partnership in the State of
Delaware is The Corporation Trust Company, 1209 Orange Street, Wilmington,
Delaware 19801. The registered agent may be changed by the General Partner.
SECTION 2.03. PURPOSE. The purpose of the Partnership is to acquire, hold,
operate, sell and otherwise deal with multifamily residential properties and
other types of commercial real estate and interests therein, and to acquire,
hold, sell and otherwise deal with Securities. The Partnership will pursue its
purpose in order (i) to preserve and protect the Partnership's capital and (ii)
to provide regular cash distribution to the Unit Holders.
SECTION 2.04. TERM. The Partnership began on the date of the filing of the
Certificate and shall continue in full force and effect until December 31, 2039
or until sooner dissolved pursuant to the provisions of this Agreement.
ARTICLE III
PARTNERS AND CAPITAL
SECTION 3.01. GENERAL PARTNER.
(a) The name, address and Capital Contribution of the General Partner
are set forth in Schedule A. The General Partner, as such, shall not be
required to make any additional Capital Contribution to the Partnership,
except as provided in paragraph (b) of this Section 3.01. The Capital
Contribution of the General Partner is set forth on Exhibit A hereto.
(b) Upon the dissolution and termination of the Partnership, the General
Partner will contribute to the Partnership an amount equal to the lesser of
(i) any deficit balance in its Capital Account or (ii) the excess of (A)
1.01% of the total Capital Contributions of the Limited Partners to the
Partnership (including the Capital Contribution of the Initial Limited
Partner made on behalf of the Unit Holders) over (B) the amount of total
Capital Contributions made by the General Partner to the Partnership.
SECTION 3.02. LIMITED PARTNERS.
(a) The name, address and Capital Contribution of the Initial Limited
Partner are as set forth in Schedule A. The Initial Limited Partner, for
federal income tax purposes, will be deemed the nominee holder of the
Limited Partnership Interests on behalf of the Unit Holders. A Unit Holder
will be deemed a Limited Partner for federal income tax purposes. Upon
consummation of the Merger, the Partnership shall be deemed a continuation
of Cap Source I for federal income tax purposes. In addition, as a result of
the Merger, the Predecessor Limited Partners of Cap Source I shall be deemed
C-5
<PAGE>
to have contributed their interests therein to the Partnership in exchange
for Units in accordance with the principles set forth in Revenue Ruling
84-52, regarding partnership conversions. Further, Cap Source II shall be
deemed to have transferred its assets to the Partnership in exchange for
Units. The Capital Contribution of the Initial Limited Partner attributable
to Cap Source II shall be deemed to equal the fair market value of the
assets of Cap Source II. The Capital Contribution of the Initial Limited
Partner attributable to the Predecessor Limited Partners of Cap Source I
shall be deemed to equal the fair market value of the assets of Cap Source
I. Moreover, to the extent it deems necessary, the General Partner shall
have the authority to adjust the Capital Accounts of the Predecessor Limited
Partners of Cap Source I to reflect the fair market value of its assets
immediately prior to the Merger in accordance with the requirements of
Treasury Regulation 1.704-1(b)(2)(iv)(f).
(b) Neither the Initial Limited Partner nor the Unit Holders shall be
required to make any additional Capital Contribution to the Partnership. No
Limited Partner or Unit Holder shall be required to lend any funds to the
Partnership. Other than to serve as Initial Limited Partner, the Initial
Limited Partner shall have no other business purpose and shall not engage in
any other activity or incur any debts. The Initial Limited Partner agrees
not to amend its articles of incorporation with respect to the incurrence of
debt without the written Consent of a majority in interest of the Unit
Holders.
SECTION 3.03. PARTNERSHIP CAPITAL.
(a) No Partner or Unit Holder shall be paid interest on any Capital
Contribution.
(b) Except as specifically provided in Section 6.03, the Partnership
shall not be required to redeem or repurchase any Partnership Interest or
Unit and no Partner or Unit Holder shall have the right to withdraw, or
receive any return of, his Capital Contribution. Under circumstances
requiring a return of any Capital Contribution, no Limited Partner or Unit
Holder will have the right to receive property other than cash.
(c) No Limited Partner or Unit Holder shall have any priority over any
other Limited Partner or Unit Holder as to the return of his Capital
Contribution or as to distributions.
(d) The General Partner shall have no liability for the repayment of the
Capital Contributions of the Limited Partners or the Unit Holders.
SECTION 3.04. LIABILITY OF PARTNERS AND UNIT HOLDERS. The liability of any
Limited Partner or Unit Holder for the losses, debts, liabilities and
obligations of the Partnership shall, so long as the Limited Partner or Unit
Holder complies with Section 5.01(b), be limited to his Capital Contribution and
his share of any undistributed Income of the Partnership. Notwithstanding the
foregoing, it is possible that, under applicable law, a Limited Partner or Unit
Holder may be liable to the Partnership to the extent of previous distributions
made to such Limited Partner or Unit Holder in the event the Partnership does
not have sufficient assets to discharge liabilities to its creditors who
extended credit or whose claims arose prior to such distributions. To the extent
that the Initial Limited Partner is required by law to return any distributions
or repay any amount each Unit Holder who has received any portion of such
distributions agrees, by virtue of accepting such distribution, to pay his
proportionate share of such amount to the Initial Limited Partner immediately
upon Notice by the Initial Limited Partner to such Unit Holder. In lieu of
requiring return of such distributions from Unit Holders, the General Partner
may withhold future distributions of Net Operating Income, Net Sale Proceeds or
Liquidation Proceeds until the amount so withheld equals the amount of the
distributions the Initial Limited Partner is required to repay or return
regardless of whether the Unit Holders entitled to receive such distribution
were the same Unit Holders who actually received the distribution required to be
returned. In the event that the Initial Limited Partner is determined to have
unlimited liability for losses, debts, liabilities and obligations of the
Partnership, nothing set forth in this Section shall be construed to require
Unit Holders to assume any portion of such liability.
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ARTICLE IV
DISTRIBUTIONS OF CASH; ALLOCATIONS OF INCOME AND LOSS
SECTION 4.01. DISTRIBUTIONS OF NET OPERATING INCOME. On each Distribution
Date, all Net Operating Income will be distributed 99% to the Limited Partners
and Unit Holders as a class and 1% to the General Partner.
SECTION 4.02. DISTRIBUTIONS OF NET SALE PROCEEDS AND OF LIQUIDATION
PROCEEDS.
(a) On each Distribution Date, all amounts representing Net Sale
Proceeds will be distributed 99% to the Limited Partners and Unit Holders as
a class and 1% to the General Partner.
(b) All Liquidation Proceeds shall be applied and distributed in the
following amounts and order of priority:
(i) to the payment of the amounts and the establishment of the
reserves provided for in Section 8.02(b);
(ii) to the Partners and Unit Holders in accordance with the
positive balances in their respective Capital Accounts until such
accounts are reduced to zero; and
(iii) then 99% to the Limited Partners and Unit Holders as a class
and 1% to the General Partner.
SECTION 4.03. ALLOCATION OF INCOME AND LOSS.
(a) Income and Loss shall be determined in accordance with the
accounting methods followed by the Partnership for federal income tax
purposes. For purposes of determining the Income, Loss, tax credits or any
other items allocable to any period, Income, Loss, tax credits and any such
other items shall be determined on a daily, monthly or other basis, as
determined by the General Partner using any permissible method under Section
706 of the Code and the Regulations thereunder. An allocation to a Partner
or Unit Holder of a share of Income or Loss under this Section 4.03 shall be
treated as an allocation to such Partner of the same share of each item of
income, gain, loss, deduction and credit that is taken into account in
computing such Income and Loss.
(b) Subject to the provisions of Sections 4.03(c) and (d) and 5.04(j),
Income and Loss for each Distribution Period shall be allocated 1% to the
General Partner and 99% to the Limited Partners and the Unit Holders as a
class.
(c) Notwithstanding any provision hereof to the contrary, if any
Partners have deficit Capital Account balances as of the last day of any
fiscal year, then all items of Income for such fiscal year shall be first
allocated pro rata to such Partners in the amount and in the manner
necessary to eliminate such deficit Capital Account balances and thereafter
in such a manner so that the ratio of the Capital Account balances of the
Limited Partners and Unit Holders as a class to the Capital Account balance
of the General Partner shall be 99 to 1.
(d) Notwithstanding any other provision of this Agreement, all
allocations of Income and Loss shall be subject to and interpreted in
accordance with Section 704 of the Code to the extent applicable. The
foregoing allocations are intended to comply with Section 704 of the Code
and the Regulations promulgated thereunder and shall be interpreted
consistently therewith. The General Partner may amend such allocations
without the vote or consent of the Partners or the Unit Holders to make the
allocations comply with Section 704 of the Code and the Regulations
promulgated thereunder.
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SECTION 4.04. DETERMINATION OF ALLOCATIONS AND DISTRIBUTIONS AMONG LIMITED
PARTNERS AND UNIT HOLDERS.
(a) As of each Quarterly Record Date during the term of the Partnership,
a determination shall be made of the amount of Income and Loss which, under
the Partnership's method of accounting, is properly attributable to the
quarter to which such Quarterly Record Date relates and which was allocable
to the Limited Partners and Unit Holders as a class in accordance with
Section 4.04.
(b) As of the last day of each Distribution Period during the term of
the Partnership, a determination shall be made of the amount of Net
Operating Income and Net Sale Proceeds available to the Partnership during
such Distribution Period which was allocated for distribution to the Limited
Partners and Unit Holders in accordance with Sections 4.01 and 4.02;
provided, however, that the General Partner may elect to make the
determination under this Section 4.04(b) as of each Quarterly Record Date.
(c) All allocations to the Limited Partners and Unit Holders as a class
pursuant to Section 4.03 shall be made on a quarterly basis among the
Limited Partners or Unit Holders who held of record a Limited Partnership
Interest or Unit as of the Quarterly Record Date in the ratio that (i) the
number of Limited Partnership Interests or Units held of record by each such
Limited Partner or Unit Holder as of the Quarterly Record Date bears to (ii)
the aggregate number of Limited Partnership Interests and Units outstanding
on each such Quarterly Record Date.
(d) Net Operating Income and Net Sale Proceeds will be allocated to the
Limited Partners or Unit Holders of record on the last day of the
Distribution Period (or, if the General Partner so elects, on each Quarterly
Record Date during such Distribution Period) in the ratio that (i) the
number of Limited Partnership Interests or Units owned of record by each
such Limited Partner or Unit Holder on each such date bears to (ii) the
number of Limited Partnership Interests or Units outstanding on such date.
SECTION 4.05. CAPITAL ACCOUNTS. A separate Capital Account shall be
maintained and adjusted for each Partner in accordance with the Code and the
Regulations. Each Partner's Capital Account balance initially shall be equal to
their respective Capital Contributions and thereafter shall be increased by the
amount of all cash and the fair market value of all property actually or deemed
contributed by a Partner to the Partnership and all items of Income allocated to
such Partner and decreased by (a) the amount of cash or fair market value of all
actual and deemed distributions of cash or property made to such Partner, and
(b) all items of Loss allocated to such Partner.
The Initial Limited Partner's Capital Account attributable to Cap Source I
shall be subdivided into separate Capital Accounts for the Unit Holders that
were Predecessor Limited Partners of Cap Source I in the same proportions as
their capital accounts in Cap Source I. The remainder of the Initial Limited
Partner's Capital Account balance shall be subdivided into separate Capital
Accounts for Unit Holders that were Predecessor Limited Partners in Cap Source
II in the same proportions as their capital accounts in Cap Source II. Any items
credited or charged to the Unit Holders shall be reflected in the Capital
Account of the Initial Limited Partner and in the sub-accounts reflecting the
interest of each Unit Holder. Any person who acquires a Limited Partnership
Interest or a Unit from a Limited Partner or Unit Holder shall have a Capital
Account equal to the Capital Account of the Limited Partner or Unit Holder from
which such Limited Partnership Interest or Unit was acquired.
SECTION 4.06. RIGHTS TO DISTRIBUTIONS. Each holder of Partnership
Interests and Units shall look solely to the assets of the Partnership for all
distributions with respect to the Partnership, his Capital Contributions and his
share of Net Operating Income, Net Sale Proceeds and Liquidation Proceeds and,
except as provided in Section 3.01(b), shall have no recourse therefor, upon
dissolution or otherwise, against the General Partner or the Initial Limited
Partner. No Partner or Unit Holder shall have any right to demand or receive
property other than cash upon dissolution and termination of the Partnership.
All distributions pursuant to this Article IV are subject to the provisions of
Section 3.04.
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ARTICLE V
RIGHTS, OBLIGATIONS AND POWERS OF THE GENERAL PARTNER
SECTION 5.01. MANAGEMENT OF THE PARTNERSHIP.
(a) The General Partner, within the authority granted to it under this
Agreement, shall have full, complete and exclusive discretion to manage and
control the business of the Partnership and to carry out the purposes of the
Partnership. In so doing, the General Partner shall use its best efforts to
take all actions necessary or appropriate to protect the interests of the
Limited Partners and the Unit Holders. All decisions made for and on behalf
of the Partnership by the General Partner shall be binding upon the
Partnership. Except as otherwise provided in this Agreement, the General
Partner shall have all the rights and powers and shall be subject to all the
restrictions and liabilities of a partner in a partnership without limited
partners.
(b) No Limited Partner or Unit Holder shall take part in the management
or control of the business of the Partnership or transact any business in
the name of the Partnership. No Limited Partner or Unit Holder shall have
the power or authority to bind the Partnership or to sign any agreement or
document in the name of the Partnership. No Limited Partner or Unit Holder
shall have any power or authority with respect to the Partnership except
insofar as the vote or Consent of the Limited Partners or Unit Holders shall
be expressly required or permitted by this Agreement.
SECTION 5.02. AUTHORITY OF THE GENERAL PARTNER.
(a) Subject to Sections 5.03 and 5.04, but otherwise without in any way
limiting the power and authority conferred on the General Partner by Section
5.01(a), the General Partner, for and in the name and on behalf of the
Partnership, is hereby authorized:
(i) to negotiate for and enter into agreements to acquire, hold,
operate, sell and otherwise deal with the Properties and Securities,
including the Original Assets, at such prices and upon such terms as it
determines in its sole discretion, including holding such Properties
through special purpose corporations or other entities as may be required
by a rating agency or a lender in connection with the refinancing of a
Property;
(ii) to acquire by purchase, lease, exchange or otherwise any real
or personal property to be used in connection with the business of the
Partnership; provided, however, that no property may be acquired from the
General Partner except for goods and services provided subject to the
restrictions of Section 5.03;
(iii) to borrow money and issue evidences of indebtedness and to
secure the same by a pledge, lien, mortgage or other encumbrance on any
assets of the Partnership and to apply the proceeds of such borrowing to
the acquisition of Properties or such other proper Partnership purpose as
the General Partner shall determine in its sole discretion;
(iv) to employ agents, accountants, attorneys, consultants and other
Persons that are necessary or appropriate to carry out the business and
operations of the Partnership and to pay fees, expenses and other
compensation to such Persons; provided, that if such Persons are
Affiliates of the General Partner, the terms of such employment shall be
subject to the restrictions of Section 5.03;
(v) to pay, extend, renew, modify, adjust, submit to arbitration,
prosecute, defend or compromise, upon such terms as it may determine and
upon such evidence as it may deem sufficient, any obligation, suit,
liability, cause of action or claim, including taxes, either in favor of
or against the Partnership;
(vi) except as otherwise expressly provided herein, to determine the
appropriate accounting method or methods to be used by the Partnership;
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(vii) except as prohibited by this Agreement, to cause the
Partnership to make or revoke any of the elections referred to in the
Code or any similar provisions enacted in lieu thereof, including, but
not limited to, those elections provided for in Code Sections 108, 709
and 1017;
(viii) to amend the Certificate or this Agreement to reflect the
addition or substitution of Partners and to amend this Agreement as
provided in Section 12.03;
(ix) to deal with, or otherwise engage in business with, or provide
services to and receive compensation therefor from, any Person who has
provided or may in the future provide any services to, lend money to,
sell property to or purchase property from the General Partner or any of
its Affiliates;
(x) to obtain loans from the General Partner or its Affiliates,
provided that the requirements of Section 5.03(d)(iii) are met;
(xi) to establish and maintain the Reserve in such amounts as it
deems appropriate from time to time and to increase, reduce or eliminate
the Reserve as it deems appropriate from time to time;
(xii) to invest all funds not immediately needed in the operation of
the business including, but not limited to, (A) Capital Contributions,
(B) the Reserves or (C) Net Operating Income and Net Sale Proceeds prior
to their distribution to the Partners and Unit Holders;
(xiii) to acquire Units for the account of the Partnership in the
secondary trading market, provided that the Units are listed on the
NASDAQ Stock Market or a national securities exchange, and to cause such
Units to be cancelled;
(xiv) to engage in any kind of activity and to enter into, perform
and carry out contracts of any kind necessary or incidental to, or in
connection with, the accomplishment of the purposes of the Partnership;
(xv) to cause the elimination of the mortgage insurance on the Prior
Partnerships' mortgage loans insured by GNMA or FHA;
(xvi) to issue additional Units or other debt or equity securities;
(xvii) to purchase and hold equity or debt securities issued by REITs;
(xviii) to enter into joint ventures or other similar business
arrangements with other Persons or Affiliates of the General Partners;
and
(xix) to invest any cash or cash equivalents of the Partnership in a
manner such that the Partnership, if incorporated, would not be
characterized as an investment company, as set forth in Section 351(e) of
the Code or as set forth in the Investment Company Act.
(b) With respect to all of its obligations, powers and responsibilities
under this Agreement, the General Partner is authorized to execute and
deliver, for and on behalf of the Partnership, such notes and other
evidences of indebtedness, contracts, trust instruments, agreements,
assignments, deeds, loan agreements, mortgages, deeds of trust, leases and
such other documents as it deems proper, all on such terms and conditions as
it deems proper.
(c) No Person dealing with the General Partner shall be required to
determine the General Partner's authority to enter into any contract,
agreement or undertaking on behalf of the Partnership or to determine any
facts or circumstances bearing upon the existence of such authority. Any
Person dealing with the Partnership or the General Partner may rely upon a
certificate signed by the General Partner as to:
(i) the identity of the General Partner or any Unit Holder or
Limited Partner;
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(ii) the existence or nonexistence of any fact or facts which
constitute a condition precedent to acts by the General Partner or are in
any other manner germane to the affairs of the Partnership;
(iii) the Persons who are authorized to execute and deliver any
instrument or document by or on behalf of the Partnership; or
(iv) any act or failure to act by the Partnership or as to any other
matter whatsoever involving the Partnership or any Partner.
SECTION 5.03. AUTHORITY OF GENERAL PARTNER AND ITS AFFILIATES TO DEAL WITH
THE PARTNERSHIP.
(a) The General Partner and its Affiliates may, and shall have the right
to, provide goods and services to the Partnership (including the right to
act as property manager of a Property), subject to the conditions set forth
in Section 5.03(b).
(b) The General Partner and its Affiliates shall have the right to
provide goods and services to the Partnership as long as (i) such goods and
services are reasonable for and necessary to the Partnership and are
actually furnished to the Partnership, (ii) the price paid for the goods and
services by the Partnership do not exceed the competitive rate charged by
unaffiliated persons rendering similar services in the same geographic
location and (iii) the provision of such goods and services in all other
respects meets the requirements of Section 5.03(c) and (d).
(c) Any payment made to the General Partner or any Affiliate for goods
and services provided to the Partnership shall be fully disclosed to all
Limited Partners and Unit Holders in the reports required under this
Agreement.
(d) The General Partner is prohibited from entering into any agreements,
contracts or arrangements on behalf of the Partnership with the General
Partner or any Affiliate of the General Partner under which:
(i) the General Partner or any Affiliate shall be given an exclusive
right to sell, or exclusive employment to sell, a Property;
(ii) the Partnership lends money to the General Partner; or
(iii) the General Partner or any Affiliate of the General Partner
makes a loan to the Partnership which provides for a prepayment penalty
or provides for an interest rate or other finance charges and fees which
are in excess of amounts charged by unrelated banks or other financial
institutions on comparable loans, made for the same purpose and in the
same locality, to the Partnership.
(e) Notwithstanding any provisions of this Section 5.03, neither the
General Partner nor any of its Affiliates shall:
(i) receive any rebate or give-up, or participate in any reciprocal
arrangement, which would circumvent the provisions of this Section 5.03;
or
(ii) receive any compensation for providing insurance brokerage
services to the Partnership; or
(iii) charge the Partnership for, or take from any other Person, any
property management or real estate brokerage fee with respect to
Partnership property or assets, except as provided in Section 5.05(d).
(f) The Partnership may sell assets or securities to or buy assets or
securities from Affiliates of the General Partner, provided such assets or
securities are sold or purchased, as the case may be, for fair market value.
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SECTION 5.04. GENERAL RESTRICTIONS ON AUTHORITY OF THE GENERAL PARTNER. In
exercising management authority and control of the Partnership, the General
Partner, on behalf of the Partnership and in furtherance of the business of the
Partnership, shall have the authority to perform all acts which the Partnership
is authorized to perform. However, the General Partner shall not have any
authority to:
(a) perform any act in violation of this Agreement or any applicable law
or regulation thereunder;
(b) do any act required to be approved or ratified by the Limited
Partners under the Act without the Consent of the Limited Partners or the
Unit Holders, unless the right to do so is expressly otherwise given in this
Agreement;
(c) borrow money from the Partnership;
(d) possess Partnership property, or assign the Partnership's rights in
specific Partnership property, for other than a Partnership purpose;
(e) admit a Person as a General Partner, except as provided in this
Agreement;
(f) admit a Person as a Limited Partner, except as provided in this
Agreement;
(g) underwrite the securities of other issuers;
(h) do any act which would make it impossible to carry on the ordinary
business of the Partnership;
(i) knowingly perform any act that would subject any Limited Partner or
Unit Holder to liability as a general partner in any jurisdiction;
(j) allocate any Income or Loss (or any item thereof) to any Partner or
Unit Holder in a manner that would cause the allocations of Income or Loss
(or any item thereof) provided for in Article IV hereof to fail to comply
with Section 704(b) of the Code and the Regulations promulgated thereunder;
(k) confess a judgment against the Partnership;
(l) engage in a transaction or an activity that would cause the
Partnership under Section 7704(c)(2) to be characterized as a regulated
investment company under Section 851(a) of the Code if it were a domestic
corporation;
(m) engage in a transaction or an activity that would cause, under
Section 7704(d) of the Code, the Partnership to derive interest income from
the conduct of an insurance business or a financial business;
(n) engage in a transaction or an activity that would cause, with
respect to any taxable years of the Partnership, less than 90% of the
Partnership's gross income to be derived from the sources set forth in
Section 7704(d) of the Code;
(o) engage in any transaction or activity that would cause the
Partnership, in any taxable year, to have less than 90 percent of its gross
income consist of qualifying income, as defined in Section 7704(d) of the
Code;
(p) make loans to the Partnership or accept loans on behalf of the
Partnership from the General Partner or any Affiliates of the General
Partner, except as provided in Section 5.03(d)(iii);
(q) amend this Agreement, except to the extent the right to amend this
Agreement is expressly provided for in other provisions of this Agreement;
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(r) sell substantially all of the assets of the Partnership in one
transaction or in a series of transactions without the consent of a majority
in interest of the Limited Partners (it being understood that the Initial
Limited Partner shall act at the direction of the Unit Holders); or
(s) cause the Partnership to be regulated as an investment company by
the Investment Company Act.
SECTION 5.05. COMPENSATION AND FEES.
(a) Except as provided in this Agreement, the General Partner will
receive no compensation from the Partnership.
(b) The Partnership will pay the General Partner an Acquisition Fee in
connection with the identification, evaluation and acquisition of New Assets
and the financing thereof in an amount equal to 1.25% of the aggregate
purchase price paid by the Partnership for such New Asset. The Acquisition
Fee with respect to an acquisition of a New Asset will be payable at the
time of the closing of the acquisition. The Acquisition Fee will be treated
as a guaranteed payment under Section 707(c) of the Code.
(c) The Partnership will pay the General Partner an Administrative Fee
in connection with the ongoing administration of the business of the
Partnership in an amount equal to 0.50%, per annum, of the sum of (i) the
fair market value on the Merger Date of the Original Assets that are then
still owned by the Partnership, plus (ii) the purchase price paid by the
Partnership for New Assets that are then held by the Partnership. The first
$100,000 of the Administrative Fee shall be payable each year, with the
balance payable only during years that funds from operations ("FFO"),
calculated before Administrative Fees, exceeds 7% of the Unit Holders'
average capital for that year. FFO represents net income (or loss) (computed
in accordance with GAAP), excluding gains (or losses) from debt
restructuring and sales of properties, plus real estate-related depreciation
and amortization (excluding amortization of deferred financing costs and
depreciation of non-real estate assets) and after adjustments for
unconsolidated partnerships and joint ventures. The Unit Holders' average
capital shall be computed by taking an average of the Partners' Capital
balance attributable to the Unit Holders from the Partnership's balance
sheet at the end of each of the fiscal quarters for that year. Such
Administrative Fee will be payable on a monthly basis.
(d) The Partnership may pay an Affiliate of the General Partner a
reasonable property management fee in connection with the management of the
Properties. The property management fee paid with respect to any Property
will be subject to the provisions of Section 5.03 and may not exceed 5% of
the gross revenues of such Property (in the case of residential property) or
6% or the gross revenues of such Property (in the case of industrial or
commercial property); provided, however, that the property management fee
shall not exceed an amount that would be charged by unaffiliated parties
rendering similar services in the same geographic location and for
comparable property.
(e) Subject to Section 5.05(f), the Partnership will reimburse the
General Partner or its Affiliates on a monthly basis for the actual
out-of-pocket costs of direct telephone and travel expenses incurred by them
on Partnership business, direct out-of-pocket fees, expenses and charges
paid by them to third parties for rendering legal, auditing, accounting,
bookkeeping, computer, printing and public relations services, expenses of
preparing and distributing reports to Limited Partners and Unit Holders, an
allocable portion of the salaries and fringe benefits of employees of the
General Partner or its Affiliates, all costs associated with the evaluation
of potential New Assets for acquisition by the Partnership, insurance
premiums (including premiums for liability insurance which will cover the
Partnership, the General Partner and its Affiliates), the cost of compliance
with all state and federal regulatory requirements and stock exchange or
NASDAQ listing fees and charges and other payments to third parties for
services rendered to the Partnership. Any reimbursements pursuant to this
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provision shall not be in excess of the lower of actual costs or the amount
the Partnership would be required to pay independent third parties for
comparable services in the same geographic location.
(f) The Partnership will not reimburse the General Partner or its
Affiliates for any items of general overhead, including, but not limited to,
rent, utilities or the use of computers, office equipment or other capital
items owned by the General Partner or its Affiliates. The Partnership will
not reimburse the General Partner for any salaries or fringe benefits of any
officer of America First Companies L.L.C. regardless of whether such persons
provide services to the Partnership.
(g) The Accountants will verify on the basis of generally accepted
auditing standards that any amounts reimbursed by the Partnership pursuant
to Section 5.05(e) were incurred by the General Partner or its Affiliates in
connection with the conduct of the business and affairs of the Partnership
or the acquisition and management of its assets and were permissible
reimbursements pursuant to Section 5.05(f).
SECTION 5.06. DUTIES AND OBLIGATIONS OF THE GENERAL PARTNER.
(a) The General Partner shall devote to the affairs of the Partnership
such time as it deems necessary for the proper performance of its duties
under this Agreement, but neither the General Partner, its general partner
nor any officer or manager of its general partners shall be expected to
devote full time to the performance of such duties.
(b) The General Partner shall take such action as may be necessary or
appropriate for the continuation of the Partnership's valid existence under
the laws of the State of Delaware and in order to qualify the Partnership
under the laws of any jurisdiction in which the Partnership is doing
business or in which such qualification is necessary or appropriate to
protect the limited liability of the Limited Partners and Unit Holders or in
order to continue in effect such qualification. The General Partner shall
file or cause to be filed for recordation in the office of the appropriate
authorities of the State of Delaware, and in the proper office or offices in
each other jurisdiction in which the Partnership is qualified, such
certificates, including limited partnership and fictitious name
certificates, and other documents as are required by the applicable
statutes, rules or regulations of any such jurisdiction.
(c) The General Partner shall prepare or cause to be prepared and shall
file on or before the due date (or any extension thereof) any federal, state
or local tax returns required to be filed by the Partnership. The General
Partner shall cause the Partnership to pay any taxes payable by the
Partnership.
(d) The General Partner shall have fiduciary responsibility for the
safekeeping and use of all funds and assets of the Partnership, whether or
not in the General Partner's possession or control. The General Partner
shall not employ, or permit another to employ, such funds or assets in any
manner except for the exclusive benefit of the Partnership. The General
Partner shall take all steps necessary to insure that the funds of the
Partnership are not commingled with the funds of any other entity. The
General Partner owes the same fiduciary duty to the Unit Holders as the
General Partner owes to the Limited Partners.
(e) The General Partner shall take all such action as is necessary to
monitor the activities and investments of the Partnership to determine if,
at all times, the Partnership meets the requirements of Section 7704(c) of
the Code and shall take all such action as is necessary to meet such
requirements.
SECTION 5.07. DELEGATION OF AUTHORITY. Subject to the provisions of this
Article V, the General Partner may delegate all or any of its powers, rights and
obligations under this Agreement and may appoint, employ, contract or otherwise
deal with any Person for the transaction of the business of the Partnership,
which Person may, under supervision of the General Partner, perform any acts or
services for the Partnership as the General Partner may approve. Notwithstanding
any such delegation, the General Partner shall remain liable for any acts or
omissions by such Person under the standards of responsibility for the General
Partner set forth herein.
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SECTION 5.08. OTHER ACTIVITIES. The General Partner and its Affiliates may
engage in or possess interests in other business ventures of every kind and
description for their own accounts, including, without limitation, serving as
general partner of other partnerships which own, either directly or through
interests in other partnerships, real estate similar in nature to the
Properties. Neither the Partnership nor the Partners or Unit Holders shall have
any rights by virtue of this Agreement in or to such other business ventures or
to the income or profits derived therefrom, and the pursuit of such ventures,
even if competitive with the business of the Partnership, shall not be deemed
wrongful, improper or a breach of fiduciary duty.
SECTION 5.09. LIMITATION ON LIABILITY OF THE GENERAL PARTNER AND INITIAL
LIMITED PARTNER; INDEMNIFICATION. Neither the General Partner, the Initial
Limited Partner nor their Affiliates (including the officers, managers and
employees of any member of AFCSI) shall be liable, responsible or accountable in
damages or otherwise to the Partnership or to any of the Limited Partners or
Unit Holders for any act or omission performed or omitted by such General
Partner or Initial Limited Partner in good faith and in a manner reasonably
believed by it to be within the scope of the authority granted to it by this
Agreement and in the best interests of the Partnership, provided that such
General Partner's or Initial Limited Partner's conduct did not constitute Cause.
The Partnership shall indemnify and hold harmless the General Partner, the
Initial Limited Partner and their Affiliates (including the officers, managers
and employees of any member of AFCSI) against and for any loss, liability or
damage incurred by any of them or the Partnership by reason of any act performed
or omitted to be performed by them in connection with the business of the
Partnership, including all judgments, costs and attorneys' fees (which costs and
attorneys' fees may be paid as incurred) and any amounts expended in settlement
of any claims of liability, loss or damage, provided that the indemnified
Person's conduct did not constitute Cause. The satisfaction of any
indemnification obligation shall be from and limited to Partnership assets, and
no Limited Partner or Unit Holder shall have any personal liability on account
thereof. The termination of any action, suit or proceeding, by judgment or
settlement, shall not, of itself, create a presumption that the indemnified
Person did not act in good faith and in a manner which is reasonably believed to
be in or not opposed to the best interest of the Partnership. Any
indemnification under this subsection, unless ordered by a court, shall be made
by the Partnership only upon a determination by independent legal counsel in a
written opinion that indemnification of the indemnified Person is proper in the
circumstances because he has met the applicable standard of conduct set forth in
this Agreement.
SECTION 5.10. SPECIAL AMENDMENTS TO THE AGREEMENT.
(a) Any provision to the contrary herein notwithstanding, the General
Partner may, without the Consent of the Limited Partners or Unit Holders,
amend Sections 4.03 and 4.04 of this Agreement on the advice of Counsel or
the Accountants and upon Notice to the Limited Partners and Unit Holders
mailed 10 days prior to the proposed effectiveness of such amendment (unless
earlier effectiveness is required by law) to the extent necessary to ensure
compliance with the Code and Regulations then in effect, provided that such
amendments do not materially adversely affect the interests of the Limited
Partners and Unit Holders in the sole determination of the General Partner.
(b) New allocations made by the General Partner in reliance upon the
advice of Counsel or the Accountants pursuant to Section 5.10(a) shall be
deemed to be made pursuant to the fiduciary obligation of the General
Partner to the Partnership, the Limited Partners and the Unit Holders, and
no such new allocation shall give rise to any claim or cause of action by
any Limited Partner or Unit Holder.
(c) The General Partner may take such action as it deems necessary or
appropriate, including action with respect to the manner in which Units are
being or may be transferred or traded, in order to preserve the status of
the Partnership as a partnership rather than an association taxable as a
corporation for federal income tax purposes or to insure that Unit Holders
will be treated as limited partners for federal income tax purposes.
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ARTICLE VI
CHANGES IN GENERAL PARTNERS
SECTION 6.01. WITHDRAWAL OF GENERAL PARTNER. The General Partner shall not
be entitled to voluntarily withdraw from the Partnership or to sell, transfer or
assign all or a portion of its Partnership Interest as General Partner unless a
substitute General Partner has been admitted in accordance with the conditions
of Section 6.02.
SECTION 6.02. ADMISSION OF A SUCCESSOR OR ADDITIONAL GENERAL PARTNER. The
General Partner may at any time designate additional Persons to be General
Partners, whose Partnership Interest in the Partnership shall be such as shall
be agreed upon by the General Partner and such additional General Partners,
provided that the Partnership Interests of the Limited Partners and the Unit
Holders shall not be reduced thereby. A Person shall be admitted as a General
Partner of the Partnership only if each of the following conditions is
satisfied:
(a) The admission of such Person shall have been Consented to by a
majority in interest of the Limited Partners (including the Initial Limited
Partner voting on behalf of the Unit Holders) as a class;
(b) such Person shall have accepted and agreed to be bound by the terms
and provisions of this Agreement by executing a counterpart hereof, and such
documents or instruments as may be required or appropriate in order to
effect the admission of such Person as a General Partner shall have been
filed for recording, and all other actions required by law in connection
with such admission shall have been performed;
(c) if such Person is a corporation, it shall have provided the
Partnership evidence satisfactory to Counsel of its authority to become a
General Partner and to be bound by the terms and provisions of this
Agreement;
(d) the Partnership shall have received an opinion of Counsel that the
admission of such Person is in conformity with the Act and that none of the
actions taken in connection with the admission of such Person is in
violation of the Act;
SECTION 6.03. REMOVAL OF A GENERAL PARTNER.
(a) Subject to Section 10.02, a majority in interest of the Limited
Partners (including the Initial Limited Partner voting on behalf of the Unit
Holders) acting together as a class, without the Consent or other action by
the General Partner to be removed, may remove any General Partner and,
subject to the provisions of Sections 6.02 and 8.01(a), may elect a
replacement therefor. After the Limited Partners vote to remove a General
Partner pursuant to this Section 6.03, they shall provide the removed
General Partner with Notice thereof, which Notice shall set forth the date
upon which such removal is to become effective, which date shall be no
earlier than the date upon which the General Partner receives such Notice.
(b) If the General Partner is removed for Cause, the Limited Partners or
any successor General Partner, if any, proposed by them shall have the
option, but not the obligation, to acquire, upon payment of any agreed-upon
value or the then fair market value therefor, the Partnership Interest of
any General Partner so removed which has not been assigned to the successor
General Partner pursuant to Section 6.04(b). If such Partnership Interest is
not acquired, it shall be converted to a Limited Partnership Interest as
provided in Section 6.04(b). If the General Partner has been removed without
Cause, the successor General Partner shall have the obligation to acquire
the Partnership Interest of the General Partner so removed at the then fair
market value of such Partnership Interest, unless (i) the Partnership elects
to purchase the Partnership Interest of the removed General Partner at the
then fair market value of such Partnership Interest, or (ii) the removed
General Partner elects
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to have its Partnership Interest converted to a Limited Partnership Interest
as provided in Section 6.04(b). The then fair market value of such
Partnership Interest shall be determined by agreement of the removed General
Partner and the Partnership or, if they cannot agree, by arbitration in
accordance with the then current rules of the American Arbitration
Association. The expense of arbitration shall be borne equally by the
removed General Partner and the Partnership. The fair market value of the
removed General Partner's Partnership Interest shall be the sum of (i) the
present value of future Administrative Fees and Net Operating Income which
would be paid to the General Partner if the removal had not occurred and
(ii) the amount the removed General Partner would receive upon dissolution
and termination of the Partnership, assuming that such dissolution or
termination occurred on the date of the terminating event and the assets of
the Partnership were sold for their then fair market value without any
compulsion on the part of the Partnership to sell such assets. The method of
payment to the removed General Partner may be in cash or a promissory note
with a term of no more than five years with equal annual installments;
provided that such note will become due and payable when the last Property
held by the Partnership is sold. Such promissory note (i) will bear interest
at the then current market interest rate available to the Partnership from
an unrelated bank, (ii) may be prepaid at any time without penalty and (iii)
will have not increased the priority of distributions to the removed General
Partner in relation to distributions to the Limited Partners and Unit
Holders made pursuant to Article IV hereof.
SECTION 6.04. EFFECT OF INCAPACITY OF A GENERAL PARTNER.
(a) In the event of the Incapacity of the General Partner, the business
of the Partnership shall be continued with Partnership property by any other
General Partner or General Partners; provided, however, that if the
Incapacitated General Partner is then the sole General Partner, the
provisions of Section 8.01(a)(i) shall be applicable.
(b) Upon the Incapacity of a General Partner, such General Partner shall
immediately cease to be a General Partner. Except in the case of the removal
of a General Partner without Cause, if at the time of such event the
aggregate of the Partnership Interests of the successor or remaining General
Partner(s) (including any Partnership Interest received by such successor or
remaining General Partner(s) pursuant to Section 6.04(e)) is less than 1% of
all Partnership Interests, there shall be then assigned and transferred, at
the then present fair market value as provided in Section 6.03(b), on a pro
rata basis, to the successor or remaining General Partner(s) such portion of
the Partnership Interest of the Incapacitated General Partner as shall be
necessary to increase the aggregate Partnership Interests of the successor
or remaining General Partner(s) to 1% of all Partnership Interests. To the
extent that the Partnership Interest of the Incapacitated General Partner is
not so assigned and transferred or acquired or repurchased pursuant to
Section 6.03(b), such General Partner's Partnership Interest shall be
converted into that of a Limited Partner, with the same rights under Article
IV as before to share in Income, Loss, Net Operating Income, Net Sale
Proceeds and Liquidation Proceeds. However, any General Partner which
becomes a Limited Partner pursuant to this Section shall not have the right
to participate in the management of the affairs of the Partnership or to
vote on any matter requiring the Consent of the Limited Partners and shall
not be entitled to any portion of the Income, Loss, Net Operating Income,
Net Sale Proceeds or Liquidation Proceeds payable to the class comprised of
Limited Partners and Unit Holders and, further, the aggregate distributions
on the Limited Partnership Interests conveyed to the General Partner
hereunder shall not exceed the fair market value of the Partnership Interest
converted, computed as set forth in Section 6.03(b). Any General Partner
which becomes a Limited Partner pursuant to this Section shall be entitled
to the allocations and distributions such General Partner would have been
entitled to as a General Partner under Article IV of this Agreement but only
to the extent of the Partnership Interest held by such former General
Partner. Nothing in this Section 6.04 shall affect any rights, including the
rights to the payment of any fees under this Agreement, of the Incapacitated
General Partner which matured or were earned prior to the Incapacity of such
General Partner. Such Incapacitated General Partner shall remain liable for
all
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obligations and liabilities incurred by it as General Partner before such
Incapacity shall have become effective, but shall be free from any
obligations or liability as General Partner incurred on account of the
activities of the Partnership from and after the time such Incapacity shall
have become effective.
(c) If, at the time of Incapacity of the General Partner, the
Incapacitated General Partner was not the sole General Partner of the
Partnership, the remaining General Partner or Partners shall immediately (i)
give Notice to the Limited Partners and Unit Holders of such Incapacity and
(ii) prepare such amendments to this Agreement and execute and file for
recording such amendments or documents or other instruments necessary to
reflect the assignment, transfer, termination or conversion (as the case may
be) of the Partnership Interest of the Incapacitated General Partner.
(d) All parties hereto hereby agree to take all actions and to execute
all documents necessary or appropriate to effect the foregoing provisions of
this Section 6.04.
(e) Notwithstanding any other provision of Section 6.03 or 6.04, if
AFCSI is removed as the General Partner for fraud, gross negligence or
willful malfeasance, as determined by a final judgment of a court of
competent jurisdiction, and which fraud, gross negligence or willful
malfeasance is committed by the Person or Persons, if any, owning a majority
of the equity interests in America First Companies L.L.C. or by employees of
America First Companies L.L.C., then a portion of AFCSI's Partnership
Interest which is proportionately equal to such Person's or Persons'
interest in AFCSI (including any limited partnership interest held by such
Person in AFCSI) shall be assigned and transferred, on a pro rata basis
without any compensation therefor, to the successor or remaining General
Partner.
ARTICLE VII
TRANSFERABILITY OF UNITS AND LIMITED PARTNERS' INTERESTS
SECTION 7.01. FREE TRANSFERABILITY OF UNITS.
(a) Units shall be issued in registered form only and shall be freely
transferable (subject to compliance with federal or state securities law and
Section 7.02 or 11.04 of this Agreement); provided, however, nothing in this
Agreement shall impose any obligation on the General Partner, the
Partnership or any transfer agent to restrict or place conditions on the
transfer of Units.
(b) Units may be transferred only on the books and records of the
Partnership.
(c) A Person shall be recognized as a Unit Holder for all purposes on
the books and records of the Partnership as of the day on which the General
Partner (or other transfer agent appointed by the General Partner) receives
evidence of the transfer of a Unit to such Person which is satisfactory to
the General Partner. All Unit Holder rights, including voting rights, rights
to receive distributions and rights to receive reports, and all allocations
in respect of Unit Holders, including allocations of Income and Loss, will
vest in, and be allocable to, each Unit Holder as of the close of business
on such day.
(d) In order to record a transfer of a Unit on the Partnership's books
and records, the General Partner may require such evidence of transfer or
assignment and authority of the transferor or assignor, including signature
guarantees, and such additional documentation as the General Partner may
determine.
(e) The General Partner is hereby authorized to do all things necessary
in order to register the Units under the Securities Act of 1933, as amended,
and the Securities Exchange Act of 1934, as amended, pursuant to the rules
and regulations of the Securities and Exchange Commission, to qualify the
Units with state securities regulatory authorities or to perfect exemptions
from qualification, to cause the Units to be listed on The NASDAQ Stock
Market or a national stock exchange and to any other actions necessary to
allow the resale of Units by the Unit Holders.
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SECTION 7.02. RESTRICTIONS ON TRANSFERS OF UNITS AND OF INTERESTS OF
LIMITED PARTNERS OTHER THAN THE INITIAL LIMITED PARTNER.
(a) A Limited Partner (other than the Initial Limited Partner) may
assign his Limited Partnership Interests only by a duly executed written
instrument of assignment, the terms of which are not in contravention of any
of the provisions of this Agreement. Within 30 days after an assignment of
Limited Partnership Interests (other than by the Initial Limited Partner)
which occurs without a transfer of record ownership of such Limited
Partnership Interests, the assignor shall give Notice of such assignment to
the General Partner.
(b) The provisions of this Section 7.02 and of Section 7.03 shall not
apply to the transfer and assignment by the Initial Limited Partner of
Limited Partnership Interests to Unit Holders in accordance with Section
11.01(a).
SECTION 7.03. ASSIGNEES OF LIMITED PARTNERS OTHER THAN THE INITIAL LIMITED
PARTNER.
(a) If a Limited Partner other than the Initial Limited Partner dies,
his executor, administrator or trustee, or, if he is adjudicated
incompetent, his committee, guardian or conservator, or, if he becomes
Bankrupt, the trustee or receiver of his estate, shall have all the rights
of a Limited Partner for the purpose of settling or managing his estate and
such power as the deceased or incompetent Limited Partner possessed to
assign all or any part of his Limited Partnership Interests and to join with
the assignee thereof in satisfying any conditions precedent to such assignee
becoming a Limited Partner. The Incapacity of a Limited Partner shall not
dissolve the Partnership.
(b) The Partnership need not recognize for any purpose any assignment of
all or any fraction of the Limited Partnership Interests of a Limited
Partner other than the Initial Limited Partner unless there shall have been
filed with the Partnership and recorded on the Partnership's books a duly
executed and acknowledged counterpart of the instrument effecting such
assignment, and unless such instrument evidences the written acceptance by
the assignee of all of the terms and provisions of this Agreement, contains
a representation that such assignment was made in accordance with all
applicable laws and regulations (including any investor suitability
requirements) and in all other respects is satisfactory in form and
substance to the General Partner.
(c) Any Limited Partner other than the Initial Limited Partner who shall
assign all of his Limited Partnership Interests shall cease to be a Limited
Partner of the Partnership, except that unless and until a Limited Partner
is admitted in his place, such assigning Limited Partner shall retain the
statutory rights and liabilities of an assignor of a limited partnership
interest under the Act.
(d) An assignee of Limited Partnership Interests (other than a Unit
Holder) may become a Limited Partner only if each of the following
conditions is satisfied:
(i) the instrument of assignment sets forth the intentions of the
assignor that the assignee succeed to the assignor's Limited Partnership
Interest in his place;
(ii) the assignee shall have fulfilled the requirements of Sections
7.03(b) and 12.03(b);
(iii) the assignee shall have paid all reasonable legal fees and
filing costs incurred by the Partnership in connection with his
substitution as a Limited Partner; and
(iv) the assignee shall have received the Consent of the General
Partner, which Consent the General Partner may withhold in its sole
discretion.
(e) This Agreement and the Certificate shall be amended as necessary to
recognize the admission of any Limited Partners and shall be submitted in a
timely manner for filing with the Delaware Secretary of State. Assignees of
Limited Partnership Interests (other than a Unit Holder) shall be recognized
as such, to the extent set forth in Section 7.03(b) or 7.03(d), as of the
day on which the
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Partnership has received the instrument of assignment and all of the other
conditions to the assignment are satisfied.
(f) An assignee of Limited Partnership Interests (other than a Unit
Holder) who does not become a Limited Partner and who desires to make a
further assignment of his Limited Partnership Interests shall be subject to
all of the provisions of this Article VII to the same extent and in the same
manner as a Limited Partner desiring to make an assignment of Limited
Partnership Interests.
SECTION 7.04. JOINT OWNERSHIP OF INTERESTS. Subject to the other
provisions of this Agreement, a Limited Partnership Interest or Unit may be
acquired by two or more Persons, who shall, at the time they acquire such
Limited Partnership Interest or Unit, indicate to the Partnership whether the
Limited Partnership Interest or Unit is being held by them as joint tenants with
the right of survivorship, as tenants-in-common or as community property. In the
absence of any such designation, joint owners shall be presumed to hold such
Limited Partnership Interest or Unit as tenants-in-common. The Consent of such
joint Limited Partners or Unit Holders shall not require the action or vote of
all owners of any such jointly held Limited Partnership Interest or Unit.
ARTICLE VIII
DISSOLUTION AND LIQUIDATION OF THE PARTNERSHIP
SECTION 8.01. EVENTS CAUSING DISSOLUTION.
(a) The Partnership shall dissolve upon the happening of any of the
following events:
(i) ninety days following the Incapacity of a General Partner who is
at that time the sole General Partner, unless all of the remaining
Partners (it being understood that, notwithstanding any other provision
herein to the contrary, for purposes of this provision the Initial
Limited Partner shall act solely in accordance with the direction of a
majority in interest of the Unit Holders) agree in writing to continue
the business of the Partnership and a successor General Partner
satisfying the standards set forth in Section 6.02 is designated within
90 days of the occurrence of such an Incapacity;
(ii) in the General Partner's sole discretion, after the repayment,
sale or other disposition of all of the Properties and substantially all
other assets, if any, held by the Partnership;
(iii) the expiration of the term of the Partnership specified in
Section 2.04;
(iv) upon the determination by the General Partner to dissolve the
Partnership;
(v) upon the vote of a majority in interest of the Limited Partners
(it being understood that the Initial Limited Partner shall act at the
direction of the Unit Holders); or
(vi) any other event causing the dissolution of the Partnership
under the laws of the State of Delaware.
(b) Dissolution of the Partnership shall be effective on the day on
which the event occurs giving rise to the dissolution, but the Partnership
shall not terminate until a certificate of cancellation is filed with the
Delaware Secretary of State and the assets of the Partnership are
distributed as provided in Section 8.02. Notwithstanding the dissolution of
the Partnership, prior to the termination of the Partnership, the business
of the Partnership and the affairs of the Partners shall continue to be
governed by this Agreement.
(c) The obligations imposed on the General Partner by Article IX of the
Agreement will cease upon the termination of the Partnership.
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SECTION 8.02. LIQUIDATION.
(a) Upon dissolution of the Partnership, unless all of the Partners
elect to reform the Partnership (it being understood that, notwithstanding
any other provision herein to the contrary, for purposes of this provision
the Initial Limited Partner shall act solely in accordance with the
direction of a majority in interest of the Unit Holders), the General
Partner shall liquidate the assets of the Partnership and shall apply and
distribute the proceeds thereof as contemplated by this Section 8.02 and
Article IV and cause the cancellation of the Certificate in accordance with
the Act. If there is no General Partner, a majority in interest of the
Limited Partners (including the Initial Limited Partner voting on behalf of
the Unit Holders) may elect a liquidator to liquidate the assets of the
Partnership and perform the functions of the General Partner set forth in
this Section 8.02.
(b) After payment of the expenses of the liquidation and of liabilities
owing to creditors of the Partnership (including the repayment of any loans
from the General Partner or its Affiliates), the General Partner may set
aside as a reserve such amount as it deems reasonably necessary for any
contingent or unforeseen liabilities or obligations of the Partnership which
may be paid over by the General Partner to a bank, to be held in escrow for
the purpose of paying any such contingent or unforeseen liabilities or
obligations, and, at the expiration of such period as the General Partner
may deem advisable, the amount in such reserve shall be distributed in the
manner set forth in Section 4.02(b) among the Partners and Unit Holders who
would have been entitled to receive such amounts had such amounts not been
placed in such reserves.
(c) Notwithstanding the foregoing, if the General Partner or liquidator
shall determine that an immediate sale of part or all of the Partnership's
assets would cause undue loss to the Partners or the Unit Holders, the
General Partner or liquidator may, after giving Notice to the Limited
Partners and Unit Holders, and to the extent not then prohibited by any
applicable law of any jurisdiction in which the Partnership is then formed
or qualified, defer liquidation and withhold from distribution for a
reasonable time any assets of the Partnership, except those assets necessary
to satisfy the Partnership's debts and obligations.
ARTICLE IX
BOOKS AND RECORDS, ACCOUNTING, REPORTS, TAX ELECTIONS
SECTION 9.01. BOOKS AND RECORDS. The Partnership shall maintain its books
and records at its principal office. The Partnership's books and records shall
be available during ordinary business hours for examination and copying there at
the reasonable request, and at the expense, of any Partner or Unit Holder or his
duly authorized representative, or copies of such books and records may be
requested in writing by any Partner or Unit Holder or his duly authorized
representative, provided that the reasonable costs of fulfilling such request,
including copying expenses, shall be paid by the Partner or Unit Holder making
such request. The Partnership's books and records shall include the following:
(a) a current list of the full name, last known home or business address
and Partnership Interest of each Partner and Unit Holder set forth in
alphabetical order;
(b) a copy of this Agreement and the Certificate, together with executed
copies of any powers of attorney pursuant to which such Certificate, and any
amendments thereto, have been executed;
(c) copies of the Partnership's federal, state and local income tax
returns and reports, if any, for the three most recent years;
(d) copies of all financial statements of the Partnership for the three
most recent years; and
(e) all appraisals, if any, obtained with respect to the Properties
(which appraisals shall be maintained for at least five years).
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SECTION 9.02. ACCOUNTING BASIS, FISCAL YEAR AND TAX ELECTIONS. The
accounting method, taxable year and all tax elections of the Partnership shall
initially be the same as those of Cap Source I prior to the Merger, but may be
changed by the General Partner.
SECTION 9.03. REPORTS.
(a) Within 60 days after the end of each of the first three quarters of
each fiscal year, the General Partner shall send to each Person who was a
Limited Partner or a Unit Holder during such quarter a balance sheet and
statements of income, changes in Partners' capital and cash flow of the
Partnership (all prepared in accordance with generally accepted accounting
principles but none of which need be audited) and a statement showing
distributions of Net Operating Income and Net Sale Proceeds during such
quarter, which need not be audited.
(b) Within 75 days after the end of each taxable year, the General
Partner shall send to each Person who was a Limited Partner or a Unit Holder
at any time during the year then ended such tax information relating to the
Partnership as shall be necessary for the preparation by such Limited
Partner or Unit Holder of his federal income tax return and required state
income and other tax returns.
(c) Within 120 days after the end of each fiscal year, the General
Partner shall send to each Person who was a Limited Partner or Unit Holder
at any time during the year then ended a report including (i) the balance
sheet of the Partnership as of the end of such year and statements of
income, changes in Partners' capital and cash flow of the Partnership for
such year, all of which shall be prepared in accordance with generally
accepted accounting principles and accompanied by a report of the
Accountants containing an opinion of the Accountants, (ii) a report of the
activities of the Partnership during such year and (iii) a statement (which
need not be audited) showing cash distributions per Limited Partnership
Interest and per Unit by Investment Date during such year in respect of such
year, which statement shall identify distributions of (a) Net Operating
Income and Net Sale Proceeds received by the Partnership during such year,
(b) Net Operating Income and Net Sale Proceeds received during prior years
which had been held in the Reserve and (c) cash placed in Reserves during
such year. The Partnership's annual report will include a detailed statement
of (i) the amount of the fees paid to the General Partner pursuant to
Sections 5.05(b), (c) and (d) hereof and (ii) the amounts actually
reimbursed to the General Partner and its Affiliates pursuant to Section
5.05(e) hereof. The Accountants will certify that the amounts actually
reimbursed to the General Partner pursuant to Section 5.05(e) were costs
incurred by the General Partner in connection with the conduct of the
business and affairs of the Partnership or the acquisition and management of
its assets and were permissible reimbursements under this Agreement. The
methods of verification used by the Accountants will be in accordance with
generally accepted auditing standards and include such tests of the
accounting records and other auditing procedures which the Accountants
consider appropriate.
SECTION 9.04. DESIGNATION OF TAX MATTERS PARTNER. The General Partner is
hereby authorized to designate itself or any other General Partner as Tax
Matters Partner of the Partnership, as provided in Section 6231 of the Code and
the Regulations promulgated thereunder. Each Partner, by execution of this
Agreement, and each Unit Holder, by acceptance of his Units, consents to such
designation of the General Partner as the Tax Matters Partner and agrees to
execute, certify, acknowledge, deliver, swear to, file and record at the
appropriate public offices such documents as may be necessary or appropriate to
evidence the appointment of the General Partner as such.
SECTION 9.05. EXPENSES OF TAX MATTERS PARTNER. The Partnership shall
reimburse the Tax Matters Partner for all expenses, including legal and
accounting fees, and shall indemnify him for claims, liabilities, losses and
damages incurred in connection with any administrative or judicial proceeding
with respect to the tax liability of the Partners and Unit Holders. The payment
of all such expenses and indemnification shall be made before any distributions
are made from Net Operating Income, Net Sale Proceeds or Liquidation Proceeds.
Neither the General Partner, nor any Affiliate, nor any other Person shall have
any
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obligation to provide funds for such purpose. The taking of any action and the
incurring of any expense by the Tax Matters Partner in connection with any such
proceeding, except to the extent required by law, is a matter in the sole
discretion of the Tax Matters Partner, and the provisions on limitations of
liability of the General Partner and indemnification set forth in Section 5.09
of this Agreement shall be fully applicable to the Tax Matters Partner in its
capacity as such.
ARTICLE X
MEETINGS AND VOTING RIGHTS OF LIMITED PARTNERS AND UNIT HOLDERS
SECTION 10.01. MEETINGS.
(a) The General Partner may call a meeting of the Limited Partners and
Unit Holders for any purpose or call for a vote of the Limited Partners and
Unit Holders without a meeting or otherwise solicit the consent of the
Limited Partners and Unit Holders at any time and the General Partner shall
call for such a meeting or vote without a meeting or solicit the consents of
the Limited Partners and Unit Holders upon receipt of a written request for
such a meeting, vote or solicitation signed by 10% or more in interest of
the Limited Partners (it being understood that the Initial Limited Partner
will act in accordance with the directions of the Unit Holders). Any such
meeting shall be held not less than 15 days nor more than 60 days after the
receipt of such request. Any such request shall state the purpose of the
proposed meeting and the matters proposed to be acted upon at such meeting,
and no matter may be acted upon at the meeting other than as set forth in
such request or as otherwise permitted by the General Partner. Meetings
shall be held at the principal office of the Partnership or at such other
place as may be designated by the General Partner or, if the meeting is
called upon the request of the Limited Partners (including the Initial
Limited Partner acting on behalf of the Unit Holders), as designated by such
Limited Partners (including the Initial Limited Partner acting on behalf of
the Unit Holders).
(b) Notice of any meeting to be held pursuant to Section 10.01(a) shall
be given (in person or by certified mail) within 10 days of the receipt by
the General Partner of the request for such meeting to each Limited Partner
at his record address, or at such other address which he may have furnished
in writing to the General Partner and to the Unit Holders at the address
shown on the Partnership's books and records kept in accordance with Section
9.01. Such Notice shall state the place, date and hour of the meeting and
shall indicate that the Notice is being issued at the direction of, or by,
the Partner(s) calling the meeting. The Notice shall state the record date
established in Section 10.01(c) and state the purpose of the meeting. If a
meeting is adjourned to another time or place, and if an announcement of the
adjournment of time or place is made at the meeting, it shall not be
necessary to give Notice of the adjourned meeting. The presence in person or
by proxy of a majority in interest of the Limited Partners (including the
Initial Limited Partner acting for and at the direction of the Unit Holders)
considered as a class shall constitute a quorum at all meetings of the
Partners and Unit Holders; provided, however, that if no such quorum is
present, holders of a majority in interest of the Limited Partners
considered as a class (it being understood that the Initial Limited Partner
shall be present at the direction of the Unit Holders and only to the extent
of such direction) so present or so represented may adjourn the meeting from
time to time without further Notice, until a quorum shall have been
obtained. No Notice of the time, place or purpose of any meeting of Limited
Partners and Unit Holders need be given (i) to any Limited Partner or Unit
Holder who attends in person or is represented by proxy, except for a
Partner attending a meeting for the express purpose of objecting at the
beginning of the meeting to the transaction of any business on the ground
that the meeting is not lawfully called or convened, or (ii) to any Limited
Partner or Unit Holder entitled to such Notice who, in writing, executed and
filed with the records of the meeting, either before or after the time
thereof, waives such Notice.
C-23
<PAGE>
(c) For the purpose of determining the Limited Partners entitled to vote
at any meeting of the Limited Partners and Unit Holders, and the Unit
Holders entitled to receive Notice of and direct the voting of the Initial
Limited Partner at any such meeting, or any adjournment thereof, or to act
by written Consent without a meeting, the General Partner or the Limited
Partners or the Unit Holders requesting such meeting or vote pursuant to
Section 11.03(a) may fix, in advance, a date as the record date of any such
determination of Limited Partners and Unit Holders. Such date shall not be
more than 60 days nor less than 15 days before any such meeting or not more
than 60 days prior to the initial solicitation of Consents from the Limited
Partners and Unit Holders.
(d) At each meeting of Limited Partners and Unit Holders, the Limited
Partners and Unit Holders present or represented by proxy shall elect such
officers and adopt such rules for the conduct of such meeting as they shall
deem appropriate.
SECTION 10.02. VOTING RIGHTS OF LIMITED PARTNERS AND UNIT HOLDERS.
(a) A majority in interest of the Limited Partners (it being understood
that the Initial Limited Partner shall act at the direction of the Unit
Holders), without the concurrence of the General Partner, may: (i) amend
this Agreement, provided that the concurrence of the General Partner shall
be required for any amendment to this Agreement which modifies the
compensation or distributions to which the General Partner is entitled or
which affects the duties of the General Partner; (ii) elect to dissolve the
Partnership, and (iii) remove any General Partner and elect a successor
therefor, which successor shall become a General Partner only in accordance
with Section 6.02. Amendments to this Agreement may be proposed at any time
by a writing signed by 10% or more in interest of the Limited Partners (it
being understood that the Initial Limited Partner will act in accordance
with the direction of the Unit Holders).
(b) A Limited Partner shall be entitled to cast one vote for each
Limited Partnership Interest which he owns, and a Unit Holder shall be
entitled to direct the Initial Limited Partner to cast one vote for each
Unit which he owns (it being understood that the Initial Limited Partner
will act at the direction of the Unit Holders) at a meeting, in person, by
written proxy or by a signed writing directing the manner in which he
desires that his vote be cast, which writing must be received by the General
Partner prior to the adjournment SINE DIE of such meeting. In the
alternative, Unit Holders may Consent to actions without a meeting, by a
signed writing identifying the action taken or proposed to be taken. Every
proxy must be signed by the Limited Partner or Unit Holder or his
attorney-in-fact. No proxy shall be valid after the expiration of 12 months
from the date thereof unless otherwise provided in the proxy. Every proxy
shall be revocable at the pleasure of the Limited Partner or the Unit Holder
executing it by Notice to the Person to whom the proxy was given. Written
Consents may be irrevocable if stated in a writing delivered to Unit Holders
at the time at which their Consent is solicited. Only the votes or Consents
of Limited Partners or Unit Holders of record on the record date established
pursuant to Section 10.01(c), whether at a meeting or otherwise, shall be
counted. The General Partner shall not be entitled to vote in its capacity
as General Partner. The laws of the State of Delaware pertaining to the
validity and use of corporate proxies shall govern the validity and use of
proxies given by the Limited Partners and Unit Holders, except to the extent
such laws are inconsistent with this Agreement. The Unit Holders may give
proxies only to the Initial Limited Partner. The Initial Limited Partner
will vote in accordance with the directions of the Unit Holders so that each
Unit will be voted separately.
(c) Reference in this Agreement to a specified percentage in interest of
the Limited Partners and Unit Holders means the Limited Partners and Unit
Holders whose combined Capital Contributions (it being understood that the
Unit Holders' Capital Contributions were made by the Initial Limited
Partner) represent the specified percentage of the Capital Contributions of
all Limited Partners and Unit Holders.
C-24
<PAGE>
SECTION 10.03. OTHER ACTIVITIES. The Limited Partners and Unit Holders may
engage in or possess interests in other business ventures of every kind and
description for their own accounts, including without limitation serving as
general or limited partners of other partnerships which own, either directly or
through interests in other partnerships or otherwise, commercial real estate
similar to the Properties. Neither the Partnership nor any of the Partners or
Unit Holders shall have any rights by virtue of this Agreement in or to such
business ventures or to the income or profits derived therefrom.
ARTICLE XI
ASSIGNMENT OF LIMITED PARTNERSHIP INTERESTS TO UNIT HOLDERS AND RIGHTS OF UNIT
HOLDERS
SECTION 11.01. ASSIGNMENT OF LIMITED PARTNERSHIP INTERESTS TO UNIT
HOLDERS.
(a) Except as otherwise provided herein, the Initial Limited Partner, by
the execution of this Agreement, irrevocably assigns to the Persons who are
Unit Holders of the Prior Partnerships as of the record date established
therefor by the General Partner, all of the Initial Limited Partner's rights
and interest in its Partnership Interests. The rights and interest so
transferred and assigned shall include, without limitation, the following:
(i) all rights to receive distributions of Net Operating Income
pursuant to Section 4.01;
(ii) all rights to receive Net Sale Proceeds and Liquidation
Proceeds pursuant to Section 4.02;
(iii) all rights in respect of allocations of Income and Loss
pursuant to Section 4.03;
(iv) all rights in respect of determinations of allocations and
distributions pursuant to Section 4.04;
(v) all rights to inspect records and to receive reports pursuant to
Article IX;
(vi) all rights to vote on Partnership matters pursuant to Article
X; and
(vii) all rights which Limited Partners have, or may have in the
future, under this Agreement or under the Act, except as otherwise
provided herein.
All Persons becoming Unit Holders shall be bound by the terms and conditions of,
and shall be entitled to all rights of, Limited Partners under this Agreement.
(b) The Initial Limited Partner shall remain as Initial Limited Partner
on the books and records of the Partnership notwithstanding the assignment
of all of its Limited Partnership Interest until such time as the Initial
Limited Partner transfers its position as Initial Limited Partner to another
Person with the Consent of the General Partner. Other than pursuant to
Section 11.01(a), the Initial Limited Partner may not transfer or assign a
Limited Partnership Interest without the prior written Consent of the
General Partner.
(c) The General Partner, by the execution of this Agreement, irrevocably
Consents to and acknowledges on behalf of itself and the Partnership that
(i) the foregoing assignment pursuant to Section 11.01(a) by the Initial
Limited Partner to the Unit Holders of the Initial Limited Partner's rights
and interest in the Limited Partnership Interests is valid and binding on
the Partnership and the General Partner, and (ii) the Unit Holders are
intended to be third-party beneficiaries of all rights and privileges of the
Initial Limited Partner in respect of the Limited Partnership Interests. The
General Partner covenants and agrees that, in accordance with the foregoing
transfer and assignment, all the Initial Limited Partner's rights and
privileges in respect of the Limited Partnership Interests assigned to the
Unit Holders may be exercised by the Unit Holders, including, without
limitation, those listed in Section 11.01(a).
C-25
<PAGE>
SECTION 11.02. RIGHTS OF UNIT HOLDERS.
(a) Limited Partners (including the Initial Limited Partner but only
with respect to its own Limited Partnership Interests) and Unit Holders
shall share PARI PASSU on the basis of one Limited Partnership Interest for
one Unit, and shall be considered as a single class with respect to all
rights to receive distributions of Net Operating Income, Net Sale Proceeds
and Liquidation Proceeds, allocations of Income and Loss, and other
determinations of allocations and distributions pursuant to this Agreement.
(b) Limited Partners (including the Initial Limited Partner voting on
behalf of the Unit Holders) shall vote on all matters in respect of which
they are entitled to vote (either in person, by proxy or by written
Consent), as a single class with each entitled to one vote.
(c) A Unit Holder is entitled to the same duty (including any fiduciary
duty created by law) from the General Partner as the General Partner owes to
a Limited Partner and may sue the General Partner to enforce the same. A
Unit Holder may bring a derivative action against any Person (including the
General Partner) to enforce any right of the Partnership to recover a
judgment to the same extent as a Limited Partner has such a right under the
Act.
(d) A Unit Holder is not a Limited Partner and has no right to be
admitted to the Partnership as such. However, the Unit Holders will be
deemed Partners in the Partnership for federal income tax purposes.
SECTION 11.03. VOTING BY THE INITIAL LIMITED PARTNER ON BEHALF OF UNIT
HOLDERS.
(a) Subject to Section 8.01(a)(i), the Initial Limited Partner hereby
agrees that, with respect to any matter on which a vote of the Limited
Partners is taken, the Consent of the Limited Partners is required or any
other action of the Limited Partners is required or permitted, it will not
vote its Limited Partnership Interest or grant such Consent or take such
action (other than solely administrative actions as to which the Initial
Limited Partner has no discretion) except for the sole benefit of, and in
accordance with the written instructions of, the Unit Holders with respect
to their Units. The Initial Limited Partner (or the Partnership on behalf of
the Initial Limited Partner) will provide Notice to the Unit Holders
containing information regarding any matters to be voted upon or as to which
any Consent or other action is requested or proposed. The Partnership and
the General Partner hereby agree to permit Unit Holders to attend any
meetings of Partners and the Initial Limited Partner shall, upon the written
request of Unit Holders owning Units which represent in the aggregate 10% or
more of all of the outstanding Units, request the General Partner to call a
meeting of Partners pursuant to Section 10.01 or to submit a matter to the
Initial Limited Partner without a meeting pursuant to this Agreement. The
General Partner shall give the Unit Holders Notice of any meeting to be held
pursuant to Section 10.01(a) at the same time and manner as such Notice is
required to be given to the Initial Limited Partner pursuant to Section
10.01(b).
(b) The Initial Limited Partner will exercise its right to vote or
Consent to any action under this Agreement in accordance with the written
instructions of holders of Units outstanding as of the relevant record date.
In addition, holders of a majority of the Units outstanding may instruct the
Initial Limited Partner to take, and upon receipt of such instruction, the
Initial Limited Partner shall take, the actions permitted by Section 10.02.
SECTION 11.04. PRESERVATION OF TAX STATUS. With the Consent of each Unit
Holder so affected, the General Partner may at any time cause such Unit Holder
to become a Limited Partner and may take such other action with respect to the
manner in which Units are being or may be transferred or traded as it may deem
necessary or appropriate, in order to preserve the status of the Partnership as
a partnership rather than an association or publicly traded partnership taxable
as a corporation for federal income tax purposes or to insure that Unit Holders
will be treated as limited partners for federal income tax purposes.
C-26
<PAGE>
ARTICLE XII
MISCELLANEOUS PROVISIONS
SECTION 12.01. APPOINTMENT OF THE GENERAL PARTNER AS ATTORNEY-IN-FACT.
(a) Each Limited Partner by the execution of this Agreement irrevocably
constitutes and appoints, with full power of substitution, the General
Partner as his true and lawful attorney-in-fact with full power and
authority in his name, place and stead to execute, certify, acknowledge,
deliver, swear to, file and record at the appropriate public offices such
documents as may be necessary or appropriate to carry out the provisions of
this Agreement, including but not limited to:
(i) the Certificate and amendments thereto, and all certificates and
other instruments (including counterparts of this Agreement), and any
amendments thereof, which any such Person deems appropriate to form,
qualify or continue the Partnership as a limited partnership (or a
partnership in which the Limited Partners will have limited liability
comparable to that provided by the Act on the date thereof) in a
jurisdiction in which the Partnership may conduct business or in which
such formation, qualification or continuation is, in the opinion of any
such Person, necessary to protect the limited liability of the Limited
Partners and Unit Holders;
(ii) any other instrument or document which may be required to be
filed by the Partnership under federal law or under the laws of any state
in which any such Person deems it advisable to file;
(iii) all amendments to this Agreement adopted in accordance with the
terms hereof and all instruments which any such Person deems appropriate
to reflect a change or modification of the Partnership in accordance with
the terms of this Agreement; and
(iv) any instrument or document, including amendments to this
Agreement, which may be required to effect the continuation of the
Partnership, the admission of a Limited Partner or an additional or
successor General Partner or the dissolution and termination of the
Partnership (provided such continuation, admission or dissolution and
termination are in accordance with the terms of this Agreement) or to
reflect any reductions in amount of Capital Accounts.
(b) The appointment by each Limited Partner of each of such Persons as
his attorney-in-fact is irrevocable and shall be deemed to be a power
coupled with an interest, in recognition of the fact that each of the
Partners under this Agreement will be relying upon the power of such Persons
to act as contemplated by this Agreement in any filing and other action by
them on behalf of the Partnership, and such power shall survive the
Incapacity of any Person hereby giving such power and the transfer or
assignment of all or any part of the Limited Partnership Interests of such
Person; provided, however, that in the event of a transfer by a Limited
Partner of all or any part of his Limited Partnership Interests, the
foregoing power of attorney shall survive such transfer only until such time
as the transferee is admitted to the Partnership as a Limited Partner and
all required documents and instruments are duly executed, filed and recorded
to effect such substitution.
SECTION 12.02. SIGNATURES. Each Limited Partner and any additional or
successor General Partner shall become a signatory hereto by signing such number
of counterpart signature pages to this Agreement and such other instrument or
instruments in such manner and at such time as the General Partner shall
determine. By so signing, each Limited Partner, successor General Partner or
additional General Partner, as the case may be, shall be deemed to have adopted,
and to have agreed to be bound by, all the provisions of this Agreement, as
amended from time to time; provided, however, that no such counterpart shall be
binding unless and until it has been accepted by the General Partner.
C-27
<PAGE>
SECTION 12.03. AMENDMENTS.
(a) In addition to any amendments otherwise authorized herein,
amendments may be made to this Agreement or the Certificate from time to
time by the General Partner, without the Consent of the Limited Partners or
the Unit Holders, (i) to add to the representations, duties or obligations
of the General Partner or surrender any right or power granted to the
General Partner in this Agreement; (ii) to cure any ambiguity or correct or
supplement any provision in this Agreement which may be inconsistent with
the manifest intent of this Agreement, if such amendment is not materially
adverse to the interests of Limited Partners and Unit Holders in the sole
judgment of the General Partner; (iii) to delete or add to any provision of
this Agreement required to be deleted or added to based upon comments by the
staff of the Securities and Exchange Commission or other federal agency or
by a state securities commissioner; (iv) to delete, add or revise any
provision of this Agreement that may be necessary or appropriate, in the
General Partner's judgment, to insure that the Partnership will be treated
as a partnership, and that each Unit Holder and each Limited Partner will be
treated as a limited partner, for federal income tax purposes; (v) to
reflect the withdrawal, removal or admission of Partners; (vi) to reflect a
change in the name or address of the Partnership's registered agent in the
State of Delaware; and (vii) change the allocations set forth in Section
4.03 hereof so that they comply with the requirements of Section 704 of the
Code and the Regulations promulgated thereunder; provided, however, that no
amendment shall be adopted pursuant to this Section 12.03(a) unless the
adoption thereof (A) is consistent with Section 5.01 and is not prohibited
by Section 5.04; (B) does not affect the distribution of Net Operating
Income, Net Sales Proceeds or Liquidation Proceeds or the allocation of
Income or Loss (except as provided in Section 5.10); (C) does not, in the
sole judgment of the General Partner after consultation with Counsel, affect
the limited liability of the Limited Partners or the Unit Holders or cause
the Partnership to be characterized as an association or publicly traded
partnership taxable as a corporation for federal income tax purposes; and
(D) does not amend this Section 12.03(a).
(b) If this Agreement shall be amended as a result of substituting a
Limited Partner, the amendment to this Agreement shall be signed by the
General Partner, the Person to be substituted and the assigning Limited
Partner. If this Agreement shall be amended to reflect the designation of an
additional General Partner, such amendment shall be signed by the other
General Partners and by such additional General Partner. If this Agreement
shall be amended to reflect the withdrawal of a General Partner when the
business of the Partnership is being continued, such amendment shall be
signed by the withdrawing General Partner and by the remaining or successor
General Partner. In the event the withdrawing General Partner or the
assigning Limited Partner does not sign such an amendment within 30 days
following its withdrawal or substitution, the remaining or successor General
Partners are hereby appointed by the withdrawing General Partner or the
assigning Limited Partner as its attorney-in-fact for purposes of signing
such amendment.
(c) In making any amendments, there shall be prepared and filed by the
General Partner for recording such documents and certificates as shall be
required to be prepared and filed under the Act and in any other
jurisdictions under the laws of which the Partnership is then qualified.
SECTION 12.04. BINDING PROVISIONS. The covenants and agreements contained
herein shall be binding upon, and inure to the benefit of, the heirs, executors,
administrators, personal representatives, successors and assigns of the
respective parties hereto.
SECTION 12.05. APPLICABLE LAW. This Agreement shall be governed by and
construed and enforced in accordance with the internal laws of the State of
Delaware.
SECTION 12.06. SEPARABILITY OF PROVISIONS. Each provision of this
Agreement shall be considered separable and if for any reason any provision or
provisions hereof are determined to be invalid and contrary to any law, such
invalidity shall not impair the operation of or affect those portions of this
Agreement which are valid.
C-28
<PAGE>
SECTION 12.07. CAPTIONS. Article and Section titles are for descriptive
purposes only and shall not control or alter the meaning of this Agreement as
set forth in the text.
SECTION 12.08. ENTIRE AGREEMENT. This Agreement, together with Schedule A
hereto, sets forth all, and is intended by all parties to be an integration of
all, of the promises, agreements and understandings among the parties hereto
with respect to the Partnership, the Partnership business and the property of
the Partnership, and there are no promises, agreements, or understandings, oral
or written, express or implied, among them other than as set forth, incorporated
or contemplated in this Agreement.
IN WITNESS WHEREOF, the parties have signed this Agreement as of the day
of , 1999.
GENERAL PARTNER:
AMERICA FIRST CAPITAL SOURCE I L.L.C.
--------------------------------------
Michael B. Yanney, President
INITIAL LIMITED PARTNER:
H/T CORP.
--------------------------------------
Michael B. Yanney, President
C-29
<PAGE>
EXHIBIT A
CAPITAL CONTRIBUTIONS
<TABLE>
<CAPTION>
FAIR MARKET
DESCRIPTION VALUE
- --------------------------------------------------------------------------------------------------- -------------
<S> <C>
General Partner*................................................................................... $
Cap Source II**.................................................................................... $ 30,872,167
Predecessor Limited Partners of Cap Source I**..................................................... $ 47,569,968
</TABLE>
- ------------
* See Section 3.01 hereof
** See Section 3.02 hereof
C-30
<PAGE>
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON JULY 21, 1999
REGISTRATION NO. 333-52117
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
------------------------
FINANCIAL STATEMENT SUPPLEMENT
TO
PRE-EFFECTIVE
AMENDMENT NO. 3
TO
FORM S-4
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
---------------------
AMERICA FIRST REAL ESTATE
INVESTMENT PARTNERS, L.P.
(Exact name of registrant as specified in its charter)
1004 FARNAM STREET, SUITE 400
OMAHA, NEBRASKA 68102
(402) 444-1130
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
<PAGE>
INDEX TO FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
PAGE
-----
<S> <C>
CAPITAL SOURCE L.P.
Management's Discussion and Analysis of Financial Condition and Results of Operations as of December 31,
1998..................................................................................................... 1
Report of Independent Accountants.......................................................................... 8
Balance Sheets as of December 31, 1998 and 1997............................................................ 9
Statements of Income and Comprehensive Income for the Years Ended December 31, 1998, 1997, 1996............ 10
Statements of Partners' Capital for the Years Ended December 31, 1998, 1997, 1996.......................... 11
Statements of Cash Flows for the Years Ended December 31, 1998, 1997, and 1996............................. 12
Notes to Financial Statements.............................................................................. 13
Management's Discussion and Analysis of Financial Condition and Results of Operations as of March 31,
1999..................................................................................................... 23
Balance Sheets as of March 31, 1999 (Unaudited)............................................................ 28
Statements of Income and Comprehensive Income for the Three Months Ended March 31, 1999 (Unaudited)........ 29
Statements of Partners' Capital for the Three Months Ended March 31, 1999 (Unaudited)...................... 30
Statements of Cash Flows for the Three Months Ended March 31, 1999 (Unaudited)............................. 31
Notes to Financial Statements (Unaudited).................................................................. 32
CAPITAL SOURCE II L.P.-A
Management's Discussion and Analysis of Financial Condition and Results of Operations as of December 31,
1998..................................................................................................... 38
Report of Independent Accountants.......................................................................... 45
Balance Sheets as of December 31, 1998 and 1997............................................................ 46
Statements of Income and Comprehensive Income for the Years Ended December 31, 1998, 1997, 1996............ 47
Statements of Partners' Capital for the Years Ended December 31, 1998, 1997, 1996.......................... 48
Statements of Cash Flows for the Years Ended December 31, 1998, 1997, and 1996............................. 49
Notes to Financial Statements.............................................................................. 50
Management's Discussion and Analysis of Financial Condition and Results of Operations as of March 31,
1999..................................................................................................... 59
Balance Sheets as of March 31, 1999 (Unaudited)............................................................ 64
Statements of Income and Comprehensive Income for the Three Months Ended March 31, 1999 (Unaudited)........ 65
Statements of Partners' Capital for the Three Months Ended March 31, 1999 (Unaudited)...................... 66
Statements of Cash Flows for the Three Months Ended March 31, 1999 (Unaudited)............................. 66
Notes to Financial Statements (Unaudited).................................................................. 67
</TABLE>
<PAGE>
CAPITAL SOURCE L.P.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
DECEMBER 31, 1998
Capitalized terms not otherwise defined herein shall have the meanings set
forth in the accompanying Prospectus/Consent Solicitation Statement.
LIQUIDITY AND CAPITAL RESOURCES
Capital Source L.P. (the "Partnership") originally acquired: (i) five
mortgage-backed securities guaranteed as to principal and interest by the
Government National Mortgage Association ("GNMA") collateralized by first
mortgage loans on multifamily housing properties located in five states; (ii)
three first mortgage loans insured as to principal and interest by the Federal
Housing Administration ("FHA") on multifamily housing properties located in two
states; and (iii) Partnership Equity Investments in eight limited partnerships
which own the multifamily properties financed by the GNMA Certificates and FHA
Loans. The Partnership subsequently received FHA Debentures in payment of the
FHA Loan on Fox Hollow Apartments which were paid in full in 1993. In 1994,
foreclosure proceedings were initiated on Falcon Point Apartments and,
accordingly, the Partnership no longer holds a Partnership Equity Investment in
this property. In addition, during 1995, the GNMA Certificate related to Falcon
Point Apartments was paid-in-full to the Partnership. Collectively, the
remaining GNMA Certificates, FHA Loans and Partnership Equity investments are
referred to as the "Permanent Investments." The Partnership has also invested
amounts held in its reserve account in certain GNMA securities backed by pools
of single-family mortgages ("Reserve Investments"). The obligations of GNMA and
FHA are backed by the full faith and credit of the United States government.
DISTRIBUTIONS
Cash distributions paid or accrued per Beneficial Assignment Certificate
("BAC") were as follows:
<TABLE>
<CAPTION>
FOR THE FOR THE FOR THE
YEAR ENDED YEAR ENDED YEAR ENDED
DECEMBER 31, 1998 DECEMBER 31, 1997 DECEMBER 31, 1996
----------------- ----------------- -----------------
<S> <C> <C> <C>
Regular monthly distributions
Income................................................ $ .5582 $ .8952 $ .9352
Return of capital..................................... .4518 .1148 .0748
------- ------- -------
$ 1.0100 $ 1.0100 $ 1.0100
------- ------- -------
------- ------- -------
Distributions
Paid out of cash flow................................. $ 1.0100 $ 1.0100 $ 1.0100
------- ------- -------
------- ------- -------
</TABLE>
Regular quarterly distributions to BAC Holders consist primarily of interest
received on FHA Loans and GNMA Certificates. Additional cash for distributions
is received from other temporary investments. The Partnership may draw on
reserves to pay operating expenses or to supplement cash distributions to BAC
Holders. The Partnership is permitted to replenish reserves with cash flows in
excess of distributions paid. For the year ended December 31, 1998, a net amount
of $1,334,522 of undistributed cash flow was added to reserves. The total amount
held in reserves at December 31, 1998, was $9,229,246 of which $879,182 was
invested in GNMA Certificates.
The Partnership believes that cash provided by operating and investing
activities and, if necessary, withdrawals from the Partnership's reserves will
be adequate to meet its short-term and long-term liquidity requirements,
including the payments of distributions to BAC Holders. Under the terms of the
Partnership Agreement, the Partnership has the authority to enter into
short-term and long-term debt financing arrangements; however, the Partnership
currently does not anticipate entering into such arrangements.
<PAGE>
The Partnership is not authorized to issue additional BACs to meet short-term
and long-term liquidity requirements.
ASSET QUALITY
The FHA Loans and GNMA Certificates owned by the Partnership are guaranteed
as to principal and interest by FHA and GNMA, respectively. The obligations of
FHA and GNMA are backed by the full faith and credit of the United States
government. The Partnership Equity Investments, however, are not insured or
guaranteed. The value of these investments is a function of the value of the
real estate owned by the Operating Partnerships.
The fair value of the properties underlying the Operating Partnerships is
based on management's best estimate of the fair value of such properties,
however; the ultimate realized values may vary from these estimates. The fair
value of the properties is determined based on the discounted estimated future
cash flows from the properties, including estimated sales proceeds. The
calculation of discounted estimated future cash flows includes certain variables
such as the assumed inflation rates for rents and expenses, capitalization rates
and discount rates. These variables are supplied to management by an independent
real estate firm and are based on local market conditions for each property. In
certain cases, additional factors such as the replacement value of the property
or comparable sales of similar properties are also taken into consideration.
The following table shows the occupancy levels of the properties financed by
the Partnership at December 31, 1998:
<TABLE>
<CAPTION>
NUMBER PERCENTAGE
NUMBER OF UNITS OF UNITS
PROPERTY NAME LOCATION OF UNITS OCCUPIED OCCUPIED
- --------------------------------------------------------- ---------------------- ----------- ----------- -------------
<S> <C> <C> <C> <C>
Bluff Ridge Apartments................................... Jacksonville, NC 108 107 99%
Fox Hollow Apartments.................................... High Point, NC 184 177 96%
Highland Park Apartments................................. Columbus, OH 252 236 94%
Misty Springs Apartments................................. Daytona Beach, FL 128 126 98%
The Ponds at Georgetown.................................. Ann Arbor, MI 134 133 99%
Waterman's Crossing...................................... Newport News, VA 260 260 100%
Water's Edge Apartments.................................. Lake Villa, IL 108 105 97%
----- ----- ---
1,174 1,144 97%
----- ----- ---
----- ----- ---
</TABLE>
The following sets forth certain information regarding the properties
financed by the Partnership:
BLUFF RIDGE APARTMENTS
Bluff Ridge Apartments is a 108-unit complex located in Jacksonville, North
Carolina. Average occupancy was 99% in 1998, compared to 96% in 1997. Operations
at Bluff Ridge are heavily dependent on demand from the local military
personnel. The Jacksonville rental market has remained relatively stable
throughout 1998. Operating revenue increased as a result of rental rate
increases and an increase in average occupancy. In addition, real estate
operating costs decreased primarily due to a decrease in repairs and maintenance
expenses and property improvements. As a result, net operating income, excluding
interest, depreciation and amortization, increased approximately 3% from 1997 to
1998. The property was current on its debt service payments during 1998.
FOX HOLLOW APARTMENTS
Fox Hollow Apartments is a 184-unit apartment community located in High
Point, North Carolina. Average occupancy was 95% in 1998, compared to 96% in
1997. Excluding interest, depreciation and amortization, net operating income
increased approximately 19% from 1997 to 1998. This increase was
2
<PAGE>
primarily due to a decrease in repairs and maintenance expenses and a slight
increase in rental revenues due to rental rate increases. The property remained
in compliance with the terms of the Loan Modification Agreement entered into
with the mortgage holder in 1996. While there can be no assurance that the
modified terms of the Fox Hollow mortgage will enable the property to remain
current on its mortgage obligations, the restructuring allows the Partnership to
retain its Partnership Equity Investment in the Fox Hollow Apartments and
improves the property's ability to make its required mortgage payments.
HIGHLAND PARK APARTMENTS
Highland Park Apartments contains 252 luxury garden apartments and is
located in Columbus, Ohio. Average occupancy was 95% in 1998, compared to 93% in
1997. Excluding interest, depreciation and amortization, net operating income
decreased approximately 5% from 1997 to 1998. This decrease is primarily due to
an increase in real estate operating expenses of approximately 9% which was
partially offset by a 1% increase in rental revenue resulting primarily from the
increase in average occupancy. The increases in real estate operating expenses
resulted from higher repairs and maintenance expenses and advertising costs
which were partially offset by a decrease in other administrative expenses. The
property remained current on its mortgage obligations throughout 1998.
MISTY SPRINGS APARTMENTS
Misty Springs Apartments is a 128-unit apartment community located in
Daytona Beach, Florida. Average occupancy was 100% in 1998, compared to 98% in
1997. Net operating income, excluding interest, depreciation and amortization,
was approximately 5% lower in 1998, compared to 1997. This decrease resulted
from a 14% increase in real estate operating expenses which was partially offset
by an increase of approximately 5% in operating revenue. Real estate operating
expenses were higher primarily due to increases in salaries and related expenses
and repairs and maintenance expenses which were partially offset by a 9%
decrease in administrative expenses. The increase in operating revenue was due
primarily to the increase in average occupancy. Shortfalls of $10,000 were
funded by the Partnership reserves in 1998.
At December 31, 1998, the Operating Partnership was in compliance with the
terms of a Reinstatement Agreement entered into in 1993. The Operating
Partnership was current on its debt service payments on its mortgage loan during
1998.
THE PONDS AT GEORGETOWN
The Ponds at Georgetown consists of 134 apartments located in Ann Arbor,
Michigan. Average occupancy was 99% in 1998, compared to 97% in 1997. Rental
revenue increased approximately 3.5% in 1998, compared to 1997, primarily due to
the increase in average occupancy while real estate operating expenses increased
approximately 8%. The increase in real estate operating expenses was primarily
due to an 8% increase in repairs and maintenance expenses which was partially
offset by a 17% decrease in real estate taxes. As previously disclosed, the
mortgage loan for the Ponds at Georgetown was restructured in September 1998
which lowered the interest rate from 9.25% to 7.85%. In connection with the
restructuring, shortfalls of $176,942 were funded by the Partnership's reserves.
As a result of restructuring the mortgage loan, cash flow from the property is
now anticipated to be sufficient to cover all the operating partnership's cash
needs, including mortgage payments and taxes. The property was current on its
mortgage obligations as of December 31, 1998.
WATERMAN'S CROSSING
Waterman's Crossing is a 260-unit apartment community located in Newport
News, Virginia. Average occupancy was 100% in 1998, compared to 98% in 1997. The
operating partnership was current on its mortgage obligations in 1998. Excluding
interest, depreciation and amortization, operating income increased 6% from 1997
to 1998. This increase was primarily due to reductions of approximately 5% in
3
<PAGE>
repairs and maintenance expenses and 11% in advertising expenses. These
decreases were partially offset by an increase in administrative expenses of
approximately 6% and an increase in operating revenue of approximately 4%. The
increase in operating revenue resulted primarily from the increase in average
occupancy.
WATER'S EDGE APARTMENTS
Water's Edge Apartments is a 108-unit apartment complex located in Lake
Villa, Illinois. Average occupancy was 96% in 1998 and 1997. Net operating
income, excluding interest, depreciation and amortization, increased
approximately 2% in 1998 compared to 1997. This increase is primarily
attributable to higher operating revenue due primarily to the increase in
average occupancy. The operating partnership remained current on its mortgage
obligations in 1998.
RESULTS OF OPERATIONS
The tables below compare the results of operations for each year shown.
<TABLE>
<CAPTION>
FOR THE FOR THE FOR THE
YEAR ENDED YEAR ENDED YEAR ENDED
DEC. 31, DEC. 31, DEC. 31,
1998 1997 1996
------------ ------------ ------------
<S> <C> <C> <C>
Mortgage-backed securities income...................................... $3,262,922 $3,302,727 $3,340,747
Interest income on temporary cash
Investments and U.S. government securities........................... 530,396 554,604 523,636
Equity in losses of Operating Partnerships............................. (186,942) (178,550) (257,512)
Other income........................................................... 6,300 5,334 9,749
------------ ------------ ------------
3,612,676 3,684,115 3,616,620
Operating and administrative expenses.................................. 1,710,173 632,894 429,313
------------ ------------ ------------
Net income............................................................. $1,902,503 $3,051,221 $3,187,307
------------ ------------ ------------
------------ ------------ ------------
</TABLE>
<TABLE>
<CAPTION>
INCREASE INCREASE
(DECREASE) (DECREASE)
FROM 1997 FROM 1996
------------- -----------
<S> <C> <C>
Mortgage-backed securities income..................................................... $ (39,805) $ (38,020)
Interest income on temporary cash investments and U.S. government securities.......... (24,208) 30,968
Equity in losses of Operating Partnerships............................................ (8,392) 78,962
Other income.......................................................................... 966 (4,415)
------------- -----------
(71,439) 67,495
Operating and administrative expenses................................................. 1,077,279 203,581
------------- -----------
Net income............................................................................ $ (1,148,718) $ (136,086)
------------- -----------
------------- -----------
</TABLE>
Mortgage-backed securities income decreased $39,805 from 1997 to 1998 and
$38,020 from 1996 to 1997, due to the continued amortization of the principal
balances of the Partnership's mortgage-backed securities.
Interest income on temporary cash investments and U.S. government securities
decreased $24,208 from 1997 to 1998 due to a decrease in the average cash
balance primarily due to additional equity contributions made to The Ponds at
Georgetown and an increased investment in The Ponds at Georgetown GNMA
Certificate.
4
<PAGE>
Interest income on temporary cash investments and U.S. government securities
increased $30,968 from 1996 to 1997 due to an increase in the Partnership's cash
reserve as additional cash was placed in reserves during 1996 and 1997.
The Partnership suspended recognizing losses in the Operating Partnerships
when its entire initial investment had been consumed by such losses.
Subsequently, losses have been recognized only to the extent of additional
contributions, net of distributions received, to the Operating Partnerships by
the Partnership.
The Partnership made additional investments in certain Operating
Partnerships of $186,942, $178,550, and $334,745 during 1998, 1997 and 1996,
respectively. During 1996, the Partnership received a distribution of $77,233
from one of the Operating Partnerships. The Partnership recorded equity in
losses of Operating Partnerships for 1998, 1997, and 1996 to the extent of the
additional investments in Operating Partnerships, net of distributions received.
Operating and administrative expenses increased $1,077,279 from 1997 to
1998. This increase was due to: (i) the write-off of approximately $767,000 in
transaction costs incurred in conjunction with the proposed merger described in
Note 9 to the financial statements; (ii) an increase of approximately $273,000
in salaries and related expenses primarily due to additional management time
incurred in conjunction with the aforementioned proposed merger; (iii) an
increase of approximately $30,000 in fees and expenses incurred in connection
with a review of various options for restructuring the Partnership to improve
total investment returns and provide liquidity to the Partnership's investors
and (iv) an increase of approximately $7,000 in other operating and
administrative expenses. Operating and administrative expenses increased
$203,581 from 1996 to 1997 primarily due to: (i) an increase of approximately
$137,000 in salaries and related expenses, and (ii) an increase of approximately
$44,000 in professional fees incurred in connection with a review of various
options available to the Partnership to improve total investment returns and
provide liquidity to the Partnership's investors and (iii) an increase of
approximately $23,000 in other operating and administrative expenses.
YEAR 2000
The Partnership does not own or operate its own computer system and owns no
business or other equipment. However, the operation of the Partnership's
business relies on the computer system and other equipment maintained by America
First Companies L.L.C., the parent company of its general partners ("America
First"). In addition, the Partnership has business relationships with a number
of third parties whose ability to perform their obligations to the Partnership
depend on such systems and equipment. Some or all of these systems and equipment
may be affected by the inability of certain computer programs and embedded
circuitry to correctly recognize dates occurring after December 31, 1999.
America First has adopted a plan to deal with this so-called "Year 2000 problem"
with respect to its information technology ("IT") systems, non-IT systems and
third party business relationships.
STATE OF READINESS
The IT system maintained by America First consists primarily of personal
computers, most of which are connected by a local area network. All accounting
and other record keeping functions relating to the Partnership that are
conducted in house by America First are performed on this PC-LAN system. America
First does not own or operate any "mainframe" computer systems. The PC-LAN
system runs software programs that America First believes are compatible with
dates after December 31, 1999. America First has engaged a third party computer
consulting firm to review and test its PC-LAN system to ensure that it will
function correctly after that date and expects that this process, along with any
necessary remediation, will be completed by mid-1999. America First believes any
Year 2000 problems relating to its IT systems will be resolved without
significant operational difficulties. However, there can be no assurance that
testing
5
<PAGE>
will discover all potential Year 2000 problems or that it will not reveal
unanticipated material problems with the America First IT systems that will need
to be resolved.
Non-IT systems include embedded circuitry such as microcontrollers found in
telephone equipment, security and alarm systems, copiers, fax machines, mail
room equipment, heating and air conditioning systems and other infrastructure
systems that are used by America First in connection with the operation of the
Partnership's business. America First is reviewing its non-IT systems along with
the providers that service and maintain these systems, with initial emphasis
being placed on those, such as telephone systems, which have been identified as
necessary to America First's ability to conduct the operation of the
Partnership's business activities. America First expects that any necessary
modification or replacement of such "mission critical" systems will be
accomplished by mid-1999.
The Partnership has no control over the remediation efforts of third parties
with which it has material business relationships and the failure of certain of
these third parties to successfully remediate their Year 2000 issues could have
a material adverse effect on the Partnership. Accordingly, America First has
undertaken the process of contacting each such third party to determine the
state of their readiness for Year 2000. Such parties include, but are not
limited to, the obligors on the Partnership's GNMA Certificates and FHA Loans,
the Partnership's transfer and paying agent and the financial institutions with
which the Partnership maintains accounts. America First has received initial
assurances from certain of these third parties that their ability to perform
their obligations to the Partnership are not expected to be materially adversely
affected by the Year 2000 problem. America First will continue to request
updated information from these material third parties in order to access their
Year 2000 readiness. If a material third party vendor is unable to provide
assurance to America First that it is, or will be, ready for Year 2000, America
First intends to seek an alternative vendor to the extent practical.
COSTS
All of the IT systems and non-IT systems used to conduct the Partnership's
business operations are owned or leased by America First. Under the terms of its
partnership agreement, neither America First nor the Partnership's general
partners may be reimbursed by the Partnership for expenses associated with their
computer systems or other business equipment. Therefore, the costs associated
with the identification, remediation and testing of America First's IT and
non-IT systems will be paid by America First rather than the Partnership. The
Partnership will bear its proportionate share of the costs associated with
surveying the Year 2000 readiness of third parties. However, the Partnership's
share of the costs associated with these activities are expected to be
insignificant. Accordingly, the costs associated with addressing the
Partnership's Year 2000 issues are not expected to have a material effect on the
Partnership's results of operations, financial position or cash flow.
YEAR 2000 RISKS
The Partnership's general partners believe that the most reasonably likely
worst-case scenario will be that one or more of the third parties with which it
has a material business relationship will not have successfully dealt with its
Year 2000 issues and, as a result, is unable to provide services or otherwise
perform its obligations to the Partnership. For example, if an obligor on the
Partnership's GNMA Certificates or FHA Loan encounters a serious and unexpected
Year 2000 issue, it may be unable to make a timely payment of principal and
interest to the Partnership. This, in turn, could cause a delay or temporary
reduction in cash distributions to BAC holders. In addition, if the
Partnership's transfer and paying agent experiences Year 2000-related
difficulties, it may cause delays in making distributions to BAC holders or in
the processing of transfers of BACs. It is also possible that one or more of the
IT and non-IT systems of America First will not function correctly, and that
such problems may make it difficult to conduct necessary accounting and other
record keeping functions for the Partnership. However, based on currently
available information, the general partners do not believe that there will be
any protracted
6
<PAGE>
systemic failures of the IT or non-IT systems utilized by America First in
connection with the operation of the Partnership's business.
CONTINGENCY PLANS
Because of the progress which America First has made toward achieving Year
2000 readiness, the Partnership has not made any specific contingency plans with
respect to the IT and non-IT systems of America First. In the event of a Year
2000 problem with its IT system, America First may be required to manually
perform certain accounting and other record-keeping functions. America First
plans to terminate the Partnership's relationships with material third party
service providers that are not able to represent to America First that they will
be able to successfully resolve their material Year 2000 issues in a timely
manner. However, the Partnership will not be able to terminate its relationships
with certain third parties, such as the obligors on its GNMA Certificates and
FHA Loans, who may experience Year 2000 problems. The Partnership has no
specific contingency plans for dealing with Year 2000 problems experienced with
these third parties.
QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The Partnership's primary market risk exposure is interest rate risk. The
Partnership's exposure to market risk for changes in interest rates relates
primarily to its investment securities which is comprised of investments in debt
securities with fixed interest rates. The Partnership does not use derivative
financial instruments to hedge its investment portfolio.
The table below presents principal amounts and weighted average interest
rates by year of maturity for the Partnership's investment portfolio:
<TABLE>
<CAPTION>
PRINCIPAL WEIGHTED AVERAGE
MATURITY AMOUNT INTEREST RATE
- ------------ ------------- -------------------
<S> <C> <C>
1999 $ 216,559 8.82%
2000 238,486 8.81%
2001 260,774 8.81%
2002 285,159 8.81%
2003 311,840 8.80%
Thereafter 34,532,160 9.01%
</TABLE>
The aggregate fair value of the Partnership's investment securities at
December 31, 1998, was $36,129,123.
FORWARD LOOKING STATEMENTS
This report contains forward looking statements that reflect management's
current beliefs and estimates of future economic circumstances, industry
conditions, the Partnership's performance and financial results. All statements,
trend analysis and other information concerning possible or assumed future
results of operations of the Partnership and the real estate investments it has
made (including, but not limited to, the information contained in "Management's
Discussion and Analysis of Financial Condition and Results of Operations"),
constitute forward-looking statements. BAC holders and others should understand
that these forward looking statements are subject to numerous risks and
uncertainties and a number of factors could affect the future results of the
Partnership and could cause those results to differ materially from those
expressed in the forward looking statements contained herein.
7
<PAGE>
INDEPENDENT ACCOUNTANTS' REPORT
To the Partners
Capital Source L.P.:
We have audited the accompanying balance sheets of Capital Source L.P. as of
December 31, 1998 and 1997, and the related statements of income and
comprehensive income, partners' capital (deficit) and cash flows for the three
years in the period ended December 31, 1998. These financial statements are the
responsibility of the Partnership's management. Our responsibility is to express
an opinion on these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of Capital Source L.P. as of
December 31, 1998 and 1997, and the results of its operations and its cash flows
for each of the three years in the period ended December 31, 1998, in conformity
with generally accepted accounting principles.
/s/ KPMG LLP
Omaha, Nebraska
March 19, 1999
8
<PAGE>
CAPITAL SOURCE L.P.
BALANCE SHEETS
<TABLE>
<CAPTION>
DEC. 31, 1998 DEC. 31, 1997
------------- -------------
<S> <C> <C>
ASSETS
Cash and temporary cash investments, at cost which approximates market value..... $ 9,304,694 $ 10,410,564
Investment in FHA Loans (Note 5)................................................. 12,429,485 12,511,046
Investment in GNMA Certificates (Note 5)......................................... 23,454,411 23,588,139
Investment in Operating Partnerships (Note 6).................................... -- --
Interest receivable.............................................................. 306,659 321,485
Other assets..................................................................... 211,928 134,574
------------- -------------
$ 45,707,177 $ 46,965,808
------------- -------------
------------- -------------
LIABILITIES AND PARTNERS' CAPITAL (DEFICIT)
Liabilities
Accounts payable (Note 7)...................................................... 490,085 $ 204,142
Distribution payable (Note 4).................................................. 860,597 860,587
------------- -------------
$ 1,350,682 $ 1,064,729
------------- -------------
------------- -------------
Partners' Capital (Deficit)
General Partner................................................................ (172,094) (156,647)
Beneficial Assignment Certificate Holders ($13.20 per BAC in 1998 and $13.65 in
1997)........................................................................ 44,528,589 46,057,726
------------- -------------
44,356,495 45,901,079
------------- -------------
$ 45,707,177 $ 46,965,808
------------- -------------
------------- -------------
</TABLE>
The accompanying notes are an integral part of the financial statements.
9
<PAGE>
CAPITAL SOURCE L.P.
STATEMENTS OF INCOME AND COMPREHENSIVE INCOME
<TABLE>
<CAPTION>
FOR THE YEAR ENDED DECEMBER 31,
----------------------------------------
1998 1997 1996
------------ ------------ ------------
<S> <C> <C> <C>
Income
Mortgage-backed securities income (Note 5)............................ $ 3,262,922 $ 3,302,727 $ 3,340,747
Interest income on temporary cash investments and U.S. government
securities.......................................................... 530,396 554,604 523,636
Equity in losses of Operating Partnerships (Note 6)................... (186,942) (178,550) (257,512)
Other income.......................................................... 6,300 5,334 9,749
------------ ------------ ------------
3,612,676 3,684,115 3,616,620
Expenses
Operating and administrative expenses (Note 7)........................ 1,710,173 632,894 429,313
------------ ------------ ------------
Net income.............................................................. $ 1,902,503 $ 3,051,221 $ 3,187,307
Other comprehensive income:
Unrealized gains (losses) on securities
Unrealized holding gains (losses) arising during the year........... (4,669) 2,114 (39,504)
------------ ------------ ------------
Net comprehensive income................................................ $ 1,897,804 $ 3,053,335 $ 3,147,803
------------ ------------ ------------
------------ ------------ ------------
Net income allocated to:
General Partner....................................................... $ 19,025 $ 30,512 $ 31,873
BAC Holders........................................................... 1,883,478 3,020,709 3,155,434
------------ ------------ ------------
$ 1,902,503 $ 3,051,221 $ 3,187,307
------------ ------------ ------------
------------ ------------ ------------
Net income, basic and diluted, per BAC.................................. $ .56 $ .90 $ .94
------------ ------------ ------------
------------ ------------ ------------
Weighted average number of BACs outstanding............................. 3,374,222 3,374,222 3,374,222
------------ ------------ ------------
------------ ------------ ------------
</TABLE>
The accompanying notes are an integral part of the financial statements.
10
<PAGE>
CAPITAL SOURCE L.P.
STATEMENT OF PARTNERS' CAPITAL (DEFICIT)
FROM DECEMBER 31, 1995 TO DECEMBER 31, 1998
<TABLE>
<CAPTION>
GENERAL BAC
PARTNERS HOLDERS TOTAL
----------- ------------- -------------
<S> <C> <C> <C>
Partners' Capital (Deficit) (excluding accumulated other comprehensive
income)
Balance at December 31, 1995........................................ (150,620) 46,654,333 46,503,713
Net income.......................................................... 31,873 3,155,434 3,187,307
Cash distributions paid or accrued (Note 4)......................... (34,424) (3,407,965) (3,442,389)
----------- ------------- -------------
Balance at December 31, 1996........................................ (153,171) 46,401,802 46,248,631
Net income.......................................................... 30,512 3,020,709 3,051,221
Cash distributions paid or accrued (Note 4)......................... (34,424) (3,407,965) (3,442,389)
----------- ------------- -------------
Balance at December 31, 1997........................................ (157,083) 46,014,546 45,857,463
Net income.......................................................... 19,025 1,883,478 1,902,503
Cash distributions paid or accrued (Note 4)......................... (34,425) (3,407,963) (3,442,388)
----------- ------------- -------------
(172,483) 44,490,061 44,317,578
----------- ------------- -------------
Accumulated Other Comprehensive Income
Balance at December 31, 1995........................................ 810 80,196 81,006
Other comprehensive income.......................................... (395) (39,109) (39,504)
----------- ------------- -------------
Balance at December 31, 1996........................................ 415 41,087 41,502
Other comprehensive income.......................................... 21 2,093 2,114
----------- ------------- -------------
Balance at December 31, 1997........................................ 436 43,180 43,616
Other comprehensive income.......................................... (47) (4,652) (4,699)
----------- ------------- -------------
389 38,528 38,917
----------- ------------- -------------
Balance at December 31, 1998.......................................... $ (172,094) $ 44,528,589 $ 44,356,495
----------- ------------- -------------
----------- ------------- -------------
</TABLE>
The accompanying notes are an integral part of the financial statements.
11
<PAGE>
CAPITAL SOURCE L.P.
STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
FOR THE FOR THE FOR THE
YEAR ENDED YEAR ENDED YEAR ENDED
DEC. 31, 1998 DEC. 31, 1997 DEC. 31, 1996
------------- ------------- -------------
<S> <C> <C> <C>
Cash flows from operating activities
Net income........................................................ $ 1,902,503 $ 3,051,221 $ 3,187,307
Adjustments to reconcile net income to net cash provided by
operating activities
Equity in losses of Operating Partnerships...................... 186,942 178,550 257,512
Amortization of discount on mortgage-backed securities.......... (2,287) (2,665) (6,700)
(Decrease) increase in interest receivable...................... 14,826 275 10,926
Decrease (increase) in other assets............................. (77,354) (3,605) 67,223
Increase in accounts payable.................................... 285,943 106,086 1,641
------------- ------------- -------------
Net cash provided by operating activities........................... 2,310,573 3,329,862 3,517,909
------------- ------------- -------------
Cash flows from investing activities
FHA Loan and GNMA principal payments received..................... 2,635,396 429,144 491,754
Acquisition of GNMA Certificate................................... (2,422,519) -- --
Investments in Operating Partnerships............................. (186,942) (178,550) (334,745)
Distributions received from Operating Partnerships................ -- -- 77,233
Maturity of U.S. government securities............................ -- -- 1,000,000
------------- ------------- -------------
Net cash provided by investing activities......................... 25,935 250,594 1,234,242
------------- ------------- -------------
Cash flows from financing activities
Distributions paid................................................ (3,442,378) (3,442,389) (3,442,389)
------------- ------------- -------------
Net increase in cash and temporary cash investments................. (1,105,870) 138,067 1,309,762
Cash and temporary cash investments at beginning of year.......... 10,410,564 10,272,497 8,962,735
------------- ------------- -------------
Cash and temporary cash investments at end of year................ $ 9,304,694 $ 10,410,564 $ 10,272,497
------------- ------------- -------------
------------- ------------- -------------
</TABLE>
The accompanying notes are an integral part of the financial statements.
12
<PAGE>
CAPITAL SOURCE L.P.
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1998
1. ORGANIZATION.
Capital Source L.P. (the "Partnership") was formed on August 22, 1985, under
the Delaware Revised Uniform Limited Partnership Act. The General Partners of
the Partnership are Insured Mortgage Equities Inc. and America First Capital
Source I, L.L.C. (the "General Partners").
The Partnership was formed to invest principally in federally-insured
mortgages on multifamily housing properties and limited partnership interests in
operating partnerships which construct and operate these properties. Each
federally insured loan is guaranteed in amounts equal to the face amount of the
mortgage, by the Federal Housing Administration (FHA) or the Government National
Mortgage Association (GNMA). Hereinafter, the Partnership's investments in such
mortgages are referred to as investments in mortgage-backed securities. The
Operating Partnerships are geographically located as follows: (i) two in North
Carolina; and, (ii) one each in Ohio, Florida, Michigan, Virginia and Illinois.
CS Properties I, Inc., which is owned by the General Partners, serves as the
Special Limited Partner for the Operating Partnerships. The Special Limited
Partner has the power, among other things, to remove the general partners of the
Operating Partnerships under certain circumstances and to consent to the sale of
the Operating Partnerships' assets. CS Properties I, Inc. also serves as the
general partner of Misty Springs Apartments, Waterman's Crossing and Fox Hollow
Apartments and as a co-general partner of The Ponds at Georgetown.
The Partnership will terminate subsequent to the sale of all properties but
in no event will the Partnership continue beyond December 31, 2030.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES.
(a) FINANCIAL STATEMENT PRESENTATION. The financial statements of the
Partnership are prepared on the accrual basis of accounting in accordance with
generally accepted accounting principles.
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
(b) INVESTMENT IN MORTGAGE-BACKED SECURITIES. Investment securities are
classified as held-to-maturity, available-for-sale, or trading. Investments
classified as held-to-maturity are carried at amortized cost. Investments
classified as available-for-sale are reported at fair value, as determined by
reference to published sources. Any unrealized gains or losses are excluded from
earnings and reflected in other comprehensive income. Subsequent increases and
decreases in the net unrealized gain/loss on the available-for-sale securities
are reflected as adjustments to the carrying value of the portfolio and in other
comprehensive income. The Partnership does not have investment securities
classified as trading.
(c) INVESTMENT IN OPERATING PARTNERSHIPS. The investment in Operating
Partnerships consists of interests in limited partnerships which own properties
underlying the mortgage-backed securities and are accounted for using the equity
method. The investments by the Partnership in the Operating Partnerships were
recorded at the cost to acquire such interests. Subsequently losses were
recorded by the Partnership as they were realized by the Operating Partnerships.
The Partnership suspended recognizing losses in the Operating Partnerships when
its entire initial investment had been consumed by such losses. Subsequently,
losses have been recognized only to the extent of additional contributions, net
of distribution received, to the Operating Partnerships by the Partnership. The
Operating Partnerships are not insured or guaranteed.
13
<PAGE>
The value of these investments is a function of the value of the real estate
owned by Operating Partnerships. With regard to the Operating Partnerships, the
Partnership is not the general partner and it has no legal obligation to provide
additional cash support, nor has it indicated any commitment to provide this
support; accordingly it has not reduced its investment in these Operating
Partnerships below zero.
(d) INCOME TAXES. No provision has been made for income taxes since BAC
Holders are required to report their share of the Partnership's income for
federal and state income tax purposes. The book basis of the Partnerships'
assets and liabilities exceeded the tax basis by $10,331,740 and $9,517,551 at
December 31, 1998, and December 31, 1997, respectively.
(e) TEMPORARY CASH INVESTMENTS. Temporary cash investments are invested in
short-term debt securities purchased with an original maturity of three months
or less.
(f) NET INCOME PER BENEFICIAL ASSIGNMENT CERTIFICATE ("BAC"). Net income per
BAC is based on the number of BACs outstanding (3,374,222) during each year
presented.
(g) COMPREHENSIVE INCOME. In 1998, the Partnership adopted Statement of
Financial Accounting Standards No. 130, "Reporting Comprehensive Income" ("SFAS
130"). SFAS 130 requires the display and reporting of comprehensive income,
which includes all changes in Partners' Capital with the exception of additional
investments by partners or distributions to partners. Comprehensive income for
the Partnership includes net income and the change in net unrealized holding
gains (losses) on investments. The adoption of SFAS 130 had no impact on total
Partners' Capital.
(h) SEGMENT REPORTING. In 1998, the Partnership adopted Statement of
Financing Accounting Standards No. 131, "Disclosures about Segments of an
Enterprise and Related Information" ("SFAS 131"). SFAS 131 requires that a
public business enterprise report financial and descriptive information about
its reportable operating segments. The adoption of SFAS 131 did not have an
impact on the financial reporting of the partnership as it is engaged solely in
the business of owning mortgages and holding equity interests in real estate
limited partnerships.
(i) NEW ACCOUNTING PRONOUNCEMENTS. In June, 1998, the Financial Accounting
Standards Board issued Statement of Financial Accounting Standards No. 133,
"Accounting for Derivative Instruments and Hedging Activities" ("SFAS 133").
This statement provides new accounting and reporting standards for the use of
derivative instruments. Adoption of this statement is required by the
Partnership effective January 1, 2000. Management believes that the impact of
such adoption will not be material to the financial statements.
In April 1998, the Accounting Standards Executive Committee issued Statement
of Position 98-5, "Reporting on the Costs of Start-Up Activities" ("SOP 98-5").
This statement requires costs of start-up activities and organization costs to
be expensed as incurred. Adoption of this statement is required by the
Partnership effective January 1, 1999. Management intends to adopt the statement
as required in fiscal 1999. Management believes that the impact of such adoption
will not have an impact to the financial statements.
3. PARTNERSHIP RESERVE ACCOUNT.
The Partnership maintains a reserve account which consisted of the following
at December 31, 1998:
<TABLE>
<S> <C>
Cash and temporary cash investments............................. $8,350,064
GNMA Certificates............................................... 879,182
---------
$9,229,246
---------
---------
</TABLE>
14
<PAGE>
The reserve account was established to maintain working capital for the
Partnership and is available for distribution to BAC Holders and for any
contingencies related to mortgage-backed securities and the operation of the
Partnership. See Note 5 regarding the investment in mortgage-backed securities.
4. PARTNERSHIP INCOME, EXPENSES AND CASH DISTRIBUTIONS.
Profits and losses from continuing operations and cash available for
distribution will be allocated 99% to the investors and 1% to the General
Partners. Certain fees payable to the General Partners will not become due until
investors have received certain priority returns. Cash distributions included in
the financial statements represent the actual cash distributions made during
each year and the cash distributions accrued at the end of each year.
The General Partners will also receive 1% of the net proceeds from any sale
of Partnership assets. The General Partners will receive a termination fee equal
to 3% of all sales proceeds less actual costs incurred in connection with all
sales transactions, payable only after the investors have received a return of
their capital contributions and a 13% annual return on a cumulative basis. The
General Partners will also receive a fee equal to 9.1% of all cash available for
distribution and sales proceeds (after deducting from cash available or sales
proceeds any termination fee paid therefrom) after investors have received a
return of their capital contributions and a 13% annual return on a cumulative
basis.
5. INVESTMENT IN MORTGAGE-BACKED SECURITIES.
The mortgage-backed securities held by the Partnership represent Government
National Mortgage Association ("GNMA") Certificates and Federal Housing
Administration ("FHA") Loans. The GNMA Certificates are backed by first mortgage
loans on multifamily housing properties and pools of single-family properties.
The GNMA Certificates are debt securities issued by a private mortgage lender
and are guaranteed by GNMA as to the full and timely payment of principal and
interest on the underlying loans. The FHA Loans are guaranteed as to the full
and timely payment of principal and interest on the underlying loans.
At December 31, 1998, the total amortized cost, gross unrealized holding
gains, and aggregate fair value of available-for-sale securities were $840,265,
$38,917 and $879,182, respectively. The total amortized cost, gross unrealized
holding gains and aggregate fair value of held-to-maturity securities were
$35,004,714, $245,227 and $35,249,941, respectively.
At December 31, 1997, the total amortized cost, gross unrealized holding
gains, and aggregate fair value of available-for-sale securities were
$1,044,910, $43,616 and $1,088,526, respectively. The total amortized cost,
gross unrealized holding gains and aggregate fair value of held-to-maturity
securities were $35,010,659, $491,651 and $35,502,310, respectively.
15
<PAGE>
Descriptions of the Partnership's mortgage-backed securities held during the
year ended December 31, 1998, are as follows:
<TABLE>
<CAPTION>
INCOME
NUMBER INTEREST CARRYING EARNED IN
TYPE OF SECURITY AND NAME LOCATION OF UNITS RATE MATURITY DATE AMOUNT 1998
- ---------------------------------------- ----------------- -------- -------- ------------- ----------- ----------
<S> <C> <C> <C> <C> <C> <C>
Held-to-Maturity
GNMA Certificates:
Misty Springs Apartments Daytona Beach, FL 128 8.75% 06-15-2029 $ 4,246,682 $ 372,615
The Ponds at Georgetown Ann Arbor, MI 134 7.50%(1) 12-15-2029 2,419,479 196,242
Waterman's Crossing Newport News, VA 260 10.00% 09-15-2028 10,873,980 1,089,882
Water's Edge Apartments Lake Villa, IL 108 8.75% 12-15-2028 5,035,088 441,852
----------- ----------
22,575,229 2,100,591
FHA Loans:
Bluff Ridge Apartments Jacksonville, NC 108 8.72% 11-15-2028 3,487,222 305,012
Highland Park Apartments Columbus, OH 252 8.75% 11-01-2028 8,942,263 784,841
----------- ----------
12,429,485 1,089,853
----------- ----------
35,004,714 3,190,444
----------- ----------
Available-for-Sale
GNMA Certificates:
Pools of single-family mortgages 7.58%(2) 2008 to 2009 437,306(3) 36,001
Pools of single-family mortgages 7.58%(2) 2007 to 2008 441,876(3) 36,477
----------- ----------
879,182 72,478
----------- ----------
Balance at December 31, 1998 $35,883,896 $3,262,922
----------- ----------
----------- ----------
</TABLE>
- ---------------
(1) During the fourth quarter of 1998, this GNMA Certificate was repaid and a
new GNMA Certificate was issued. The interest rate on the reissued GNMA
Certificate is 7.5% compared to 9.0% on the repaid GNMA Certificate.
(2) Represents effective yield to the Partnership.
(3) Reserve account asset--see Note 3.
Reconciliation of the carrying amount of the mortgage-backed securities is
as follows:
<TABLE>
<CAPTION>
FOR THE FOR THE FOR THE
YEAR ENDED YEAR ENDED YEAR ENDED
DEC. 31, 1998 DEC. 31, 1997 DEC. 31, 1996
------------- ------------- -------------
<S> <C> <C> <C>
Balance at beginning of year........................................ $ 36,099,185 $ 36,523,550 $ 37,043,108
Additions
Acquisition of GNMA Certificate................................. 2,422,519 -- --
Amortization of discount on mortgage-backed securities.......... 2,287 2,665 6,700
Deductions
FHA Loan and GNMA principal payments received................... (2,635,396) (429,144) (491,754)
Change in net unrealized holding gains on Available-for-sale
mortgage-backed securities.................................... (4,699) 2,114 (34,504)
------------- ------------- -------------
Balance at end of year.............................................. $ 35,883,896 $ 36,099,185 $ 36,523,550
------------- ------------- -------------
------------- ------------- -------------
</TABLE>
16
<PAGE>
6. INVESTMENT IN OPERATING PARTNERSHIPS.
The Partnership's Operating Partnerships consist of interests in limited
partnerships which own multifamily properties financed by the GNMA Certificates
and FHA Loans held by the Partnership. The limited partnership agreements
originally provided for the payment of a base return on the equity provided to
the limited partnerships and for the payment of additional amounts out of a
portion of the net cash flow or net sale or refinancing proceeds of the
properties subject to various priority payments.
Descriptions of the Operating Partnerships held at December 31, 1998, are as
follows:
<TABLE>
<CAPTION>
1998 EQUITY
IN
LOSSES OF
CARRYING OPERATING
NAME LOCATION PARTNERSHIP NAME AMOUNT PARTNERSHIPS
- ------------------------------- ---------------------- ------------------------------ ----------- -------------
<S> <C> <C> <C> <C>
Misty Springs Apartments Daytona Beach, FL Cypress Landings II, LTD. $ -- $ (10,000)
The Ponds at Georgetown Ann Arbor, MI Ponds at Georgetown Limited
Partnership -- (176,942)
Waterman's Crossing Newport News, VA Oyster Cove Limited
Partnership -- --
Water's Edge Apartments Lake Villa, IL Water's Edge Limited
Partnership -- --
Bluff Ridge Apartments Jacksonville, NC Bluff Ridge Associates Limited
Partnership -- --
Highland Park Apartments Columbus, OH Interstate Limited Partnership -- --
----- -------------
Balance at December 31, 1998 $ -- $ (186,942)
----- -------------
----- -------------
</TABLE>
Reconciliation of the carrying amount of the Operating Partnerships is as
follows:
<TABLE>
<CAPTION>
FOR THE FOR THE FOR THE
YEAR ENDED YEAR ENDED YEAR ENDED
DEC. 31, DEC. 31, DEC. 31,
1998 1997 1996
------------ ------------ ------------
<S> <C> <C> <C>
Balance at beginning of year........................................... $ -- $ -- $ --
Addition
Investment in Operating Partnerships............................... 186,942 178,550 334,745
Deductions
Equity in losses of Operating Partnerships......................... (186,942) (178,550) (257,512)
Distributions received from Operating Partnerships................. -- -- (77,233)
------------ ------------ ------------
Balance at end of year................................................. $ -- $ -- $ --
------------ ------------ ------------
------------ ------------ ------------
</TABLE>
17
<PAGE>
Combined Financial Statements of the Operating Partnerships are as follows:
CAPITAL SOURCE L.P.
OPERATING PARTNERSHIPS BALANCE SHEETS
<TABLE>
<CAPTION>
DEC. 31, 1998 DEC. 31, 1997
-------------- --------------
<S> <C> <C>
Assets
Investment in real estate:
Land.......................................................................... $ 3,098,171 $ 3,093,671
Buildings..................................................................... 38,090,720 37,716,906
Personal Property............................................................. 1,663,961 2,001,950
-------------- --------------
42,852,852 42,812,527
Less accumulated depreciation................................................. (12,219,492) (11,267,188)
-------------- --------------
Net investment in real estate................................................. 30,633,361 31,545,339
Cash and temporary cash investments, at cost which approximates market
value....................................................................... 358,887 294,233
Escrow deposits and property reserves......................................... 567,420 600,753
Interest and other receivables................................................ 56,782 16,103
Deferred mortgage issuance cost, net of accumulated amortization.............. 2,061,678 2,047,698
Other assets.................................................................. 448,844 518,661
-------------- --------------
$ 34,126,971 $ 35,022,787
-------------- --------------
-------------- --------------
Liabilities and Partners' Capital (Deficit)
Liabilities
Accounts payable and accrued expenses......................................... $ 1,194,471 $ 1,303,872
Mortgage loan payable......................................................... 41,100,810 41,331,679
Intercompany interest payable................................................. 254,370 291,230
Due to general partners and their affiliates.................................. 3,941,467 4,013,626
-------------- --------------
46,491,118 46,940,407
-------------- --------------
Partners' Capital (Deficit)
General Partners.............................................................. (12,364,146) (11,917,620)
Limited Partners.............................................................. -- --
-------------- --------------
(12,364,146) (11,917,620)
-------------- --------------
$ 34,126,971 $ 35,022,757
-------------- --------------
-------------- --------------
</TABLE>
18
<PAGE>
CAPITAL SOURCE L.P.
OPERATING PARTNERSHIPS INCOME STATEMENTS
<TABLE>
<CAPTION>
FOR THE FOR THE
YEAR ENDED YEAR ENDED FOR THE
DEC. 31, DEC. 31, YEAR ENDED
1998 1997 DEC. 31, 1996
------------ ------------ -------------
<S> <C> <C> <C>
Income
Rental income....................................................... $7,739,350 $7,555,700 $ 7,203,323
Interest on temporary cash investment and U.S. government
securities........................................................ 23,807 29,277 26,964
Other income........................................................ 374,279 246,723 260,383
------------ ------------ -------------
8,137,436 7,831,700 7,490,670
------------ ------------ -------------
Expenses
Real estate operating expenses...................................... 3,674,740 3,601,141 3,712,500
Depreciation expense................................................ 952,305 960,062 951,835
Interest expense.................................................... 4,067,738 4,073,157 3,855,732
Amortization........................................................ 75,201 73,980 69,309
------------ ------------ -------------
8,769,984 8,708,340 8,589,376
------------ ------------ -------------
Loss before extraordinary item........................................ (632,548) (876,640) (1,098,706)
Extraordinary item--gain from forgiveness of accrued interest......... -- -- 82,216
Net Loss.............................................................. $ (632,548) $ (876,640) $ (1,016,490)
------------ ------------ -------------
------------ ------------ -------------
Net Loss allocated to:
General Partners.................................................... (445,606) (698,090) (758,978)
Limited partners.................................................... (186,942) (178,550) (257,512)
------------ ------------ -------------
$ (632,548) $ (876,640) $ (1,016,490)
------------ ------------ -------------
------------ ------------ -------------
</TABLE>
19
<PAGE>
CAPITAL SOURCE L.P.
OPERATING PARTNERSHIPS STATEMENTS OF CASH FLOW
<TABLE>
<CAPTION>
FOR THE FOR THE
YEAR ENDED YEAR ENDED FOR THE
DEC. 31, DEC. 31, YEAR ENDED
1998 1997 DEC. 31, 1996
------------ ------------ -------------
<S> <C> <C> <C>
Cash flows from operating activities
Net loss.............................................................. $ (632,546) $ (876,640) $ (1,016,490)
Adjustments to reconcile net loss to net cash provided by operating
activities:
Extraordinary item--gain from forgiveness of accrued interest..... -- -- 82,216
Depreciation and amortization..................................... 1,027,506 1,034,042 1,021,144
Decrease (increase) in interest and other receivables............. (40,679) (7,298) 1,233
Decrease (increase) in escrow deposits and property reserves...... (33,333) (358) 55,329
Decrease (increase) in other assets............................... 69,817 21,962 (31,269)
Increase in accounts payable and accrued expenses................. (109,401) 9,152 209,282
Decrease in intercompany interest payable......................... (36,860) (1,173) (313,032)
Increase (decrease) in due to general partners and their
affiliates...................................................... (72,159) (103,479) 4,522
------------ ------------ -------------
Net cash provided by operating activities........................... 172,345 76,208 12,935
------------ ------------ -------------
Cash flows from investing activities:
Acquisition of real estate........................................ (378,315) (19,652) (12,000)
Acquisition of personal property.................................. 337,989 (8,971) (5,222)
------------ ------------ -------------
Net cash used in investing activities............................. (40,326) (28,623) (17,222)
------------ ------------ -------------
Cash flows from financing activities:
Principal payments on mortgage loan payable....................... (230,869) (219,993) (206,424)
Contributions..................................................... 186,942 178,550 334,745
Distributions..................................................... -- -- (77,233)
Other net......................................................... (23,438) (29,310) (93,005)
------------ ------------ -------------
Net cash used in financing activities............................. (67,365) (70,753) (41,917)
------------ ------------ -------------
Net increase (decrease) in cash and temporary cash investments........ 64,654 (23,168) (46,204)
Cash and temporary cash investments at beginning of year.............. 294,233 317,401 363,605
------------ ------------ -------------
Cash and temporary cash investments at end of year.................... $ 358,887 $ 294,233 $ 317,401
------------ ------------ -------------
------------ ------------ -------------
</TABLE>
7. TRANSACTIONS WITH RELATED PARTIES.
The General Partners, certain of their affiliates and the Operating
Partnerships' general partners have received or may receive fees, compensation,
income, distributions and payments from the Partnership in connection with the
offering and the investment, management and sale of the Partnership's assets
(other than disclosed elsewhere) as follows.
The General Partners are entitled to receive an asset management and
partnership administration fee equal to 0.5% of invested assets per annum,
payable only during such years that an 8% return has been paid to investors on a
noncumulative basis. Any unpaid amounts will accrue and be payable only after a
13% annual return to investors has been paid on a cumulative basis and the
investors have received the return of their capital contributions. For the years
ended December 31, 1998, 1997 and 1996, distributions
20
<PAGE>
to investors represented less than an 8% return; accordingly, no fees were paid
or accrued during these years.
Substantially all of the Partnership's general and administrative expenses
and certain costs capitalized by the Partnership are paid by a General Partner
or an affiliate and reimbursed by the Partnership. The amount of such expenses
reimbursed to the General Partner was $1,305,744, $533,419 and $347,522 for the
years ended December 31, 1998, 1997 and 1996, respectively. These reimbursed
expenses are presented on a cash basis and do not reflect accruals made at each
year end.
An affiliate of the General Partners has been retained to provide property
management services for Waterman's Crossing, Misty Springs Apartments, Fox
Hollow Apartments and The Ponds at Georgetown (beginning in November 1996). The
fees for services provided were $196,606, $183,069 and $165,721 for 1998, 1997
and 1996, respectively, and represented the lower of costs incurred in providing
management of the property or customary fees for such services determined on a
competitive basis.
8. FAIR VALUE OF FINANCIAL INSTRUMENTS.
The following methods and assumptions were used by the Partnership in
estimating the fair value of its financial instruments:
CASH AND TEMPORARY CASH INVESTMENTS, INTEREST RECEIVABLE, OTHER ASSETS,
ACCOUNTS PAYABLE, DISTRIBUTIONS PAYABLE: Fair value approximates the carrying
value of such assets.
INVESTMENT IN FHA LOANS AND GNMA CERTIFICATES. Fair values are based on
prices obtained from an independent pricing source, adjusted for estimated
prepayments.
<TABLE>
<CAPTION>
AT DECEMBER 31, 1998 AT DECEMBER 31, 1997
---------------------- ----------------------
CARRYING ESTIMATED CARRYING ESTIMATED
AMOUNT FAIR VALUE AMOUNT FAIR VALUE
---------- ---------- ---------- ----------
<S> <C> <C> <C> <C>
Cash and temporary cash investments....... $9,304,694 $9,304,694 $10,410,564 $10,410,564
Investment in FHA Loans................... $12,429,485 $12,500,047 $12,511,046 $12,679,944
Investment in GNMA Certificates........... $23,454,411 $23,629,076 $23,588,139 $23,910,892
</TABLE>
9. PROPOSED MERGER.
Due to significant changes in the United States equity and real estate
markets in the Fall of 1998, the general partners of the Partnership have
reevaluated the terms of the proposed merger of the Partnership and Capital
Source II L.P.-A into a newly formed corporation that would have made
opportunistic, growth-oriented real estate investments that had the potential
for higher than average returns with correspondingly greater risks. The general
partners have decided to restructure the proposed transaction so that the
resulting entity is a publicly-traded limited partnership that will primarily
invest in residential apartment complexes and other commercial real estate.
Therefore, the investment objectives of the new limited partnership will be
substantially different than those of the originally proposed merger but similar
to those of the Partnership. As a result of restructuring the proposed
transaction, certain costs totaling approximately $767,000 that related to the
previous transaction that would have been capitalized by the Partnership were
expensed as of December 31, 1998.
10. LEGAL PROCEEDINGS.
The Partnership has been named as a defendant in a purported class action
lawsuit filed in the Delaware Court of Chancery on February 3, 1999 by two BAC
holders, Alvin M. Panzer and Sandra G. Panzer, against the Partnership, its
general partners, America First and various of their affiliates (including
Capital Source II L.P.-A, a similar partnership with general partners that are
affiliates of America First) and Lehman Brothers, Inc. The plaintiffs seek to
have the lawsuit certified as a class action on behalf of all
21
<PAGE>
BAC holders of the Partnership and Capital Source II L.P.-A. The lawsuit
alleges, among other things, that a proposed merger transaction involving the
Partnership and Capital Source II L.P.-A is deficient and coercive, that the
defendants have breached the terms of the Partnership agreement and that the
defendants have acted in manners which violate their fiduciary duties to the BAC
holders. The plaintiffs seek to enjoin the proposed merger transaction and to
appoint an independent BAC holder representative to investigate alternative
transactions. The lawsuit also requests a judicial dissolution of the
Partnership, an accounting, and unspecified damages and costs. At this time, the
general partners are unable to estimate the effect of the litigation on the
financial statements of the Partnership.
11. SUMMARY OF UNAUDITED QUARTERLY RESULTS OF OPERATIONS.
<TABLE>
<CAPTION>
FROM JANUARY 1, 1998, TO DECEMBER 31, FIRST SECOND THIRD FOURTH
1998 QUARTER QUARTER QUARTER QUARTER
- ---------------------------------------- --------- --------- --------- -----------
<S> <C> <C> <C> <C>
Total income............................ $ 949,619 $ 956,546 $ 797,305 $ 909,206
Total expenses.......................... (222,804) (196,565) (220,104)(1) (1,070,700)(2)
--------- --------- --------- -----------
Net income.............................. $ 726,815 $ 759,981 $ 577,201 $ (161,494)
--------- --------- --------- -----------
--------- --------- --------- -----------
Net income, basic and diluted, per
BAC................................... $ .22 $ .22 $ .17 $ (.05)
--------- --------- --------- -----------
--------- --------- --------- -----------
</TABLE>
- ------------
(1) The Partnership had equity in losses of Operating Partnerships of $156,040.
(2) The Partnership wrote off approximately $767,000 in transaction costs
incurred in conjunction with the proposed merger described in Note 9.
<TABLE>
<CAPTION>
FIRST SECOND THIRD FOURTH
FROM JANUARY 1, 1997, TO DECEMBER 31, 1997 QUARTER QUARTER QUARTER QUARTER
- ---------------------------------------------------------- ----------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
Total income.............................................. $ 928,096 $ 885,712 $ 947,165 $ 923,142
Total expenses............................................ (120,423) (119,321) (138,961) (254,189)(1)
----------- ----------- ----------- -----------
Net income................................................ $ 807,673 $ 766,391 $ 808,204 $ 668,953
----------- ----------- ----------- -----------
----------- ----------- ----------- -----------
Net income, basic and diluted per BAC..................... $ .24 $ .22 $ .24 $ .20
----------- ----------- ----------- -----------
----------- ----------- ----------- -----------
</TABLE>
- ------------
(1) The Partnership incurred additional management time and expenses in
connection with a review of various options for restructuring to improve
total investment returns and provide liquidity to the Partnership's
investors.
22
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
MARCH 31, 1999
LIQUIDITY AND CAPITAL RESOURCES
Capital Source L.P. (the "Partnership") originally acquired: (i) five
mortgage-backed securities guaranteed as to principal and interest by the
Government National Mortgage Association ("GNMA") collateralized by first
mortgage loans on multifamily housing properties located in five states; (ii)
three first mortgage loans insured as to principal and interest by the Federal
Housing Administration ("FHA") on multifamily housing properties located in two
states; and (iii) Partnership Equity Investments in eight limited partnerships
which own the multifamily properties financed by the GNMA Certificates and FHA
Loans. The Partnership subsequently received FHA Debentures (which were paid in
full in 1993) in payment of the FHA Loan on Fox Hollow Apartments. In 1994,
foreclosure proceedings were initiated on Falcon Point Apartments and,
accordingly, the Partnership no longer holds a Partnership Equity Investment in
this property. In addition, during 1995, the GNMA Certificate related to Falcon
Point Apartments was paid in full to the Partnership. Collectively, the
remaining GNMA Certificates, FHA Loans and Partnership Equity Investments are
referred to as the "Permanent Investments". The Partnership has also invested
amounts held in its reserve account in certain GNMA securities backed by pools
of single-family mortgages ("Reserve Investments"). The obligations of GNMA and
FHA are backed by the full faith and credit of the United States government.
DISTRIBUTIONS
Cash distributions paid or accrued per BAC were as follows:
<TABLE>
<CAPTION>
FOR THE THREE FOR THE THREE
MONTHS ENDED MONTHS ENDED
MARCH 31, 1999 MARCH 31, 1998
--------------- ---------------
<S> <C> <C>
Regular quarterly distributions
Income..................................................... $ .2111 $ .2132
Return of capital.......................................... .0414 .0393
------ ------
.2525 .2525
------ ------
------ ------
Distributions
Paid out of cash flow...................................... .2525 $ .2525
------ ------
------ ------
</TABLE>
Regular quarterly distributions to BAC Holders consist primarily of interest
received on FHA Loans and GNMA Certificates. Additional cash for distributions
is received from other investments. The Partnership may draw on reserves to pay
operating expenses or to supplement cash distributions to investors. The
Partnership is permitted to replenish reserves with cash flows in excess of
distributions paid. For the three months ended March 31, 1999, $18,218 of
undistributed cash flow was placed in reserves. The total amount held in
reserves at March 31, 1999 was $9,146,979 of which $828,696 was invested in GNMA
Certificates.
The Partnership believes that cash provided by operating and investing
activities and, if necessary, withdrawals from the Partnership's reserves will
be adequate to meet its short-term and long-term liquidity requirements,
including the payments of distributions to BAC Holders. Under the terms of its
Partnership Agreement, the Partnership has the authority to enter into
short-term and long-term debt financing arrangements; however, the Partnership
currently does not anticipate entering into such arrangements. The Partnership
is not authorized to issue additional BACs to meet short-term and long-term
liquidity requirements.
23
<PAGE>
ASSET QUALITY
The FHA Loans and GNMA Certificates owned by the Partnership are guaranteed
as to principal and interest by FHA and GNMA, respectively. The obligations of
FHA and GNMA are backed by the full faith and credit of the United States
government. The Partnership Equity Investments, however, are not insured or
guaranteed. The value of these investments is a function of the value of the
real estate underlying the Operating Partnerships. The fair value of the
properties underlying the Operating Partnerships is based on management's best
estimate of the net realizable value of such properties; however, the ultimate
realized values may vary from these estimates.
The overall status of the Partnership's investments has remained relatively
constant since December 31, 1998.
The following table shows the occupancy levels of the properties financed by
the Partnership at March 31, 1999:
<TABLE>
<CAPTION>
NUMBER PERCENTAGE
NUMBER OF UNITS OF UNITS
PROPERTY NAME LOCATION OF UNITS OCCUPIED OCCUPIED
- ------------------------------------------------------- ---------------------- ----------- ----------- -------------
<S> <C> <C> <C> <C>
Bluff Ridge Apartments................................. Jacksonville, NC 108 108 100%
Fox Hollow Apartments.................................. High Point, NC 184 181 98%
Highland Park Apartments............................... Columbus, OH 252 242 96%
Misty Springs Apartments............................... Daytona Beach, FL 128 127 99%
The Ponds at Georgetown................................ Ann Arbor, MI 134 134 100%
Waterman's Crossing.................................... Newport News, VA 260 258 99%
Water's Edge Apartments................................ Lake Villa, IL 108 102 94%
----- ----- ---
1,174 1,152 98%
----- ----- ---
----- ----- ---
</TABLE>
RESULTS OF OPERATIONS
The table below compares the results of operations for each period shown.
<TABLE>
<CAPTION>
FOR THE THREE FOR THE THREE INCREASE
MONTHS ENDED MONTHS ENDED (DECREASE)
MARCH 31, 1999 MARCH 31, 1998 FROM 1998
-------------- -------------- -----------
<S> <C> <C> <C>
Mortgage-backed securities income.................................... $ 807,466 $ 820,292 $ (12,826)
Interest income on temporary cash investments........................ 104,026 138,177 (34,151)
Equity in losses of Operating Partnerships........................... (50,000) (10,000) (40,000)
Other income......................................................... 2,000 1,150 850
-------------- -------------- -----------
863,492 949,619 (86,127)
Operating and administrative expenses................................ 144,121 222,804 (78,683)
-------------- -------------- -----------
Net income........................................................... $ 719,371 $ 726,815 $ (7,444)
-------------- -------------- -----------
-------------- -------------- -----------
</TABLE>
Mortgage-backed securities income decreased for the three months ended March
31, 1999, compared to the same period in 1998 due to the continued amortization
of the principal balances of the Partnership's mortgage-backed securities.
Interest income on temporary cash investments decreased for the three months
ended March 31, 1999, compared to the same period in 1998 due to withdrawals
made from the Partnership's reserves during 1998 to supplement distributions to
investors and provide additional equity to certain Operating Partnerships.
The Partnership suspended recognizing losses in the Operating Partnerships
when its entire initial investment had been consumed by such losses.
Subsequently, losses have been recognized only to the
24
<PAGE>
extent of additional contributions, net of distributions received, to the
Operating Partnerships by the Partnership. During the three months ended March
31, 1999 and March 31, 1998, the Partnership made additional investments in
certain Operating Partnerships of $50,000 and $10,000, respectively. The
Partnership recorded equity in losses of Operating Partnerships for the
respective periods to the extent of the additional investments.
Operating and administrative expenses decreased for the three months ended
March 31, 1999, compared to the same period in 1998 primarily due to decreases
in consulting, amortization and travel expenses.
YEAR 2000
The Partnership does not own or operate its own computer system and owns no
business or other equipment. However, the operation of the Partnership's
business relies on the computer system and other equipment maintained by America
First Companies L.L.C., the parent company of its general partners ("America
First"). In addition, the Partnership has business relationships with a number
of third parties whose ability to perform their obligations to the Partnership
depend on such systems and equipment. Some or all of these systems and equipment
may be affected by the inability of certain computer programs and embedded
circuitry to correctly recognize dates occurring after December 31, 1999.
America First has adopted a plan to deal with this so-called "Year 2000 problem"
with respect to its information technology ("IT") systems, non-IT systems and
third party business relationships.
STATE OF READINESS
The IT system maintained by America First consists primarily of personal
computers, most of which are connected by a local area network. All accounting
and other record keeping functions relating to the Partnership that are
conducted in house by America First are performed on this PC-LAN system. America
First does not own or operate any "mainframe" computer systems. The PC-LAN
system runs software programs that America First believes are compatible with
dates after December 31, 1999. America First has engaged a third party computer
consulting firm to review and test its PC-LAN system to ensure that it will
function correctly after that date and expects that this process, along with any
necessary remediation, will be completed by mid-1999. America First believes any
Year 2000 problems relating to its IT systems will be resolved without
significant operational difficulties. However, there can be no assurance that
testing will discover all potential Year 2000 problems or that it will not
reveal unanticipated material problems with the America First IT systems that
will need to be resolved.
Non-IT systems include embedded circuitry such as microcontrollers found in
telephone equipment, security and alarm systems, copiers, fax machines, mail
room equipment, heating and air conditioning systems and other infrastructure
systems that are used by America First in connection with the operation of the
Partnership's business. America First is reviewing its non-IT systems along with
the providers that service and maintain these systems, with initial emphasis
being placed on those, such as telephone systems, which have been identified as
necessary to America First's ability to conduct the operation of the
Partnership's business activities. America First expects that any necessary
modification or replacement of such "mission critical" systems will be
accomplished by mid-1999.
The Partnership has no control over the remediation efforts of third parties
with which it has material business relationships and the failure of certain of
these third parties to successfully remediate their Year 2000 issues could have
a material adverse effect on the Partnership. Accordingly, America First has
undertaken the process of contacting each such third party to determine the
state of their readiness for Year 2000. Such parties include, but are not
limited to, the obligors on the Partnership's GNMA Certificates and FHA Loans,
the Partnership's transfer and paying agent and the financial institutions with
which the Partnership maintains accounts. America First has received initial
assurances from certain of these third parties that their ability to perform
their obligations to the Partnership are not expected to be
25
<PAGE>
materially adversely affected by the Year 2000 problem. America First will
continue to request updated information from these material third parties in
order to assess their Year 2000 readiness. If a material third party vendor is
unable to provide assurance to America First that it is, or will be, ready for
Year 2000, America First intends to seek an alternative vendor to the extent
practical.
COSTS
All of the IT systems and non-IT systems used to conduct the Partnership's
business operations are owned or leased by America First. Under the terms of its
partnership agreement, neither America First nor the Partnership's general
partners may be reimbursed by the Partnership for expenses associated with their
computer systems or other business equipment. Therefore, the costs associated
with the identification, remediation and testing of America First's IT and
non-IT systems will be paid by America First rather than the Partnership. The
Partnership will bear its proportionate share of the costs associated with
surveying the Year 2000 readiness of third parties. However, the Partnership's
share of the costs associated with these activities is expected to be
insignificant. Accordingly, the costs associated with addressing the
Partnership's Year 2000 issues are not expected to have a material effect on the
Partnership's results of operations, financial position or cash flow.
YEAR 2000 RISKS
The Partnership's general partners believe that the most reasonably likely
worst-case scenario will be that one or more of the third parties with which it
has a material business relationship will not have successfully dealt with its
Year 2000 issues and, as a result, is unable to provide services or otherwise
perform its obligations to the Partnership. For example, if an obligor on the
Partnership's GNMA Certificates or FHA Loans encounters a serious and unexpected
Year 2000 issue, it may be unable to make a timely payment of principal and
interest to the Partnership. This, in turn, could cause a delay or temporary
reduction in cash distributions to BAC holders. In addition, if the
Partnership's transfer and paying agent experiences Year 2000-related
difficulties, it may cause delays in making distributions to BAC holders or in
the processing of transfers of BACs. It is also possible that one or more of the
IT and non-IT systems of America First will not function correctly, and that
such problems may make it difficult to conduct necessary accounting and other
record keeping functions for the Partnership. However, based on currently
available information, the general partners do not believe that there will be
any protracted systemic failures of the IT or non-IT systems utilized by America
First in connection with the operation of the Partnership's business.
CONTINGENCY PLANS
Because of the progress which America First has made toward achieving Year
2000 readiness, the Partnership has not made any specific contingency plans with
respect to the IT and non-IT systems of America First. In the event of a Year
2000 problem with its IT system, America First may be required to manually
perform certain accounting and other record-keeping functions. America First
plans to terminate the Partnership's relationships with material third party
service providers that are not able to represent to America First that they will
be able to successfully resolve their material Year 2000 issues in a timely
manner. However, the Partnership will not be able to terminate its relationships
with certain third parties, such as the obligors on its GNMA Certificates and
FHA Loans, who may experience Year 2000 problems. The Partnership has no
specific contingency plans for dealing with Year 2000 problems experienced with
these third parties.
All forecasts, estimates or other statements in this report relating to the
Year 2000 readiness of the Partnership and its affiliates are based on
information and assumptions about future events. Such "forward-looking
statements" are subject to various known and unknown risks and uncertainties
that may cause actual events to differ from such statements. Important factors
upon which the Partnership's Year 2000 forward-looking statements are based
include, but are not limited to, (a) the belief of America First
26
<PAGE>
that the software used in IT systems is already able to correctly read and
interpret dates after December 31, 1999 and will require little or any
remediation; (b) the ability to identify, repair or replace mission critical
non-IT equipment in a timely manner, (c) third parties' remediation of their
internal systems to be Year 2000 ready and their willingness to test their
systems interfaces with those of America First, (d) no third party system
failures causing material disruption of telecommunications, data transmission,
payment networks, government services, utilities or other infrastructure, (e) no
unexpected failures by third parties with which the Partnership has a material
business relationship and (f) no material undiscovered flaws in America First's
Year 2000 testing process.
QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
There have been no material changes in the Partnership's market risk since
December 31, 1998.
FORWARD-LOOKING STATEMENTS
This report contains forward-looking statements that reflect management's
current beliefs and estimates of future economic circumstances, industry
conditions, the Partnership's performance and financial results. All statements,
trend analysis and other information concerning possible or assumed future
results of operations of the Partnership and the real estate investments it has
made (including, but not limited to, the information contained in "Management's
Discussion and Analysis of Financial Condition and Results of Operations"),
constitute forward-looking statements. BAC Holders and others should understand
that these forward-looking statements are subject to numerous risks and
uncertainties and a number of factors could affect the future results of the
Partnership and could cause those results to differ materially from those
expressed in the forward-looking statements contained herein.
27
<PAGE>
CAPITAL SOURCE L.P.
BALANCE SHEETS
<TABLE>
<CAPTION>
MARCH 31, 1999
(UNAUDITED) DEC. 31, 1998
-------------- -------------
<S> <C> <C>
ASSETS
Cash and temporary cash investments, at cost which approximates market value.... $ 8,919,955 $ 9,304,694
Investment in FHA Loans (Note 5)................................................ 12,407,952 12,429,485
Investment in GNMA Certificates (Note 5)........................................ 23,370,123 23,454,411
Investment in Operating Partnerships (Note 6)................................... -- --
Interest receivable............................................................. 303,399 306,659
Other assets.................................................................... 275,264 211,928
-------------- -------------
$ 45,276,693 $ 45,707,177
-------------- -------------
-------------- -------------
LIABILITIES AND PARTNERS' CAPITAL (DEFICIT)
Liabilities
Accounts payable (Note 7)..................................................... $ 197,832 $ 490,085
Distribution payable (Note 4)................................................. 860,597 860,597
-------------- -------------
1,058,429 1,350,682
-------------- -------------
Partners' Capital (Deficit)
General Partner............................................................... (173,476) (172,094)
Beneficial Assignment Certificate Holders ($13.16 per BAC in 1999 and $13.20
in 1998).................................................................... 44,391,740 44,528,589
-------------- -------------
44,218,264 44,356,495
-------------- -------------
$ 45,276,693 $ 45,707,177
-------------- -------------
-------------- -------------
</TABLE>
The accompanying notes are an integral part of the financial statements.
28
<PAGE>
CAPITAL SOURCE L.P.
STATEMENTS OF INCOME AND COMPREHENSIVE INCOME
(UNAUDITED)
<TABLE>
<CAPTION>
FOR THE THREE FOR THE THREE
MONTHS ENDED MONTHS ENDED
MARCH 31, 1999 MARCH 31, 1998
-------------- --------------
<S> <C> <C>
Income
Mortgage-backed securities income.............................................. $ 807,466 $ 820,292
Interest income on temporary cash investments.................................. 104,026 138,177
Equity in losses of Operating Partnerships..................................... (50,000) (10,000)
Other income................................................................... 2,000 1,150
-------------- --------------
863,492 949,619
Expenses
Operating and administrative expenses (Note 7)................................. 144,121 222,804
-------------- --------------
Net income....................................................................... 719,371 726,815
Other comprehensive income:
Unrealized holding gains on securities arising during the period............... 2,995 4,038
-------------- --------------
Net comprehensive income......................................................... $ 722,366 $ 730,853
-------------- --------------
-------------- --------------
Net income allocated to:
General Partner................................................................ $ 7,194 $ 7,268
Limited Partner................................................................ 712,177 719,547
-------------- --------------
$ 719,371 $ 726,815
-------------- --------------
-------------- --------------
Net income, basic and diluted, per BAC........................................... $ .21 $ .22
-------------- --------------
-------------- --------------
</TABLE>
The accompanying notes are an integral part of the financial statements.
29
<PAGE>
CAPITAL SOURCE L.P.
STATEMENT OF PARTNERS CAPITAL (DEFICIT)
FOR THE THREE MONTHS ENDED MARCH 31, 1999
(UNAUDITED)
<TABLE>
<CAPTION>
GENERAL
PARTNER BAC HOLDERS TOTAL
----------- ------------- -------------
<S> <C> <C> <C>
Partners' Capital (Deficit) (excluding accumulated other comprehensive
income)
Balance at December 31, 1998........................................ $ (172,483) $ 44,490,061 $ 44,317,578
Net income.......................................................... 7,194 712,177 719,371
Cash distributions paid or accrued (Note 4)......................... (8,606) (851,991) (860,597)
----------- ------------- -------------
(173,895) 44,350,247 44,176,352
----------- ------------- -------------
Accumulated Other Comprehensive Income
Balance at December 31, 1998........................................ 389 38,528 38,917
Other comprehensive income.......................................... 30 2,965 2,995
----------- ------------- -------------
419 41,493 41,912
----------- ------------- -------------
Balance at March 31, 1999............................................. $ (173,476) $ 44,391,740 $ 44,218,264
----------- ------------- -------------
----------- ------------- -------------
</TABLE>
30
<PAGE>
CAPITAL SOURCE L.P.
STATEMENTS OF CASH FLOWS
(UNAUDITED)
<TABLE>
<CAPTION>
FOR THE THREE FOR THE THREE
MONTHS ENDED MONTHS ENDED
MARCH 31, 1999 MARCH 31, 1998
-------------- --------------
<S> <C> <C>
Cash flows from operating activities
Net income..................................................................... $ 719,371 $ 726,815
Adjustments to reconcile net income to net cash from operating activities
Equity in losses of Operating Partnerships................................. 50,000 10,000
Amortization of discount on mortgage-backed securities..................... (628) (495)
Decrease in interest receivable............................................ 3,260 2,174
Increase in other assets................................................... (63,336) (150,565)
Decrease in accounts payable............................................... (292,253) (3,269)
-------------- --------------
Net cash provided by operating activities........................................ 416,414 584,660
-------------- --------------
Cash flows from investing activities
FHA Loan and GNMA principal payments received.................................. 109,444 94,314
Investment in Operating Partnerships........................................... (50,000) (10,000)
-------------- --------------
Net cash provided by investing activities........................................ 59,444 84,314
-------------- --------------
Cash flow used in financing activity
Distributions paid............................................................. (860,597) (860,597)
-------------- --------------
Net decrease in cash and temporary cash investments.............................. (384,739) (191,623)
Cash and temporary cash investments at beginning of period....................... 9,304,694 10,410,564
-------------- --------------
Cash and temporary cash investments at end of period............................. $ 8,919,955 $ 10,218,941
-------------- --------------
-------------- --------------
</TABLE>
The accompanying notes are an integral part of the financial statements.
31
<PAGE>
CAPITAL SOURCE L.P.
NOTES TO FINANCIAL STATEMENTS
MARCH 31, 1999
(UNAUDITED)
1. ORGANIZATION.
Capital Source L.P. (the "Partnership") was formed on August 22, 1985, under
the Delaware Revised Uniform Limited Partnership Act. The General Partners of
the Partnership are Insured Mortgage Equities Inc. and America First Capital
Source I, L.L.C. (the "General Partners").
The Partnership was formed to invest principally in federally-insured
mortgages on multifamily housing properties and limited partnership interests in
Operating Partnerships which construct and operate these properties. Each
federally insured loan is guaranteed in amounts equal to the face amount of the
mortgage, by the Federal Housing Administration ("FHA") or the Government
National Mortgage Association ("GNMA"). Hereinafter, the Partnership's
investments in such mortgages are referred to as investments in mortgage-backed
securities. The Operating Partnerships are geographically located as follows:
(i) two in North Carolina; and, (ii) one each in Ohio, Florida, Michigan,
Virginia and Illinois.
CS Properties I, Inc., which is owned by the General Partners, serves as the
special Limited Partner for the Operating Partnerships. The Special Limited
Partner has the power, among other things, to remove the general partners of the
Operating Partnerships under certain circumstances and to consent to the sale of
the Operating Partnerships' assets. CS Properties I, Inc. also serves as the
general partner of Misty Springs Apartments, Waterman's Crossing and Fox Hollow
Apartments and as a co-general partner of The Ponds at Georgetown.
The Partnership will terminate subsequent to the sale of all properties but
in no event will the Partnership continue beyond December 31, 2030.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES.
(a) FINANCIAL STATEMENT PRESENTATION. The financial statements of the
Partnership are prepared without audit on the accrual basis of accounting in
accordance with generally accepted accounting principles. The 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 for the year
ended December 31, 1998. In the opinion of management, all normal and recurring
adjustments necessary to present fairly the financial position at March 31, 1999
and results of operations for all periods presented have been made.
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
(b) INVESTMENT IN MORTGAGE-BACKED SECURITIES. Investment securities are
classified as held-to-maturity, available-for-sale, or trading. Investments
classified as held-to-maturity are carried at amortized cost. Investments
classified as available-for-sale are reported at fair value, as determined by
reference to published sources. Any unrealized gains or losses are excluded from
earnings and reflected in other comprehensive income. Subsequent increases and
decreases in the net unrealized gain/loss on the available-for-sale securities
are reflected as adjustments to the carrying value of the portfolio and in other
comprehensive income. The Partnership does not have investment securities
classified as trading.
(c) INVESTMENT IN OPERATING PARTNERSHIPS. The investment in Operating
Partnerships consists of interests in limited partnerships which own properties
underlying the mortgage-backed securities and are
32
<PAGE>
accounted for using the equity method. The investments by the Partnership in the
Operating Partnerships were recorded at the cost to acquire such interests.
Subsequently losses were recorded by the Partnership as they were realized by
the Operating Partnerships. The Partnership suspended recognizing losses in the
Operating Partnerships when its entire initial investment had been consumed by
such losses. Subsequently, losses have been recognized only to the extent of
additional contributions, net of distributions received, to the Operating
Partnerships by the Partnership. The Operating Partnerships are not insured or
guaranteed. The value of these investments is a function of the value of the
real estate underlying the Operating Partnerships. With regard to the Operating
Partnerships, the Partnership is not the general partner and it has no legal
obligation to provide additional cash support, nor has it indicated any
commitment to provide this support; accordingly it has not reduced its
investment in these Operating Partnerships below zero.
(d) INCOME TAXES. No provision has been made for income taxes since
Beneficial Assignment Certificate ("BAC") Holders are required to report their
share of the Partnership's income for federal and state income tax purposes.
(e) TEMPORARY CASH INVESTMENTS. Temporary cash investments are invested in
short-term debt securities purchased with an original maturity of three months
or less.
(f) NET INCOME PER BAC. Net income per BAC has been calculated based on the
number of BACs outstanding (3,374,222) for all periods presented.
(g) RESTATEMENT. The Partnership holds a majority ownership interest and
through CS Properties I, Inc. can influence the decisions of the general
partners of the Operating Partnerships in certain circumstances. Accordingly,
the Partnership had consolidated the Operating Partnerships since inception. In
1998 it was determined that this influence did not constitute control of the
Operating Partnerships. Therefore, the accompanying 1998 financial statements
have been restated to deconsolidate the Operating Partnerships and to account
for the investments in Operating Partnerships under the equity method of
accounting rather than consolidation.
Under the equity method of accounting, the Partnership's investments are
adjusted to reflect its share of Operating Partnership profits or losses and
distributions. As required by consolidation accounting, the Partnership had
recorded losses from the Operating Partnerships substantially in excess of its
investments. As previously disclosed, the Partnership is not the general
partner, nor is it obliged to fund the negative balances. Under equity
accounting, the Partnership does not reduce the carrying value of its
investments below zero. As restated, investments in the Operating Partnerships
are reflected at zero and profits and losses are recorded based on capital
contributions made and distributions received from the Operating Partnerships.
The restatement increased net income for the three months ended March 31, 1998
by $159,514 or $.05 per BAC (basic and diluted).
(h) NEW ACCOUNTING PRONOUNCEMENT. On January 1, 1999, the Partnership
adopted Statement of Position 98-5, "Reporting on the Costs of Start-Up
Activities" (SOP 98-5). SOP 98-5 requires costs of start-up activities and
organization costs to be expensed as incurred. The adoption of SOP 98-5 did not
have an impact on the Partnership's financial statements.
3. PARTNERSHIP RESERVE ACCOUNT.
The Partnership maintains a reserve account which consisted of the following
at March 31, 1999:
<TABLE>
<S> <C>
Cash and temporary cash investments............................. $8,318,283
GNMA Certificates............................................... 828,696
---------
$9,146,979
---------
---------
</TABLE>
The reserve account was established to maintain working capital for the
Partnership and is available to supplement distributions to investors and for
any contingencies related to the Partnership's investment in
33
<PAGE>
mortgage-backed securities and the operation of the Partnership. See Note 5
regarding the investment in mortgage-backed securities.
4. PARTNERSHIP INCOME, EXPENSES AND CASH DISTRIBUTIONS.
Profits and losses from continuing operations and cash available for
distribution will be allocated 99% to the investors and 1% to the General
Partner. Certain fees payable to the General Partners will not become due until
investors have received certain priority returns. Cash distributions included in
the financial statements represent the actual cash distributions made during
each period and the change in cash distributions accrued at the end of each
period.
The General Partners will receive 1% of the net proceeds from any sale of
Partnership assets. The General Partners will receive a termination fee equal to
3% of all sales proceeds less actual costs incurred in connection with all sales
transactions, payable only after the investors have received a return of their
capital contributions and a 13% annual return on a cumulative basis. The General
Partners will also receive a fee equal to 9.1% of all cash available for
distribution and sales proceeds (after deducting from cash available or sales
proceeds any termination fee paid therefrom) after investors have received a
return of their capital contributions and a 13% annual return on a cumulative
basis.
5. INVESTMENT IN MORTGAGE-BACKED SECURITIES.
The mortgage-backed securities held by the Partnership represent Government
National Mortgage Association ("GNMA") Certificates and Federal Housing
Administration ("FHA") Loans. The GNMA Certificates are backed by first mortgage
loans on multifamily housing properties and pools of single-family properties.
The GNMA Certificates are debt securities issued by a private mortgage lender
and are guaranteed by GNMA as to the full and timely payment of principal and
interest on the underlying loans. The FHA Loans are guaranteed as to the full
and timely payment of principal and interest on the underlying loans.
At March 31, 1999, the total amortized cost, gross unrealized holding gains
and aggregate fair value of available-for-sale securities were $786,784, $41,912
and $828,696, respectively. At March 31, 1999, the total amortized cost, gross
unrealized holding gains and aggregate fair value of held-to-maturity securities
were $34,949,379, $244,851 and $35,194,230, respectively.
34
<PAGE>
Descriptions of the Partnership's mortgage-backed securities at March 31,
1999, are as follows:
<TABLE>
<CAPTION>
NUMBER INTEREST CARRYING
TYPE OF SECURITY AND NAME LOCATION OF UNITS RATE MATURITY DATE AMOUNT
- --------------------------------------- ------------------ ------------- ----------- ------------- ----------
<S> <C> <C> <C> <C> <C>
Held-to-Maturity
GNMA Certificates:
Misty Springs Apartments Daytona Beach, FL 128 8.75% 06-15-2029 $4,240,000
The Ponds at Georgetown Ann Arbor, MI 134 7.50% 12-15-2029 2,414,842
Waterman's Crossing Newport News, VA 260 10.00% 09-15-2028 10,859,809
Water's Edge Apartments Lake Villa, IL 108 8.75% 12-15-2028 5,026,776
----------
22,541,427
FHA Loans:
Bluff Ridge Apartments Jacksonville, NC 108 8.72% 11-15-2028 3,481,199
Highland Park Apartments Columbus, OH 252 8.75% 11-01-2028 8,926,753
----------
12,407,952
----------
34,949,379
----------
Available-for-Sale
GNMA Certificates:
Pools of single-family mortgages 7.58%(1) 2008 to 2009 413,926(2)
Pools of single-family mortgages 7.58%(1) 2007 to 2008 414,770(2)
----------
828,696
----------
Balance at March 31, 1999 $35,778,075
----------
----------
</TABLE>
- ---------------
(1) Represents effective yield to the Partnership.
(2) Reserve account asset--see Note 3.
Reconciliation of the carrying amount of the mortgage-backed securities is
as follows:
<TABLE>
<S> <C>
Balance at December 31, 1998................................................... $35,883,896
Addition
Amortization of discount on mortgage-backed securities..................... 628
Deductions
FHA Loan and GNMA principal payments received.............................. (109,444)
Change in net unrealized holding gains on available-for-sale
mortgage-backed securities............................................... 2,995
----------
Balance at March 31, 1999...................................................... $35,778,075
----------
----------
</TABLE>
6. INVESTMENT IN OPERATING PARTNERSHIPS.
The Partnership's Investment in Operating Partnerships consist of interests
in limited partnerships which own multifamily properties financed by the GNMA
Certificates and FHA Loans held by the Partnership. The limited partnership
agreements originally provided for the payment of a base return on the equity
provided to the limited partnerships and for the payment of additional amounts
out of a portion of the net cash flow or net sale or refinancing proceeds of the
properties subject to various priority payments.
35
<PAGE>
Descriptions of the Operating Partnerships held at March 31, 1999, are as
follows:
<TABLE>
<CAPTION>
CARRYING
NAME LOCATION PARTNERSHIP NAME AMOUNT
- -------------------------------------- ---------------------- -------------------------------------- -----------
<S> <C> <C> <C>
Misty Springs Apartments.............. Daytona Beach, FL Cypress Landings II, Ltd. $ --
The Ponds at Georgetown............... Ann Arbor, MI Ponds at Georgetown Limited --
Partnership
Waterman's Crossing................... Newport News, VA Oyster Cove Limited Partnership --
Water's Edge Apartments............... Lake Villa, IL Water's Edge Limited Partnership --
Bluff Ridge Apartments................ Jacksonville, NC Bluff Ridge Associates Limited --
Partnership
Highland Park Apartments.............. Columbus, OH Interstate Limited Partnership --
-----------
Balance at March 31, 1999............. $ --
-----------
-----------
</TABLE>
Reconciliation of the carrying amount of the Operating Partnerships is as
follows:
<TABLE>
<CAPTION>
FOR THE THREE
MONTHS ENDED
MARCH 31, 1999
--------------
<S> <C>
Balance at beginning of year...................................................................... $ --
Addition
Investment in Operating Partnerships.......................................................... 50,000
Deduction
Equity in losses of Operating Partnerships.................................................... (50,000)
--------------
Balance at end of period.......................................................................... $
--------------
--------------
</TABLE>
7. TRANSACTIONS WITH RELATED PARTIES.
The General Partners, certain of their affiliates and the Operating
Partnerships' general partners have received or may receive fees, compensation,
income, distributions and payments from the Partnership in connection with the
offering and the investment, management and sale of the Partnership's assets
(other than disclosed elsewhere) as follows:
The General Partners are entitled to receive an asset management and
partnership administration fee equal to 0.5% of invested assets per annum,
payable only during such years that an 8% return has been paid to investors on a
noncumulative basis. Any unpaid amounts will accrue and be payable only after a
13% annual return to investors has been paid on a cumulative basis and the
investors have received the return of their capital contributions. For the three
months ended March 31, 1999, distributions to investors represented less than an
8% return; accordingly, no fees were paid or accrued during this period.
Substantially all of the Partnership's general and administrative expenses
and certain costs capitalized by the Partnership are paid by a General Partner
or an affiliate and reimbursed by the Partnership. The amount of such expenses
reimbursed to the General Partner for the three months ended March 31, 1999, was
$161,974. These reimbursed expenses are presented on a cash basis and do not
reflect accruals made at quarter end.
An affiliate of the General Partners has been retained to provide property
management services for Waterman's Crossing, Misty Springs Apartments, Fox
Hollow Apartments and The Ponds at Georgetown. The fees for services provided
were $49,859 for the three months ended March 31, 1999, and represented the
lower of costs incurred in providing management of the property or customary
fees for such services determined on a competitive basis.
36
<PAGE>
8. LEGAL PROCEEDINGS.
The Partnership has been named as a defendant in a purported class action
lawsuit filed in the Delaware Court of Chancery on February 3, 1999 by two BAC
holders, Alvin M. Panzer and Sandra G. Panzer, against the Partnership, its
general partners, America First and various of their affiliates (including
Capital Source II L.P.-A, a similar partnership with general partners that are
affiliates of America First) and Lehman Brothers, Inc. The plaintiffs seek to
have the lawsuit certified as a class action on behalf of all BAC holders of the
Partnership and Capital Source II L.P.-A. The lawsuit alleges, among other
things, that a proposed merger transaction involving the Partnership and Capital
Source II L.P.-A is deficient and coercive, that the defendants have breached
the terms of the Partnership's partnership agreement and that the defendants
have acted in manners which violate their fiduciary duties to the BAC holders.
The plaintiffs seek to enjoin the proposed merger transaction and to appoint an
independent BAC holder representative to investigate alternative transactions.
The lawsuit also requests a judicial dissolution of the Partnership, an
accounting, and unspecified damages and costs. At this time, the general
partners are unable to estimate the effect of the litigation, if any, on the
financial statements of the Partnership.
37
<PAGE>
CAPITAL SOURCE II L.P.-A
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
DECEMBER 31, 1998
Capitalized terms not otherwise defined herein shall have the meanings set
forth in the accompanying Prospectus/Consent Solicitation Statement.
LIQUIDITY AND CAPITAL RESOURCES
Capital Source II L.P.-A (the "Partnership") originally acquired: (i) four
GNMA Certificates which are guaranteed as to principal and interest by the
Government National Mortgage Association ("GNMA") collateralized by first
mortgage loans on multifamily housing properties located in three states; (ii)
an FHA Loan which is insured as to principal and interest by the Federal Housing
Administration ("FHA") on a multifamily housing property; and (iii) Partnership
Equity Investments in five Operating Partnerships which own the multifamily
properties financed by the GNMA Certificates and the FHA Loan. The Partnership
has been repaid by GNMA on one of the GNMA Certificates and the related property
has been deeded to GNMA in lieu of foreclosure, thus eliminating the Partnership
Equity Investment in this property. Collectively, the remaining GNMA
Certificates, the FHA Loan, and the Partnership Equity Investments are referred
to as the "Permanent Investments." The Partnership had also invested amounts
held in its reserve account in certain GNMA securities backed by pools of
single-family mortgages ("Reserve Investments"); however, at December 31, 1998
the Partnership no longer had any GNMA securities in its reserve account. The
obligations of GNMA and FHA are backed by the full faith and credit of the
United States government.
DISTRIBUTIONS
Cash distributions paid or accrued per BAC were as follows:
<TABLE>
<CAPTION>
FOR THE FOR THE FOR THE
YEAR ENDED YEAR ENDED YEAR ENDED
DECEMBER 31, 1998 DECEMBER 31, 1997 DECEMBER 31, 1996
----------------- ----------------- -----------------
<S> <C> <C> <C>
Regular monthly distributions
Income................................................ $ .2175 $ .4082 $ .5240
Return of capital..................................... .4425 .4018 .2860
------ ------ ------
$ .6600 $ .8100 $ .8100
------ ------ ------
------ ------ ------
Distributions
Paid out of cash flow................................. .4005 $ .5172 $ .6019
Paid out of reserves.................................. .2595 .2928 .2081
------ ------ ------
$ .6600 $ .8100 $ .8100
------ ------ ------
------ ------ ------
</TABLE>
Regular monthly distributions to BAC Holders consist primarily of interest
received on the FHA Loan, GNMA Certificates and the Reserve Investments.
Additional cash for distributions is received from other temporary investments.
The Partnership may draw on reserves to pay operating expenses or to supplement
cash distributions to BAC Holders. The Partnership is permitted to replenish
reserves with cash flows in excess of distributions paid. During 1998, the
Partnership depleted its reserves.
As previously reported, the Partnership reduced the level of distributions
from $.0675 per month to $.0375 per month effective with the August 1998
distribution payable in October 1998. A reduction in the distribution was
required so that cash provided by operating activities and, if necessary,
withdrawals from the Partnership's reserves, to the extent available, will be
adequate to meet its short-term liquidity requirements, including the payments
of distributions to BAC Holders. The Partnership has no other
38
<PAGE>
internal or external sources of liquidity. Under the terms of its Partnership
Agreement, the Partnership has the authority to enter into short- and long-term
debt financing arrangements; however, the Partnership currently does not
anticipate entering into such arrangements. The Partnership is not authorized to
issue additional BACs to meet short-term and long-term liquidity requirements.
ASSET QUALITY
The FHA Loan and GNMA Certificates owned by the Partnership are guaranteed
as to principal and interest by FHA and GNMA, respectively. The obligations of
FHA and GNMA are backed by the full faith and credit of the United States
government. The Partnership Equity Investments, however, are not insured or
guaranteed. The value of these investments is a function of the value of the
real estate underlying the Operating Partnerships.
The fair value of the properties underlying the Operating Partnerships is
based on management's best estimate of the net realizable value of such
properties, however; the ultimate realized values may vary from these estimates.
The net realizable value of the properties is determined based on the discounted
estimated future cash flows from the properties, including estimated sales
proceeds. The calculation of discounted estimated future cash flows includes
certain variables such as the assumed inflation rates for rents and expenses,
capitalization rates and discount rates. These variables are supplied to
management by an independent real estate firm and are based on local market
conditions for each property. In certain cases, additional factors such as the
replacement value of the property or comparable sales of similar properties are
also taken into consideration.
The following table shows the occupancy levels of the properties financed by
the Partnership as of December 31, 1998:
<TABLE>
<CAPTION>
NUMBER OF PERCENTAGE OF
NUMBER OF UNITS UNITS
PROPERTY NAME LOCATION UNITS OCCUPIED OCCUPIED
- ------------------------------------------------------------ ------------------ ----------- ------------- -------------
<S> <C> <C> <C> <C>
Crane's Landing............................................. Winter Park, FL 252 242 96%
Delta Crossing.............................................. Charlotte, NC 178 168 94%
Monticello Apartments....................................... Southfield, MI 106 104 98%
The Ponds at Georgetown..................................... Ann Arbor, MI 134 132 99%
--- --- ---
670 646 96%
--- --- ---
--- --- ---
</TABLE>
The following sets forth certain information regarding the properties
financed by the Partnership.
CRANE'S LANDING
Crane's Landing, located in Winter Park, Florida, is a 252-unit complex with
one-, two- and three-bedroom apartments on fourteen acres of land. Average
occupancy was 96% during 1998 and 1997. Rental revenue remained constant from
1997 to 1998; however, real estate operating expenses increased approximately
17% in 1998, compared to 1997. Real estate operating expenses increased
primarily due to a 41% increase in repairs and maintenance expenses. As a
result, net operating income before depreciation, interest and amortization
decreased approximately 12% from 1997 to 1998. The property remained current on
its mortgage obligations during 1998.
DELTA CROSSING
Delta Crossing is a 178-unit apartment complex located in Charlotte, North
Carolina. Average occupancy was 94% in 1998, compared to 93% in 1997. As a
result of the increase in occupancy and rental rate increases, rental income
increased approximately 3% in 1998, compared to 1997. The increase in rental
income, combined with a decrease of approximately 7% in repairs and maintenance
expenses and
39
<PAGE>
property improvements, was more than offset by an increase of 10% in labor
expenses and slight increases in other expenses. As a result, net operating
income before depreciation, interest and amortization decreased approximately 2%
from 1997 to 1998. The property was current on its mortgage obligations during
1998.
MONTICELLO APARTMENTS
Monticello Apartments, located in Southfield, Michigan, contains 106 rental
units. Average occupancy was 98% in 1998, compared to 97% in 1997. Due to the
slight increase in average occupancy and rental rate increases, rental income
increased approximately 5% in 1998, compared to 1997. The increase in rental
income, was partially offset by an increase of approximately 27% in repairs and
maintenance expenses. As a result, net operating income before depreciation,
interest and amortization increased approximately 6% from 1997 to 1998. The
property was current on its mortgage obligations during 1998.
THE PONDS AT GEORGETOWN
The Ponds at Georgetown consists of 134 apartments located in Ann Arbor,
Michigan. Average occupancy was 99% in 1998, compared to 97% in 1997. Rental
revenue increased approximately 3.5% in 1998, compared to 1997, primarily due to
the increase in average occupancy, while real estate operating expenses
increased approximately 8%. The increase in real estate operating expenses was
primarily due to an 8% increase in repairs and maintenance expenses which was
partially offset by a 17% decrease in real estate taxes. As previously
disclosed, the mortgage loan for the Ponds at Georgetown was restructured in
September 1998, which lowered the interest rate from 9.25% to 7.85%. In
connection with the restructuring, shortfalls of $407,218 were funded by the
Partnership's reserves. As a result of restructuring the mortgage loan, cash
flow from the property is now anticipated to be sufficient to cover all the
operating partnership's cash needs, including mortgage payments and taxes. The
property was current on its mortgage obligations as of December 31, 1998.
40
<PAGE>
RESULTS OF OPERATIONS
The tables below compare the results of operations for each year shown.
<TABLE>
<CAPTION>
FOR THE FOR THE FOR THE
YEAR ENDED YEAR ENDED YEAR ENDED
DEC. 31, DEC. 31, DEC. 31,
1998 1997 1996
------------ ------------ ------------
<S> <C> <C> <C>
Mortgage-backed securities income...................................... $2,426,356 $2,499,844 $2,520,727
Interest income on temporary cash investments and U.S. government
securities........................................................... 42,339 91,327 147,530
Equity in losses of Operating Partnerships............................. (407,218) (121,450) --
Other income........................................................... 4,750 3,800 6,950
Gain on sale of mortgage-backed securities............................. 35,101 -- --
------------ ------------ ------------
2,101,328 2,473,521 2,675,207
Operating and administrative expenses.................................. 1,220,213 819,516 552,170
------------ ------------ ------------
Net income............................................................. $ 881,115 $1,654,005 $2,123,037
------------ ------------ ------------
------------ ------------ ------------
</TABLE>
<TABLE>
<CAPTION>
INCREASE INCREASE
(DECREASE) (DECREASE)
FROM 1997 FROM 1996
----------- -----------
<S> <C> <C>
Mortgage-backed securities income....................................................... $ (73,488) $ (20,883)
Interest income on temporary cash investments and
U.S. government securities............................................................ (48,988) (56,203)
Equity in losses of Operating Partnerships.............................................. (285,768) (121,450)
Other income............................................................................ 950 (3,150)
Gain on sale of mortgage-backed securities.............................................. 35,101 --
----------- -----------
(372,193) (201,686)
Operating and administrative expenses................................................... 400,697 267,346
----------- -----------
Net income.............................................................................. $ (772,890) $ (469,032)
----------- -----------
----------- -----------
</TABLE>
Mortgage-backed securities income decreased $73,488 from 1997 to 1998 and
$20,883 from 1996 to 1997. Approximately $31,000 of such decrease from 1997 to
1998 was attributable to the payoff of the GNMA Certificate on the Ponds at
Georgetown which had an interest rate of 9% and the issuance of a new GNMA
Certificate at 7.25%. The remaining decrease from 1997 to 1998 and from 1996 to
1997 was attributable to the continued amortization of the principal balances of
the Partnership's mortgage-backed securities.
Interest income on temporary cash investments and U.S. government securities
decreased $48,988 from 1997 to 1998 and $56,203 from 1996 to 1997. These
decreases were due to withdrawals made from the Partnership's reserves to
supplement distributions to BAC Holders.
The Partnership suspended recognizing losses in the Operating Partnerships
when its entire initial investment had been consumed by such losses.
Subsequently, losses have been recognized only to the extent of additional
contributions, net of distributions received, to the Operating Partnership by
the Partnership.
The Partnership made additional investments in certain Operating
Partnerships during 1998 and 1997. As such, equity in losses of Operating
Partnerships was recorded in 1998 and 1997 to the extent of the additional
investments in the amount of $407,218 and $121,450, respectively. No such
investments were made and therefore no equity in losses was recorded in 1996.
During 1998, the Partnership sold the mortgage-backed securities held in its
reserves and realized a gain of $35,101 on the sale. There were no such sales or
gains during either 1996 or 1997.
41
<PAGE>
Operating and administrative expenses increased $400,697 from 1997 to 1998.
The increase was due to: (i) an increase of approximately $341,000 in
transaction costs incurred in conjunction with the proposed merger described in
Note 8 to the financial statements; (ii) an increase of approximately $152,000
in salaries and related expenses primarily due to additional management time
incurred in conjunction with the aforementioned merger; (iii) an increase of
approximately $31,000 in consulting fees incurred in connection with a review of
various options for restructuring to improve total investment returns and
provide liquidity to the Partnership's investors; (iv) a decrease of $116,000 in
asset management and partnership administration fees payable to the General
Partners and (v) decreases of approximately $7,000 in other operating and
administrative expenses.
Operating and administrative expenses increased $267,346 from 1996 to 1997.
Approximately $126,000 of such increase was due to costs incurred in connection
with a review of various options available to the Partnership to improve total
investment returns and provide liquidity to the Partnership's investors. The
remaining increase of $141,346 from 1996 to 1997 was due primarily to increases
in salaries and related expenses.
YEAR 2000
The Partnership does not own or operate its own computer system and owns no
business or other equipment. However, the operation of the Partnership's
business relies on the computer system and other equipment maintained by America
First Companies L.L.C., the parent company of its general partners ("America
First"). In addition, the Partnership has business relationships with a number
of third parties whose ability to perform their obligations to the Partnership
depend on such systems and equipment. Some or all of these systems and equipment
may be affected by the inability of certain computer programs and embedded
circuitry to correctly recognize dates occurring after December 31, 1999.
America First has adopted a plan to deal with this so-called "Year 2000 problem"
with respect to its information technology ("IT") systems, non-IT systems and
third party business relationships.
STATE OF READINESS
The IT system maintained by America First consists primarily of personal
computers, most of which are connected by a local area network. All accounting
and other record keeping functions relating to the Partnership that are
conducted in house by America First are performed on this PC-LAN system. America
First does not own or operate any "mainframe" computer systems. The PC-LAN
system runs software programs that America First believes are compatible with
dates after December 31, 1999. America First has engaged a third party computer
consulting firm to review and test its PC-LAN system to ensure that it will
function correctly after that date and expects that this process, along with any
necessary remediation, will be completed by mid-1999. America First believes any
Year 2000 problems relating to its IT systems will be resolved without
significant operational difficulties. However, there can be no assurance that
testing will discover all potential Year 2000 problems or that it will not
reveal unanticipated material problems with the America First IT systems that
will need to be resolved.
Non-IT systems include embedded circuitry such as microcontrollers found in
telephone equipment, security and alarm systems, copiers, fax machines, mail
room equipment, heating and air conditioning systems and other infrastructure
systems that are used by America First in connection with the operation of the
Partnership's business. America First is reviewing its non-IT systems along with
the providers that service and maintain these systems, with initial emphasis
being placed on those, such as telephone systems, which have been identified as
necessary to America First's ability to conduct the operation of the
Partnership's business activities. America First expects that any necessary
modification or replacement of such "mission critical" systems will be
accomplished by mid-1999.
The Partnership has no control over the remediation efforts of third parties
with which it has material business relationships and the failure of certain of
these third parties to successfully remediate their Year
42
<PAGE>
2000 issues could have a material adverse effect on the Partnership.
Accordingly, America First has undertaken the process of contacting each such
third party to determine the state of their readiness for Year 2000. Such
parties include, but are not limited to, the obligors on the Partnership's GNMA
Certificates and FHA Loan, the Partnership's transfer and paying agent and the
financial institutions with which the Partnership maintains accounts. America
First has received initial assurances from certain of these third parties that
their ability to perform their obligations to the Partnership are not expected
to be materially adversely affected by the Year 2000 problem. America First will
continue to request updated information from these material third parties in
order to access their Year 2000 readiness. If a material third party vendor is
unable to provide assurance to America First that it is, or will be, ready for
Year 2000, America First intends to seek an alternative vendor to the extent
practical.
COSTS
All of the IT systems and non-IT systems used to conduct the Partnership's
business operations are owned or leased by America First. Under the terms of its
partnership agreement, neither America First nor the Partnership's general
partners may be reimbursed by the Partnership for expenses associated with their
computer systems or other business equipment. Therefore, the costs associated
with the identification, remediation and testing of America First's IT and
non-IT systems will be paid by America First rather than the Partnership. The
Partnership will bear its proportionate share of the costs associated with
surveying the Year 2000 readiness of third parties. However, the Partnership's
share of the costs associated with these activities are expected to be
insignificant. Accordingly, the costs associated with addressing the
Partnership's Year 2000 issues are not expected to have a material effect on the
Partnership's results of operations, financial position or cash flow.
YEAR 2000 RISKS
The Partnership's general partners believe that the most reasonably likely
worst-case scenario will be that one or more of the third parties with which it
has a material business relationship will not have successfully dealt with its
Year 2000 issues and, as a result, is unable to provide services or otherwise
perform its obligations to the Partnership. For example, if an obligor on the
Partnership's GNMA Certificates or FHA Loan encounters a serious and unexpected
Year 2000 issue, it may be unable to make a timely payment of principal and
interest to the Partnership. This, in turn, could cause a delay or temporary
reduction in cash distributions to BAC holders. In addition, if the
Partnership's transfer and paying agent experiences Year 2000-related
difficulties, it may cause delays in making distributions to BAC holders or in
the processing of transfers of BACs. It is also possible that one or more of the
IT and non-IT systems of America First will not function correctly, and that
such problem may make it difficult to conduct necessary accounting and other
record keeping functions for the Partnership. However, based on currently
available information, the general partners do not believe that there will be
any protracted systemic failures of the IT or non-IT systems utilized by America
First in connection with the operation of the Partnership's business.
CONTINGENCY PLANS
Because of the progress which America First has made toward achieving Year
2000 readiness, the Partnership has not made any specific contingency plans with
respect to the IT and non-IT systems of America First. In the event of a Year
2000 problem with its IT system, America First may be required to manually
perform certain accounting and other record-keeping functions. America First
plans to terminate the Partnership's relationships with material third party
service providers that are not able to represent to America First that they will
be able to successfully resolve their material Year 2000 issues in a timely
manner. However, the Partnership will not be able to terminate its relationships
with certain third parties, such as the obligors on its GNMA Certificates and
FHA Loan, who may experience Year 2000 problems.
43
<PAGE>
The Partnership has no specific contingency plans for dealing with Year 2000
problems experienced with these third parties.
All forecasts, estimates or other statements in this report relating to the
Year 2000 readiness of the Partnership and its affiliates are based on
information and assumptions about future events. Such "forward-looking
statements" are subject to various known and unknown risks and uncertainties
that may cause actual events to differ from such statements. Important factors
upon which the Partnership's Year 2000 forward-looking statements are based
include, but are not limited to, (a) the belief of America First that the
software used in IT systems is already able to correctly read and interpret
dates after December 31, 1999 and will require little or any remediation; (b)
the ability to identify, repair or replace mission critical non-IT equipment in
a timely manner, (c) third parties' remediation of their internal systems to be
Year 2000 ready and their willingness to test their systems interfaces with
those of America First, (d) no third party system failures causing material
disruption of telecommunications, data transmission, payment networks,
government services, utilities or other infrastructure, (e) no unexpected
failures by third parties with which the Partnership has a material business
relationship and (f) no material undiscovered flaws in America First's Year 2000
testing process.
QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The Partnership's primary market risk exposure is interest rate risk. The
Partnership's exposure to market risk for changes in interest rates relates
primarily to its investment securities which is comprised of investments in debt
securities with fixed interest rates. The Partnership does not use derivative
financial instruments to hedge its investment portfolio.
The table below presents principal amounts and weighted average interest
rates by year of maturity for the Partnership's investment portfolio:
<TABLE>
<CAPTION>
PRINCIPAL WEIGHTED AVERAGE
MATURITY AMOUNT INTEREST RATE
- ------------ ------------- -----------------
<S> <C> <C>
1999 $ 168,912 8.6%
2000 184,103 8.6%
2001 200,668 8.6%
2002 218,402 8.6%
2003 238,427 8.6%
Thereafter 26,033,070 8.6%
</TABLE>
The aggregate fair value of the Partnership's investment securities at
December 31, 1998, was $27,248,970.
FORWARD LOOKING STATEMENTS
This report contains forward looking statements that reflect management's
current beliefs and estimates of future economic circumstances, industry
conditions, the Partnership's performance and financial results. All statements,
trend analysis and other information concerning possible or assumed future
results of operations of the Partnership and the real estate investments it has
made (including, but not limited to, the information contained in "Management's
Discussion and Analysis of Financial Condition and Results of Operations"),
constitute forward-looking statements. BAC holders and others should understand
that these forward looking statements are subject to numerous risks and
uncertainties and a number of factors could affect the future results of the
Partnership and could cause those results to differ materially from those
expressed in the forward looking statements contained herein.
44
<PAGE>
INDEPENDENT ACCOUNTANTS' REPORT
To the Partners
Capital Source II L.P.-A:
We have audited the accompanying balance sheets of Capital Source II L.P.-A
as of December 31, 1998 and 1997, and the related statements of income and
comprehensive income, partners' capital (deficit) and cash flows for the three
years in the period ended December 31, 1998. These financial statements are the
responsibility of the Partnership's management. Our responsibility is to express
an opinion on these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of Capital Source II L.P.-A as
of December 31, 1998 and 1997, and the results of its operations and its cash
flows for each of the three years in the period ended December 31, 1998, in
conformity with generally accepted accounting principles.
/s/ KPMG LLP
Omaha, Nebraska
March 19, 1999
45
<PAGE>
CAPITAL SOURCE II L.P.-A
BALANCE SHEETS
<TABLE>
<CAPTION>
DECEMBER 31, 1998 DECEMBER 31, 1997
----------------- -----------------
<S> <C> <C>
ASSETS
Cash and temporary cash investments, at cost which approximates market
value.................................................................. $ 432,999 $ 1,240,992
Investment in FHA Loan (Note 4).......................................... 6,505,857 6,538,424
Investment in GNMA Certificates (Note 4)................................. 20,497,706 21,674,940
Investment in Operating Partnerships (Note 5)............................ -- --
Interest receivable...................................................... 195,440 213,024
Other assets............................................................. 139,204 162,154
----------------- -----------------
$ 27,771,206 $ 29,829,534
----------------- -----------------
----------------- -----------------
LIABILITIES AND PARTNERS' CAPITAL (DEFICIT)
Liabilities
Accounts payable (Note 6)................................................ $ 347,446 $ 327,513
Distribution payable (Note 3)............................................ 303,871 546,968
----------------- -----------------
651,317 874,481
----------------- -----------------
Partners' Capital (Deficit)
General Partner.......................................................... (295,259) (276,907)
Beneficial Assignment Certificate Holders ($6.83 per BAC in 1998 and
$7.29 in 1997)......................................................... 27,415,148 29,231,960
----------------- -----------------
27,119,889 28,955,053
----------------- -----------------
$ 27,771,206 $ 29,829,534
----------------- -----------------
----------------- -----------------
</TABLE>
The accompanying notes are an integral part of the financial statements.
46
<PAGE>
CAPITAL SOURCE II L.P.-A
STATEMENTS OF INCOME AND COMPREHENSIVE INCOME
<TABLE>
<CAPTION>
FOR THE YEAR ENDED DECEMBER 31,
----------------------------------------
1998 1997 1996
------------ ------------ ------------
<S> <C> <C> <C>
Income
Mortgage-backed securities income (Note 4)............................ $ 2,426,356 $ 2,499,844 $ 2,520,727
Interest income on temporary cash investments and U.S. government
securities.......................................................... 42,339 91,327 147,530
Equity in losses of Operating Partnerships (Note 5)................... (407,218) (121,450) --
Other income.......................................................... 4,750 3,800 6,950
Gain on sale of mortgage-backed securities............................ 35,101 -- --
------------ ------------ ------------
2,101,328 2,473,521 2,675,207
Expenses
Operating and administrative expenses (Note 6)........................ 1,220,213 819,516 552,170
------------ ------------ ------------
Net income.............................................................. 881,115 $ 1,654,005 $ 2,123,037
Other comprehensive income:
Unrealized gains on securities
Net unrealized holding gains (losses) arising during the year....... (7,110) 5,969 (42,500)
Plus: reclassification adjustment for losses included in net
income............................................................ (35,101) -- --
------------ ------------ ------------
Change in net unrealized holding gains.............................. (42,211) 5,969 (42,500)
------------ ------------ ------------
Net comprehensive income.............................................. $ 838,904 $ 1,659,974 $ 2,080,537
------------ ------------ ------------
------------ ------------ ------------
Net income allocated to:
General Partner....................................................... $ 8,811 $ 16,540 $ 21,230
BAC Holders........................................................... 872,304 1,637,465 2,101,807
------------ ------------ ------------
$ 881,115 $ 1,654,005 $ 2,123,037
------------ ------------ ------------
------------ ------------ ------------
Net income, basic and diluted, per BAC.................................. $ .22 $ .41 $ .52
------------ ------------ ------------
------------ ------------ ------------
Weighted average number of BACs outstanding............................. 4,011,101 4,011,101 4,011,101
------------ ------------ ------------
------------ ------------ ------------
</TABLE>
The accompanying notes are an integral part of the financial statements.
47
<PAGE>
CAPITAL SOURCE II L.P.-A
STATEMENTS OF PARTNERS' CAPITAL (DEFICIT)
FROM DECEMBER 31, 1995 TO DECEMBER 31, 1998
<TABLE>
<CAPTION>
GENERAL
PARTNERS BAC HOLDERS TOTAL
----------- ------------- -------------
<S> <C> <C> <C>
Partners' Capital (Deficit) (excluding accumulated other comprehensive
income)
Balance at December 31, 1995........................................ (249,463) 31,948,883 31,699,420
Net income.......................................................... 21,230 2,101,807 2,123,037
Cash distributions paid or accrued (Note 3)......................... (32,818) (3,248,992) (3,281,810)
----------- ------------- -------------
Balance at December 31, 1996........................................ (261,051) 30,801,698 30,540,647
Net income.......................................................... 16,540 1,637,465 1,654,005
Cash distributions paid or accrued (Note 3)......................... (32,818) (3,248,992) (3,281,810)
----------- ------------- -------------
Balance at December 31, 1999........................................ (277,329) 29,190,171 28,912,842
Net income.......................................................... 8,811 872,304 881,115
Cash distributions paid or accrued (Note 3)......................... (26,741) (2,647,327) (2,674,068)
----------- ------------- -------------
(295,259) 27,415,148 27,119,889
----------- ------------- -------------
----------- ------------- -------------
Accumulated Other Comprehensive Income
Balance at December 31, 1995........................................ 787 77,955 78,742
Other comprehensive income.......................................... (425) (42,075) (42,500)
----------- ------------- -------------
Balance at December 31, 1996........................................ 362 35,880 36,242
Other comprehensive income.......................................... 60 5,909 5,969
----------- ------------- -------------
Balance at December 31, 1997........................................ 422 41,789 42,211
Other comprehensive income.......................................... (422) (41,789) (42,211)
----------- ------------- -------------
-- -- --
----------- ------------- -------------
Balance at December 31, 1998.......................................... $ (295,259) $ 27,415,148 $ 27,119,889
----------- ------------- -------------
----------- ------------- -------------
</TABLE>
The accompanying notes are an integral part of the financial statements.
48
<PAGE>
CAPITAL SOURCE II L.P.-A
STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
FOR THE FOR THE FOR THE
YEAR ENDED YEAR ENDED YEAR ENDED
DECEMBER 31, 1998 DECEMBER 31, 1997 DECEMBER 31, 1996
----------------- ----------------- -----------------
<S> <C> <C> <C>
Cash flows from operating activities
Net income............................................ $ 881,115 $ 1,654,005 $ 2,123,037
Adjustments to reconcile net income to net cash
provided by operating activities
Equity in losses of Operating Partnerships.......... 407,218 121,450 --
Amortization of discount............................ (1,471) (1,397) (9,400)
Gain on sale of mortgage-backed securities.......... (35,101) -- --
Decrease interest receivable........................ 17,584 6,637 26,654
Decrease in other assets............................ 22,950 63,589 62,156
Increase (decrease) in accounts payable............. 19,933 111,215 (339)
----------------- ----------------- -----------------
Net cash provided by operating activities........... 1,312,228 1,955,499 2,202,108
----------------- ----------------- -----------------
Cash flows from investing activities
FHA Loan and GNMA principal payments received......... 271,807 257,816 253,258
Disposition of mortgage-backed securities............. 5,046,437 -- --
Proceeds from sale of available-for-sale securities... 915,012 -- --
Acquisition of GNMA Certificate....................... (5,029,094) -- --
Investment in Operating Partnerships.................. (407,218) (121,450) --
Maturity of U.S. government securities................ -- -- 2,500,000
----------------- ----------------- -----------------
Net cash provided by investing activities........... 796,944 136,366 2,753,258
----------------- ----------------- -----------------
Cash flows from financing activities
Distributions paid.................................... (2,917,165) (3,281,810) (3,281,810)
Net increase (decrease) in cash and temporary cash
investments........................................... (807,993) (1,189,945) 1,673,556
Cash and temporary cash investments at beginning of
year.................................................. 1,240,992 2,430,937 757,381
----------------- ----------------- -----------------
Cash and temporary cash investments at end of year...... $ 432,999 $ 1,240,992 $ 2,430,937
----------------- ----------------- -----------------
----------------- ----------------- -----------------
</TABLE>
The accompanying notes are an integral part of the financial statements.
49
<PAGE>
CAPITAL SOURCE II L.P.-A
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1998
1. ORGANIZATION.
Capital Source II L.P.-A (the "Partnership") was formed on August 22, 1986,
under the Delaware Revised Uniform Limited Partnership Act. The General Partners
of the Partnership are Insured Mortgage Equities II L.P. and America First
Capital Source II, L.L.C. (the "General Partners").
The Partnership was formed to invest principally in federally-insured
mortgages on multifamily housing properties and limited partnership interests in
the Operating Partnerships which construct and operate these properties. Each
federally insured loan is guaranteed in amounts equal to the face amount of the
mortgage, by the Federal Housing Administration ("FHA") or the Government
National Mortgage Association ("GNMA"). Hereinafter, the Partnership's
investments in such mortgages are referred to as investments in mortgage-backed
securities. The Operating Partnerships are geographically located as follows:
(i) two in Michigan and (ii) one each in Florida and North Carolina.
CS Properties II, Inc., which is owned by the General Partners, serves as
the Special Limited Partner for the Operating Partnerships. The Special Limited
Partner has the power, among other things, to remove the general partners of the
Operating Partnerships under certain circumstances and to consent to the sale of
the Operating Partnerships' assets. CS Properties II, Inc. also serves as a
co-general partner of The Ponds at Georgetown.
The Partnership will terminate subsequent to the sale of all properties but
in no event will the Partnership continue beyond December 31, 2035.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES.
(a) METHOD OF ACCOUNTING. The financial statements of the Partnership are
prepared on the accrual basis of accounting in accordance with generally
accepted accounting principles.
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
(b) INVESTMENT IN MORTGAGE-BACKED SECURITIES. Investment securities are
classified as held-to-maturity, available-for-sale or trading. Investments
classified as held-to-maturity are carried at amortized cost. Investments
classified as available-for-sale are reported at fair value, as determined by
reference to published sources. Any unrealized gains or losses excluded from
earnings and reflected in other comprehensive income. Subsequent increases and
decreases in the net unrealized gain/loss on the available-for-sale securities
are reflected as adjustments to the carrying value of the portfolio and in other
comprehensive income. The Partnership does not have investment securities
classified as trading.
(c) INVESTMENT IN OPERATING PARTNERSHIPS. The investment in Operating
Partnerships consists of interests in limited partnerships which own properties
underlying the mortgage-backed securities and are accounted for using the equity
method. The investments by the Partnership in the Operating Partnerships were
recorded at the cost to acquire such interests. Subsequently, losses were
recorded by the Partnership as they were realized by the Operating Partnerships.
The Partnership suspended recognizing losses in the Operating Partnerships when
its entire initial investment had been consumed by such losses. Subsequently,
losses have been recognized only to the extent of additional contributions net
of distribution received, to the Operating Partnerships by the Partnership. The
Operating Partnerships are not insured or guaranteed.
50
<PAGE>
The value of these investments is a function of the value of the real estate
owned by the Operating Partnerships. With regard to the Operating Partnerships,
the Partnership is not the general partner and it has no legal obligation to
provide additional cash support nor has it indicated any commitment to provide
this support; accordingly it has not reduced its investment in these Operating
Partnerships below zero.
(d) INCOME TAXES. No provision has been made for income taxes since BAC
Holders are required to report their share of the Partnership's income for
federal and state income tax purposes. The tax basis of the Partnerships' assets
and liabilities exceeded the reported amounts by $1,236,222 and $1,817,163 at
December 31, 1998, and December 31, 1997, respectively.
(e) TEMPORARY CASH INVESTMENTS. Temporary cash investments are invested in
short-term debt securities purchased with original maturities of three months or
less.
(f) NET INCOME PER BENEFICIAL ASSIGNMENT CERTIFICATE ("BAC"). Net income per
BAC was calculated based on the number of BACs outstanding (4,011,101) during
each year presented.
(g) COMPREHENSIVE INCOME. In 1998, the Partnership adopted Statement of
Financial Accounting Standards No. 130, "Reporting Comprehensive Income" ("SFAS
130"). SFAS 130 requires the display and reporting of comprehensive income,
which includes all changes in Partners' Capital with the exception of additional
investments by partners or distributions to partners. Comprehensive income for
the Partnership includes net income and the change in net unrealized holding
gains (losses) on investments. The adoption of SFAS 130 had no impact on total
Partners' Capital.
(h) SEGMENT REPORTING. In 1998, the Partnership adopted Statement of
Financing Accounting Standards No. 131, "Disclosures about Segments of an
Enterprise and Related Information" ("SFAS 131"). SFAS 131 requires that a
public business enterprise report financial and descriptive information about
its reportable operating segments. The adoption of SFAS 131 did not have an
impact on the financial reporting of the partnership as it is engaged solely in
the business of owning mortgages and holding equity interests in real estate
limited partnerships.
(i) NEW ACCOUNTING PRONOUNCEMENTS. In June, 1998, the Financial Accounting
Standards Board issued Statement of Financial Accounting Standards No. 133,
"Accounting for Derivative Instruments and Hedging Activities" ("SFAS 133").
This statement provides new accounting and reporting standards for the use of
derivative instruments. Adoption of this statement is required by the
Partnership effective January 1, 2000. Management believes that the impact of
such adoption will not be material to the financial statements.
In April 1998, the Accounting Standards Executive Committee issued Statement
of Position 98-5, "Reporting on the Costs of Start-Up Activities" ("SOP 98-5").
This statement requires costs of start-up activities and organization costs to
be expensed as incurred. Adoption of this statement is required by the
Partnership effective January 1, 1999. Management intends to adopt the statement
as required in fiscal 1999. Management believes that the impact of such adoption
will not have an impact to the financial statements.
3. PARTNERSHIP INCOME, EXPENSES AND CASH DISTRIBUTIONS.
Profits and losses from continuing operations and cash available for
distribution will be allocated 99% to the Investors and 1% to the General
Partners. Certain fees payable to the General Partners will not become due until
investors have received certain priority returns. Cash distributions included in
the financial statements represent the actual cash distributions made during
each year and the change in cash distributions accrued at the end of each year.
The General Partners will receive 1% of the net proceeds from any sale of
Partnership assets. The General Partners will receive a termination fee equal to
3% of all sales proceeds less actual costs incurred in connection with all sales
transactions, payable only after the investors have received a return of their
51
<PAGE>
capital contributions and an 11.5% annual return on a cumulative basis. The
General Partners will also receive a fee equal to 9.1% of all cash available for
distribution and sales proceeds (after deducting from cash available or sales
proceeds any termination fee paid therefrom) after investors have received a
return of their capital contributions and a 11.5% annual return on a cumulative
basis.
4. INVESTMENT IN MORTGAGE-BACKED SECURITIES.
The mortgage-backed securities held by the Partnership represent Government
National Mortgage Association (GNMA) Certificates and Federal Housing
Administration (FHA) Loans. The GNMA Certificates are backed by first mortgage
loans on multifamily housing properties and pools of single-family properties.
The GNMA Certificates are debt securities issued by a private mortgage lender
and are guaranteed by GNMA as to the full and timely payment of principal and
interest on the underlying loans. The FHA Loan is guaranteed as to the full and
timely payment of principal and interest on the underlying loans.
At December 31, 1998, there were no available-for-sale securities. At
December 31, 1998, the total amortized cost, gross unrealized holding gains and
aggregate fair value of held-to-maturity securities were $27,003,563, $245,407,
and $27,248,970, respectively.
At December 31, 1997, the total amortized cost, gross unrealized holding
gains and aggregate fair value of available-for-sale securities were $1,008,507,
$42,211, and $1,050,718, respectively. At December 31, 1997, the total amortized
cost, gross unrealized holding gains and aggregate fair value of held-to-
maturity securities were $27,162,646, $331,442, and $27,494,088, respectively.
During May and August of 1998, the Partnership sold available-for-sale
mortgage-backed securities with an amortized cost of $879,911 for $915,012
thereby recognizing a gain of $35,101 on the sales.
Descriptions of the Partnership's mortgage-backed securities held during the
year ended December 31, 1998, are as follows:
<TABLE>
<CAPTION>
INCOME
NUMBER OF INTEREST CARRYING EARNED IN
TYPE OF SECURITY AND NAME LOCATION UNITS RATE MATURITY DATE AMOUNT 1998
- -------------------------------- ------------------ ------------- ----------- ------------- ------------- ---------
<S> <C> <C> <C> <C> <C> <C>
Held-to-Maturity
FHA Loan:
Delta Crossing Charlotte, NC 178 9.10% 10-01-2030 $ 6,505,857 $ 593,414
GNMA Certificates:
Crane's Landing Winter Park, FL 252 8.75% 12-15-2030 10,176,802 892,610
Monticello Apartments Southfield, MI 106 8.75% 11-15-2029 5,298,123 464,821
The Ponds at Georgetown Ann Arbor, MI 134 7.50%(1) 12-15-2029 5,022,781 436,281
------------- ---------
20,497,706 1,793,712
------------- ---------
27,003,563 2,387,126
Available-for-Sale
GNMA Certificates:
Pools of single-family
mortgages 7.58%(2) 2008 to 2009 --(3) 39,230
------------- ---------
Balance at December 31, 1998 $ 27,003,563 $2,426,356
------------- ---------
------------- ---------
</TABLE>
- ---------------
(1) During the fourth quarter of 1998, this GNMA Certificate was repaid and a
new GNMA Certificate was issued. The interest rate on the reissued GNMA
Certificate is 7.5% compared to 9% on the repaid GNMA Certificate.
(2) Represents effective yield to the Partnership.
(3) Reserve account asset.
52
<PAGE>
Reconciliation of the carrying amount of the mortgage-backed securities is
as follows:
<TABLE>
<CAPTION>
FOR THE FOR THE FOR THE
YEAR ENDED YEAR ENDED YEAR ENDED
DEC. 31, 1998 DEC. 31, 1997 DEC. 31, 1996
------------- ------------- -------------
<S> <C> <C> <C>
Balance at beginning of year........................................ $ 28,213,364 $ 28,463,814 $ 28,737,672
Additions
Acquisition of GNMA Certificate................................. 5,029,094 -- --
Amortization of discount on mortgage-backed securities.......... 1,471 1,397 1,470
Deductions
FHA Loan and GNMA principal payments received................... (271,807) (257,816) (253,258)
Disposition of mortgage-backed securities....................... (5,046,437) -- --
Proceeds from sale of available-for-sale securities............. (915,012) -- --
Change in net unrealized holding gains on available-for-sale
securities.................................................... (42,211) 5,969 (22,070)
------------- ------------- -------------
Balance at end of year.............................................. $ 27,003,563 $ 28,213,364 $ 28,463,814
------------- ------------- -------------
------------- ------------- -------------
</TABLE>
5. INVESTMENT IN OPERATING PARTNERSHIPS.
The Partnership's Operating Partnerships consist of interests in limited
partnerships which own multifamily properties financed by the GNMA Certificates
and FHA Loan held by the Partnership. The limited partnership agreements
originally provided for the payment of a base return on the equity provided to
the limited partnerships and for the payment of additional amounts out of a
portion of the net cash flow or net sale or refinancing proceeds of the
properties subject to various priority payments.
Descriptions of the Operating Partnerships held at December 31, 1998, are as
follows:
<TABLE>
<CAPTION>
EQUITY IN
LOSSES OF
CARRYING OPERATING
NAME LOCATION PARTNERSHIP NAME AMOUNT PARTNERSHIPS
- --------------------------------- ------------------ --------------------------------- ----------- ------------
<S> <C> <C> <C> <C>
Delta Crossing................... Charlotte, NC Delta Crossing Limited $ -- $ --
Partnership
Crane's Landing.................. Winter Park, FL Crane's Landing Partner, Ltd. -- --
Monticello Apartments............ Southfield, MI Centrum Monticello Limited -- --
Partnership
The Ponds at Georgetown.......... Ann Arbor, MI Ponds at Georgetown Limited -- (407,218)
Partnership
----------- ------------
Balance at December 31, 1998..... $ -- $ (407,218)
----------- ------------
----------- ------------
</TABLE>
53
<PAGE>
Reconciliation of the carrying amount of the Operating Partnerships is as
follows:
<TABLE>
<CAPTION>
FOR THE YEAR FOR THE YEAR FOR THE YEAR
ENDED ENDED ENDED
DEC. 31, DEC. 31, DEC. 31,
1998 1997 1996
------------ ------------ ------------
<S> <C> <C> <C>
Balance at beginning of year $ -- $ -- $ --
Addition
Investment in Operating Partnerships............................... 407,218 121,450 --
Deduction
Equity in losses of Operating Partnerships......................... (407,218) (121,450) $ --
------------ ------------ ------------
Balance at end of year................................................. $ -- $ -- $ --
------------ ------------ ------------
------------ ------------ ------------
</TABLE>
Combined Financial Statements of the Operating Partnerships are as follows:
CAPITAL SOURCE II L.P.
OPERATING PARTNERSHIPS BALANCE SHEET
<TABLE>
<CAPTION>
DEC. 31, 1998 DEC. 31, 1997
------------- -------------
<S> <C> <C>
Assets
Investment in real estate:
Land........................................................................... $ 2,800,750 $ 2,800,750
Buildings...................................................................... 24,406,463 24,396,923
Personal Property.............................................................. 1,757,049 1,666,485
------------- -------------
28,964,262 28,864,158
Less accumulated depreciation.................................................. (7,290,932) (6,598,576)
------------- -------------
Net investment in real estate.................................................... 21,673,330 22,265,582
Cash and temporary cash investments, at cost which approximates market value..... 632,149 491,562
Escrow deposits and property reserves............................................ 606,575 613,261
Interest and other receivables................................................... 19,437 7,442
Deferred mortgage issuance cost, net of accumulated amortization................. 1,394,161 1,428,684
Other assets..................................................................... 193,964 234,560
------------- -------------
$ 24,519,616 $ 25,041,091
------------- -------------
------------- -------------
Liabilities and Partners' Capital (Deficit)
Liabilities
Accounts payable and accrued expenses.......................................... $ 307,981 $ 850,743
Mortgage loan payable.......................................................... 27,186,893 27,164,788
Intercompany interest payable.................................................. 294,222 247,487
Due to general partners and their affiliates................................... 920,347 961,563
------------- -------------
28,709,443 29,224,581
------------- -------------
Partners' Capital (Deficit)
General Partners............................................................... (4,189,827) (4,183,490)
Limited Partners............................................................... -- --
------------- -------------
(4,189,827) (4,183,490)
------------- -------------
$ 24,519,616 $ 25,041,091
------------- -------------
------------- -------------
</TABLE>
54
<PAGE>
CAPITAL SOURCE II L.P.
OPERATING PARTNERSHIPS INCOME STATEMENT
<TABLE>
<CAPTION>
FOR THE FOR THE FOR THE
YEAR ENDED YEAR ENDED YEAR ENDED
DEC. 31, DEC. 31, DEC. 31,
1998 1997 1996
------------ ------------ ------------
<S> <C> <C> <C>
Income
Rental income........................................................ $5,220,888 $5,105,108 $4,854,898
Interest on temporary cash investments............................... 19,993 13,084 20,781
Other income......................................................... 351,218 198,870 154,855
------------ ------------ ------------
5,592,099 5,317,062 5,030,534
------------ ------------ ------------
Expenses
Real estate operating expenses....................................... 2,779,741 2,504,026 2,325,848
Depreciation expense................................................. 692,357 700,297 725,922
Property development and management fees............................. -- -- 314
Interest expense..................................................... 2,493,145 2,476,272 2,487,587
Amortization......................................................... 46,008 48,768 48,819
------------ ------------ ------------
6,011,251 5,729,363 5,588,490
------------ ------------ ------------
Net Loss............................................................... $ (419,152) $ (412,301) $ (557,956)
------------ ------------ ------------
------------ ------------ ------------
Net Loss allocated to:
General Partners..................................................... (11,934) (290,851) (557,956)
Limited Partners..................................................... (407,218) (121,450) --
------------ ------------ ------------
$ (419,152) $ (412,301) $ (557,956)
------------ ------------ ------------
------------ ------------ ------------
</TABLE>
55
<PAGE>
CAPITAL SOURCE II L.P.
OPERATING PARTNERSHIPS STATEMENTS OF CASH FLOW
<TABLE>
<CAPTION>
FOR THE FOR THE FOR THE
YEAR ENDED YEAR ENDED YEAR ENDED
DEC. 31, DEC. 31, DEC. 31,
1998 1997 1996
------------ ------------ ------------
<S> <C> <C> <C>
Cash flows from operating activities
Net Loss............................................................. $ (419,152) $ (412,301) $ (557,956)
Adjustments to reconcile net loss to net cash provided by operating
activities
Depreciation and amortization.................................... 738,365 749,065 774,741
Property development and management fees......................... -- -- 314
Decrease (increase) in interest and other receivables............ (11,995) (1,992) 10,467
Decrease (increase) in escrow deposits and property reserves..... 6,686 (125,385) 63,524
Decrease in other assets......................................... 13,654 (22,669) (21,816)
Increase (decrease) in accounts payable and accrued expenses..... (542,762) 110,274 22,040
Decrease in intercompany interest payable........................ 46,735 (794) (728)
Increase (decrease) in due to general partners and their
affiliates..................................................... (41,216) (9,646) 15,090
------------ ------------ ------------
Net cash provided by operating activities.......................... (209,685) 286,552 305,676
------------ ------------ ------------
Cash flows from investing activities
Acquisition of real estate........................................... (9,540) -- (60,663)
Acquisition of personal property..................................... (90,564) (68,819) (102,292)
------------ ------------ ------------
Net cash used in investing activities................................ (100,104) (68,819) (162,955)
------------ ------------ ------------
Cash flows from financing activities
Principal payments on mortgage loan payable.......................... (141,789) (129,902) (118,650)
Capital contributions................................................ 407,218 121,450 --
Other, net........................................................... 184,947 (904) (17,956)
------------ ------------ ------------
Net cash provided by (used in) financing activities.................. 450,376 (9,356) (136,606)
------------ ------------ ------------
Net increase in cash and temporary cash investments.................... 140,587 208,377 6,115
Cash and temporary cash investments at beginning of year............... 491,562 283,185 277,070
------------ ------------ ------------
Cash and temporary cash investments at end of year..................... $ 632,149 $ 491,562 $ 283,185
------------ ------------ ------------
------------ ------------ ------------
</TABLE>
6. TRANSACTIONS WITH RELATED PARTIES.
The General Partners, certain of their affiliates and the Operating
Partnerships' general partners have received or may receive fees, compensation,
income, distributions and payments from the Partnership in connection with the
offering and the investment, management and sale of the Partnership's assets
(other than disclosed elsewhere) as follows.
The General Partners are entitled to receive an asset management and
partnership administration fee equal to 0.5% of invested assets per annum, the
first $50,000 of which will be paid each year with the balance payable only
during such years that a 6.5% annual return has been paid to investors on a
noncumulative basis. An additional fee equal to 0.5% of invested assets per
annum will be payable only during those years that an 11.5% annual return has
been paid to investors on a noncumulative basis. Any unpaid amounts will accrue
and be payable only after an 11.5% annual return to investors has been paid on a
cumulative basis and the investors have received the return of their capital
contributions. Asset
56
<PAGE>
management and partnership administration fees amounted to $50,000, $166,000 and
$166,000 for the years ended December 31, 1998, 1997 and 1996, respectively.
Substantially all of the Partnership's general and administrative expenses
are paid by a General Partner or an affiliate and reimbursed by the Partnership.
The amount of such expenses reimbursed to the General Partner for the years
ended December 31, 1998, 1997 and 1996 amounted to $842,272, $494,165 and
$313,049, respectively. These reimbursed amounts are presented on a cash basis
and do not reflect accruals made at each year end.
An affiliate of the General Partners has been retained to provide property
management services for The Ponds at Georgetown beginning in November 1996. The
fees for services provided were $41,167, $31,924 and $4,933 for 1998, 1997 and
1996, respectively, and represented the lower of costs incurred in providing
management of the property or customary fees for such services determined on a
competitive basis.
7. FAIR VALUE OF FINANCIAL INSTRUMENTS.
The following methods and assumptions were used by the Partnership in
estimating the fair value of its financial instruments:
CASH AND TEMPORARY CASH INVESTMENTS, INTEREST RECEIVABLE, OTHER ASSETS,
ACCOUNTS PAYABLE, DISTRIBUTIONS PAYABLE: Fair value approximates the carrying
value of such assets.
INVESTMENT IN FHA LOAN AND GNMA CERTIFICATES: Fair values are based on
prices obtained from an independent pricing source, adjusted for estimated
prepayments.
<TABLE>
<CAPTION>
AT DECEMBER 31, 1998 AT DECEMBER 31, 1997
---------------------------- ----------------------------
CARRYING ESTIMATED CARRYING ESTIMATED
AMOUNT FAIR VALUE AMOUNT FAIR VALUE
------------- ------------- ------------- -------------
<S> <C> <C> <C> <C>
Cash and temporary cash investments................. $ 432,999 $ 432,999 $ 1,240,992 $ 1,240,992
Investment in FHA Loan.............................. $ 6,505,857 $ 6,531,230 $ 6,538,424 $ 6,645,393
Investment in GNMA Certificates..................... $ 20,497,706 $ 20,717,740 $ 21,674,940 $ 21,899,413
</TABLE>
8. PROPOSED MERGER.
Due to significant changes in the United States equity and real estate
markets in the Fall of 1998, the general partners of the Partnership have
reevaluated the terms of the proposed merger of the Partnership and Capital
Source L.P. into a newly formed corporation that would have made opportunistic,
growth-oriented real estate investments that had the potential for higher than
average returns with correspondingly greater risks. The general partners have
decided to restructure the proposed transaction so that the resulting entity is
a publicly-traded limited partnership that will primarily invest in residential
apartment complexes and other commercial real estate. Therefore, the investment
objectives of the new limited partnership will be substantially different than
those of the originally proposed merger but similar to those of the Partnership.
9. LEGAL PROCEEDINGS.
The Partnership has been named as a defendant in a purported class action
lawsuit filed in the Delaware Court of Chancery on February 3, 1999 by two BAC
holders, Alvin M. Panzer and Sandra G. Panzer, against the Partnership, its
general partners, America First and various of their affiliates (including
Capital Source L.P., a similar partnership with general partners that are
affiliates of America First) and Lehman Brothers, Inc. The plaintiffs seek to
have the lawsuit certified as a class action on behalf of all BAC holders of the
Partnership and Capital Source L.P. The lawsuit alleges, among other things,
that a proposed merger transaction involving the Partnership and Capital Source
L.P. is deficient and coercive, that the defendants have breached the terms of
the Partnership agreement and that the defendants have
57
<PAGE>
acted in manners which violate their fiduciary duties to the BAC holders. The
plaintiffs seek to enjoin the proposed merger transaction and to appoint an
independent BAC holder representative to investigate alternative transactions.
The lawsuit also requests a judicial dissolution of the Partnership, an
accounting, and unspecified damages and costs. At this time, the general
partners are unable to estimate the effect of the litigation on the financial
statements of the Partnership.
10. SUMMARY OF UNAUDITED QUARTERLY RESULTS OF OPERATIONS.
<TABLE>
<CAPTION>
FROM JANUARY 1, 1998 TO DECEMBER 31, 1998 FIRST QUARTER SECOND QUARTER THIRD QUARTER FOURTH QUARTER
- --------------------------------------------- --------------- --------------- --------------- ---------------
<S> <C> <C> <C> <C>
Total income................................. $ 634,350 $ 639,955 $ 296,136(1) $ 530,887(2)
Total expenses............................... (417,488)(3) (273,959)(3) (158,660) (370,106)(3)
--------------- --------------- --------------- ---------------
Net income................................... $ 216,862 $ 365,996 $ 137,476 $ 160,781
--------------- --------------- --------------- ---------------
--------------- --------------- --------------- ---------------
Net income, basic and diluted, per BAC $ .06 $ .09 $ .03 $ .04
--------------- --------------- --------------- ---------------
--------------- --------------- --------------- ---------------
</TABLE>
<TABLE>
<CAPTION>
FROM JANUARY 1, 1997 TO DECEMBER 31, 1997 FIRST QUARTER SECOND QUARTER THIRD QUARTER FOURTH QUARTER
- --------------------------------------------- --------------- --------------- --------------- ---------------
<S> <C> <C> <C> <C>
Total income................................. $ 655,945 $ 529,318(1) $ 646,693 $ 641,565
Total expenses............................... (151,630) (148,583) (164,872) (354,431)(4)
--------------- --------------- --------------- ---------------
Net income................................... $ 504,315 $ 380,735 $ 481,821 $ 287,134
--------------- --------------- --------------- ---------------
--------------- --------------- --------------- ---------------
Net income, basic and diluted, per BAC....... $ .12 $ .10 $ .12 $ .07
--------------- --------------- --------------- ---------------
--------------- --------------- --------------- ---------------
</TABLE>
- ------------
(1) The Partnership had equity in losses of Operating Partnerships of $359,113
for the third quarter of 1998 and $121,450 for the second quarter of 1997.
(2) The Partnership earned less interest income during the quarter due primarily
to withdrawals from reserves to supplement monthly distributions to BAC
Holders, a reduction in the interest rate on The Ponds at Georgetown GNMA
Certificate (See Note 4), and an additional equity contribution made to The
Ponds at Georgetown Operating Partnership. In addition, the Partnership had
equity in losses of Operating Partnerships of $48,105 for the quarter.
(3) The Partnership incurred expenses of approximately $186,000, $66,000,
$38,000 and $177,000 during the first, second, third and fourth quarters,
respectively, in conjunction with the proposed merger described in Note 8.
(4) The Partnership incurred additional expenses in connection with a review of
various options for restructuring to improve total investment returns and
provide liquidity to the Partnership's investors.
58
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
MARCH 31, 1999
LIQUIDITY AND CAPITAL RESOURCES
The Partnership originally acquired: (a) four GNMA Certificates which are
guaranteed as to principal and interest by the Government National Mortgage
Association ("GNMA") collateralized by first mortgage loans on multifamily
housing properties located in three states; (b) an FHA Loan which is insured as
to principal and interest by the Federal Housing Administration ("FHA") on a
multifamily housing property; and (c) Partnership Equity investments in five
Operating Partnerships which own the multifamily properties financed by the GNMA
Certificates and the FHA Loan. The Partnership has been repaid by GNMA on one of
the GNMA Certificates and the related property has been deeded to GNMA in lieu
of foreclosure, thus eliminating the Partnership Equity Investment in such
Property. The obligations of GNMA and FHA are backed by the full faith and
credit of the United States government.
DISTRIBUTIONS
Cash distributions paid or accrued per BAC were as follows:
<TABLE>
<CAPTION>
FOR THE THREE MONTHS FOR THE THREE MONTHS
ENDED MARCH 31, 1999 ENDED MARCH 31, 1998
--------------------- ---------------------
<S> <C> <C>
Regular monthly distributions
Income............................................................. $ .1116 $ .0535
Return of capital.................................................. .0009 .1490
------ ------
$ .1125 $ .2025
------ ------
------ ------
Distributions
Paid out of cash flow.............................................. $ .1125 $ .0797
Paid out of reserves............................................... .0000 .1228
------ ------
$ .1125 $ .2025
------ ------
------ ------
</TABLE>
Regular monthly distributions to BAC Holders consist primarily of interest
received on the FHA Loan and GNMA Certificates. Additional cash for
distributions is received from other investments. The Partnership is permitted
to replenish its reserves with cash flows in excess of distributions paid. For
the three months ended March 31, 1999, $52,058 was placed into reserves for cash
flow in excess of the regular monthly cash distributions.
The Partnership believes that cash provided by operating and investing
activities and, if necessary, withdrawals from the Partnership's reserves, to
the extent available, will be adequate to meet short-term liquidity
requirements, including the payments of distributions to BAC Holders. The
Partnership has no other internal or external sources of liquidity. Under the
terms of its Partnership Agreement, the Partnership has the authority to enter
into short- and long-term debt financing arrangements; however, the Partnership
currently does not anticipate entering into such arrangements. The Partnership
is not authorized to issue additional BACs to meet short-term and long-term
liquidity requirements.
ASSET QUALITY
The FHA Loan and GNMA Certificates owned by the Partnership are guaranteed
as to principal and interest by FHA and GNMA, respectively. The obligations of
FHA and GNMA are backed by the full faith and credit of the United States
government. The Partnership Equity Investments, however, are not insured or
guaranteed. The value of these investments is a function of the value of the
real estate underlying the Operating Partnerships. The fair value of the
properties underlying the Operating Partnerships is based on
59
<PAGE>
management's best estimate of the net realizable value of such properties;
however, the ultimate realized values may vary from these estimates.
The overall status of the Partnership's investments has remained relatively
constant since December 31, 1998.
The following table shows the occupancy levels of the properties financed by
the Partnership as of March 31, 1999:
<TABLE>
<CAPTION>
NUMBER OF NUMBER OF UNITS PERCENTAGE OF
PROPERTY NAME LOCATION UNITS OCCUPIED UNITS OCCUPIED
- ------------------------------------------------ ------------------ ------------- ----------------- -----------------
<S> <C> <C> <C> <C>
Crane's Landing................................. Winter Park, FL 252 248 98%
Delta Crossing.................................. Charlotte, NC 178 169 95%
Monticello Apartments........................... Southfield, MI 106 97 92%
The Ponds at Georgetown......................... Ann Arbor, MI 134 134 100%
--- --- ---
670 648 97%
--- --- ---
--- --- ---
</TABLE>
RESULTS OF OPERATIONS
The table below compares the results of operations for each period shown.
<TABLE>
<CAPTION>
FOR THE THREE FOR THE THREE INCREASE
MONTHS ENDED MONTHS ENDED (DECREASE)
MARCH 31, 1999 MARCH 31, 1998 FROM 1998
-------------- -------------- -----------
<S> <C> <C> <C>
Mortgage-backed securities income................................... $ 580,957 $ 621,444 $ (40,487)
Interest income on temporary cash investments....................... 4,151 11,756 (7,605)
Other income........................................................ 400 1,150 (750)
-------------- -------------- -----------
585,508 634,350 (48,842)
Operating and administrative expenses............................... 133,446 417,488 (284,042)
-------------- -------------- -----------
Net income.......................................................... $ 452,062 $ 216,862 $ 235,200
-------------- -------------- -----------
-------------- -------------- -----------
</TABLE>
Mortgage-backed securities income decreased for the three months ended March
31, 1999, compared to the same period in 1998. Approximately $19,000 of such
decrease was due to the October 1998 payoff of The Ponds at Georgetown GNMA
Certificate which had an interest rate of 9% and the issuance of a new GNMA
Certificate at 7.25%. Approximately $18,900 of the remaining decrease of $21,500
was attributable to the 1998 sales of GNMA Certificates held in the
Partnership's reserves with the remaining $2,600 decrease due to the continued
amortization of the principal balances of the Partnership's mortgage-backed
securities.
Interest income on temporary cash investments decreased for the three months
ended March 31, 1999, compared to the same period in 1998, due to withdrawals
made from the Partnership's reserves during 1998 to supplement distributions to
BAC Holders.
Operating and administrative expenses decreased $284,042 for the three
months ended March 31, 1999, compared to the same period in 1998. Approximately
$186,400 of such decrease was attributable to the costs incurred during 1998 in
connection with the proposed merger under consideration during such period. The
remaining decrease was due primarily to decreases in salaries and related
expenses, consulting fees and the asset management and partnership
administration fee.
YEAR 2000
The Partnership does not own or operate its own computer system and owns no
business or other equipment. However, the operation of the Partnership's
business relies on the computer system and other
60
<PAGE>
equipment maintained by America First Companies L.L.C., the parent company of
its general partners ("America First"). In addition, the Partnership has
business relationships with a number of third parties whose ability to perform
their obligations to the Partnership depend on such systems and equipment. Some
or all of these systems and equipment may be affected by the inability of
certain computer programs and embedded circuitry to correctly recognize dates
occurring after December 31, 1999. America First has adopted a plan to deal with
this so-called "Year 2000 problem" with respect to its information technology
("IT") systems, non-IT systems and third party business relationships.
STATE OF READINESS
The IT system maintained by America First consists primarily of personal
computers, most of which are connected by a local area network. All accounting
and other record-keeping functions relating to the Partnership that are
conducted in house by America First are performed on this PC-LAN system. America
First does not own or operate any "mainframe" computer systems. The PC-LAN
system runs software programs that America First believes are compatible with
dates after December 31, 1999. America First has engaged a third party computer
consulting firm to review and test its PC-LAN system to ensure that it will
function correctly after that date and expects that this process, along with any
necessary remediation, will be completed by mid-1999. America First believes any
Year 2000 problems relating to its IT systems will be resolved without
significant operational difficulties. However, there can be no assurance that
testing will discover all potential Year 2000 problems or that it will not
reveal unanticipated material problems with the America First IT systems that
will need to be resolved.
Non-IT systems include embedded circuitry such as microcontrollers found in
telephone equipment, security and alarm systems, copiers, fax machines, mail
room equipment, heating and air conditioning systems and other infrastructure
systems that are used by America First in connection with the operation of the
Partnership's business. America First is reviewing its non-IT systems along with
the providers that service and maintain these systems, with initial emphasis
being placed on those, such as telephone systems, which have been identified as
necessary to America First's ability to conduct the operation of the
Partnership's business activities. America First expects that any necessary
modification or replacement of such "mission critical" systems will be
accomplished by mid-1999.
The Partnership has no control over the remediation efforts of third parties
with which it has material business relationships and the failure of certain of
these third parties to successfully remediate their Year 2000 issues could have
a material adverse effect on the Partnership. Accordingly, America First has
undertaken the process of contacting each such third party to determine the
state of their readiness for Year 2000. Such parties include, but are not
limited to, the obligors on the Partnership's GNMA Certificates and FHA Loan,
the Partnership's transfer and paying agent and the financial institutions with
which the Partnership maintains accounts. America First has received initial
assurances from certain of these third parties that their ability to perform
their obligations to the Partnership are not expected to be materially adversely
affected by the Year 2000 problem. America First will continue to request
updated information from these material third parties in order to assess their
Year 2000 readiness. If a material third party vendor is unable to provide
assurance to America First that it is, or will be, ready for Year 2000, America
First intends to seek an alternative vendor to the extent practical.
61
<PAGE>
COSTS
All of the IT systems and non-IT systems used to conduct the Partnership's
business operations are owned or leased by America First. Under the terms of its
partnership agreement, neither America First nor the Partnership's general
partners may be reimbursed by the Partnership for expenses associated with their
computer systems or other business equipment. Therefore, the costs associated
with the identification, remediation and testing of America First's IT and
non-IT systems will be paid by America First rather than the Partnership. The
Partnership will bear its proportionate share of the costs associated with
surveying the Year 2000 readiness of third parties. However, the Partnership's
share of the costs associated with these activities is expected to be
insignificant. Accordingly, the costs associated with addressing the
Partnership's Year 2000 issues are not expected to have a material effect on the
Partnership's results of operations, financial position or cash flow.
YEAR 2000 RISKS
The Partnership's general partners believe that the most reasonably likely
worst-case scenario will be that one or more of the third parties with which it
has a material business relationship will not have successfully dealt with its
Year 2000 issues and, as a result, is unable to provide services or otherwise
perform its obligations to the Partnership. For example, if an obligor on the
Partnership's GNMA Certificates or FHA Loan encounters a serious and unexpected
Year 2000 issue, it may be unable to make a timely payment of principal and
interest to the Partnership. This, in turn, could cause a delay or temporary
reduction in cash distributions to BAC holders. In addition, if the
Partnership's transfer and paying agent experiences Year 2000-related
difficulties, it may cause delays in making distributions to BAC holders or in
the processing of transfers of BACs. It is also possible that one or more of the
IT and non-IT systems of America First will not function correctly, and that
such problems may make it difficult to conduct necessary accounting and other
record keeping functions for the Partnership. However, based on currently
available information, the general partners do not believe that there will be
any protracted systemic failures of the IT or non-IT systems utilized by America
First in connection with the operation of the Partnership's business.
CONTINGENCY PLANS
Because of the progress which America First has made toward achieving Year
2000 readiness, the Partnership has not made any specific contingency plans with
respect to the IT and non-IT systems of America First. In the event of a Year
2000 problem with its IT system, America First may be required to manually
perform certain accounting and other record-keeping functions. America First
plans to terminate the Partnership's relationships with material third party
service providers that are not able to represent to America First that they will
be able to successfully resolve their material Year 2000 issues in a timely
manner. However, the Partnership will not be able to terminate its relationships
with certain third parties, such as the obligors on its GNMA Certificates and
FHA Loan, who may experience Year 2000 problems. The Partnership has no specific
contingency plans for dealing with Year 2000 problems experienced with these
third parties.
All forecasts, estimates or other statements in this report relating to the
Year 2000 readiness of the Partnership and its affiliates are based on
information and assumptions about future events. Such "forward-looking
statements" are subject to various known and unknown risks and uncertainties
that may cause actual events to differ from such statements. Important factors
upon which the Partnership's Year 2000 forward-looking statements are based
include, but are not limited to, (a) the belief of America First that the
software used in IT systems is already able to correctly read and interpret
dates after December 31, 1999 and will require little or no remediation; (b) the
ability to identify, repair or replace mission critical non-IT equipment in a
timely manner, (c) third parties' remediation of their internal systems to be
Year 2000 ready and their willingness to test their systems' interfaces with
those of America First, (d) no third party system failures causing material
disruption of telecommunications, data transmission, payment
62
<PAGE>
networks, government services, utilities or other infrastructure, (e) no
unexpected failures by third parties with which the Partnership has a material
business relationship and (f) no material undiscovered flaws in America First's
Year 2000 testing process.
QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
There have been no material changes in the Partnership's market risk since
December 31, 1998.
FORWARD-LOOKING STATEMENTS
This report contains forward-looking statements that reflect management's
current beliefs and estimates of future economic circumstances, industry
conditions, the Partnership's performance and financial results. All statements,
trend analysis and other information concerning possible or assumed future
results of operations of the Partnership and the real estate investments it has
made (including, but not limited to, the information contained in "Management's
Discussion and Analysis of Financial Condition and Results of Operations"),
constitute forward-looking statements. BAC Holders and others should understand
that these forward-looking statements are subject to numerous risks and
uncertainties and a number of factors could affect the future results of the
Partnership and could cause those results to differ materially from those
expressed in the forward looking statements contained herein.
63
<PAGE>
CAPITAL SOURCE II L.P.-A
BALANCE SHEETS
<TABLE>
<CAPTION>
MARCH 31, 1999
(UNAUDITED) DEC. 31, 1998
-------------- -------------
<S> <C> <C>
ASSETS
Cash and temporary cash investments, at cost which approximates market value.... $ 364,577 $ 432,999
Investment in FHA Loan (Note 4)................................................. 6,497,238 6,505,857
Investment in GNMA Certificates (Note 4)........................................ 20,466,193 20,497,706
Investment in Operating Partnerships (Note 5)................................... -- --
Interest receivable............................................................. 195,002 195,440
Other assets.................................................................... 124,040 139,204
-------------- -------------
$ 27,647,050 $ 27,771,206
-------------- -------------
-------------- -------------
LIABILITIES AND PARTNERS' CAPITAL (DEFICIT)
Liabilities
Accounts payable (Note 6)..................................................... $ 227,035 $ 347,446
Distribution payable (Note 3)................................................. 303,871 303,871
-------------- -------------
530,906 651,317
-------------- -------------
Partners' Capital (Deficit)
General Partner............................................................... (295,296) (295,259)
Beneficial Assignment Certificate Holders ($6.83 per BAC in 1999 and 1998).... 27,411,440 27,415,148
-------------- -------------
27,116,144 27,119,889
-------------- -------------
$ 27,647,050 $ 27,771,206
-------------- -------------
-------------- -------------
</TABLE>
The accompanying notes are an integral part of the financial statements.
64
<PAGE>
CAPITAL SOURCE II L.P.-A
STATEMENTS OF INCOME AND COMPREHENSIVE INCOME
(UNAUDITED)
<TABLE>
<CAPTION>
FOR THE THREE FOR THE THREE
MONTHS ENDED MONTHS ENDED
MARCH 31, 1999 MARCH 31, 1998
-------------- --------------
<S> <C> <C>
Income
Mortgage-backed securities income.............................................. $ 580,957 $ 621,444
Interest income on temporary cash investments.................................. 4,151 11,756
Other income................................................................... 400 1,150
-------------- --------------
585,508 634,350
Expenses
Operating and administrative expenses (Note 6)................................. 133,446 417,488
-------------- --------------
Net income..................................................................... 452,062 216,862
Other comprehensive income:
Unrealized holding gains arising during the period........................... -- 3,415
-------------- --------------
Net comprehensive income......................................................... $ 452,062 $ 220,277
-------------- --------------
-------------- --------------
Net income allocated to:
General Partners............................................................... $ 4,521 $ 2,169
Limited Partners............................................................... 447,541 214,693
-------------- --------------
$ 452,062 $ 216,862
-------------- --------------
-------------- --------------
Net income, basic and diluted, per BAC........................................... $ .11 $ .06
-------------- --------------
-------------- --------------
</TABLE>
The accompanying notes are an integral part of the financial statements.
65
<PAGE>
CAPITAL SOURCE II L.P.-A
STATEMENT OF PARTNERS' CAPITAL (DEFICIT)
FOR THE THREE MONTHS ENDED MARCH 31, 1999
(UNAUDITED)
<TABLE>
<CAPTION>
GENERAL
PARTNER BAC HOLDERS TOTAL
----------- ------------- -------------
<S> <C> <C> <C>
Balance at December 31, 1998.......................................... $ (295,259) $ 27,415,148 $ 27,119,889
Net income.......................................................... 4,521 447,541 452,062
Cash distributions paid or accrued (Note 3)......................... (4,558) (451,249) (455,807)
----------- ------------- -------------
Balance at March 31, 1999............................................. $ (295,296) $ 27,411,440 $ 27,116,144
----------- ------------- -------------
----------- ------------- -------------
</TABLE>
CAPITAL SOURCE II L.P.-A
STATEMENTS OF CASH FLOWS
(UNAUDITED)
<TABLE>
<CAPTION>
FOR THE THREE FOR THE THREE
MONTHS ENDED MONTHS ENDED
MARCH 31, 1999 MARCH 31, 1998
-------------- --------------
<S> <C> <C>
Cash flows from operating activities
Net income..................................................................... $ 452,062 $ 216,862
Adjustments to reconcile net income to net cash from operating activities
Amortization of discount on mortgage-backed securities..................... (77) (610)
Decrease in interest receivable............................................ 438 2,979
Decrease in other assets................................................... 15,164 16,922
Decrease in accounts payable............................................... (120,411) (108,349)
-------------- --------------
Net cash provided by operating activities........................................ 347,176 127,804
-------------- --------------
Cash flow provided by investing activity
FHA Loan and GNMA Certificate principal payments received...................... 40,209 90,219
-------------- --------------
Cash flow used in financing activity
Distributions paid............................................................. (455,807) (820,452)
-------------- --------------
Net decrease in cash and temporary cash investments.............................. (68,422) (602,429)
Cash and temporary cash investments at beginning of period....................... 432,999 1,240,992
-------------- --------------
Cash and temporary cash investments at end of period............................. $ 364,577 $ 638,563
-------------- --------------
-------------- --------------
</TABLE>
The accompanying notes are an integral part of the financial statements.
66
<PAGE>
CAPITAL SOURCE II L.P.-A
NOTES TO FINANCIAL STATEMENTS
MARCH 31, 1999
(UNAUDITED)
1. ORGANIZATION.
Capital Source II L.P.-A (the "Partnership") was formed on August 22, 1986,
under the Delaware Revised Uniform Limited Partnership Act. The General Partners
of the Partnership are Insured Mortgage Equities II L.P. and America First
Capital Source II, L.L.C. (the "General Partners").
The Partnership was formed to invest principally in federally insured
mortgages on multifamily housing properties and limited partnership interests in
Operating Partnerships which construct and operate these properties. Each
federally insured loan is guaranteed in amounts equal to the face amount of the
mortgage, by the Federal Housing Administration ("FHA") or the Government
National Mortgage Association ("GNMA"). Hereinafter, the Partnership's
investments in such mortgages are referred to as investments in mortgage-backed
securities. The Operating Partnerships are geographically located as follows:
(i) two in Michigan; and (ii) one each in Florida and North Carolina.
CS Properties II, Inc., which is owned by the General Partners, serves as
the Special Limited Partner for the Operating Partnerships. The Special Limited
Partner has the power, among other things, to remove the general partners of the
Operating Partnerships under certain circumstances and to consent to the sale of
the Operating Partnerships' assets. CS Properties II, Inc. also serves as a
co-general partner of The Ponds at Georgetown.
The Partnership will terminate subsequent to the sale of all properties but
in no event will the Partnership continue beyond December 31, 2035.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES.
(a) FINANCIAL STATEMENT PRESENTATION. The financial statements of the
Partnership are prepared without audit on the accrual basis of accounting in
accordance with generally accepted accounting principles. The 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 for the year
ended December 31, 1998. In the opinion of management, all normal and recurring
adjustments necessary to present fairly the financial position at March 31,
1999, and results of operations for all periods presented have been made.
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
(b) INVESTMENT IN MORTGAGE-BACKED SECURITIES. Investment securities are
classified as held-to-maturity, available-for-sale, or trading. Investments
classified as held-to-maturity are carried at amortized cost. Investments
classified as available-for-sale are reported at fair value, as determined by
reference to published sources. Any unrealized gains or losses are excluded from
earnings and reflected in other comprehensive income. Subsequent increases and
decreases in the net unrealized gain/loss on the available-for-sale securities
are reflected as adjustments to the carrying value of the portfolio and in other
comprehensive income. The Partnership does not have investment securities
classified as trading.
(c) INVESTMENT IN OPERATING PARTNERSHIPS. The investment in Operating
Partnerships consists of interests in limited partnerships which own properties
underlying the mortgage-backed securities and are accounted for using the equity
method. The investments by the Partnership in the Operating Partnerships
67
<PAGE>
were recorded at the cost to acquire such interests. Subsequently, losses were
recorded by the Partnership as they were realized by the Operating Partnerships.
The Partnership suspended recognizing losses in the Operating Partnerships when
its entire initial investment had been consumed by such losses. Subsequently,
losses have been recognized only to the extent of additional contributions, net
of distributions received, to the Operating Partnerships by the Partnership. The
Operating Partnerships are not insured or guaranteed. The value of these
investments is a function of the value of the real estate owned by the Operating
Partnerships. With regard to the Operating Partnerships, the Partnership is not
the general partner and it has no legal obligation to provide additional cash
support nor has it indicated any commitment to provide this support; accordingly
it has not reduced its investment in these Operating Partnerships below zero.
(d) INCOME TAXES. No provision has been made for income taxes since
Beneficial Assignment Certificate ("BAC") Holders are required to report their
share of the Partnership's income for federal and state income tax purposes.
(e) TEMPORARY CASH INVESTMENTS. Temporary cash investments are invested in
short-term debt securities purchased with an original maturity of three months
or less.
(f) NET INCOME PER BAC. Net income per BAC has been calculated based on the
number of BACs outstanding (4,011,101) for all periods presented.
(g) RESTATEMENT. The Partnership holds a majority ownership interest and
through CS Properties II, Inc. can influence the decisions of the general
partners of the Operating Partnerships in certain circumstances. Accordingly,
the Partnership had consolidated the Operating Partnerships since inception. In
1998, it was determined that this influence did not constitute control of the
Operating Partnerships. Therefore, the accompanying 1998 financial statements
have been restated to deconsolidate the Operating Partnerships and to account
for the investments in Operating Partnerships under the equity method of
accounting rather than consolidation.
Under the equity method of accounting, the Partnership's investments are
adjusted to reflect its share of Operating Partnership profits or losses and
distributions. As required by consolidation accounting, the Partnership had
recorded losses from the Operating Partnerships substantially in excess of its
investments. As previously disclosed, the Partnership is not the general
partner, nor is it obliged to fund the negative balances. Under equity
accounting, the Partnership does not reduce the carrying value of its
investments below zero. As restated, investments in the Operating Partnerships
are reflected at zero and profits and losses are recorded based on capital
contributions made and distributions received from the Operating Partnerships.
The restatement increased net income for the three months ended March 31, 1998,
by $106,039 or $.02 per BAC (basic and diluted).
(h) NEW ACCOUNTING PRONOUNCEMENT. On January 1, 1999, the Partnership
adopted Statement of Position 98-5, "Reporting on the Costs of Start-up
Activities" (SOP 98-5). SOP 98-5 requires costs of start-up activities and
organization costs to be expensed as incurred. The adoption of SOP 98-5 did not
have an impact on the Partnership's financial statements.
3. PARTNERSHIP INCOME, EXPENSES AND CASH DISTRIBUTIONS.
Profits and losses from continuing operations and cash available for
distribution will be allocated 99% to the investors and 1% to the General
Partners. Certain fees payable to the General Partners will not become due until
investors have received certain priority returns. Cash distributions included in
the financial statements represent the actual cash distributions made during
each period and the change in cash distributions accrued at the end of each
period.
The General Partners will receive 1% of the net proceeds from any sale of
Partnership assets. The General Partners will receive a termination fee equal to
3% of all sales proceeds less actual costs incurred in connection with all sales
transactions, payable only after the investors have received a return of their
capital contributions and an 11.5% annual return on a cumulative basis. The
General Partners will also
68
<PAGE>
receive a fee equal to 9.1% of all cash available for distribution and sales
proceeds (after deducting from cash available or sales proceeds any termination
fee paid therefrom) after investors have received a return of their capital
contributions and an 11.5% annual return on a cumulative basis.
4. INVESTMENT IN MORTGAGE-BACKED SECURITIES.
The mortgage-backed securities held by the Partnership represent Government
National Mortgage Association ("GNMA") Certificates and a Federal Housing
Administration ("FHA") Loan. The GNMA Certificates are backed by first mortgage
loans on multifamily housing properties and pools of single-family properties.
The GNMA Certificates are debt securities issued by a private mortgage lender
and are guaranteed by GNMA as to the full and timely payment of principal and
interest on the underlying loans. The FHA Loan is guaranteed as to the full and
timely payment of principal and interest on the underlying Loan.
At March 31, 1999, all of the Partnership's mortgage-backed securities were
classified as held-to-maturity. The total amortized cost, gross unrealized
holding gains and aggregate fair value of such securities were $26,963,431,
$245,015 and $27,208,446, respectively.
Descriptions of the Partnership's mortgage-backed securities at March 31,
1999, are as follows:
<TABLE>
<CAPTION>
NUMBER OF INTEREST MATURITY CARRYING
TYPE OF SECURITY AND NAME LOCATION UNITS RATE DATE AMOUNT
- ------------------------------------------ -------------------- ----------- ----------- ------------ -------------
<S> <C> <C> <C> <C> <C>
GNMA Certificates:
Crane's Landing Winter Park, FL 252 8.75% 12-15-2030 $ 10,162,924
Monticello Apartments Southfield, MI 106 8.75% 11-15-2029 5,290,112
The Ponds at Georgetown Ann Arbor, MI 134 7.50% 12-15-2029 5,013,157
-------------
20,466,193
FHA Loan:
Delta Crossing Charlotte, NC 178 9.10% 10-01-2030 6,497,238
-------------
Balance at March 31, 1999 $ 26,963,431
-------------
-------------
</TABLE>
Reconciliation of the carrying amount of the mortgage-backed securities is
as follows:
<TABLE>
<S> <C>
Balance at December 31, 1998................................................... $27,003,563
Addition
Amortization of discount on mortgage-backed securities..................... 77
Deduction
FHA Loan and GNMA Certificate principal payments received.................. (40,209)
----------
Balance at March 31, 1999...................................................... $26,963,431
----------
----------
</TABLE>
5. INVESTMENT IN OPERATING PARTNERSHIPS.
The Partnership's Investment in Operating Partnerships consist of interests
in limited partnerships which own multifamily properties financed by the GNMA
Certificates and FHA Loan held by the Partnership. The limited partnership
agreements originally provided for the payment of a base return on the equity
provided to the limited partnerships and for the payment of additional amounts
out of a portion of the net cash flow or net sale or refinancing proceeds of the
properties subject to various priority payments.
69
<PAGE>
Descriptions of the Operating Partnerships held at March 31, 1999, are as
follows:
<TABLE>
<CAPTION>
CARRYING
NAME LOCATION PARTNERSHIP NAME AMOUNT
- ---------------------------------------- ------------------ ---------------------------------------- -----------
<S> <C> <C> <C>
Delta Crossing.......................... Charlotte, NC Delta Crossing Limited Partnership $ --
Crane's Landing......................... Winter Park, FL Crane's Landing Partnership, Ltd. --
Monticello Apartments................... Southfield, MI Centrum Monticello Limited Partnership --
The Ponds at Georgetown................. Ann Arbor, MI Ponds at Georgetown Limited Partnership --
-----------
Balance at March 31, 1999............... $ --
-----------
-----------
</TABLE>
6. TRANSACTIONS WITH RELATED PARTIES.
The General Partners, certain of their affiliates and the Operating
Partnerships' general partners have received or may receive fees, compensation,
income, distributions and payments from the Partnership in connection with the
offering and the investment, management and sale of the Partnership's assets
(other than disclosed elsewhere) as follows.
The General Partners are entitled to receive an asset management and
partnership administrative fee equal to 0.5% of invested assets per annum, the
first $50,000 of which will be paid each year with the balance payable only
during such years that a 6.5% annual return has been paid to investors on a
noncumulative basis. An additional fee equal to 0.5% of invested assets per
annum will be payable only during those years that an 11.5% annual return has
been paid to investors on a noncumulative basis. Any unpaid amounts will accrue
and be payable only after an 11.5% annual return to investors has been paid on a
cumulative basis and the investors have received the return of their capital
contributions. Asset management and partnership administration fees of $12,500
were incurred during the three months ended March 31, 1999.
Substantially all of the Partnership's general and administrative expenses
are paid by a General Partner or an affiliate and reimbursed by the Partnership.
The amount of such expenses reimbursed to the General Partner for the three
months ended March 31, 1999 was $125,051. These reimbursed expenses are
presented on a cash basis and do not reflect accruals made at quarter end.
An affiliate of the General Partners has been retained to provide property
management services for The Ponds at Georgetown. The fees for services provided
were $10,674 for the three months ended March 31, 1999 and represented the lower
of costs incurred in providing management of the property or customary fees for
such services determined on a competitive basis.
7. LEGAL PROCEEDINGS.
The Partnership has been named as a defendant in a purported class action
lawsuit filed in the Delaware Court of Chancery on February 3, 1999 by two BAC
holders, Alvin M. Panzer and Sandra G. Panzer, against the Partnership, its
general partners, America First and various of their affiliates (including
Capital Source L.P., a similar partnership with general partners that are
affiliates of America First) and Lehman Brothers, Inc. The plaintiffs seek to
have the lawsuit certified as a class action on behalf of all BAC holders of the
Partnership and Capital Source L.P. The lawsuit alleges, among other things,
that a proposed merger transaction involving the Partnership and Capital Source
L.P. is deficient and coercive, that the defendants have breached the terms of
the Partnership's partnership agreement and that the defendants have acted in
manners which violate their fiduciary duties to the BAC holders. The plaintiffs
seek to enjoin the proposed merger transaction and to appoint an independent BAC
holder representative to investigate alternative transactions. The lawsuit also
requests a judicial dissolution of the Partnership, an accounting, and
unspecified damages and costs. At this time, the general partners are unable to
estimate the effect of the litigation, if any, on the financial statements of
the Partnership.
70
<PAGE>
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON JULY 21, 1999
REGISTRATION NO. 333-52117
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
------------------------
PARTNERSHIP SUPPLEMENTS
TO
PRE-EFFECTIVE
AMENDMENT NO. 3
TO
FORM S-4
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
---------------------
AMERICA FIRST REAL ESTATE
INVESTMENT PARTNERS, L.P.
(Exact name of registrant as specified in its charter)
1004 FARNAM STREET, SUITE 400
OMAHA, NEBRASKA 68102
(402) 444-1130
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
<PAGE>
AMERICA FIRST REAL ESTATE INVESTMENT PARTNERS, L.P.
SUPPLEMENT DATED , 1999
TO
PROSPECTUS/CONSENT SOLICITATION STATEMENT
DATED , 1999
FOR
CAPITAL SOURCE L.P.
As described in detail in the accompanying prospectus/consent solicitation
statement, we are proposing a merger of Capital Source L.P. and Capital Source
II L.P.-A, which we refer to as the partnerships, with and into America First
Real Estate Investment Partners, L.P., a newly organized Delaware limited
partnership, which we refer to as the company. We, the general partners of the
partnerships, are soliciting your consent to this transaction. In the
transaction, the company will distribute units of assigned limited partner
interests, and in some situations cash, promissory notes and Variable Rate
Junior Notes Callable on or After the Date of Issuance, or notes, to the
partnerships in exchange for the assets of the partnerships. After the
transaction, you will be a unitholder or noteholder, as the case may be, of the
company and will no longer be a limited partner, or BAC holder, in your
respective partnership. We expect that the units will be listed for trading on
NASDAQ under the symbol " ". The notes will not be listed for trading.
Through this prospectus/consent solicitation statement and the accompanying
supplements, we are asking you, as a BAC holder, to approve the transaction. BAC
holders holding in excess of 50% in interest of the outstanding BACs of each
partnership must vote "YES" in favor of the transaction on the enclosed consent
form in order for the transaction to be completed.
We have proposed the transaction to enhance the liquidity of your investment
and to increase the cash flow and net asset values of the partnerships. We plan
to accomplish this by listing the company's units on NASDAQ, by leveraging its
assets, by making equity investments primarily in multifamily residential
properties and by actively managing the makeup of its real estate portfolio. We
believe that the proposed transaction permits you to realize the value of your
investment in the partnerships, as opposed to liquidating your partnership or
continuing your partnership unchanged.
We, as the general partners of the partnerships, strongly recommend that you
vote "YES" in favor of the transaction.
This Supplement has been prepared for you, as a Cap Source I investor, to
discuss the effects and fairness of the transaction with respect to your BACs,
and to provide information on your partnership. The effects of the transaction
may be different for Cap Source I investors than for Cap Source II investors. A
supplement has also been prepared for Cap Source II investors. The supplements
are a part of the prospectus/consent solicitation statement. Capitalized terms
not defined in this supplement shall have the same meaning as those terms have
in the accompanying prospectus/consent solicitation statement.
You or your representatives may obtain a copy of any supplement without
charge by making a request in writing to the general partners of your
partnership. All requests should be directed to America First Investor Services
Department, 1004 Farnam Street, Suite 400, Omaha, Nebraska 68102.
THIS TRANSACTION INVOLVES MATERIAL RISKS THAT YOU SHOULD CONSIDER. SEE "RISK
FACTORS" BEGINNING ON PAGE 19 OF THE PROSPECTUS/CONSENT SOLICITATION STATEMENT.
IN PARTICULAR, YOU SHOULD CONSIDER THE FOLLOWING:
- The units may trade at prices below the value of the company's assets and
the $10 per unit price arbitrarily assigned for the sole purpose of
allocating the units in the transaction. We do not expect a public market
for the notes to develop. If the notes are sold, they may sell at prices
substantially below their issuance price.
- We initiated and participated in the structuring of the transaction and
have conflicts of interests with respect to its completion.
- There can be no guarantee of the level of the company's future cash
distributions.
<PAGE>
- The company is newly formed and has no operating history.
- If you vote "NO" against the transaction, but your partnership approves
it, you do not have any appraisal or other dissenters' rights under
Delaware law and none will be offered in the transaction.
- There are alternatives to the transaction. By approving the transaction,
you will effectively preclude the pursuit of some of the alternatives.
- The company intends to use debt financing to increase its real estate
asset portfolio. An increase in debt may increase the possibility of
default on the company's obligations. This could affect the company's
ability to pay distributions to you.
- If your partnership approves the transaction, you will be bound even if
you vote "NO" against the transaction.
- If you choose to receive notes, you will not hold an equity interest in
the company and will not be able to participate in the company's growth or
benefit from any increases in the value of the units. The notes are
unsecured obligations of the company and may be redeemed before maturity
at the company's option.
SIMILARITIES BETWEEN CAP SOURCE I AND CAP SOURCE II
The investment objectives and the assets held by the partnerships are
substantially similar in nature and character. Although there are differences in
the geographic area, style of construction and specific locations for each
property owned by the operating partnerships, there are no significant
differences in occupancy rates or property types. All of the properties owned by
the operating partnerships are multifamily apartment complexes. In addition,
ownership of the operating partnership interests in the Ponds at Georgetown
Limited partnership ("The Ponds") is shared by Cap Source I and Cap Source II.
DIFFERENCES BETWEEN CAP SOURCE I AND CAP SOURCE II
Except for The Ponds, each partnership equity interest is unique to the
partnership that holds the interest. The style of construction, specific
location and geographic areas for each property owned by the operating
partnerships are different. Cap Source I has partnership equity interests in
four operating partnerships that have a general partner that is an affiliate of
Cap Source I, which include Waterman's Crossing, Fox Hollow, Misty Springs and
The Ponds. The remaining Cap Source I operating partnerships have general
partners that are not affiliated with Cap Source I. All of the Cap Source II
operating partnerships, except The Ponds, have general partners that are not
affiliated with Cap Source II. See "THE PARTNERSHIPS" in the prospectus/consent
solicitation statement.
Although both partnerships hold a majority of their assets in liquid
investments, the amount of cash and cash equivalents held by each partnership is
different. Cash, cash equivalents and net other assets and liabilities make up
20.4% of Cap Source I's assets, whereas only 1.5% of Cap Source II's assets are
in cash, cash equivalents and net other assets and liabilities.
Distributions for both partnerships are based upon the adjusted BAC value,
which is $20.00 per BAC of original investment, adjusted for returns of capital
to investors. The adjusted BAC value for Cap Source I is $18.35. The adjusted
BAC value for Cap Source II is $12.39.
In 1998, Cap Source I made distributions at the rate of 5.5% of its adjusted
BAC value, which equaled $1.01 per BAC for the year. Cap Source I made
distributions at an annual rate of 5.5% of its adjusted BAC value, which equaled
$.2525 per BAC for the first quarter of 1999. Cap Source II made distributions
at the rate of 5.3% of its adjusted BAC value, which equaled $.66 per BAC for
1998, $.2595 of which was made from reserves. Cap Source II made distributions
at an annual rate of 3.6% of its adjusted BAC value, which equaled $.1125 per
BAC for the first quarter of 1999. See "SECONDARY MARKET AND OWNERSHIP OF
PARTNERSHIP BACS--Partnership Distributions" in the prospectus/consent
solicitation statement.
Cap Source I Supp-2
<PAGE>
The partnerships have different fee structures for compensating their
general partners. The Cap Source I General Partners are entitled to receive an
asset management and partnership administrative fee equal to 0.5% of invested
assets per annum, payable only during such years that an 8% return has been paid
to investors on a noncumulative basis. Any unpaid amounts will accrue and be
payable only after a 13% annual return to Cap Source I investors has been paid
on a cumulative basis and such investors have received the return of their
capital contributions.
The Cap Source II General Partners are entitled to receive an asset
management and partnership administrative fee equal to 0.5% of invested assets
per annum, the first $50,000 of which is paid each year with the balance payable
only during such years that a 6.5% annual return has been paid to Cap Source II
investors on a noncumulative basis. An additional fee of 0.5% of invested assets
will be paid in years that an 11.5% annual return has been paid to Cap Source II
investors on a cumulative basis. Any unpaid amounts will accrue and be payable
only after an 11.5% annual return to investors has been paid on a cumulative
basis and the investors have received the return of their capital contributions.
The general partners of both partnerships also receive 1% of the net
proceeds from any sale of partnership assets. The general partners of both
partnerships will receive a termination fee equal to 3% of all sales proceeds
less actual costs incurred in connection with all sales transactions, payable
only after the investors have received a return of their capital contributions
and a 13% annual return on a cumulative basis with respect to Cap Source I or an
11.5% annual return on a cumulative basis with respect to Cap Source II. The
general partners of both partnerships will also receive a fee equal to 9.1% of
all cash available for distribution and sales proceeds (after deducting from
cash available or sales proceeds any termination fee paid therefrom) after
investors have received a return of their capital contributions and a 13% annual
return on a cumulative basis with respect to Cap Source I or an 11.5% annual
return on a cumulative basis with respect to Cap Source II. However, the
difference in this latter fee is not a material difference since neither
partnership has achieved the target level since inception, and the Cap Source
General Partners do not anticipate that this level will be reached in the
foreseeable future.
RISK FACTORS
The transaction does not involve risks which are more significant to Cap
Source I investors than to Cap Source II investors. However, the transaction
involves some risks and other adverse factors which are applicable to both
partnerships. Because all of the risks and adverse factors described in the
prospectus/ consent solicitation statement apply to the effects of the
transaction on both partnerships, you should carefully review the section
entitled "RISK FACTORS" in the prospectus/consent solicitation statement. Except
as otherwise stated in this supplement, there are no material differences in the
manner in which Cap Source I or Cap Source II will be effected by any of the
risks or adverse factors discussed in such "RISK FACTORS" section.
For most investors, the transaction will not result in a taxable transaction
except to the extent notes are received in the transaction. For a more detailed
discussion of the tax consequences of the transaction see the sections entitled
"FEDERAL INCOME TAX CONSEQUENCES" below and in the prospectus/ consent
solicitation statement.
By participating in the transaction, you will assume risks associated with
the assets of the other partnership, Cap Source II. Although the majority of the
assets in Cap Source II are substantially similar to those of Cap Source I, the
multifamily apartment complexes in which Cap Source II owns limited partnership
interests are of different construction, geographic area and specific location
than the complexes in which your partnership owns interests. Because the market
for real estate may vary from one region of the country to another, the change
in geographic diversity may expose you to different and greater risks than those
you are presently exposed. For geographic information regarding the
partnerships' properties, see "THE PARTNERSHIPS" in the prospectus/consent
solicitation statement. Moreover, because the properties owned by the
partnerships are not of uniform quality, combining assets and
Cap Source I Supp-3
<PAGE>
liabilities of the partnerships in the transaction may diminish the overall
asset quality underlying the investments of some of the investors by comparison
with their existing partnership investment.
The following is a brief description of the potential disadvantages, adverse
consequences and risks of the transaction that is applicable to both
partnerships. This description is qualified in its entirety by the more detailed
discussion in the section entitled "RISK FACTORS" contained in the
prospectus/consent solicitation statement.
- We cannot predict the prices at which the units will trade after the
transaction. The price of the units may decrease after the transaction due
to the potentially large number of units that may be sold immediately by
unitholders. Thus, the units may trade at prices substantially below the
estimated liquidation value of the company's assets and the $10 per unit
price we arbitrarily assigned for the sole purpose of allocating the units
in the transaction.
- We do not expect a public market for the notes to develop. If the notes
are sold, they may sell at prices substantially below their issuance
price. Investors who receive notes are likely to receive the full face
amount of the notes only if they hold the notes to maturity or if the
company repays or refinances the notes at or before maturity. The maturity
date of the notes is approximately eight years after the transaction.
- We initiated and participated in the structuring of the transaction and
have conflicts of interests with respect to its completion. We will
receive economic benefits as a result of the transaction. We will hold a
1% interest in the company as its general partner, which continues our 1%
interest in the partnerships. We will also receive management and other
fees from the company as its general partner following the transaction.
See "THE TRANSACTION--Conflicts of Interest and Benefits to Insiders" and
"MANAGEMENT OF THE GENERAL PARTNER" in the prospectus/consent solicitation
statement.
- There can be no guarantee of the level of the company's future
distributions. Regardless of the initial level, distributions could
decline in the future so that you may receive distributions that are lower
than the distributions you currently receive as an investor in the
partnerships. The company may also reinvest cash generated by the sale of
existing assets or from operations to acquire additional assets. This
could cause cash distributions to be lower than the distributions made by
the partnerships in some cases.
- The company was recently organized and has no operating history. As a
result, there can be no assurance that any of the company's planned future
activities will be successful.
- If you vote "NO" against the transaction, but your partnership approves
the transaction, you will not be entitled to receive cash based on an
appraisal of your BACs or any other dissenters' rights under Delaware law,
nor will you be given any similar rights in the transaction. You will have
the right to exchange your BACs for notes if you so elect, with some
limitations. See "THE NOTES" in the prospectus/consent solicitation
statement.
- There are alternatives to the transaction. If you approve the transaction,
you will effectively preclude the pursuit of some of the alternatives. See
"BENEFITS OF, AND BACKGROUND AND REASONS FOR, THE
TRANSACTION--Alternatives Considered" in the prospectus/ consent
solicitation statement.
- The company intends to use debt financing to increase its real estate
asset portfolio. Although the notes will be issued under an indenture that
creates debt limitations, the company's organizational documents do not
limit the amount of debt the company may incur. The company will therefore
be more leveraged than either of the partnerships. This use of debt
financing may increase the possibility of default on the company's
obligations, which could adversely affect the company's earnings and its
ability to pay expected distributions to you.
Cap Source I Supp-4
<PAGE>
- If the investors holding a majority in interest of the BACs of each
partnership approve the transaction, your partnership will be merged with
and into the company. You will be bound by this approval even if you vote
"NO" against the transaction or abstain from voting.
- The notes are prepayable at any time, unsecured obligations of the company
and, as a practical matter, will be junior to all other debt of the
company. The notes will bear interest at a variable rate that may be lower
than rates on other variable rate debt instruments that may be perceived
as having comparable or lower risks than the notes. If you choose and
receive notes, you will not hold an equity interest in the company and
therefore will not be able to participate in the company's growth or
benefit from any increases in the value of the units.
- The company may be liable for unknown, undisclosed or contingent
liabilities of the partnerships, which could adversely affect the
liquidity of the company and its ability to pay expected distributions to
you.
- If dissenting investors elect to receive notes in excess of the maximum
note limitation, the transaction will not be completed. If this does not
occur, but the total amount of notes allocable to all investors who elect
to receive notes exceeds the maximum note limitation, notes will be
allocated first to dissenting investors who elected to receive notes and
then, on a pro rata basis, to investors who abstained from voting or who
voted "YES" in favor of the transaction. Thus, you could choose notes but
receive units instead. To be assured of receiving notes, you must vote
"NO" with respect to the transaction and elect to receive notes.
For a more detailed discussion of the risks associated with the transaction,
see "RISK FACTORS" in the prospectus/consent solicitation statement.
EFFECT ON FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Upon completion of the transaction, the operations and existence of the
partnerships will cease. See "THE TRANSACTION" in the prospectus/consent
solicitation statement. If the transaction is not completed, we do not
contemplate liquidation of the partnerships, which would result in an all-cash
payment to you in the near future. The transaction, however, does not result in
an all-cash payment to you in liquidation of your investment. For example, if
you become a noteholder, you will have exchanged your BACs for unsecured debt
obligations of the company which may not be retired in full until ,
2007, a date approximately seven years after the effective date. On the other
hand, if you exchange your BACs for units, you will receive an equity interest
in the company whose marketability will depend upon the aftermarket that may
develop with respect to the units.
If the transaction is approved, all transaction costs will be paid by the
partnerships and the company. If the transaction is rejected, the general
partners of each partnership will bear a percentage of all transaction costs,
excluding solicitation/communication costs, equal to the total number of
abstentions and "NO" votes cast by investors in that partnership with respect to
the transaction, divided by the total number of abstentions and votes cast by
investors in that partnership. In such event, the partnerships will bear the
remaining transaction costs. For a more detailed discussion of the transaction
costs see "THE TRANSACTION--Transaction Expenses" in the prospectus/consent
solicitation statement.
Cap Source I Supp-5
<PAGE>
EXCHANGE VALUE TABLES
The first table below indicates the exchange value as it relates to the
allocation of units to Cap Source I in connection with the transaction. The
second table shows the calculation of the exchange value assigned to Cap Source
I, which is composed of (a) the principal amount of GNMA certificates and the
FHA loans as shown in the partnership's audited financial statements for the
period ended December 31, 1998, (b) the value of the partnership's limited
partnership interests in the operating partnerships, and (c) the market value of
the partnership's remaining net assets as shown in the partnership's audited
financial statements for the period ended December 31, 1998. See
"--Determination of Exchange Values" below, and the tables entitled "Calculation
Of Exchange Values" and "Net Other Assets and Liabilities Table for
Partnerships" in the prospectus/consent solicitation statement. The third table
shows the specific components of net other assets and liabilities of Cap Source
I.
EXCHANGE VALUE(1)
FOR ALLOCATION OF UNITS TO CAP SOURCE I
AS OF DECEMBER 31, 1998
<TABLE>
<CAPTION>
PER $1,000
ORIGINAL INVESTMENT
------------------------
<S> <C> <C> <C> <C> <C>
INVESTOR TOTAL NUMBER INVESTOR
TOTAL EXCHANGE EXCHANGE OF UNITS TO PERCENT OF TOTAL UNITS EXCHANGE NUMBER OF
VALUE(2) VALUE(3) INVESTORS(4) (EXCHANGE RATIO) VALUE UNITS(5)
- -------------- ------------- ------------- ----------------------- ----------- -----------
$ 47,569,968 $ 47,094,268 4,709,427 60.6% $ 698 69.79
</TABLE>
- ---------------
(1) This Exchange Value Table assumes that no notes will be issued.
(2) See the table entitled "Calculation Of Exchange Values" in the
prospectus/consent solicitation statement for a determination of the
Exchange Values for each of the partnerships.
(3) The investor exchange value was derived by taking 99% of the total exchange
value to reflect the fact that we will hold a 1% interest in the company as
its general partner.
(4) The total number of units to be allocated to Cap Source I was calculated by
dividing the Investor Exchange Value assigned to the partnership by $10.
(5) The number of units to be issued per $1,000 original investment was
calculated by dividing the Investor Exchange Value per $1,000 original
investment by $10. No fractional unit will be issued. Each investor who
would otherwise be entitled to a fractional unit will instead receive a cash
payment equal to $10 multiplied by the fraction. See "THE TRANSACTION--No
Fractional Units" in the prospectus/consent solicitation statement.
CALCULATION OF EXCHANGE VALUES
<TABLE>
<CAPTION>
GNMA
CERTIFICATES PARTNERSHIP NET OTHER TOTAL
AND MORTGAGE EQUITY ASSETS AND EXCHANGE
LOANS(1) INTERESTS(2) LIABILITIES VALUE
------------- ------------ ------------ -------------
<S> <C> <C> <C> <C>
Cap Source I........................................... $ 35,023,246 $ 3,194,941 $ 9,351,781 $ 47,569,968
</TABLE>
- ---------------
(1) GNMA Certificates and FHA Loans are included at their outstanding principal
balances as of December 31, 1998.
(2) Partnership equity interests are derived by using the value of the
properties as determined by the appraisals using the direct capitalization
approach then deducting 4% of these values to account for the costs of sales
of these properties, then subtracting the current principal balances of the
mortgages, then allocating the remaining proceeds, if any, according to the
limited partnership agreements.
Cap Source I Supp-6
<PAGE>
NET OTHER ASSETS AND LIABILITIES TABLE
FOR CAP SOURCE I
AS OF DECEMBER 31, 1998
<TABLE>
<CAPTION>
NET OTHER
CASH & CASH MISC. GNMA ASSETS & DISTRIBUTIONS
EQUIVALENTS CERTIFICATES(1) LIABILITIES(2) PAYABLE TOTAL
------------ ------------- ------------ ------------ ------------
<S> <C> <C> <C> <C> <C>
Cap Source I............................. $9,304,694 $ 879,182 $ 28,502 $ (860,597) $ 9,351,781
</TABLE>
- ---------------
(1) These assets are classified for reporting purposes as "available for sale"
and are therefore reported at fair value.
(2) Generally, interest receivable less accounts payable.
DETERMINATION OF EXCHANGE VALUES
You will receive units or notes based upon an exchange value described
below. We determined the exchange values.
The exchange values are based upon (1) the principal amount of GNMA
Certificates and the FHA Loans as shown in the partnership's audited financial
statements for the period ended December 31, 1998, (2) the value of the
partnership's limited partner interests in the operating partnerships, and (3)
the market value of the partnerships' remaining net assets as shown in the
partnerships' audited financial statements for the period ended December 31,
1998.
To determine the value of each partnership's limited partner interest in an
operating partnership, we started with the values provided by Valuation Research
in its appraisal of the operating partnership's properties using the direct
capitalization approach, then deducting 4% of these values to account for the
costs of sales of the properties. See "APPRAISALS" in the prospectus/consent
solicitation statement. The liabilities of the operating partnership, including
amounts required to pay off the insured mortgage on the property and amounts
owed to the general partner of the operating partnership, were then subtracted
from the mean value. The net value after these adjustments was then apportioned
among the general partner and limited partners of the operating partnership
according to each operating partnership's limited partnership agreement. In
valuing the operating partnerships, we did not take into account amounts that
may be payable by some of the operating partnerships to our affiliates that will
be waived if the transaction is completed. See "BENEFITS OF, AND BACKGROUND AND
REASONS FOR, THE TRANSACTION--Reasons for, and Benefits of, the
Transaction--WAIVER BY AFFILIATES OF THE CAP SOURCE GENERAL PARTNERS OF AMOUNTS
POTENTIALLY PAYABLE BY CERTAIN OPERATING PARTNERSHIPS" in the prospectus/consent
solicitation statement.
The exchange values were determined as of December 31, 1998. As of the date
of the prospectus/ consent solicitation statement, we did not know of any
material change in the partnerships which would affect the exchange values.
FEDERAL INCOME TAX CONSEQUENCES
The company will not recognize any gain or loss as a result of the
transaction. Cap Source II investors will be required to include in income a
share of income or gain recognized by Cap Source II as a result of the receipt
by Cap Source II of notes or cash, even if the Cap Source II investor receives
units in connection with the transaction. See "FEDERAL INCOME TAX
CONSEQUENCES--Tax Treatment of the Transaction" in the prospectus/consent
solicitation statement. If the maximum amount of notes are issued in connection
with the transaction, the maximum potential gain that Cap Source II could
recognize will be approximately $2 million, or approximately $.50 per Cap Source
II BAC. Cap Source I investors will only recognize gain to the extent the fair
market value of the notes or the amount of cash actually received in the
transaction exceeds the adjusted basis in his or her BACs. The company will be
characterized as a partnership for federal income tax purposes. Therefore, the
company will not be subject to federal income
Cap Source I Supp-7
<PAGE>
taxation and, instead, each unitholder is required to take into account his or
her share of income, deductions or loss of the company regardless of whether any
cash is distributed. The character of income to each unitholder will be
dependent upon its character to the company. See "FEDERAL INCOME TAX
CONSEQUENCES--Taxation of Unitholders" in the prospectus/consent solicitation
statement. For the purposes of Section 469 of the Code, the company will be
deemed a publicly traded partnership. Therefore, passive income, gain and losses
from the company may only be applied against other items of income, gain or loss
from the company.
Income of the company may be generated by debt-financed property. Therefore,
distributions of the company may constitute unrelated business taxable income to
tax-exempt unitholders. See "FEDERAL INCOME TAX CONSEQUENCES--Considerations for
Tax-Exempt Unitholders" and "--Taxation of Unitholders" in the
prospectus/consent solicitation statement.
FAIRNESS
GENERAL. There are no material differences with respect to the fairness of
the transaction to the partnerships, individually, or in the aggregate.
Therefore, the discussion of the fairness of the transaction below is intended
to summarize briefly our belief as to fairness and the material factors on which
our belief is based. In our analysis, we did not assign relative weights to
these factors. For a more detailed discussion of the fairness of the
transaction, see the sections entitled "FAIRNESS" in the prospectus/consent
solicitation statement.
CAP SOURCE GENERAL PARTNERS' BELIEF AS TO FAIRNESS. We believe the terms of
the transaction are fair as a whole, to the partnerships and to the investors in
each of the partnerships, regardless of whether you receive units or notes.
BASIS FOR CAP SOURCE GENERAL PARTNERS' BELIEF AS TO FAIRNESS. We have based
our determination as to the fairness of the transaction on the following
material factors: (1) the terms and conditions of the transaction will result in
limited changes to the structure of the partnerships and limited changes to the
business and investment objectives of the partnerships; (2) the opportunity for
you to object to the transaction and the requirement that the transaction be
approved by investors holding a majority in interest of the outstanding BACs of
each partnership; (3) the form and amount of consideration offered to you; (4)
the method of allocating the units and notes among the partnerships in the
transaction and the exchange values used in connection with this allocation; (5)
the independent appraisals prepared by Valuation Research Corporation, which
were used in part in the determination of the exchange values; (6) the lack of
material differences with respect to the assets of the partnerships and the
consistent valuation methodology applied to the assets; and (7) the fact that
all investors, including dissenting investors, will be given the opportunity to
elect to receive notes, with some limitations. For a complete discussion of
these factors, see "FAIRNESS" in the prospectus/consent solicitation statement.
We also considered the potential benefits of the transaction compared to the
alternatives in reaching our conclusion as to the fairness of the transaction.
Some potential benefits include, but are not limited to: (1) enhanced liquidity
resulting from the anticipated listing of the units on NASDAQ; (2) the company's
potential for growth and enhanced access to capital; (3) a capital and operating
structure that will allow the company to respond more efficiently to changing
conditions in the U.S. equity markets, thereby potentially reducing the adverse
effects of such changes; and (4) general and administrative costs savings
resulting from combined operation of the partnerships as a single entity. See
"BENEFITS OF, AND BACKGROUND AND REASONS FOR, THE TRANSACTION" in the
prospectus/consent solicitation statement.
Cap Source I Supp-8
<PAGE>
COMPENSATION, REIMBURSEMENTS AND DISTRIBUTIONS TO THE CAP SOURCE GENERAL
PARTNERS
The following table compares the cash distributions, fees and reimbursements
we currently receive from the partnerships and the fees that we, as general
partner of the company, would have received from the company had the transaction
occurred before the periods indicated.
COMPARISON OF COMPENSATION,
REIMBURSEMENTS AND DISTRIBUTIONS TO
CAP SOURCE GENERAL PARTNERS
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31, THREE MONTHS
---------------------------------- ENDED
1996 1997 1998 MARCH 31, 1999
---------- ---------- ---------- --------------
<S> <C> <C> <C> <C>
ACTUAL AMOUNTS PAID TO CAP SOURCE GENERAL PARTNERS
CAPITAL SOURCE I
1% Share of Cash Distributions(1)........................ $ 34,424 $ 34,424 $ 34,425 $ 8,606
Asset Management and Partnership Administrative Fee(2)... 0 0 0 0
Reimbursements(3)........................................ 192,896 243,973 319,874 106,077
---------- ---------- ---------- --------------
Subtotal............................................... $ 227,320 $ 278,397 $ 354,299 $ 114,683
---------- ---------- ---------- --------------
CAPITAL SOURCE II
1% Share of Cash Distributions(1)........................ $ 32,818 $ 32,818 $ 26,741 $ 4,558
Asset Management and Partnership Administrative Fee(4)... 166,000 166,000 50,000 12,500
Reimbursements(3)........................................ 175,922 225,782 266,946 80,125
---------- ---------- ---------- --------------
Subtotal............................................... $ 374,740 $ 424,600 $ 343,687 $ 97,183
---------- ---------- ---------- --------------
Total.................................................... $ 602,060 $ 702,997 $ 697,986 $ 211,866
---------- ---------- ---------- --------------
---------- ---------- ---------- --------------
COMPANY--FEES PAYABLE TO THE GENERAL PARTNER
1% Share of Cash Distributions............................. $ 67,242 $ 67,242 $ 61,166 $ 13,164
Acquisition Fee(5)......................................... 0 0 0 0
Administrative Fee(6)...................................... 100,000 100,000 100,000 25,000
Reimbursements(7).......................................... 368,818 469,755 586,820 186,202
---------- ---------- ---------- --------------
Total.................................................... $ 536,060 $ 636,997 $ 747,986 $ 224,366
---------- ---------- ---------- --------------
---------- ---------- ---------- --------------
</TABLE>
- ---------------
(1) The respective partnership agreements provide that 1% of cash available for
distribution will be allocated to the Cap Source general partners.
(2) The Cap Source I general partners are entitled to receive an asset
management and partnership administrative fee equal to 0.5% of invested
assets per annum, payable only during years that an 8% return has been paid
to investors on a noncumulative basis. Any unpaid amounts will accrue and be
payable only after a 13% annual return to investors has been paid on a
cumulative basis and the investors have received the return of their capital
contributions.
(3) The Cap Source general partners are paid or reimbursed for some costs and
expenses incurred in connection with the operation of the partnership. The
increase in historical reimbursements to the Cap Source general partners
from 1996 to 1998 is primarily the result of an increase in salaries and
related expenses. Starting in 1996, additional management time was incurred
in exploring various options available to the partnerships to improve total
returns. For a description of the fee structure of the general partner, see
"COMPARISON OF BACS AND UNITS--Compensation, Fees and Expenses" in the
prospectus/consent solicitation statement.
(4) The Cap Source II general partners are entitled to receive an asset
management and partnership administrative fee equal to 0.5% of invested
assets per annum, the first $50,000 of which shall be paid each year with
the balance payable only during years that a 6.5% annual return has been
paid to investors on a noncumulative basis. An additional fee of 0.5% of
invested assets will be paid in those years that an 11.5% annual return has
been paid to investors on a cumulative basis. Any unpaid amounts will
Cap Source I Supp-9
<PAGE>
accrue and be payable only after an 11.5% annual return to investors has
been paid on a cumulative basis and the investors have received the return
of their capital contributions.
(5) No acquisition fees would have been paid because no new assets were
purchased or permitted to be purchased in the years 1996 to 1998. Since the
company will be permitted to acquire new assets, this fee will increase in
future years if the transaction is completed.
(6) Calculated based on the fees described in more detail under "COMPARISON OF
BACS AND UNITS--Compensation, Fees and Expenses" in the prospectus/consent
solicitation statement.
(7) The general partner is entitled to be reimbursed for some of its costs and
expenses incurred in connection with the operation of the company.
CASH DISTRIBUTIONS TO INVESTORS
The information below should be read in conjunction with the information in
the prospectus/consent solicitation statement under the captions "SECONDARY
MARKET AND OWNERSHIP OF PARTNERSHIP BACS" and "SELECTED FINANCIAL DATA OF THE
PARTNERSHIPS."
The following table sets forth the distributions paid to investors in Cap
Source I (per $1,000 original investment) for the periods indicated below:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31, 3 MONTHS ENDED
----------------------------------------------------- MARCH 31,
1994 1995 1996 1997 1998 1999
--------- --------- --------- --------- --------- ---------------
<S> <C> <C> <C> <C> <C> <C>
Distributions from Income..................... $ 50.50 $ 50.500 $ 47.230 $ 45.214 $ 27.910 $ 10.555
Distributions from Return of Capital.......... -- -- 3.270 5.286 22.590 2.070
--------- --------- --------- --------- --------- -------
Total....................................... $ 50.500 $ 50.500 $ 50.500 $ 50.500 50.500 $ 12.625
--------- --------- --------- --------- --------- -------
--------- --------- --------- --------- --------- -------
</TABLE>
Cash from operations, defined in the partnership agreement as disbursable
cash, is distributed to the investors. Any variation in the amount of
distributions from operations is due to fluctuations in net cash from operating
activities. Reference is made to "MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS" in the Financial Statement
Supplement to the prospectus/consent solicitation statement for a discussion and
analysis of such fluctuations. Cash proceeds from the sale of property may be
distributed separately to the investors as a return of capital. The adjusted
capital contribution of an investor is generally the investor's initial capital
contribution reduced by the cash distributions to the investor of proceeds from
the sale of partnership properties. The adjusted capital contribution per BAC
for investors in Cap Source I, as defined in its partnership agreement, was
$18.35 as of March 31, 1999, based on an initial capital contribution of $20 per
unit.
See the information in the prospectus/consent solicitation statement under
"SELECTED FINANCIAL DATA OF THE PARTNERSHIPS" for more detailed financial
information with respect to the partnerships and the effects of the transaction.
Cap Source I Supp-10
<PAGE>
AMERICA FIRST REAL ESTATE INVESTMENT PARTNERS, L.P.
SUPPLEMENT DATED , 1999
TO
PROSPECTUS/CONSENT SOLICITATION STATEMENT
DATED , 1999
FOR
CAPITAL SOURCE II L.P.-A
As described in detail in the accompanying prospectus/consent solicitation
statement, we are proposing a merger of Capital Source L.P. and Capital Source
II L.P.-A, which we refer to as the partnerships, with and into America First
Real Estate Investment Partners, L.P., a newly organized Delaware limited
partnership, which we refer to as the company. We, the general partners of the
partnerships, are soliciting your consent to this transaction. In the
transaction, the company will distribute units of assigned limited partner
interests, and in some situations cash, promissory notes and Variable Rate
Junior Notes Callable on or After the Date of Issuance, or notes, to the
partnerships in exchange for the assets of the partnerships. After the
transaction, you will be a unitholder or noteholder, as the case may be, of the
company and will no longer be a limited partner, or BAC holder, in your
respective partnership. We expect that the units will be listed for trading on
NASDAQ under the symbol " ". The notes will not be listed for trading.
Through this prospectus/consent solicitation statement and the accompanying
supplements, we are asking you, as a BAC holder, to approve the transaction. BAC
holders holding in excess of 50% in interest of the outstanding BACs of each
partnership must vote "YES" in favor of the transaction on the enclosed consent
form in order for the transaction to be completed.
We have proposed the transaction to enhance the liquidity of your investment
and to increase the cash flow and net asset values of the partnerships. We plan
to accomplish this by listing the company's units on NASDAQ, by leveraging its
assets, by making equity investments primarily in multifamily residential
properties and by actively managing the makeup of its real estate portfolio. We
believe that the proposed transaction permits you to realize the value of your
investment in the partnerships, as opposed to liquidating your partnership or
continuing your partnership unchanged.
We, as the general partners of the partnerships, strongly recommend that you
vote "YES" in favor of the transaction.
This Supplement has been prepared for you, as a Cap Source II investor, to
discuss the effects and fairness of the transaction with respect to your BACs,
and to provide information on your partnership. The effects of the transaction
may be different for Cap Source I investors than for Cap Source II investors. A
supplement has also been prepared for Cap Source I investors. The supplements
are a part of the prospectus/consent solicitation statement. Capitalized terms
not defined in this supplement shall have the same meaning as those terms have
in the accompanying prospectus/consent solicitation statement.
You or your representatives may obtain a copy of any supplement without
charge by making a request in writing to the general partners of your
partnership. All requests should be directed to America First Investor Services
Department, 1004 Farnam Street, Suite 400, Omaha, Nebraska 68102.
THIS TRANSACTION INVOLVES MATERIAL RISKS THAT YOU SHOULD CONSIDER. SEE "RISK
FACTORS" BEGINNING ON PAGE 19 OF THE PROSPECTUS/CONSENT SOLICITATION STATEMENT.
IN PARTICULAR, YOU SHOULD CONSIDER THE FOLLOWING:
- The units may trade at prices below the value of the company's assets and
the $10 per unit price arbitrarily assigned for the sole purpose of
allocating the units in the transaction. We do not expect a public market
for the notes to develop. If the notes are sold, they may sell at prices
substantially below their issuance price.
- We initiated and participated in the structuring of the transaction and
have conflicts of interests with respect to its completion.
- There can be no guarantee of the level of the company's future cash
distributions.
<PAGE>
- The company is newly formed and has no operating history.
- If you vote "NO" against the transaction, but your partnership approves
it, you do not have any appraisal or other dissenters' rights under
Delaware law and none will be offered in the transaction.
- There are alternatives to the transaction. By approving the transaction,
you will effectively preclude the pursuit of some of the alternatives.
- The company intends to use debt financing to increase its real estate
asset portfolio. An increase in debt may increase the possibility of
default on the company's obligations. This could affect the company's
ability to pay distributions to you.
- If your partnership approves the transaction, you will be bound even if
you vote "NO" against the transaction.
- If you choose to receive notes, you will not hold an equity interest in
the company and will not be able to participate in the company's growth or
benefit from any increases in the value of the units. The notes are
unsecured obligations of the company and may be redeemed before maturity
at the company's option.
SIMILARITIES BETWEEN CAP SOURCE I AND CAP SOURCE II
The investment objectives and the assets held by the partnerships are
substantially similar in nature and character. Although there are differences in
the geographic area, style of construction and specific locations for each
property owned by the operating partnerships, there are no significant
differences in occupancy rates or property types. All of the properties owned by
the operating partnerships are multifamily apartment complexes. In addition,
ownership of the operating partnership interests in the Ponds at Georgetown
Limited partnership ("The Ponds") is shared by Cap Source I and Cap Source II.
DIFFERENCES BETWEEN CAP SOURCE I AND CAP SOURCE II
Except for The Ponds, each partnership equity interest is unique to the
partnership that holds the interest. The style of construction, specific
location and geographic areas for each property owned by the operating
partnerships are different. Cap Source I has partnership equity interests in
four operating partnerships that have a general partner that is an affiliate of
Cap Source I, which include Waterman's Crossing, Fox Hollow, Misty Springs and
The Ponds. The remaining Cap Source I operating partnerships have general
partners that are not affiliated with Cap Source I. All of the Cap Source II
operating partnerships, except The Ponds, have general partners that are not
affiliated with Cap Source II. See "THE PARTNERSHIPS" in the prospectus/consent
solicitation statement.
Although both partnerships hold a majority of their assets in liquid
investments, the amount of cash and cash equivalents held by each partnership is
different. Cash, cash equivalents and net other assets and liabilities make up
20.4% of Cap Source I's assets, whereas only 1.5% of Cap Source II's assets are
in cash, cash equivalents and net other assets and liabilities.
Distributions for both partnerships are based upon the adjusted BAC value,
which is $20.00 per BAC of original investment, adjusted for returns of capital
to investors. The adjusted BAC value for Cap Source I is $18.35. The adjusted
BAC value for Cap Source II is $12.39.
In 1998, Cap Source I made distributions at the rate of 5.5% of its adjusted
BAC value, which equaled $1.01 per BAC for the year. Cap Source I made
distributions at an annual rate of 5.5% of its adjusted BAC value, which equaled
$.2525 per BAC for the first quarter of 1999. Cap Source II made distributions
at the rate of 5.3% of its adjusted BAC value, which equaled $.66 per BAC for
1998, $.2595 of which was made from reserves. Cap Source II made distributions
at an annual rate of 3.6% of its adjusted BAC value, which
Cap Source II Supp-2
<PAGE>
equaled $.1125 per BAC for the first quarter of 1999. See "SECONDARY MARKET AND
OWNERSHIP OF PARTNERSHIP BACS--Partnership Distributions" in the
prospectus/consent solicitation statement.
The partnerships have different fee structures for compensating their
general partners. The Cap Source I General Partners are entitled to receive an
asset management and partnership administrative fee equal to 0.5% of invested
assets per annum, payable only during such years that an 8% return has been paid
to investors on a noncumulative basis. Any unpaid amounts will accrue and be
payable only after a 13% annual return to Cap Source I investors has been paid
on a cumulative basis and such investors have received the return of their
capital contributions.
The Cap Source II General Partners are entitled to receive an asset
management and partnership administrative fee equal to 0.5% of invested assets
per annum, the first $50,000 of which is paid each year with the balance payable
only during such years that a 6.5% annual return has been paid to Cap Source II
investors on a noncumulative basis. An additional fee of 0.5% of invested assets
will be paid in years that an 11.5% annual return has been paid to Cap Source II
investors on a cumulative basis. Any unpaid amounts will accrue and be payable
only after an 11.5% annual return to investors has been paid on a cumulative
basis and the investors have received the return of their capital contributions.
The general partners of both partnerships also receive 1% of the net
proceeds from any sale of partnership assets. The general partners of both
partnerships will receive a termination fee equal to 3% of all sales proceeds
less actual costs incurred in connection with all sales transactions, payable
only after the investors have received a return of their capital contributions
and a 13% annual return on a cumulative basis with respect to Cap Source I or an
11.5% annual return on a cumulative basis with respect to Cap Source II. The
general partners of both partnerships will also receive a fee equal to 9.1% of
all cash available for distribution and sales proceeds (after deducting from
cash available or sales proceeds any termination fee paid therefrom) after
investors have received a return of their capital contributions and a 13% annual
return on a cumulative basis with respect to Cap Source I or an 11.5% annual
return on a cumulative basis with respect to Cap Source II. However, the
difference in this latter fee is not a material difference since neither
partnership has achieved the target level since inception, and the Cap Source
General Partners do not anticipate that this level will be reached in the
foreseeable future.
RISK FACTORS
The transaction does not involve risks which are more significant to Cap
Source II investors than to Cap Source I investors. However, the transaction
involves some risks and other adverse factors which are applicable to both
partnerships. Because all of the risks and adverse factors described in the
prospectus/ consent solicitation statement apply to the effects of the
transaction on both partnerships, you should carefully review the section
entitled "RISK FACTORS" in the prospectus/consent solicitation statement. Except
as otherwise stated in this supplement, there are no material differences in the
manner in which Cap Source I or Cap Source II will be effected by any of the
risks or adverse factors discussed in such "RISK FACTORS" section.
For most investors, the transaction will not result in a taxable transaction
except to the extent notes are received in the transaction. For a more detailed
discussion of the tax consequences of the transaction see the sections entitled
"FEDERAL INCOME TAX CONSEQUENCES" below and in the prospectus/ consent
solicitation statement.
By participating in the transaction, you will assume risks associated with
the assets of the other partnership, Cap Source I. Although the majority of the
assets in Cap Source I are substantially similar to those of Cap Source II, the
multifamily apartment complexes in which Cap Source I owns limited partnership
interests are of different construction, geographic area and specific location
than the complexes in which your partnership owns interests. Because the market
for real estate may vary from one region of the country to another, the change
in geographic diversity may expose you to different and
Cap Source II Supp-3
<PAGE>
greater risks than those you are presently exposed. For geographic information
regarding the partnerships' properties, see "THE PARTNERSHIPS" in the
prospectus/consent solicitation statement. Moreover, because the properties
owned by the partnerships are not of uniform quality, combining assets and
liabilities of the partnerships in the transaction may diminish the overall
asset quality underlying the investments of some of the investors by comparison
with their existing partnership investment.
The following is a brief description of the potential disadvantages, adverse
consequences and risks of the transaction that is applicable to both
partnerships. This description is qualified in its entirety by the more detailed
discussion in the section entitled "RISK FACTORS" contained in the
prospectus/consent solicitation statement.
- We cannot predict the prices at which the units will trade after the
transaction. The price of the units may decrease after the transaction due
to the potentially large number of units that may be sold immediately by
unitholders. Thus, the units may trade at prices substantially below the
estimated liquidation value of the company's assets and the $10 per unit
price we arbitrarily assigned for the sole purpose of allocating the units
in the transaction.
- We do not expect a public market for the notes to develop. If the notes
are sold, they may sell at prices substantially below their issuance
price. Investors who receive notes are likely to receive the full face
amount of the notes only if they hold the notes to maturity or if the
company repays or refinances the notes at or before maturity. The maturity
date of the notes is approximately eight years after the transaction.
- We initiated and participated in the structuring of the transaction and
have conflicts of interests with respect to its completion. We will
receive economic benefits as a result of the transaction. We will hold a
1% interest in the company as its general partner, which continues our 1%
interest in the partnerships. We will also receive management and other
fees from the company as its general partner following the transaction.
See "THE TRANSACTION--Conflicts of Interest and Benefits to Insiders" and
"MANAGEMENT OF THE GENERAL PARTNER" in the prospectus/consent solicitation
statement.
- There can be no guarantee of the level of the company's future
distributions. Regardless of the initial level, distributions could
decline in the future so that you may receive distributions that are lower
than the distributions you currently receive as an investor in the
partnerships. The company may also reinvest cash generated by the sale of
existing assets or from operations to acquire additional assets. This
could cause cash distributions to be lower than the distributions made by
the partnerships in some cases.
- The company was recently organized and has no operating history. As a
result, there can be no assurance that any of the company's planned future
activities will be successful.
- If you vote "NO" against the transaction, but your partnership approves
the transaction, you will not be entitled to receive cash based on an
appraisal of your BACs or any other dissenters' rights under Delaware law,
nor will you be given any similar rights in the transaction. You will have
the right to exchange your BACs for notes if you so elect, with some
limitations. See "THE NOTES" in the prospectus/consent solicitation
statement.
- There are alternatives to the transaction. If you approve the transaction,
you will effectively preclude the pursuit of some of the alternatives. See
"BENEFITS OF, AND BACKGROUND AND REASONS FOR, THE
TRANSACTION--Alternatives Considered" in the prospectus/ consent
solicitation statement.
- The company intends to use debt financing to increase its real estate
asset portfolio. Although the notes will be issued under an indenture that
creates debt limitations, the company's organizational documents do not
limit the amount of debt the company may incur. The company will therefore
be more leveraged than either of the partnerships. This use of debt
financing may increase the
Cap Source II Supp-4
<PAGE>
possibility of default on the company's obligations, which could adversely
affect the company's earnings and its ability to pay expected
distributions to you.
- If the investors holding a majority in interest of the BACs of each
partnership approve the transaction, your partnership will be merged with
and into the company. You will be bound by this approval even if you vote
"NO" against the transaction or abstain from voting.
- The notes are prepayable at any time, unsecured obligations of the company
and, as a practical matter, will be junior to all other debt of the
company. The notes will bear interest at a variable rate that may be lower
than rates on other variable rate debt instruments that may be perceived
as having comparable or lower risks than the notes. If you choose and
receive notes, you will not hold an equity interest in the company and
therefore will not be able to participate in the company's growth or
benefit from any increases in the value of the units.
- The company may be liable for unknown, undisclosed or contingent
liabilities of the partnerships, which could adversely affect the
liquidity of the company and its ability to pay expected distributions to
you.
- If dissenting investors elect to receive notes in excess of the maximum
note limitation, the transaction will not be completed. If this does not
occur, but the total amount of notes allocable to all investors who elect
to receive notes exceeds the maximum note limitation, notes will be
allocated first to dissenting investors who elected to receive notes and
then, on a pro rata basis, to investors who abstained from voting or who
voted "YES" in favor of the transaction. Thus, you could choose notes but
receive units instead. To be assured of receiving notes, you must vote
"NO" with respect to the transaction and elect to receive notes.
For a more detailed discussion of the risks associated with the transaction,
see "RISK FACTORS" in the prospectus/consent solicitation statement.
EFFECT ON FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Upon completion of the transaction, the operations and existence of the
partnerships will cease. See "THE TRANSACTION" in the prospectus/consent
solicitation statement. If the transaction is not completed, we do not
contemplate liquidation of the partnerships, which would result in an all-cash
payment to you in the near future. The transaction, however, does not result in
an all-cash payment to you in liquidation of your investment. For example, if
you become a noteholder, you will have exchanged your BACs for unsecured debt
obligations of the company which may not be retired in full until , 2007,
a date approximately seven years after the effective date. On the other hand, if
you exchange your BACs for units, you will receive an equity interest in the
company whose marketability will depend upon the aftermarket that may develop
with respect to the units.
If the transaction is approved, all transaction costs will be paid by the
partnerships and the company. If the transaction is rejected, the general
partners of each partnership will bear a percentage of all transaction costs,
excluding solicitation/communication costs, equal to the total number of
abstentions and "NO" votes cast by investors in that partnership with respect to
the transaction, divided by the total number of abstentions and votes cast by
investors in that partnership. In such event, the partnerships will bear the
remaining transaction costs. For a more detailed discussion of the transaction
costs see "THE TRANSACTION--Transaction Expenses" in the prospectus/consent
solicitation statement.
Cap Source II Supp-5
<PAGE>
EXCHANGE VALUE TABLES
The first table below indicates the exchange value as it relates to the
allocation of units to Cap Source II in connection with the transaction. The
second table shows the calculation of the exchange value assigned to Cap Source
II, which is composed of (a) the principal amount of GNMA certificates and the
FHA loans as shown in the partnership's audited financial statements for the
period ended December 31, 1998, (b) the value of the partnership's limited
partnership interests in the operating partnerships, and (c) the market value of
the partnership's remaining net assets as shown in the partnership's audited
financial statements for the period ended December 31, 1998. See
"--Determination of Exchange Values" below, and the tables entitled "Calculation
Of Exchange Values" and "Net Other Assets and Liabilities Table for
Partnerships" in the prospectus/consent solicitation statement. The third table
shows the specific components of net other assets and liabilities of Cap Source
II.
EXCHANGE VALUE(1)
FOR ALLOCATION OF UNITS TO CAP SOURCE II
AS OF DECEMBER 31, 1998
<TABLE>
<CAPTION>
PER $1,000
ORIGINAL INVESTMENT
------------------------
<S> <C> <C> <C> <C> <C>
INVESTOR TOTAL NUMBER INVESTOR
TOTAL EXCHANGE EXCHANGE OF UNITS TO PERCENT OF TOTAL UNITS EXCHANGE NUMBER OF
VALUE(2) VALUE(3) INVESTORS(4) (EXCHANGE RATIO) VALUE UNITS(5)
- -------------- ------------- ------------- ----------------------- ----------- -----------
3$0,872,167... $ 30,563,445 3,056,345 39.4% $ 381 38.10
</TABLE>
- ---------------
(1) This Exchange Value Table assumes that no notes will be issued.
(2) See the table entitled "Calculation Of Exchange Values" in the
prospectus/consent solicitation statement for a determination of the
Exchange Values for each of the partnerships.
(3) The investor exchange value was derived by taking 99% of the total exchange
value to reflect the fact that we will hold a 1% interest in the company as
its general partner.
(4) The total number of units to be allocated to Cap Source II was calculated by
dividing the Investor Exchange Value assigned to the partnership by $10.
(5) The number of units to be issued per $1,000 original investment was
calculated by dividing the Investor Exchange Value per $1,000 original
investment by $10. No fractional unit will be issued. Each investor who
would otherwise be entitled to a fractional unit will instead receive a cash
payment equal to $10 multiplied by the fraction. See "THE TRANSACTION--No
Fractional Units" in the prospectus/consent solicitation statement.
CALCULATION OF EXCHANGE VALUES
<TABLE>
<CAPTION>
GNMA
CERTIFICATES PARTNERSHIP NET OTHER TOTAL
AND MORTGAGE EQUITY ASSETS AND EXCHANGE
LOANS(1) INTERESTS(2) LIABILITIES VALUE
------------- ------------ ----------- -------------
<S> <C> <C> <C> <C>
Cap Source II............................................ $ 27,044,343 $ 3,809,948 $ 17,876 $ 30,872,167
</TABLE>
- ---------------
(1) GNMA Certificates and FHA Loans are included at their outstanding principal
balances as of December 31, 1998.
(2) Partnership equity interests are derived by using the value of the
properties as determined by the appraisals using the direct capitalization
approach then deducting 4% of these values to account for the costs of sales
of these properties, then subtracting the current principal balances of the
mortgages, then allocating the remaining proceeds, if any, according to the
limited partnership agreements.
Cap Source II Supp-6
<PAGE>
NET OTHER ASSETS AND LIABILITIES TABLE
FOR CAP SOURCE II
AS OF DECEMBER 31, 1998
<TABLE>
<CAPTION>
NET OTHER
CASH & CASH MISC. GNMA ASSETS & DISTRIBUTIONS
EQUIVALENTS CERTIFICATES(1) LIABILITIES(2) PAYABLE TOTAL
------------ ------------------- ------------ ------------ ---------
<S> <C> <C> <C> <C> <C>
Cap Source II............................... $ 432,999 $ 0 $ (111,252) $ (303,871) $ 17,876
</TABLE>
- ---------------
(1) These assets are classified for reporting purposes as "available for sale"
and are therefore reported at fair value.
(2) Generally, interest receivable less accounts payable.
DETERMINATION OF EXCHANGE VALUES
You will receive units or notes based upon an exchange value described
below. We determined the exchange values.
The exchange values are based upon (1) the principal amount of GNMA
Certificates and the FHA Loans as shown in the partnership's audited financial
statements for the period ended December 31, 1998, (2) the value of the
partnership's limited partner interests in the operating partnerships, and (3)
the market value of the partnerships' remaining net assets as shown in the
partnerships' audited financial statements for the period ended December 31,
1998.
To determine the value of each partnership's limited partner interest in an
operating partnership, we started with the values provided by Valuation Research
in its appraisal of the operating partnership's properties using the direct
capitalization approach, then deducting 4% of these values to account for the
costs of sales of the properties. See "APPRAISALS" in the prospectus/consent
solicitation statement. The liabilities of the operating partnership, including
amounts required to pay off the insured mortgage on the property and amounts
owed to the general partner of the operating partnership, were then subtracted
from the mean value. The net value after these adjustments was then apportioned
among the general partner and limited partners of the operating partnership
according to each operating partnership's limited partnership agreement. In
valuing the operating partnerships, we did not take into account amounts that
may be payable by some of the operating partnerships to our affiliates that will
be waived if the transaction is completed. See "BENEFITS OF, AND BACKGROUND AND
REASONS FOR, THE TRANSACTION--Reasons for, and Benefits of, the
Transaction--WAIVER BY AFFILIATES OF THE CAP SOURCE GENERAL PARTNERS OF AMOUNTS
POTENTIALLY PAYABLE BY CERTAIN OPERATING PARTNERSHIPS" in the prospectus/consent
solicitation statement.
The exchange values were determined as of December 31, 1998. As of the date
of the prospectus/ consent solicitation statement, we did not know of any
material change in the partnerships which would affect the exchange values.
FEDERAL INCOME TAX CONSEQUENCES
The company will not recognize any gain or loss as a result of the
transaction. Cap Source II investors will be required to include in income a
share of income or gain recognized by Cap Source II as a result of the receipt
by Cap Source II of notes or cash, even if the Cap Source II investor receives
units in connection with the transaction. See "FEDERAL INCOME TAX
CONSEQUENCES--Tax Treatment of the Transaction" in the prospectus/consent
solicitation statement. If the maximum amount of notes are issued in connection
with the transaction, the maximum potential gain that Cap Source II could
recognize will be approximately $2 million, or approximately $.50 per Cap Source
II BAC. Cap Source I investors will only recognize gain to the extent the fair
market value of the notes or the amount of cash actually received in the
transaction exceeds the adjusted basis in his or her BACs. The company will be
characterized as a partnership for federal income tax purposes. Therefore, the
company will not be subject to federal income
Cap Source II Supp-7
<PAGE>
taxation and, instead, each unitholder is required to take into account his or
her share of income, deductions or loss of the company regardless of whether any
cash is distributed. The character of income to each unitholder will be
dependent upon its character to the company. See "FEDERAL INCOME TAX
CONSEQUENCES--Taxation of Unitholders" in the prospectus/consent solicitation
statement. For the purposes of Section 469 of the Code, the company will be
deemed a publicly traded partnership. Therefore, passive income, gain and losses
from the company may only be applied against other items of income, gain or loss
from the company.
Income of the company may be generated by debt-financed property. Therefore,
distributions of the company may constitute unrelated business taxable income to
tax-exempt unitholders. See "FEDERAL INCOME TAX CONSEQUENCES--Considerations for
Tax-Exempt Unitholders" and "--Taxation of Unitholders" in the
prospectus/consent solicitation statement.
FAIRNESS
GENERAL. There are no material differences with respect to the fairness of
the transaction to the partnerships, individually, or in the aggregate.
Therefore, the discussion of the fairness of the transaction below is intended
to summarize briefly our belief as to fairness and the material factors on which
our belief is based. In our analysis, we did not assign relative weights to
these factors. For a more detailed discussion of the fairness of the
transaction, see the sections entitled "FAIRNESS" in the prospectus/consent
solicitation statement.
CAP SOURCE GENERAL PARTNERS' BELIEF AS TO FAIRNESS. We believe the terms of
the transaction are fair as a whole, to the partnerships and to the investors in
each of the partnerships, regardless of whether you receive units or notes.
BASIS FOR CAP SOURCE GENERAL PARTNERS' BELIEF AS TO FAIRNESS. We have based
our determination as to the fairness of the transaction on the following
material factors: (1) the terms and conditions of the transaction will result in
limited changes to the structure of the partnerships and limited changes to the
business and investment objectives of the partnerships; (2) the opportunity for
you to object to the transaction and the requirement that the transaction be
approved by investors holding a majority in interest of the outstanding BACs of
each partnership; (3) the form and amount of consideration offered to you; (4)
the method of allocating the units and notes among the partnerships in the
transaction and the exchange values used in connection with this allocation; (5)
the independent appraisals prepared by Valuation Research Corporation, which
were used in part in the determination of the exchange values; (6) the lack of
material differences with respect to the assets of the partnerships and the
consistent valuation methodology applied to the assets; and (7) the fact that
all investors, including dissenting investors, will be given the opportunity to
elect to receive notes, with some limitations. For a complete discussion of
these factors, see "FAIRNESS" in the prospectus/consent solicitation statement.
We also considered the potential benefits of the transaction compared to the
alternatives in reaching our conclusion as to the fairness of the transaction.
Some potential benefits include, but are not limited to: (1) enhanced liquidity
resulting from the anticipated listing of the units on NASDAQ; (2) the company's
potential for growth and enhanced access to capital; (3) a capital and operating
structure that will allow the company to respond more efficiently to changing
conditions in the U.S. equity markets, thereby potentially reducing the adverse
effects of such changes; and (4) general and administrative costs savings
resulting from combined operation of the partnerships as a single entity. See
"BENEFITS OF, AND BACKGROUND AND REASONS FOR, THE TRANSACTION" in the
prospectus/consent solicitation statement.
Cap Source II Supp-8
<PAGE>
COMPENSATION, REIMBURSEMENTS AND DISTRIBUTIONS TO THE CAP SOURCE GENERAL
PARTNERS
The following table compares the cash distributions, fees and reimbursements
we currently receive from the partnerships and the fees that we, as general
partner of the company, would have received from the company had the transaction
occurred before the periods indicated.
COMPARISON OF COMPENSATION,
REIMBURSEMENTS AND DISTRIBUTIONS TO
CAP SOURCE GENERAL PARTNERS
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31, THREE MONTHS
---------------------------------- ENDED
1996 1997 1998 MARCH 31, 1999
---------- ---------- ---------- --------------
<S> <C> <C> <C> <C>
ACTUAL AMOUNTS PAID TO CAP SOURCE GENERAL PARTNERS
CAPITAL SOURCE I
1% Share of Cash Distributions(1)........................ $ 34,424 $ 34,424 $ 34,425 $ 8,606
Asset Management and Partnership Administrative Fee(2)... 0 0 0 0
Reimbursements(3)........................................ 192,896 243,973 319,874 106,077
---------- ---------- ---------- --------------
Subtotal............................................... $ 227,320 $ 278,397 $ 354,299 $ 114,683
CAPITAL SOURCE II
1% Share of Cash Distributions(1)........................ $ 32,818 $ 32,818 $ 26,741 $ 4,558
Asset Management and Partnership Administrative Fee(4)... 166,000 166,000 50,000 12,500
Reimbursements(3)........................................ 175,922 225,782 266,946 80,125
---------- ---------- ---------- --------------
Subtotal............................................... $ 374,740 $ 424,600 $ 343,687 $ 97,183
---------- ---------- ---------- --------------
Total...................................................... $ 602,060 $ 702,997 $ 697,986 $ 211,866
---------- ---------- ---------- --------------
---------- ---------- ---------- --------------
COMPANY--FEES PAYABLE TO THE GENERAL PARTNER
1% Share of Cash Distributions............................. $ 67,242 $ 67,242 $ 61,166 $ 13,164
Acquisition Fee(5)......................................... 0 0 0 0
Administrative Fee(6)...................................... 100,000 100,000 100,000 25,000
Reimbursements(7).......................................... 368,818 469,755 586,820 186,202
---------- ---------- ---------- --------------
Total.................................................... $ 536,060 $ 636,997 $ 747,986 $ 224,366
---------- ---------- ---------- --------------
---------- ---------- ---------- --------------
</TABLE>
- ---------------
(1) The respective partnership agreements provide that 1% of cash available for
distribution will be allocated to the Cap Source general partners.
(2) The Cap Source I general partners are entitled to receive an asset
management and partnership administrative fee equal to 0.5% of invested
assets per annum, payable only during years that an 8% return has been paid
to investors on a noncumulative basis. Any unpaid amounts will accrue and be
payable only after a 13% annual return to investors has been paid on a
cumulative basis and the investors have received the return of their capital
contributions.
(3) The Cap Source general partners are paid or reimbursed for some costs and
expenses incurred in connection with the operation of the partnership. The
increase in historical reimbursements to the Cap Source general partners
from 1996 to 1998 is primarily the result of an increase in salaries and
related expenses. Starting in 1996, additional management time was incurred
in exploring various options available to the partnerships to improve total
returns. For a description of the fee structure of the general partner, see
"COMPARISON OF BACS AND UNITS--Compensation, Fees and Expenses" in the
prospectus/consent solicitation statement.
(4) The Cap Source II general partners are entitled to receive an asset
management and partnership administrative fee equal to 0.5% of invested
assets per annum, the first $50,000 of which shall be paid each year with
the balance payable only during years that a 6.5% annual return has been
paid to investors on a noncumulative basis. An additional fee of 0.5% of
invested assets will be paid in those years that an 11.5% annual return has
been paid to investors on a cumulative basis. Any unpaid amounts will accrue
and be payable only after an 11.5% annual return to investors has been paid
on a cumulative basis and the investors have received the return of their
capital contributions.
Cap Source II Supp-9
<PAGE>
(5) No acquisition fees would have been paid because no new assets were
purchased or permitted to be purchased in the years 1996 to 1998. Since the
company will be permitted to acquire new assets, this fee will increase in
future years if the transaction is completed.
(6) Calculated based on the fees described in more detail under "COMPARISON OF
BACS AND UNITS--Compensation, Fees and Expenses" in the prospectus/consent
solicitation statement.
(7) The general partner is entitled to be reimbursed for some of its costs and
expenses incurred in connection with the operation of the company.
CASH DISTRIBUTIONS TO INVESTORS
The information below should be read in conjunction with the information in
the prospectus/consent solicitation statement under the captions "SECONDARY
MARKET AND OWNERSHIP OF PARTNERSHIP BACS" and "SELECTED FINANCIAL DATA OF THE
PARTNERSHIPS."
The following table sets forth the distributions paid to investors in Cap
Source II (per $1,000 original investment) for the periods indicated below:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31, 3 MONTHS ENDED
----------------------------------------------------- MARCH 31,
1994 1995 1996 1997 1998 1999
--------- --------- --------- --------- --------- ---------------
<S> <C> <C> <C> <C> <C> <C>
Distributions from Income......................... $ 25.196 $ 27.089 $ 26.465 $ 20.410 $ 10.875 $ 5.580
Distributions from Return of Capital.............. 15.304 13.411 14.035 20.090 22.125 0.045
--------- --------- --------- --------- --------- ------
Total........................................... $ 40.500 $ 40.500 $ 40.500 $ 40.500 $ 33.000 $ 5.625
--------- --------- --------- --------- --------- ------
--------- --------- --------- --------- --------- ------
</TABLE>
Cash from operations, defined in the partnership agreement as disbursable
cash, is distributed to the investors. Any variation in the amount of
distributions from operations is due to fluctuations in net cash from operating
activities. Reference is made to "MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS" in the Financial Statement
Supplement to the prospectus/consent solicitation statement for a discussion and
analysis of such fluctuations. Cash proceeds from the sale of property may be
distributed separately to the investors as a return of capital. The adjusted
capital contribution of an investor is generally the investor's initial capital
contribution reduced by the cash distributions to the investor of proceeds from
the sale of partnership properties. The adjusted capital contribution per BAC
for investors in Cap Source II, as defined in its partnership agreement, was
$12.39 as of March 31, 1999, based on an initial capital contribution of $20 per
unit.
See the information in the prospectus/consent solicitation statement under
"SELECTED FINANCIAL DATA OF THE PARTNERSHIPS" for more detailed financial
information with respect to the partnerships and the effects of the transaction.
Cap Source II Supp-10
<PAGE>
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS/CONSENT
SOLICITATION STATEMENT
ITEM 20. INDEMNIFICATION
The Delaware Revised Uniform Limited Partnership Act provides that a limited
partnership may indemnify and hold harmless any partner or other person from and
against any and all claims and demands whatsoever, subject to any limitations
contained in its limited partnership agreement. The company's limited
partnership agreement provides generally that the general partner is indemnified
from losses, liabilities or damages relating to acts performed or omitted to be
performed in good faith and in the best interests of the company, provided the
conduct did not constitute fraud, gross negligence, willful misconduct, breach
of a fiduciary duty or a breach of obligations under the company's limited
partnership agreement. Such indemnification also includes expenses and
attorney's fees, which expenses and fees may be advanced as incurred.
ITEM 21. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES
(a) The following is a complete list of exhibits filed as part of the
Registration Statement. For electronic filing purposes only, this registration
statement contains Exhibit 27.1, the Financial Data Schedule. Exhibit numbers
correspond to the numbers in the Exhibit Table of Item 601 of Regulation S-K.
<TABLE>
<CAPTION>
EXHIBIT NO. DESCRIPTION
- ------------- -----------------------------------------------------------------------------------------------------
<C> <S>
2.01 Form of Agreement and Plan of Merger to be entered into by and among the partnerships and the company
is incorporated herein by reference to Appendix A to the Prospectus/ Consent Solicitation Statement.
3.01 Certificate of Limited Partnership of the company.(3)
3.02 Limited Partnership Agreement of the company.(3)
3.03 Form of Amended and Restated Limited Partnership Agreement of the company is incorporated herein by
reference to Appendix C to the Prospectus/Consent Solicitation Statement.
3.04 Limited Partnership Agreement and Amended Certificate of Limited Partnership of Capital Source
L.P.(1)
3.05 Limited Partnership Agreement and Amended Certificate of Limited Partnership of Capital Source II
L.P.-A.(1)
3.06 Amended Certificate of Limited Partnership of Capital Source L.P.(1)
3.07 Amended Certificate of Limited Partnership of Capital Source II L.P.-A(1)
3.08 Amendment to Limited Partnership Agreement of Capital Source L.P.(3)
3.09 Amendment to Limited Partnership Agreement of Capital Source II L.P.-A(3)
4.01 The Certificate of Limited Partnership and Amended and Restated Agreement of Limited Partnership of
the company included as Exhibits 3.01 and 3.03 are incorporated herein by reference.
4.02 Form of indenture between the company and the trustee relating to the notes being registered pursuant
to this Registration Statement, including the form of Variable Rate Junior Notes Callable On or After
the Date of Issuance and the form of promissory notes.(3)
4.03 Form of Units Certificate of the company.(2)
</TABLE>
II-1
<PAGE>
<TABLE>
<CAPTION>
EXHIBIT NO. DESCRIPTION
- ------------- -----------------------------------------------------------------------------------------------------
<C> <S>
4.04 Form of Variable Rate Junior Notes Callable On or After the Date of Issuance and Promissory Notes of
the company are included in Exhibit 4.02.
5.01 Opinion of Kutak Rock as to the legality of the units and the validity of the notes.(2)
8.01 Opinion of Kutak Rock as to certain tax matters.(2)
12.01 Ratio of Earnings to Fixed Charges.(3)
23.01 Consent of Independent Accountants.(3)
23.02 Consent of Kutak Rock (included in Exhibits 5.01 and 8.01).
23.03 Consent of Valuation Research Corporation to being named in the Registration Statement.(3)
24.01 The Power of Attorney, included on Page II-4 of the Registration Statement is incorporated herein by
reference.
25.01 Statement of Eligibility of Trustee.(3)
27.01 Financial Data Schedule of the Company.(3)
99.01 Market Value Report of Valuation Research Corporation.(2)
99.02 Form of consent card for Capital Source I and Capital Source II.(3)
</TABLE>
- ------------
(1) Previously filed.
(2) To be filed by amendment.
(3) Filed herewith.
(b) Not Applicable.
(c) The Market Value Report of Valuation Research Corporation is
included as Exhibit 99.01 to this Registration Statement.
ITEM 22. UNDERTAKINGS
A. The Company hereby undertakes the following:
(1) To file, during any period in which offers or sales are being made,
a post-effective amendment to this Registration Statement:
(a) To include any prospectus required by Section 10(a)(3) of the
Securities Act of 1933;
(b) To reflect in the prospectus any facts or events arising after
the effective date of the Registration Statement (or the most recent
post-effective amendment thereof) which, individually or in the
aggregate, represent a fundamental change in the information set forth in
the Registration Statement; and
(c) To include any material information with respect to the plan of
distribution not previously disclosed in the Registration Statement or
any material change to such information in the Registration Statement.
(2) That, for the purpose of determining any liability under the
Securities Act of 1933, each such post-effective amendment shall be deemed
to be a new registration statement relating to the securities offered
therein, and the offering of such securities at that time shall be deemed to
be the initial bona fide offering thereof.
(3) To remove from registration by means of a post-effective amendment
any of the securities being registered which remain unsold at the
termination of the offering.
II-2
<PAGE>
B. (1) The undersigned Registrant hereby undertakes as follows: that prior
to any public reoffering of the securities registered hereunder through use of a
prospectus which is a part of this Registration Statement, by any person or
party who is deemed to be an underwriter within the meaning of Rule 145(c), the
issuer undertakes that such reoffering prospectus will contain the information
called for by the applicable registration form with respect to reofferings by
persons who may be deemed underwriters, in addition to the information called
for by the other items of the applicable form.
(2) The undersigned Registrant undertakes that every prospectus (i) that
is filed pursuant to paragraph (1) immediately preceding, or (ii) that
purports to meet the requirements of Section 10(a)(3) of the Securities Act
of 1933 and is used in connection with an offering of securities subject to
Rule 415, will be filed as part of an amendment to the registration
statement and will not be used until such amendment is effective, and that,
for purposes of determining any liability under the Securities Act of 1933,
each such post-effective amendment shall be deemed to be a new registration
statement relating to the securities offered therein, and the offering of
such securities at that time shall be deemed to be the initial bona fide
offering thereof.
C. Insofar as indemnification for liabilities arising under the Securities
Act of 1933 may be permitted to directors, officers and controlling persons of
the Registrant pursuant to the foregoing provisions, or otherwise, the
Registrant has been advised that in the opinion of the Securities and Exchange
Commission such indemnification is against public policy as expressed in the
Securities Act of 1933 and is, therefore, unenforceable. In the event that a
claim for indemnification against such liabilities (other than the payment by
the Registrant of expenses incurred or paid by a director, officer or
controlling person of the Registrant in the successful defense of any action,
suit or proceeding) is asserted by such director, officer or controlling person
in connection with the securities being registered, the Registrant will, unless
in the opinion of its counsel the matter has been settled by controlling
precedent, submit to a court of appropriate jurisdiction the question whether
such indemnification by it is against public policy as expressed in the
Securities Act of 1933 and will be governed by the final adjudication of such
issue.
D. The undersigned Registrant hereby undertakes to respond to requests for
information that is incorporated by reference into the Prospectus/Consent
Solicitation Statement pursuant to Items 4, 10(b), 11 or 13 of this Form, within
one business day of receipt of such request, and to send the incorporated
documents by first class mail or other equally prompt means. This includes
information contained in documents filed subsequent to the effective date of
this Registration Statement through the date of responding to the request.
E. The undersigned Registrant hereby undertakes to supply by means of a
post-effective amendment all information concerning a transaction, and the
company being acquired involved therein, that was not the subject of and
included in the Registration Statement when it became effective.
II-3
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, as amended, the
Registrant has duly caused this Pre-Effective Amendment No. 3 to the Form S-4
Registration Statement to be signed on its behalf by the undersigned, thereunto
duly authorized, in the City of Omaha, State of Nebraska, on July 21, 1999.
<TABLE>
<S> <C> <C>
AMERICA FIRST REAL ESTATE INVESTMENT PARTNERS,
L.P.
By: America First Capital Source I L.L.C.,
general partner
By: America First Companies L.L.C., sole
member By: /s/ MICHAEL B. YANNEY
-------------------------------------
Michael B. Yanney,
CHIEF EXECUTIVE OFFICER, PRESIDENT
AND CHAIRMAN OF THE BOARD OF MANAGERS
</TABLE>
POWER OF ATTORNEY
KNOW ALL MEN BY THESE PRESENTS, that the undersigned, whose signatures
appear below, hereby constitute and appoint Michael B. Yanney their true and
lawful attorney-in-fact and agent, with full power of substitution and
resubstitution, for them and in their name, place and stead, in any and all
capacities, to sign any and all amendments (including post-effective amendments)
to this Registration Statement, and to file the same, with exhibits thereto, and
other documents in connection therewith, with the Securities and Exchange
Commission, granting unto said attorney-in-fact and agent full power and
authority to do and perform each and every act and thing requisite and necessary
to be done, as full and to all intents and purposes as he might or could do in
person, hereby ratifying and confirming all that said attorney-in-fact and
agent, or his substitute or substitutes, may lawfully do or cause to be done by
virtue hereof.
Pursuant to the requirements of the Securities Act of 1933, as amended, this
Registration Statement has been signed by the following persons in the
capacities and on the dates indicated.
<TABLE>
<CAPTION>
NAME TITLE DATE
- ------------------------------ -------------------------- -------------------
<C> <S> <C>
/s/ MICHAEL B. YANNEY Chief Executive Officer, July 21, 1999
- ------------------------------ President and Chairman
Michael B. Yanney of the Board of Managers
of America First
Companies L.L.C.
/s/ MICHAEL THESING Chief Financial Officer, July 21, 1999
- ------------------------------ Principal Accounting
Michael Thesing Officer, Secretary,
Treasurer, and Manager
of America First
Companies L.L.C.
/s/ MARTIN A. MASSENGALE Manager of America First July 21, 1999
- ------------------------------ Companies L.L.C.
Martin A. Massengale
/s/ ALAN BAER Manager of America First July 21, 1999
- ------------------------------ Companies L.L.C.
Alan Baer
</TABLE>
II-4
<PAGE>
<TABLE>
<CAPTION>
NAME TITLE DATE
- ------------------------------ -------------------------- -------------------
<C> <S> <C>
/s/ GAIL WALLING YANNEY Manager of America First July 21, 1999
- ------------------------------ Companies L.L.C.
Gail Walling Yanney
/s/ MARIANN BYERWALTER Manager of America First July 21, 1999
- ------------------------------ Companies L.L.C.
Mariann Byerwalter
</TABLE>
II-5
<PAGE>
CERTIFICATE OF LIMITED PARTNERSHIP OF
AMERICA FIRST REAL ESTATE INVESTMENT PARTNERS, L.P.
This Certificate of Limited Partnership of America First Real Estate
Investment Partners, L.P. (the "Partnership") is being executed by the
undersigned General Partner (the "General Partner") for the purpose of forming a
limited partnership pursuant to the Delaware Revised Uniform Limited Partnership
Act (6 DEL.C. Section 17-101 ET SEQ.).
ARTICLE I
The name of the limited partnership hereby formed is "America First
Real Estate Investment Partners, L.P."
ARTICLE II
The address of the registered office of the Partnership in the State of
Delaware is 1209 Orange Street, Wilmington, Delaware 19801 and the name of its
registered agent at that address for service of process on the Partnership in
the State of Delaware is The Corporation Trust Company.
ARTICLE III
The name and business address of the General Partner of the Partnership
is:
NAME BUSINESS ADDRESS
America First Capital Source I L.L.C. 1004 Farnam Street
Suite 400
Omaha, Nebraska 68102
IN WITNESS WHEREOF, the undersigned, being the sole general partner of
the Partnership, has caused this Certificate of Limited Partnership to be duly
executed as of the 17th day of June, 1999.
GENERAL PARTNER
AMERICA FIRST CAPITAL
SOURCE I L.L.C.
By: /s/ MICHAEL THESING
-------------------
Michael Thesing
Vice President
<PAGE>
AMERICA FIRST REAL ESTATE
INVESTMENT PARTNERS, L.P.
AGREEMENT OF LIMITED PARTNERSHIP
THIS AGREEMENT OF LIMITED PARTNERSHIP (this "Agreement") is entered
into as of June 17th, 1999 by America First Capital Source I L.L.C., a Delaware
limited liability company (the "General Partner") and H/T Corp., a Delaware
corporation (the "Initial Limited Partner") (the General Partner and the Initial
Limited Partner hereinafter collectively sometimes referred to as the
"Partners") in order to form a limited partnership (the "Partnership") under the
provisions of the Delaware Revised Uniform Limited Partnership Act (the "Act")
and according to the terms of this Agreement.
ARTICLE I
Section 1.1. FORM. The Partners hereby form a limited partnership
pursuant to the Act.
Section 1.2. NAME. The business of the Partnership shall be conducted
under the name of "America First Real Estate Investment Partners, L.P."
Section 1.3. PLACE OF BUSINESS. The principal office and place of
business of the Partnership shall be located at 1004 Farnam Street, Suite 400,
Omaha, Nebraska, or such other place as the Partners may from time to time
designate.
Section 1.4. PURPOSE--GENERAL. The purpose for which the Partnership is
organized is to carry on any lawful business or activity, except the business of
insurance or banking. The Partnership shall have all powers as set forth in this
Agreement and any and all powers enumerated in the Act.
Section 1.5. TERM. The Partnership shall commence on the date hereof
and shall continue for a period of 40 years, unless earlier terminated in the
following manner:
(a) upon the election of either Partner;
(b) by bankruptcy, withdrawal, resignation or expulsion
of any Partner, provided that the remaining Partner may agree to
continue the business of the Partnership in such event; or
(c) by applicable Delaware law.
ARTICLE II
Section 2.1. CONTRIBUTIONS OF PARTNERS. Each Partner has agreed to
contribute an amount to the capital of the Partnership as indicated in Section
2.2 below. Partners may contribute additional capital from time to time. No
interest shall be paid on any contribution to the capital of the Partnership.
Except as otherwise provided herein, no Partner shall have the right to demand
the return of its capital contributions and no Partner shall have any priority
over any other Partner with respect to the return of capital contributions
except as herein provided.
<PAGE>
Section 2.2. PARTNERSHIP INTERESTS. The amount of capital which each
Partner has initially agreed to contribute to the Partnership and the percentage
of interest of each Partner in the profits, losses and cash distributions of the
Partnership ("Partnership Interests") are as follows:
<TABLE>
<CAPTION>
Agreed Initial
Capital Partnership
NAMES CONTRIBUTION INTERESTS
<S> <C> <C>
H/T Corp. $990 99%
America First Capital Source I L.L.C. $10 1%
</TABLE>
If a Partner contributes additional capital to the Partnership, the respective
Partnership Interests of the Partners will be adjusted accordingly.
Section 2.3. CAPITAL ACCOUNTS. A capital account shall be maintained
for each Partner. Each Partner's capital account will be credited with all
capital contributions made by such Partner and such Partner's allocable share of
Partnership profits and will be reduced by the amount of all cash distributions
made to such Partner and by such Partner's allocable share of Partnership
losses. All capital accounts shall be maintained in accordance with Section 704
of the Internal Revenue Code of 1986, as amended.
Section 2.4. ALLOCATIONS AND DISTRIBUTIONS. (a) All profits and losses
of the Partnership shall be allocated among the Partners in proportion to their
respective Partnership Interests.
(b) Distributions to the Partners of Net Operating Cash (as hereinafter
defined) shall be made at such times as the Partners shall determine. Such
distributions shall be made to the Partners simultaneously and in proportion to
their respective Partnership Interests. For the purpose of this Agreement, Net
Operating Cash shall mean the gross receipts of the Partnership during the
relevant period, less the sum of all cash expenses incurred in the operation of
the Partnership and such sums as may be necessary to establish a reserve for
anticipated operating expenses.
Section 2.5. COMPENSATION. No Partner shall be entitled to any
compensation from the Partnership.
ARTICLE III
Section 3.1. THE GENERAL PARTNER. (a) The Partners agree that the
General Partner will have exclusive authority to conduct the day-to-day
operations of the Partnership.
(b) No Partner other than the General Partner will have any
authority to:
(i) borrow money in the name of the Partnership or
utilize collateral owned by the Partnership as security for such loans;
2
<PAGE>
(ii) make, execute or deliver any agreement or other
document on behalf of the Partnership;
(iii) assign, transfer, pledge, compromise or release any
of the claims of or debts due the Partnership or arbitrate or consent
to the arbitration of any of the disputes or controversies of the
Partnership.
Section 3.2. PROHIBITED ACTIONS. No Partner has any authority to:
(a) make, execute or deliver any assignment for the
benefit of creditors or any confession of judgment without the consent
of all Partners;
(b) perform any act in violation of this Agreement or of
any applicable law; or
(c) borrow money from the Partnership or utilize
Partnership assets for other than Partnership purposes.
ARTICLE IV
Section 4.1. TERMINATION AND DISSOLUTION. Upon a termination of the
Partnership as provided in Section 1.5, a full and general accounting of its
assets, liabilities and transactions shall at once be taken. Such assets may be
sold and turned into cash as soon as possible and all debts and other amounts
due the Partnership collected. The proceeds thereof shall thereupon be applied
as follows:
(a) First, to discharge the debts and liabilities of the
Partnership and the expenses of liquidation.
(b) Second, to divide the surplus, if any, among the
Partners or their representatives in proportion to their respective
capital accounts.
Section 4.2. RIGHT TO DEMAND PROPERTY. No Partner shall have the right
to demand and receive property in kind for its distribution.
ARTICLE V
Section 5.1. ACCOUNTING YEAR, BOOKS, STATEMENTS. The Partnership's
fiscal year shall commence on January 1 of each year and shall end on December
31 of each year. Full and accurate books of account shall be kept at such place
as the General Partner may from time to time designate, showing the condition of
the business and finances of the Partnership, and each Partner shall have access
to such books of account and shall be entitled to examine them at any time
during ordinary businesses hours. The General Partner shall cause the
Partnership to deliver to each Partner all information necessary for the
preparation of their federal income tax returns.
Section 5.2. BANKING. The Partnership shall maintain a bank account or
bank accounts in the Partnership's name in a national or state bank determined
by the General Partner. Checks
3
<PAGE>
and drafts shall be drawn on the Partnership's bank account for Partnership
purposes only and shall be signed by the General Partner or its designated
agents.
Section 5.3. TITLES AND SUBTITLES. Titles of the paragraphs and
subparagraphs are placed herein for convenient reference only and shall not to
any extent have the effect of modifying, amending or changing the express terms
and provisions of this Agreement.
Section 5.4. WORDS AND GENDER OR NUMBER. As used herein, unless the
context clearly indicates the contrary, the singular number shall include the
plural, and the plural the singular, and the use of any gender shall be
applicable to all genders.
Section 5.5. EXECUTION IN COUNTERPARTS. This Agreement may be executed
in any number of counterparts, each of which shall be taken to be an original.
Section 5.6. SEVERABILITY. In the event any parts of this Agreement are
found to be void, the remaining provisions of this Agreement shall nevertheless
be binding with the same effect as though the void parts were deleted.
Section 5.7. WAIVER. No waiver of any provisions of this Agreement
shall be valid unless in writing and signed by the person or party against whom
charged.
Section 5.8. APPLICABLE LAW. This Agreement shall be subject to and
governed by the laws of the State of Delaware.
Section 5.9. BINDING EFFECT. This Agreement shall be binding upon and
inure to the benefit of the parties hereto and their respective successors and
permitted assigns.
Section 5.10. ENTIRE AGREEMENT; AMENDMENTS. This Agreement sets forth
all, and is intended by the Partners to be a integration of all, promises,
agreements and understanding relating to the operation of the Partnership and no
other promises, agreements or understanding, whether written or oral, expressed
or implied, with respect thereto shall have any force or effect whatsoever. This
Agreement may not be amended without the consent of all Partners.
[signatures on following page]
4
<PAGE>
IN WITNESS WHEREOF, the Partners have executed this Agreement on the
date above written.
AMERICA FIRST CAPITAL
SOURCE I L.L.C., General Partner
By: /s/ MICHAEL THESING
---------------------------
Michael Thesing
Vice President
H/T CORP., Initial Limited Partner
By: /s/ MICHAEL THESING
----------------------------
Michael Thesing
Vice President
5
<PAGE>
AMENDMENT TO THE CAPITAL SOURCE L.P.
LIMITED PARTNERSHIP AGREEMENT
The Limited Partnership Agreement of Capital Source L.P., a Delaware
limited partnership (the "Partnership"), by and between Hutton Insured Mortgage
Equities, Inc., a Delaware corporation, TIG Insured Mortgage Equities, Inc., a
Delaware Corporation, and H/T Corp., a Delaware corporation dated March 24,
1986, is hereby amended as follows:
WHEREAS, the general partners of the Partnership (the "General
Partners") have changed their corporate names; and
WHEREAS, the General Partners have determined it to be in the best
interests of the Partnership to amend the Limited Partnership Agreement pursuant
to Section 12.02(b) as stated below.
W I T N E S S E T H
1. The General Partners of the Partnership are Insured Mortgage
Equities, Inc. and America First Capital Source I L.L.C.
2. Sections 7.01 and 7.02 of the Limited Partnership Agreement
are amended as follows:
The first sentence of Sections 7.01 and 7.02, which both currently read
"The Units shall be evidenced by Beneficial Ownership Certificates
which shall be issued in registered form only," shall be deleted and
replaced with the following sentence: "Ownership of the Units shall be
evidenced solely by the books and records of the Partnership."
3. Section 10.01 of the Limited Partnership Agreement is amended
as follows:
The first sentence of Section 10.01(b), which currently reads "Notice
of any meeting to be held pursuant to Section 10.01(a) shall be given
not less than 10 days nor more than 60 days before the date of the
meeting to each Limited Partner and Unit holder at his record address,
or at such other address which he may have furnished in writing to the
General Partners," shall be deleted and replaced with the following
sentence: "Notice of any meeting to be held pursuant to Section
10.01(a) shall be given not less than 10 days nor more than 120 days
before the date of the meeting to each Limited Partner and Unit holder
at his record address, or at such other address which he may have
furnished in writing to the General Partners."
The last sentence of Section 10.01(c), which currently reads "Such date
shall not be more than 60 days nor less than 10 days before any such
meeting or submission of a matter to the Limited Partners and Unit
holders for a vote by written Consent," shall be deleted
<PAGE>
and replaced with the following sentence: "Such date shall not be more
than 120 days nor less than 10 days before any such meeting or
submission of a matter to the Limited Partners and Unit holders for a
vote by written Consent."
IN WITNESS WHEREOF, the undersigned have set their hand, as of the 19th
day of July, 1999.
America First Capital Source I L.L.C., as
general partner
By: /s/ MICHAEL THESING
-------------------------------
Michael Thesing, Vice President
Insured Mortgage Equities, Inc., as general
partner
By: /s/ MICHAEL THESING
-------------------------------
Michael Thesing, Vice President
2
<PAGE>
AMENDMENT TO THE CAPITAL SOURCE II L.P.-A
LIMITED PARTNERSHIP AGREEMENT
The Limited Partnership Agreement of Capital Source II L.P.-A, a
Delaware limited partnership (the "Partnership"), by and between Hutton Insured
Mortgage Equities II L.P., a Delaware limited partnership, TIG Insured Mortgage
Equities II Inc., a Delaware Corporation, and H/T Corp. II-A, is hereby amended
as follows:
WHEREAS, the general partners of the Partnership (the "General
Partners") have changed their corporate names; and
WHEREAS, the General Partners have determined it to be in the best
interests of the Partnership to amend the Limited Partnership Agreement pursuant
to Section 12.02(b) as stated below.
WITNESSETH
1. The General Partners of the Partnership are Insured Mortgage
Equities II L.P. and America First Capital Source II L.L.C.
2. Sections 7.01 and 7.02 of the Limited Partnership Agreement
are amended as follows:
The first sentence of Sections 7.01 and 7.02, which both currently read
"The Units shall be evidenced by Beneficial Ownership Certificates
which shall be issued in registered form only," shall be deleted and
replaced with the following sentence: "Ownership of the Units shall be
evidenced solely by the books and records of the Partnership."
3. Section 10.01 of the Limited Partnership Agreement is amended
as follows:
The first sentence of Section 10.01(b), which currently reads "Notice
of any meeting to be held pursuant to Section 10.01(a) shall be given
not less than 10 days nor more than 60 days before the date of the
meeting to each Limited Partner and Unit holder at his record address,
or at such other address which he may have furnished in writing to the
General Partners," shall be deleted and replaced with the following
sentence: "Notice of any meeting to be held pursuant to Section
10.01(a) shall be given not less than 10 days nor more than 120 days
before the date of the meeting to each Limited Partner and Unit holder
at his record address, or at such other address which he may have
furnished in writing to the General Partners."
The last sentence of Section 10.01(c), which currently reads "Such date
shall not be more than 60 days nor less than 10 days before any such
meeting or submission of a matter to the Limited Partners and Unit
holders for a vote by written Consent," shall be deleted and replaced
with the following sentence: "Such date shall not be more than 120 days
nor
<PAGE>
less than 10 days before any such meeting or submission of a matter to
the Limited Partners and Unit holders for a vote by written Consent."
IN WITNESS WHEREOF, the undersigned have set their hand, as of the 19th
day of July, 1999.
America First Capital Source II L.L.C., as
general partner
By: /s/ MICHAEL THESING
-------------------------------
Michael Thesing, Vice President
Insured Mortgage Equities II L.P., as general
partner
By: CS Housing II Inc., as general partner
By: /s/ MICHAEL THESING
-------------------------------
Michael Thesing, Vice President
2
<PAGE>
Exhibit 4.02
FORM OF
AMERICA FIRST REAL ESTATE
INVESTMENT PARTNERS, L.P.
AND
-----------------------
-----------------------
AS TRUSTEE
INDENTURE
DATED AS OF , 1999
-----------------------
VARIABLE RATE JUNIOR NOTES
DUE __________, 2007
<PAGE>
CROSS-REFERENCE TABLE
This Cross-Reference Table shows the location in the Indenture of the
provisions corresponding to the requirements of particular Sections of the Trust
Indenture Act of 1939, as amended ("TIA"). This Cross-Reference Table shall not
be deemed part of the Indenture.
<TABLE>
<CAPTION>
TIA SECTION SECTION
- ----------- -------
<S> <C>
Section 310(a)(1) 9.10
(a)(2) 9.10
(a)(3) N.A.
(a)(4) N.A.
(a)(5) 9.10
(b) 9.08; 9.10
(c) N.A.
Section 311(a) 9.11
(b) 9.11
(c) N.A.
Section 312(a) 2.05
(b) 12.03
(c) 12.03
Section 313(a) 9.06
(b)(1) N.A.
(b)(2) 9.06
(c) 9.06; 12.02
(d) 9.06
Section 314(a) 6.02; 12.02
(b) N.A.
(c)(1) 12.04(a)
(c)(2) 12.04(a)
(c)(3) N.A.
(d) N.A.
(e) 12.04(b)
(f) N.A.
Section 315(a) 9.01(b)
(b) 9.05; 12.02
(c) 9.01(a)
(d) 9.01(c)
(e) 8.11
Section 316(a)(last sentence) 2.09
(a)(1)(A) 8.05
(a)(1)(B) 8.04
(a)(2) N.A.
(b) 8.07
Section 317(a)(1) 8.08
(a)(2) 8.09
1
<PAGE>
(b) 2.04
Section 318(a) 12.01
</TABLE>
- --------------------------
N.A. means Not Applicable.
2
<PAGE>
TABLE OF CONTENTS
Article I
DEFINITIONS, INCORPORATION BY REFERENCE AND RULES OF
CONSTRUCTION
Page
----
Section 1.01. Definitions.................................................1
Section 1.02. Incorporation by Reference of Trust Indenture Act...........8
Section 1.03. Rules of Construction.......................................8
Article II
THE NOTES
Section 2.01. Form, Terms and Dating......................................9
Section 2.02. Execution and Authentication...............................10
Section 2.03. Registrar and Paying Agent.................................10
Section 2.04. Paying Agent to Hold Money in Trust........................11
Section 2.05. Notes Register.............................................11
Section 2.06. Transfer and Exchange......................................12
Section 2.07. Replacement Notes..........................................12
Section 2.08. Outstanding Notes..........................................12
Section 2.09. Treasury Notes.............................................13
Section 2.10. Temporary Notes............................................13
Section 2.11. Cancellation...............................................13
Section 2.12. Defaulted Interest.........................................13
Article III
REDEMPTION
Section 3.01. Optional Redemption........................................13
Section 3.02. Mandatory Redemption.......................................14
Section 3.03. Notice of Redemption; Partial Redemption...................14
Section 3.04. Effect of Notice of Redemption.............................15
Section 3.05. Deposit of Redemption Price................................15
Article IV
THE PROMISSORY NOTES
Section 4.01. Form, Terms and Dating.....................................15
Section 4.02. Execution and Authentication...............................16
<PAGE>
Section 4.03. Registrar and Paying Agent.................................17
Section 4.04. Notes Register.............................................17
Section 4.05. Other Provisions...........................................18
Article V
PAYMENT PROVISIONS
Section 5.01. Notes Part of Junior Indebtedness..........................18
Section 5.02. Obligations of the Company Unconditional...................18
Section 5.03. Application by Trustee of Moneys Deposited With It.........18
Article VI
COVENANTS
Section 6.01. Payment of Notes...........................................18
Section 6.02. SEC Reports................................................19
Section 6.03. Waiver of Usury Defense....................................19
Section 6.04. Liquidation................................................19
Section 6.05. Compliance Certificates....................................20
Section 6.06. Notice of Defaults.........................................20
Section 6.07. Payment of Taxes and Other Claims..........................20
Section 6.08. Corporate Existence........................................20
Section 6.09. Maintenance of Properties..................................20
Section 6.10. Limitations on Indebtedness................................21
Section 6.11. Maintenance of Consolidated Coverage Ratio.................21
Article VII
SUCCESSOR ENTITY
Section 7.01. When Company May Merge, Etc................................21
Section 7.02. Successor Entity Substituted...............................22
Article VIII
DEFAULT AND REMEDIES
Section 8.01. Events of Default..........................................22
Section 8.02. Acceleration...............................................23
Section 8.03. Other Remedies.............................................24
Section 8.04. Waiver of Default and Events of Default....................24
Section 8.05. Control by Majority........................................25
Section 8.06. Limitation on Suits........................................25
Section 8.07. Rights of Holders to Receive Payment.......................25
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<PAGE>
Section 8.08. Collection Suit by Trustee.................................25
Section 8.09. Trustee May File Proofs of Claim...........................25
Section 8.10. Application of Money Collected.............................26
Section 8.11. Undertaking for Costs......................................26
Article IX
TRUSTEE
Section 9.01. Duties of Trustee..........................................26
Section 9.02. Rights of Trustee..........................................27
Section 9.03. Individual Rights of Trustee...............................28
Section 9.04. Trustee's Disclaimer.......................................28
Section 9.05. Notice of Defaults or Events of Default....................28
Section 9.06. Reports by Trustee to Holders..............................28
Section 9.07. Compensation and Indemnity.................................28
Section 9.08. Replacement of Trustee.....................................29
Section 9.09. Successor Trustee by Merger, etc...........................30
Section 9.10. Eligibility; Disqualification..............................30
Section 9.11. Preferential Collection of Claims Against Company..........30
Article X
SATISFACTION AND DISCHARGE OF INDENTURE
Section 10.01. Termination of Company's Obligations.......................30
Section 10.02. Application of Trust Money.................................31
Section 10.03. Repayment to Company.......................................31
Section 10.04. Reinstatement..............................................31
Article XI
AMENDMENTS, SUPPLEMENTS AND WAIVERS
Section 11.01. Without Consent of Holders.................................31
Section 11.02. With Consent of Holders....................................32
Section 11.03. Compliance with Trust Indenture Act........................33
Section 11.04. Revocation and Effect of Consents..........................33
Section 11.05. Notation on or Exchange of Notes...........................33
Section 11.06. Trustee to Sign Amendments, etc............................33
Article XII
MISCELLANEOUS
Section 12.01. Trust Indenture Act Controls...............................33
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<PAGE>
Section 12.02. Notices....................................................33
Section 12.03. Communications by Holders with Other Holders...............34
Section 12.04. Certificate and Opinion as to Conditions Precedent.........34
Section 12.05. Rules by Trustee, Paying Agent, Registrar..................35
Section 12.06. Legal Holidays.............................................35
Section 12.07. Governing Law..............................................35
Section 12.08. No Recourse Against Others.................................35
Section 12.09. Successors.................................................35
Section 12.10. Multiple Counterparts......................................35
Section 12.11. Separability...............................................35
Section 12.12. Table of Contents, Headings, etc...........................35
Section 12.13. Submission to Jurisdiction; Appointment of Agent for
Service of Process.......................................35
EXHIBIT A--Form of Note
EXHIBIT B--Form of Promissory Note
NOTE: This Table of Contents shall not, for any purpose, be deemed to be
a part of the Indenture.
iv
<PAGE>
INDENTURE
This Indenture is dated as of __________, 1999 and is made by and
between America First Real Estate Investment Partners, L.P., a Delaware
limited partnership (the "Company"), and ____________a national banking
association duly organized and existing under the laws of the United States
of America, as Trustee (the "Trustee").
Both parties agree as follows for the benefit of each other and for the
equal and ratable benefit of the Holders of the Company's Variable Rate Junior
Notes due ________, 2007, and the Holders of the Company's Promissory Notes due
________, 2007, both of which are being issued hereunder.
ARTICLE I
DEFINITIONS, INCORPORATION BY REFERENCE AND RULES OF CONSTRUCTION
SECTION 1.01. DEFINITIONS.
"AFFILIATE" of any specified Person means any other Person directly or
indirectly controlling, controlled by or under common control with such
specified Person, or any other Person owning or controlling 10% or more of the
outstanding voting securities of such Person. For the purposes of this
definition, "control" when used with respect to any Person means the power to
direct the management and policies of such Person, directly or indirectly,
whether through the ownership of voting securities, by contract or otherwise;
and the terms "controlling" and "controlled" have meanings correlative to the
foregoing.
"AGENT" means any Registrar or Paying Agent.
"AGGREGATE INDEBTEDNESS OF THE COMPANY" means the total aggregate principal
amount outstanding of the Company's Indebtedness.
"AMORTIZATION" means, for any period, as applied to any Person, the amount
of the amortization (other than amortization of debt discount and amortization
of capitalized financing fees) that is reflected on the financial statements of
such Person and its consolidated Subsidiaries for such period in accordance with
GAAP.
"APPLICABLE FEDERAL RATE" means that interest rate per annum determined in
accordance with Section 1274 of the Code or any successor section. As of the
date of this Indenture, the Applicable Federal Rate for debt instruments with a
term of not over three years was the "Federal short-term rate," as determined by
the Secretary of the Treasury each month for application during the following
calendar month. The Applicable Federal Rate is published each month in a Revenue
Ruling issued by the Internal Revenue Service, which can be found in the
Internal Revenue Bulletin.
"APPLICABLE VARIABLE RATE" means first the Initial Interest Rate, and then,
after the Initial Interest Rate Period and for each subsequent Interest Rate
Period, the variable interest rate determined by the Trustee on each applicable
Interest Determination Date, which interest rate
1
<PAGE>
shall be 120% of the Applicable Federal Rate for debt instruments with a term
of not over three years.
"APPRAISED VALUE OF THE ASSETS OF THE COMPANY" means the greater of (a) the
value which is placed on all the assets of the Company as of the date of the
Transaction by an independent appraiser or (b) the value which is placed on all
the assets of the Company as of some date subsequent to the Transaction, by an
independent appraiser.
"BANKRUPTCY LAW" means Title 11, U.S. Code, or any similar federal or state
law for the relief of debtors.
"BUSINESS DAY" means any day other than a Legal Holiday.
"CAPITALIZED LEASE OBLIGATION" means, as applied to any Person for any
period, any lease of any property (whether real, personal or mixed) by that
Person as lessee that, in conformity with GAAP, is or should be accounted for as
a capital lease on the balance sheet of that Person and the amount of such
obligation shall be the capitalized amount thereof, determined in accordance
with such principles.
"CAP SOURCE I" means Capital Source L.P., a Delaware limited partnership.
"CAP SOURCE I DESIGNATED ASSETS" means those Designated Assets formerly
held by Cap Source I.
"CAP SOURCE II" means Capital Source II L.P.-A, a Delaware limited
partnership.
"CAP SOURCE II DESIGNATED ASSETS" means those Designated Assets formerly
held by Cap Source II.
"CODE" means the Internal Revenue Code of 1986, as amended, including
successor statutes thereto.
"COMPANY" means America First Real Estate Investment Partners, L.P., a
newly formed Delaware limited partnership, and its successors or assigns.
"CONSOLIDATED COVERAGE RATIO" means, as applied to any Person, the ratio of
(i) the sum of Consolidated Net Income plus, to the extent reflected in the
computation of such Consolidated Net Income and without duplication,
Depreciation Expense, Amortization, Consolidated Income Tax Expense and
Consolidated Fixed Charges of such Person and its consolidated Subsidiaries
during the most recent four fiscal quarters next preceding the date of
determination to (ii) the sum of the Consolidated Fixed Charges of such Person
and its consolidated Subsidiaries incurred by such Person during the most recent
four fiscal quarters next preceding the date of determination
"CONSOLIDATED FIXED CHARGES" of any Person means, for any period for which
the determination is to be made, the aggregate amount of interest, whether
expensed or capitalized, of such Person and its consolidated Subsidiaries
(including all non-cash interest, commissions, discounts and other fees and
charges owed with respect to letters of credit and bankers'
2
<PAGE>
acceptance financing and the net cost associated with interest swap
obligations) and the interest component of Capitalized Lease Obligations,
paid, accrued or scheduled to be paid or accrued by such Person during such
period, all as determined on a consolidated basis in accordance with GAAP.
"CONSOLIDATED INCOME TAX EXPENSE" means, for any period, as applied to any
Person, the provision for federal, state, local and foreign income taxes of such
Person and its consolidated Subsidiaries for such period, determined in
accordance with GAAP.
"CONSOLIDATED NET INCOME" means, for any period, as applied to any Person,
the Net Income (or loss) of such Person and its consolidated Subsidiaries for
such period determined in accordance with GAAP; provided, that (i) the Net
Income (loss) of any Person which is not a Subsidiary or is accounted for by
such Person by the equity method of accounting shall be included only to the
extent of the fair market value of dividends or distributions paid to such
Person or a Subsidiary, and (ii) the Net Income (loss) of any Person acquired in
a pooling of interests transaction for any period prior to the date of such
acquisition shall be excluded.
"CONSOLIDATED NET WORTH" means, with respect to any Person at any date, the
consolidated stockholders' equity of such Person less the amount of such
stockholders' equity attributable to treasury stock of such Person and its
Subsidiaries, as determined in accordance with GAAP consistently applied.
"CUSTODIAN" means any receiver, trustee, assignee, liquidator, sequestrator
or similar official under any Bankruptcy Law.
"DEFAULT" means any event which is, or after notice or passage of time, or
both, would be, an Event of Default.
"DEPRECIATION EXPENSE" means, for any period, as applied to any Person, the
provision for depreciation that is reflected on the financial statements of such
Person and its consolidated Subsidiaries in accordance with GAAP.
"DESIGNATED ASSETS" means the fee interest of the Company in its assets at
the time of the Transaction which were owned by a Partnership immediately prior
to the Transaction.
"EFFECTIVE DATE" means the date upon which the registration statement
registering the Notes under the Securities Act of 1933, as amended ("1933 Act"),
is declared effective by the Securities and Exchange Commission pursuant to
Section 8(a) of the 1933 Act.
"EVENT OF DEFAULT" means the occurrence of any event described in Section
8.01 hereof.
"FISCAL YEAR" means the fiscal year of the Company, initially beginning on
January 1 and ending on December 31.
"GAAP" means generally accepted accounting principles, as in effect at the
time of any calculation or determination required by this Indenture.
"GENERAL PARTNER" means the general partner of the Company.
3
<PAGE>
"HOLDER" or "NOTEHOLDER" means the Person in whose name a Note or
Promissory Note is registered on the Registrar's books.
"INDEBTEDNESS" of any Person at any date means, without duplication, (i)
all indebtedness of such Person for borrowed money (whether or not the recourse
of the lender is to the whole of the assets of such Person or only to a portion
thereof), (ii) all obligations of such Person evidenced by bonds, debentures,
notes or other similar instruments, (iii) all obligations of such Person in
respect of letters of credit or other similar instruments (or reimbursement
obligations with respect thereto), other than standby letters of credit incurred
by such Person in the ordinary course of business, (iv) all obligations of such
Person to pay the deferred and unpaid purchase price of property or services,
except trade payables and accrued expenses incurred in the ordinary course of
business, (v) all Capitalized Lease Obligations of such Person, (vi) all
Indebtedness of others secured by a Lien (other than assessment district and
similar Liens arising in connection with municipal financings) on any asset of
such Person, whether or not such Indebtedness is assumed by such Person and
(vii) all Indebtedness of others guaranteed by such Person to the extent of such
guaranty.
"INDENTURE" means this Indenture as originally executed or as amended or
supplemented from time to time.
"INITIAL INTEREST RATE" means ______% per annum.
"INITIAL INTEREST RATE PERIOD" means the period beginning on the first day
the Notes are issued and ending on the first day of the calendar year following
completion of the Transaction.
"INTEREST ACCRUAL PERIOD" means that period, with respect to any Interest
Payment Date, which begins on the preceding Interest Payment Date and ends on
the last day preceding the applicable Interest Payment Date.
"INTEREST DETERMINATION DATE" means the date which is two Business Days
prior to each Interest Payment Date.
"INTEREST PAYMENT DATE" means the fifteenth day of each January commencing
January 15, 2000, until the Principal of and interest on all the Notes and the
Promissory Notes have been fully paid, or if such date does not occur on a
Business Day, then the first Business Day thereafter.
"INTEREST RATE PERIOD" means the period from and including an Interest
Payment Date to and including the day immediately preceding the next Interest
Payment Date.
"LEGAL HOLIDAY" means a Saturday, a Sunday or a day on which state or
federally chartered banking institutions in New York, New York are not required
to be open.
"LEVERAGE RATIO" means, as of any date of determination, the ratio of Total
Liabilities on that date to Partners' Capital on that date.
"LIEN" means, with respect to any asset, any mortgage, deed of trust,
pledge, lien, charge, security interest, adverse claim affecting title or
resulting in a charge against such asset, or
4
<PAGE>
encumbrance of any kind in respect of such asset, whether or not filed,
recorded or otherwise perfected under applicable law (including any
conditional sale or other title retention agreement, any lease in the nature
thereof, any option or other agreement to sell).
"MATURITY DATE" means ________, 2007.
"NET INCOME" means, for any period, as applied to any Person, the net
income (loss) of such Person for such period, determined in accordance with GAAP
(except as provided in this definition), excluding from "Net Income," and
without duplication however, (i) any gain or loss, net of taxes, realized upon
any sale, transfer or other disposition (including by way of merger or
consolidation) by such Person of any property or other assets of such Person
outside the ordinary course of business, (ii) any gain or loss, net of taxes,
realized upon the termination of any employee pension benefit plan and (iii) any
extraordinary gain or loss, net of taxes, in each case determined in accordance
with GAAP.
"NET PROCEEDS OF ANY SALE OR REFINANCING OF DESIGNATED ASSETS" means the
gross proceeds of all sales, exchanges or refinancings received by the Company
or any of its Subsidiaries in connection with Designated Assets, less any and
all costs and expenses incurred by the Company or any of its Subsidiaries in
connection with such sales, exchanges or refinancings.
"NOTES" means the Variable Rate Junior Notes due ________, 2007 or any of
them, or the certificates therefor, or any of them, as amended or supplemented
from time to time, that are issued under this Indenture; provided that for all
purposes and provisions of this Indenture EXCEPT the issuance and redemption of
Notes and Promissory Notes as set forth in Articles II, III and IV hereof,
"Notes" shall include Promissory Notes.
"NOTES REGISTER" means the list of the names and addresses of the
Noteholders required to be maintained pursuant to Section 2.05 hereof.
"OFFICER" means the Chairman of the Board, the President, any Vice
President, the Chief Financial Officer, the Treasurer, the Secretary or the
Controller of the General Partner.
"OFFICERS' CERTIFICATE" means a certificate signed by two Officers or by an
Officer and an Assistant Treasurer or Assistant Secretary of the General
Partner.
"OPINION OF COUNSEL" means a written opinion from legal counsel who is
acceptable to the Trustee. The counsel may be an employee of or counsel to the
Company or the Trustee.
"OUTSTANDING," when used with respect to the Notes and Promissory Notes,
has the meaning explained in Section 2.08 hereof.
"PARTNERS' CAPITAL" means, as of any date of determination, partners'
capital as of that date determined in accordance with GAAP; provided that there
shall be excluded from Partners' Capital any amount attributable to partnership
interest that is, directly or indirectly, required by its terms to be redeemed
or repurchased by the Issuer thereof at a specified date or upon the occurrence
of specified events or at the election of the holder thereof, if and to the
extent that
5
<PAGE>
such date is, or such events or election could occur, prior to the final
maturity date of any Indebtedness.
"PARTNERSHIP MERGER AGREEMENT" means an Agreement and Plan of Merger among
the Partnerships and the Company pursuant to which the merger of such entities
is to be consummated.
"PARTNERSHIPS" means, collectively, Cap Source I and Cap Source II.
Reference to a "Partnership" shall be understood to refer to any one of them.
"PAYING AGENT" has the meaning set forth in Section 2.03 and Section 4.03
hereof.
"PERSON" means any individual, corporation, limited liability company,
partnership, joint venture, association, joint-stock company, trust,
unincorporated organization or government or other agency or political
subdivision thereof.
"PRINCIPAL" of a debt security, including the Notes, means the principal of
the security plus, when appropriate, the premium, if any, on the security.
"PROMISSORY NOTES" means the Promissory Notes issued by the Company
pursuant to Article IV hereof, in connection with the Transaction; provided that
for all purposes and provisions of this Indenture EXCEPT the issuance and
redemption of Notes and Promissory Notes as set forth in Articles II, III and IV
hereof, "Promissory Notes" shall be referred to as "Notes."
"PROSPECTUS" means the Prospectus/Consent Solicitation Statement dated
____________, 1999, together with the supplements thereto, of the Company filed
with the Securities and Exchange Commission, as it may be further supplemented
or amended from time to time.
"RECORD DATE" for the interest payable on any Interest Payment Date or for
Principal payable on the Maturity Date, means the last day of the month
preceding the applicable Interest Payment Date.
"REDEMPTION DATE," when used with respect to any Note to be redeemed, means
the date fixed for such redemption pursuant to this Indenture, as set forth in
the form of Note annexed as Exhibit A hereto and the form of Promissory Note
annexed as Exhibit B hereto.
"REDEMPTION PRICE," when used with respect to any Note to be redeemed,
means the Principal amount of the Note or Notes being redeemed plus interest
accrued thereon to the Redemption Date, without premium.
"REGISTRAR" has the meaning set forth in Section 2.03 and Section 4.03
hereof.
"SEC" means the United States Securities and Exchange Commission, as from
time to time constituted, created under the Securities Exchange Act of 1934, or,
if at any time after the execution of this Indenture such Commission is not
performing the duties now assigned to it under the TIA, then the body performing
such duties at such time.
6
<PAGE>
"SENIOR INDEBTEDNESS" means the Principal of and interest (including,
without limitation, any interest accruing subsequent to the filing of a petition
or other action concerning bankruptcy or other similar proceedings) on the
following, whether presently outstanding or hereafter incurred: (a) all
indebtedness of the Company (i) for money borrowed (including that evidenced by
the Notes), (ii) which is evidenced by a note, debenture, other security or
similar instrument (including a purchase money mortgage) given in connection
with the acquisition of any property or assets (other than inventory or other
similar property acquired in the ordinary course of business), or (iii) for the
payment of money relating to a Capitalized Lease Obligation; (b) any liabilities
of others described in the preceding clause (a) which the Company has guaranteed
or which is otherwise its legal liability; and (c) renewals, extensions,
refundings, restructurings, amendments and modifications of any such
indebtedness or guarantee. Notwithstanding anything to the contrary in this
Indenture or the Notes, "Senior Indebtedness" shall not include (x) any
indebtedness of the Company to a Subsidiary, or (y) any indebtedness or
guarantee of the Company which by its terms or the terms of the instrument
creating or evidencing it is subordinate in right of payment to the Notes.
"SHORT-TERM BORROWING" means any and all indebtedness, obligations and
liabilities of the Company, excluding trade accounts payable, taxes and other
governmental assessments, which are payable on demand or within one year from
the creation thereof, except any such indebtedness, obligations or liabilities
which can be renewed or extended at the Company's sole option to a date more
than one year from the creation thereof.
"SPECIAL RECORD DATE" for the payment of any defaulted interest or
Principal means a date fixed by the Trustee pursuant to Section 2.12 hereof.
"SUBSIDIARY" means any corporation of which at least a majority of the
outstanding capital stock having voting power under ordinary circumstances to
elect directors of such corporation shall at the time be held, directly or
indirectly, by the Company, by the Company and one or more Subsidiaries or by
one or more Subsidiaries.
"TIA" means the Trust Indenture Act of 1939 (15 U.S. Code Section
77aaa-77bbbb) as in effect on the date of this Indenture.
"TOTAL LIABILITIES" means, as of any date of determination, all liabilities
that should be reflected as a liability on a consolidated balance sheet of the
Company and its Subsidiaries on such date prepared in accordance with GAAP.
"TRADING DAY" means any day on which the New York Stock Exchange and the
American Stock Exchange are open for trading.
"TRANSACTION" means the merger of the Partnerships with and into the
Company pursuant to the terms and conditions set forth in the Partnership Merger
Agreement.
"TRUSTEE" means _______________ a national banking association organized
and existing under the laws of the United States of America, until a
successor replaces it in accordance with the provisions of this Indenture and
thereafter means the successor.
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"TRUST OFFICER" means any officer within the corporate trust department (or
any successor group) of the Trustee, including any vice president, assistant
vice president, assistant secretary or any other officer of the Trustee
customarily performing functions similar to those performed by the persons who
at that time shall be such officers, and also means, with respect to a
particular corporate trust matter, any other officer of the corporate trust
department (or any successor group) of the Trustee to whom such trust matter is
referred because of his knowledge of and familiarity with the particular
subject.
"UNIT" means a beneficial ownership of limited partner interest in, or
limited partner assignment interest of, a Partnership.
"U.S. GOVERNMENT OBLIGATIONS" means direct non-callable obligations of, or
non-callable obligations guaranteed by, the United States of America for the
payment of which guarantee or obligation the full faith and credit of the United
States is pledged.
SECTION 1.02. INCORPORATION BY REFERENCE OF TRUST INDENTURE ACT. Whenever
this Indenture refers to a provision of the TIA, the provision is incorporated
by reference in and made a part of this Indenture. The following TIA terms used
in this Indenture have the following meanings:
(a) "Commission" means the SEC;
(b) "indenture Notes" means the Notes;
(c) "indenture Note holder" means a Holder or Noteholder;
(d) "indenture to be qualified" means this Indenture;
(e) "indenture trustee" or "institutional trustee" means the Trustee;
(f) "obligor" on the indenture Notes means the Company or any other
obligor on the Notes.
All other terms used in this indenture that are defined by the TIA, defined
by TIA reference to another statute or defined by SEC rule and not otherwise
defined herein have the meanings assigned to them therein.
SECTION 1.03. RULES OF CONSTRUCTION. In this Indenture, unless the context
otherwise requires:
(a) a term has the meaning assigned to it;
(b) an accounting term not otherwise defined has the meaning assigned
to it in accordance with generally accepted accounting principles in effect
on the date hereof, and any other reference in this Indenture to "generally
accepted accounting principles" refers to generally accepted accounting
principles in effect on the date hereof;
(c) "or" is not exclusive;
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(d) words in the singular include the plural, and words in the plural
include the singular;
(e) the masculine includes the feminine and the neuter; and
(f) "herein," "hereof" and other words of similar import refer to this
Indenture as a whole and not to any particular Article, Section or other
subdivision.
ARTICLE II
THE NOTES
SECTION 2.01. FORM, TERMS AND DATING. The Notes and the Trustee's
certificate of authentication shall be substantially in the form of Exhibit A,
which is incorporated in and made part of this Indenture, with such insertions,
omissions, substitutions and other variations as are required or permitted by
this Indenture. The Notes may have notations, legends or endorsements required
by law, stock exchange rules, agreements to which the Company is subject or
usage. The Company shall approve the form of the Notes and any notation, legend
or endorsement on them. Each Note shall be dated the date of its authentication.
The definitive Notes shall be printed, lithographed or engraved or produced
by any combination of these methods on steel engraved borders or may be produced
in any other manner permitted by the rules of any securities exchange on which
the Notes may be listed, all as determined by the Company.
The Notes will be issued, known and designated as the Variable Rate Junior
Notes Due ________, 2007. The Maturity Date of the Notes shall be ________, 2007
and the Notes shall bear interest on the unpaid Principal at the Applicable
Variable Rate. The Notes shall be payable as follows:
(a) annual installments of accrued interest, payable on each Interest
Payment Date, commencing January 15, 1999, and continuing until the entire
interest and Principal of each Note is paid in full; and
(b) the unpaid Principal balance on the Maturity Date.
The Principal of and interest on the Notes shall be payable at the
principal corporate trust office of the Trustee in ______________________, or of
any successor or co-Paying Agent; PROVIDED, HOWEVER, that installments of
interest, and, if applicable, Principal may be payable by check mailed to the
address of the person entitled thereto as such address shall appear on the Notes
Register, or for Holders of Notes aggregating more than $__________________ in
Outstanding Principal amount who have given written notice and wire transfer
instructions to the Trustee, by wire transfer.
Interest and Principal shall be payable on any Interest Payment Date or
Maturity Date only to those Holders whose names and addresses are listed on the
Notes Register at the close of business on the applicable Record Date.
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The Notes shall bear interest first, at the Initial Interest Rate during
the Initial Rate Period, payable on _________________, 2000. Thereafter, the
Notes shall bear interest for each subsequent Interest Rate Period, at the
Applicable Variable Rate, which shall be a rate per annum equal to 120% of the
Applicable Federal Rate for debt instruments with a term of not over three
years, and which interest rate shall be determined by the Trustee each Interest
Determination Date. The interest rate applicable to any Interest Rate Period,
determined on the immediately preceding Interest Determination Date, shall
become effective on the Interest Payment Date that is the first day of such
Interest Rate Period. Interest on the Notes shall be borne from and including
the date of first delivery thereof until payment of the principal or redemption
price thereof shall have been made or provided for in accordance with the
provisions hereof, whether at maturity, upon redemption prior to maturity or
otherwise. Interest on the Notes shall be computed on the basis of a year of 360
days, for the actual number of days elapsed.
SECTION 2.02. EXECUTION AND AUTHENTICATION. Two Officers shall sign the
Notes for the Company by manual or facsimile signature. The Company's seal shall
be reproduced by facsimile on the Notes. If an Officer whose signature is on a
Note no longer holds that office at the time the Trustee authenticates the Note,
the Note shall be valid nevertheless.
A Note shall not be valid until the Trustee manually signs the certificate
of authentication on the Note. The signature shall be conclusive evidence that
the Note has been authenticated under this Indenture.
The Trustee shall authenticate Notes for original issue in an aggregate
Principal amount of up to $____________________ upon a written Officer's
Certificate of the Company. The Officer's Certificate shall specify the
Principal amount of Notes to be authenticated and the date on which the original
issue of Notes is to be authenticated. The aggregate Principal amount of Notes
Outstanding at any time may not exceed $_______________________ except as
provided in Section 2.07.
The Trustee may appoint an authenticating agent acceptable to the Company
to authenticate the Notes. If so appointed, an authenticating agent may
authenticate Notes whenever the Trustee may do so. Each reference in this
Indenture to authentication by the Trustee includes authentication by such
agent. An authenticating agent has the same rights as an Agent to deal with the
Company or an Affiliate of the Company.
The Notes shall be issuable only in registered form without coupons and
only in denominations of $1,000 and any integral multiple thereof.
SECTION 2.03. REGISTRAR AND PAYING AGENT. The Company shall maintain an
office or agency where Notes may be presented for registration of transfer or
for exchange ("Registrar"), an office or agency where Notes may be presented for
payment ("Paying Agent"), and an office or agency where notices and demands to
or upon the Company in respect of the Notes and this Indenture may be served.
The Registrar shall keep a register of the Notes and of their transfer and
exchange (the "Notes Register"). The Company may have one or more co-Registrars
and one or more additional Paying Agents. The term "Registrar" includes any
co-Registrar and the term "Paying Agent" includes any additional Paying Agent.
Except for purposes of Article X, the Company or any Affiliate of the Company
may act as Paying Agent.
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The Company shall enter into an appropriate agency agreement with any Agent
not a party to this Indenture. The agreement shall implement the provisions of
this Indenture that relate to such Agent. The Company shall notify the Trustee
of the name and address of any Agent not a party to this Indenture. If the
Company fails to maintain a Registrar, Paying Agent or agent for service of
notices and demands, or fails to give the foregoing notice, the Trustee shall
act as such.
The Company initially appoints the Trustee as Registrar, Paying Agent and
agent for service of notices and demands.
SECTION 2.04. PAYING AGENT TO HOLD MONEY IN TRUST. Prior to each Maturity
Date or Interest Payment Date of the Principal of or interest on any Notes, the
Company shall deposit with the Paying Agent a sum sufficient to pay such
Principal or interest so becoming due. The Paying Agent shall hold in trust for
the benefit of the Noteholders or the Trustee all money held by the Paying Agent
for the payment of Principal of or interest on the Notes, and shall notify the
Trustee of any Default by the Company (or any other obligor on the Notes) in
making any such payment. If the Company or an Affiliate of the Company acts as
Paying Agent, it shall on or before each Maturity Date or Interest Payment Date
for the Principal of or interest on any Notes segregate the money and hold it as
a separate trust fund. The Company at any time may require a Paying Agent to pay
all money held by it to the Trustee and the Trustee may at any time during the
continuance of any Default, upon written request to a Paying Agent, require such
Paying Agent to forthwith pay to the Trustee all sums so held in trust by such
Paying Agent. Upon doing so, the Paying Agent (other than the Company) shall
have no further liability for the money.
SECTION 2.05. NOTES REGISTER. The Trustee, as Registrar, shall preserve in
as current a form as is reasonably practicable a list of the names and addresses
of Noteholders. If the Trustee is not the Registrar, the Company shall furnish
to the Trustee on or before each Interest Payment Date and at such other times
as the Trustee may request in writing a list of such names and addresses.
Further, the Company will furnish or cause to be furnished to the Trustee:
(a) semiannually, not more than 5 days after each Record Date, a list,
in such form as the Trustee may reasonably require, of the names and
addresses of the Holders as of such Record Date; and
(b) at such other times as the Trustee may request in writing, within
30 days after the receipt by the Company of any such request, a list of
similar form and content as of a date not more than 15 days prior to the
time such list is furnished;
EXCLUDING from any such list, names and addresses already received by the
Trustee in its capacity as Registrar.
Prior to due presentment of a Note for registration of transfer, the
Company, the Trustee and any agent of the Company or the Trustee may treat the
Person in whose name such Note is registered as the owner of such Note for the
purpose of receiving payment of Principal of and interest on such Note and for
all other purposes whatsoever, whether or not such Note be
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overdue, and neither the Company, the Trustee nor any agent of the Company or
the Trustee shall be affected by notice to the contrary.
SECTION 2.06. TRANSFER AND EXCHANGE. When a Note is presented to the
Registrar with a request to register a transfer thereof, the Registrar shall
register the transfer as requested and when Notes are presented to the Registrar
with a request to exchange them for an equal Principal amount of Notes of other
authorized denominations, the Registrar shall make the exchange as requested;
provided that every Note presented or surrendered for registration of transfer
or exchange shall be duly endorsed or be accompanied by a written instrument of
transfer in form satisfactory to the Company and the Registrar duly executed by
the Holder thereof or his attorney duly authorized in writing. To permit
registration of transfers and exchanges, the Company shall execute and the
Trustee shall authenticate Notes at the Registrar's request. Any exchange or
transfer shall be without charge, except that the Company may require payment of
a sum sufficient to cover any tax or other governmental charge that may be
imposed in relation thereto, but this requirement of payment shall not apply to
any exchange pursuant to Section 2.10 or 11.05 not involving any transfer.
SECTION 2.07. REPLACEMENT NOTES. If a mutilated Note is surrendered to the
Trustee, or if the Holder of a Note claims that the Note has been lost,
destroyed or wrongfully taken, and neither the Company nor the Trustee has
received notice that such Note has been acquired by a bona fide purchaser, the
Company shall issue and the Trustee shall authenticate a replacement Note if the
requirements of Section 8-405, Delaware Code, Title 6, as amended (the Delaware
Uniform Commercial Code), as in effect on the date of this Indenture, are met,
and there shall have been delivered to the Company and the Trustee evidence to
their satisfaction of the loss, destruction or theft of any Note if such is the
case. An indemnity bond may be required that is sufficient in the judgment of
the Company and the Trustee to protect the Company, the Trustee or any Agent
from any loss which any of them may suffer if a Note is replaced. The Company
may charge for its expenses in replacing a Note. Every replacement Note is an
additional obligation of the Company, and shall be entitled to all the benefits
of this Indenture equally and ratably with any and all other Notes duly issued
hereunder.
In case any such mutilated, destroyed, lost or stolen Note has become or is
about to become due and payable, the Company, in its discretion, may pay such
Note instead of issuing a new Note.
SECTION 2.08. OUTSTANDING NOTES. Notes Outstanding at any time are all
Notes authenticated by the Trustee, except for those cancelled by it, those
delivered to it for cancellation and those described in this Section 2.08 as not
Outstanding.
If a Note is replaced pursuant to Section 2.07 hereof, it ceases to be
Outstanding until the Trustee receives proof satisfactory to it that the
replaced Note is held by a bona fide purchaser.
If the Paying Agent (other than the Company or an Affiliate of the Company)
holds on a Redemption Date or maturity date money sufficient to pay the
Principal of and accrued interest on Notes payable on that date, then on and
after that date such Notes cease to be Outstanding and interest on them ceases
to accrue.
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A Note does not cease to be Outstanding because the Company or an Affiliate
of the Company holds the Note.
SECTION 2.09. TREASURY NOTES. In determining whether the Holders of the
required Principal amount of Notes have concurred in any notice, direction,
waiver or consent, Notes owned by the Company or any other obligor on the Notes
or by any Affiliate of the Company or of such other obligor shall be
disregarded, except that for purposes of determining whether the Trustee shall
be protected in relying on any such notice, direction, waiver or consent, only
Notes which the Trustee knows are so owned shall be so disregarded. Notes so
owned which have been pledged in good faith shall not be disregarded if the
pledgee establishes to the satisfaction of the Trustee the pledgee's right so to
act with respect to the Notes and that the pledgee is not the Company or any
other obligor upon the Notes or any Affiliate of the Company or of such other
obligor.
SECTION 2.10. TEMPORARY NOTES. Until definitive Notes are ready for
delivery, the Company may prepare, and, upon the order of the Company, the
Trustee shall authenticate, temporary Notes. Temporary Notes shall be
substantially in the form of definitive Notes but may have variations that the
Company considers appropriate for temporary Notes. Without unreasonable delay,
the Company shall prepare and the Trustee shall authenticate definitive Notes,
which shall then be exchanged for the temporary Notes. Until so exchanged, the
temporary Notes shall be entitled in all respects to the same benefits under
this Indenture as definitive Notes.
SECTION 2.11. CANCELLATION. The Company at any time may deliver Notes to
the Trustee for cancellation. The Registrar and Paying Agent shall forward to
the Trustee any Notes surrendered to them for transfer, exchange or payment. The
Trustee and no one else shall cancel all Notes surrendered for transfer,
exchange, payment or cancellation. The Company may not issue new Notes to
replace Notes it has paid or delivered to the Trustee for cancellation.
SECTION 2.12. DEFAULTED INTEREST. If the Company Defaults in a payment of
interest on the Notes, it shall pay the Defaulted interest to the Persons who
are Noteholders on a subsequent Special Record Date, and such term as used in
this Section 2.12 with respect to the payment of any Defaulted interest shall
mean the fifteenth day next preceding the special payment date fixed by the
Company, whether or not such day is a Business Day. At least 15 days before any
Special Record Date, the Company shall mail to each Noteholder and the Trustee a
notice that states the Special Record Date, the special payment date and the
amount of Defaulted interest to be paid.
ARTICLE III
REDEMPTION
SECTION 3.01. OPTIONAL REDEMPTION. The Company, at its option exercised at
any time after the execution of this Indenture, may redeem all, or from time to
time any part of, the Notes or the Promissory Notes upon written notice as set
forth in Sections 3.03 and 12.02. The Redemption Price for the Notes or the
Promissory Notes to be redeemed shall be paid by the Company to the Trustee on
or before the Redemption Date, and by the Trustee to the Noteholder(s) on the
Redemption Date.
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SECTION 3.02. MANDATORY REDEMPTION. The Company shall utilize 80% of the
Net Proceeds of any Sale or Refinancing of Cap Source I Designated Assets,
which occurs after the Transaction, to redeem the maximum number of
Promissory Notes and Notes held by former Cap Source I investors which can be
redeemed with such Net Proceeds and shall utilize 80% of the Net Proceeds of
any Sale or Refinancing of Cap Source II Designated Assets, which occurs
after the Transaction, to redeem the maximum number of Promissory Notes and
Notes held by former Cap Source II investors which can be redeemed with such
Net Proceeds ; provided, that such Net Proceeds of any Sale or Refinancing of
Designated Assets shall be accumulated by the Trustee in a segregated trust
account until the amount therein is at least $5,000,000 before calling
Promissory Notes and Notes for redemption. The Company shall fix a Redemption
Date pursuant to this Section 3.02 which is no later than 90 days following
receipt of such net proceeds or the accumulation of $5,000,000, as the case
may be.
This mandatory redemption will be made first with respect to Promissory
Notes, chosen by lot by the Trustee, until all the respective Promissory
Notes are paid in full and redeemed, and thereafter of the Notes, chosen by
lot by the Trustee, until all the respective Notes are paid in full and
redeemed.
Such mandatory redemption is not at the discretion of the Company or of
the Holders of the Notes or the Promissory Notes.
SECTION 3.03. NOTICE OF REDEMPTION; PARTIAL REDEMPTION. At least 30 days
but not more than 60 days before a Redemption Date, the Company, or the
Trustee at the written direction of the Company, shall mail a notice of
redemption by first-class mail, postage prepaid, to each Holder of Promissory
Notes or Notes, as the case may be, which are to be redeemed pursuant to
Section 3.01 or Section 3.02 hereof.
The notice shall state:
(a) the Redemption Date;
(b) the Redemption Price;
(c) the name and address of the Paying Agent;
(d) that Promissory Notes or Notes, as the case may be, must be
surrendered to the Paying Agent to collect the Redemption Price; and
(e) that, unless the Company Defaults in making the redemption
payment, interest on the Promissory Notes or Notes called for redemption
ceases to accrue on and after the Redemption Date and the only remaining
right of the Holder is to receive payment of the Redemption Price upon
surrender to the Paying Agent of the Promissory Notes or Notes.
At the Company's written request, the Trustee shall give the notice of
redemption in the Company's name and at the Company's expense.
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If less than all the Promissory Notes or Notes, as the case may be, are
to be redeemed, the Trustee shall select the Promissory Notes or Notes to be
redeemed by lot in whatever manner the Trustee determines to be efficient and
fair. The Trustee shall promptly notify the Company in writing of the
Promissory Notes or Notes selected for redemption. For all purposes of this
Indenture, unless the context otherwise requires, all provisions relating to
the redemption of Promissory Notes or Notes shall relate, in the case of any
Promissory Note or Note redeemed or to be redeemed only in part, to the
portion of the Principal amount of such Promissory Note or Note which has
been or is to be redeemed.
SECTION 3.04. EFFECT OF NOTICE OF REDEMPTION. Once notice of redemption
is mailed, the subject Promissory Notes or Notes will become due and payable
on the Redemption Date at the Redemption Price. Upon surrender to the Paying
Agent, such Promissory Notes or Notes shall be paid at the Redemption Price.
Any notice which is mailed in the manner herein provided shall be
conclusively presumed to have been duly given, whether or not the Holder
receives the notice. Failure to give notice by mail, or any defect in the
notice to the Holder of any Promissory Note or Note designated for redemption
as a whole or in part shall not affect the validity of the proceedings for
the redemption of any other Promissory Note or Note.
SECTION 3.05. DEPOSIT OF REDEMPTION PRICE. On or before the Redemption
Date, the Company shall deposit with the Paying Agent (or, if the Company is
its own Paying Agent, shall segregate and hold in trust) money sufficient to
pay the Redemption Price of all Promissory Notes or Notes to be redeemed on
that date, other than Promissory Notes or Notes or portions thereof called
for redemption on that date which have been delivered by the Company to the
Trustee for cancellation.
On and after the Redemption Date (unless the Company shall Default in
the payment of such Promissory Notes or Notes at the Redemption Price),
interest on the Promissory Notes or Notes or portions of Promissory Notes or
Notes so called for redemption shall cease to accrue and, except as provided
in Section 10.01 hereof, such Promissory Notes or Notes shall cease from and
after the Redemption Date to be entitled to any benefit or security under
this Indenture, and the Holders thereof shall have no right in respect of
such Promissory Notes or Notes except the right to receive the Redemption
Price thereof.
ARTICLE IV
THE PROMISSORY NOTES
SECTION 4.01. FORM, TERMS AND DATING. The Promissory Notes and the
Trustee's certificate of authentication shall be substantially in the form of
Exhibit B, which is incorporated in and made part of this Indenture, with
such insertions, omissions, substitutions and other variations as are
required or permitted by this Indenture. The Promissory Notes may have
notations, legends or endorsements required by law, stock exchange rules,
agreements to which the Company is subject or usage. The Company shall
approve the form of the Promissory Notes and any notation, legend or
endorsement on them. Each Promissory Note shall be dated the date of its
authentication.
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The Promissory Notes will be issued, known and designated as the
Promissory Notes Due ________, 2007. The Maturity Date of the Promissory
Notes shall be ________, 2007 and the Promissory Notes shall bear interest on
the unpaid Principal at the Applicable Variable Rate. The Promissory Notes
shall be payable as follows:
(a) annual installments of accrued interest, payable on each Interest
Payment Date, commencing January 15, 2000, and continuing until the entire
interest and Principal of each Promissory Note is paid in full; and
(b) the unpaid Principal balance on the Maturity Date.
The Principal of and interest on the Promissory Notes shall be payable
at the principal corporate trust office of the Trustee in
______________________, or of any successor or co-Paying Agent; PROVIDED,
HOWEVER, that installments of interest, and, if applicable, Principal may be
payable by check mailed to the address of the person entitled thereto as such
address shall appear on the Notes Register.
Interest and Principal shall be payable on any Interest Payment Date or
Maturity Date only to those Holders whose names and addresses are listed on
the Notes Register at the close of business on the applicable Record Date.
The Promissory Notes shall bear interest first, at the Initial Interest
Rate during the Initial Rate Period, payable on ________________________,
2000. Thereafter, the Promissory Notes shall bear interest for each
subsequent Interest Rate Period, at the Applicable Variable Rate, which shall
be a rate per annum equal to 120% of the Applicable Federal Rate for debt
instruments with a term of not over three years, and which interest rate
shall be determined by the Trustee each Interest Determination Date. The
interest rate applicable to any Interest Rate Period, determined on the
immediately preceding Interest Determination Date, shall become effective on
the Interest Payment Date that is the first day of such Interest Rate Period.
Interest on the Promissory Notes shall be borne from and including the date
of first delivery thereof until payment of the principal or redemption price
thereof shall have been made or provided for in accordance with the
provisions hereof, whether at maturity, upon redemption prior to maturity or
otherwise. Interest on the Promissory Notes shall be computed on the basis of
a year of 360 days, for the actual number of days elapsed.
SECTION 4.02. EXECUTION AND AUTHENTICATION. Two Officers shall sign the
Promissory Notes for the Company by manual or facsimile signature. The
Company's seal shall be reproduced by facsimile on the Promissory Notes. If
an Officer whose signature is on a Promissory Note no longer holds that
office at the time the Trustee authenticates the Promissory Note, the
Promissory Note shall be valid nevertheless.
A Promissory Note shall not be valid until the Trustee manually signs
the certificate of authentication on the Promissory Note. The signature shall
be conclusive evidence that the Promissory Note has been authenticated under
this Indenture.
The Trustee shall authenticate Promissory Notes for original issue in an
aggregate Principal amount of up to $_______________ upon a written Officer's
Certificate of the Company. The Officer's Certificate shall specify the
Principal amount of Promissory Notes to
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be authenticated and the date on which the original issue of Promissory Notes
is to be authenticated. The aggregate Principal amount of Promissory Notes
Outstanding at any time may not exceed $_________________ except as provided
in Section 2.07.
The Trustee may appoint an authenticating agent acceptable to the
Company to authenticate the Promissory Notes. If so appointed, an
authenticating agent may authenticate Promissory Notes whenever the Trustee
may do so. Each reference in this Indenture to authentication by the Trustee
includes authentication by such agent. An authenticating agent has the same
rights as an Agent to deal with the Company or an Affiliate of the Company.
The Promissory Notes shall be issuable only in registered form without
coupons, in denominations of such amounts less than $1,000 as the Company
shall direct.
SECTION 4.03. REGISTRAR AND PAYING AGENT. The provisions of Section 2.03
and Section 2.04 hereof, governing the Registrar and the Paying Agent for the
Notes, shall also apply in connection with the Promissory Notes.
The Company initially appoints the Trustee as Registrar, Paying Agent
and agent for service of notices and demands in connection with the
Promissory Notes.
SECTION 4.04. NOTES REGISTER. The Trustee, as Registrar, shall preserve
in as current a form as is reasonably practicable a list of the names and
addresses of the Holders of the Promissory Notes. For purposes of the Notes
Register, the Promissory Notes shall be considered "Notes." If the Trustee is
not the Registrar, the Company shall furnish to the Trustee on or before each
Interest Payment Date and at such other times as the Trustee may request in
writing a list of such names and addresses.
Further, the Company will furnish or cause to be furnished to the Trustee:
(a) annually, not more than 5 days after each Record Date, a list, in
such form as the Trustee may reasonably require, of the names and addresses
of the Holders of Promissory Notes as of such Record Date; and
(b) at such other times as the Trustee may request in writing, within
30 days after the receipt by the Company of any such request, a list of
similar form and content as of a date not more than 15 days prior to the
time such list is furnished;
EXCLUDING from any such list, names and addresses already received by the
Trustee in its capacity as Registrar.
Prior to due presentment of a Promissory Note for registration of transfer,
the Company, the Trustee and any agent of the Company or the Trustee may treat
the Person in whose name such Promissory Note is registered as the owner of such
Promissory Note for the purpose of receiving payment of Principal of and
interest on such Promissory Note and for all other purposes whatsoever, whether
or not such Promissory Note be overdue, and neither the Company, the Trustee nor
any agent of the Company or the Trustee shall be affected by notice to the
contrary.
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SECTION 4.05. OTHER PROVISIONS. For purposes of transfer and exchange or
replacement of Promissory Notes, whether Promissory Notes are considered to be
Outstanding, the definition and treatment of Promissory Notes which are
"Treasury" Promissory Notes, the cancellation of Promissory Notes, the use of
temporary Promissory Notes and provisions concerning any Defaulted interest on
the Promissory Notes, the Promissory Notes shall be treated as "Notes" pursuant
to Sections 2.06, 2.07, 2.08, 2.09, 2.10, 2.11 and 2.12 hereof.
ARTICLE V
PAYMENT PROVISIONS
SECTION 5.01. NOTES PART OF JUNIOR INDEBTEDNESS. The Notes and the
Promissory Notes shall be on a par with, and part of, the Junior Indebtedness
of the Company. In addition, all Notes and the Promissory Notes rank as to
payment of Principal and interest equally and ratably, without priority one
over the other.
SECTION 5.02. OBLIGATIONS OF THE COMPANY UNCONDITIONAL. Nothing
contained in this Article V or elsewhere in this Indenture or in any Note is
intended to or shall impair, as among the Company, its creditors and the
Holders, the obligation of the Company, which is absolute and unconditional,
to pay to the Holders the Principal of and interest on the Notes, as and when
the same shall become due and payable in accordance with the terms of the
Notes, or to affect the relative rights of the Holders and other creditors of
the Company nor shall anything herein or therein prevent the Trustee or any
Holder from exercising all remedies otherwise permitted by applicable law
upon the happening of an Event of Default under this Indenture, subject to
the provisions of Article VIII. Nothing contained in this Article V or
elsewhere in this Indenture or in the Notes shall, except during the pendency
of any dissolution, winding-up, liquidation or reorganization of the Company,
affect the obligation of the Company to make, or prevent the Company from
making, at any time (except under the circumstances described in Section
5.05) payment of Principal of or interest on the Notes.
The Company shall give prompt notice to the Trustee of any dissolution,
winding-up, liquidation or reorganization of the Company.
SECTION 5.03. APPLICATION BY TRUSTEE OF MONEYS DEPOSITED WITH IT. Money
or U.S. Government Obligations deposited in trust with the Trustee pursuant
to and in accordance with Sections 6.04 and 10.01 hereof shall be for the
sole benefit of Noteholders.
ARTICLE VI
COVENANTS
SECTION 6.01. PAYMENT OF NOTES. The Company shall pay the Principal of
and interest on the Notes on the dates and in the manner provided in the
Notes and this Indenture. An installment of Principal or interest shall be
considered paid on the date it is due if the Paying Agent (other than the
Company or an Affiliate of the Company) holds on that date money designated
for and sufficient to pay the installment. The Company shall pay interest on
overdue Principal at the interest rate per annum borne by the Notes; it shall
pay interest on overdue installments of interest at the same rate to the
extent lawful.
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SECTION 6.02. SEC REPORTS. The Company shall file all reports and other
information and documents which it is required to file with the SEC pursuant
to Section 13 or Section 15(d) of the Securities Exchange Act of 1934, as
amended (the "Exchange Act"), and within 15 days after it files them with the
SEC, the Company shall file copies of all such reports, information and other
documents with the Trustee. The Company will cause any quarterly and annual
reports which it mails to its stockholders to be mailed to the Holders of the
Notes.
If the Company is not subject to the reporting requirements of Section
13 or Section 15(d) of the Exchange Act, the Company will prepare, for the
first three quarters of each fiscal year, quarterly financial statements
substantially equivalent to the financial statements required to be included
in a report on Form 10-Q under the Exchange Act. The Company will also
prepare, on an annual basis, complete audited consolidated financial
statements including, but not limited to, a balance sheet, a statement of
income and retained earnings, a statement of changes in financial position
and all appropriate notes, along with a "Management's Discussion and Analysis
of Financial Condition and Results of Operations." All such financial
statements will be prepared in accordance with generally accepted accounting
principles consistently applied, except for changes with which the Company's
independent accountants concur, and except that quarterly statements may be
subject to year-end adjustments. The Company will cause a copy of such
financial statements to be filed with the Trustee and mailed to the Holders
of the Notes within 15 days after the date the Company would have been
required to file such information with the SEC. The Company will also comply
with the other provisions of TIA Section 314(a).
SECTION 6.03. WAIVER OF USURY DEFENSE. The Company agrees that it will
not assert, plead (as a defense or otherwise) or in any manner whatsoever
claim (and will actively resist any attempt to compel it to assert, plead or
claim) in any action, suit or proceeding that the interest rate on the Notes
violates present or future usury or other laws relating to the interest
payable on any indebtedness and will not otherwise avail itself (and will
actively resist any attempt to compel it to avail itself) of the benefits or
advantage of such laws.
SECTION 6.04. LIQUIDATION. The General Partner or the Unitholders of the
Company may not adopt a plan of liquidation which plan provides for,
contemplates or the effectuation of which is preceded by (a) the sale, lease,
conveyance or other disposition of all or substantially all of the assets of
the Company otherwise than substantially as an entirety (Article 7 of this
Indenture being the Article which governs any such sale, lease, conveyance or
other disposition substantially as an entirety), and (b) the distribution of
all or substantially all of the proceeds of such sale, lease, conveyance or
other disposition and of the remaining assets of the Company to the holders
of the Units of the Company, unless the Company shall in connection with the
adoption of such plan make provision for, or agree that prior to making any
liquidating distributions it will make provision for, the satisfaction of the
Company's obligations hereunder and under the Notes as to the payment of the
Principal and interest. The Company shall be deemed to make provision for
such payments only if (1) the Company irrevocably deposits in trust with the
Trustee money and/or U.S. Government Obligations maturing as to Principal and
interest in such amounts and at such times as are sufficient, without
consideration of any reinvestment of such interest, to pay the Principal of
and interest on the Notes then Outstanding to maturity and to pay all other
sums payable by it hereunder, or (2) there is an express assumption of the
due and punctual payment of the Company's obligations hereunder and under
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the Notes and the performance and observance of all covenants and conditions
to be performed by the Company hereunder, by the execution and delivery of a
supplemental indenture in form satisfactory to the Trustee by a Person who
acquires, or will acquire (otherwise than pursuant to a lease) a portion of
the assets of the Company, and which Person will have assets (immediately
after the acquisition) and aggregate earnings (for such Person's four full
fiscal quarters immediately preceding the acquisition) equal to not less than
the assets of the Company (immediately preceding the acquisition) and the
aggregate earnings of the Company (for its four full fiscal quarters
immediately preceding such acquisition), respectively, and which Person is a
corporation organized under the laws of the United States, any state thereof
or the District of Columbia; provided, however, that the Company shall not
make any liquidating distribution until after the Company shall have
certified to the Trustee with an Officers' Certificate at least five days
prior to the making of any liquidating distribution that it has complied with
the provisions of this Section 6.04.
SECTION 6.05. COMPLIANCE CERTIFICATES. The Company shall deliver to the
Trustee within 120 days after the end of each fiscal year of the Company, an
Officers' Certificate stating whether or not the signers know of any Default
or Event of Default. If they do know of such a Default or Event of Default,
the Certificate shall describe the Default or Event of Default and the
efforts to remedy the same. The Certificate need not comply with Section
12.04.
SECTION 6.06. NOTICE OF DEFAULTS. In the event that any indebtedness of
the Company is declared due and payable before its maturity because of the
occurrence of any Default under such indebtedness, the Company will promptly
give written notice to the Trustee of such declaration or of the occurrence
of any event which, with the giving of notice or the passage of time, or
both, would entitle the holder or holders of such indebtedness to declare
such indebtedness due and payable before its maturity.
SECTION 6.07. PAYMENT OF TAXES AND OTHER CLAIMS. The Company will pay or
discharge or cause to be paid or discharged, before the same shall become
delinquent, (1) all material taxes, assessments and governmental charges
levied or imposed upon the Company, directly or by reason of its ownership of
any Subsidiary or upon the income, profits or property of the Company; and
(2) all material lawful claims for labor, materials, and supplies, which, if
unpaid, might by law become a lien upon the property of the Company;
provided, however, that the Company shall not be required to pay or discharge
or cause to be paid or discharged any such tax, assessment, charge or claim
whose amount, applicability or validity is being contested in good faith by
appropriate proceedings and for which adequate provision has been made.
SECTION 6.08. CORPORATE EXISTENCE. Subject to Section 6.04 and Article 7
hereof, the Company will do or cause to be done all things necessary to
preserve and keep in full force and effect its corporate existence and rights
(charter and statutory); provided, however, that the Company shall not be
required to preserve any right if the General Partner shall determine that
the preservation is no longer desirable in the conduct of the Company's
business and that the loss thereof is not, and will not be, adverse in any
material respect to the Holders.
SECTION 6.09. MAINTENANCE OF PROPERTIES. Subject to Section 6.04, the
Company will cause all material properties owned, leased or licensed in the
conduct of its business to be maintained and kept in good condition, repair
and working order and supplied with all necessary
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equipment and will cause to be made all necessary repairs, renewals,
replacements, betterments and improvements thereof and thereto, all as in the
judgment of the Company may be necessary so that the business carried on in
connection therewith may be properly and advantageously conducted at all
times while any Notes are Outstanding; provided, however, that nothing in
this Section 6.09 shall prevent the Company from distinguishing the
maintenance of any such properties if such discontinuance is, in the judgment
of the General Partner, desirable in the conduct of the Company's business
and is not, and will not be, adverse in any material respect to the Holders.
SECTION 6.10. LIMITATIONS ON INDEBTEDNESS. Notwithstanding any provision
herein to the contrary, the Company shall not incur any indebtedness if such
new indebtedness would cause the Aggregate Indebtedness of the Company then
outstanding to exceed 70% of the Appraised Value of the Assets of the
Company. In addition, the Company will not, and will not permit any of its
Subsidiaries to, directly or indirectly, create, incur, assume, guarantee,
extend the maturity of or otherwise become liable with respect to
(collectively, "incur"), any Indebtedness (other than Indebtedness between
the Company and any of its wholly owned Subsidiaries) unless, after giving
effect thereto, the Company's Leverage Ratio on the date thereof would be not
greater than 1.0 to 1.0.
SECTION 6.11. MAINTENANCE OF CONSOLIDATED COVERAGE RATIO.
(a) The Company shall maintain a Consolidated Coverage Ratio, as
determined as of the last day of any fiscal quarter during any Fiscal Year,
of 2.0 to 1.0.
(b) The Company shall furnish to the Trustee an Officer's Certificate
within 60 days after the end of each of the first three fiscal quarters of
the Company and within 120 days after the end of its Fiscal Year, setting
forth the calculation of the Consolidated Coverage Ratio and stating that
the Company is in compliance with this covenant.
ARTICLE VII
SUCCESSOR ENTITY
SECTION 7.01. WHEN COMPANY MAY MERGE, ETC. The Company will not, in any
transaction or series of transactions, merge or consolidate with or into, or
sell, assign, transfer, lease or otherwise dispose of all or substantially
all of its properties and assets as an entirety to, any Person or Persons,
and the Company will not permit any of its wholly owned Subsidiaries to enter
into any such transaction or series of transactions if such transactions or
series of transactions, in the aggregate, would result in a sale, assignment,
transfer, lease or other disposition of all or substantially all of the
properties and assets of the Company and its Subsidiaries on a consolidated
basis to any other Person or Persons, unless at the time and after giving
effect thereto (i) either (A) if the transaction or transactions is a merger
or consolidation, the Company shall be the surviving Person of such merger or
consolidation, or (B) the Person formed by such consolidation or into which
the Company or such Subsidiary is merged or to which the properties and
assets of the Company or such Subsidiary, as the case may be, substantially
as an entirety, are transferred (any such surviving Person or transferee
Person being
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the "Surviving Entity") shall be a limited partnership organized and existing
under the laws of the United States of America, any state thereof or the
District of Columbia and shall expressly assume by a supplemental indenture
executed and delivered to the Trustee, in form satisfactory to the Trustee,
all the obligations of the Company under the Notes and this Indenture, and in
each case, this Indenture shall remain in full force and effect; (ii)
immediately before and immediately after giving effect to such transaction or
series of transactions on a pro forma basis (including, without limitation,
any Indebtedness incurred or anticipated to be incurred in connection with or
in respect of such transaction or series of transactions), no Default or
Event of Default shall have occurred and be continuing, and the Company or
the surviving entity, as the case may be, after giving effect to such
transaction or series of transactions on a pro forma basis, could incur $1.00
of additional indebtedness under the first paragraph of Section 6.10 hereof
(assuming a market rate of interest with respect to such additional
Indebtedness); and (iii) immediately after giving effect to such transaction
or series of transactions on a pro forma basis, the Consolidated Net Worth of
the Company or the Surviving Entity, as the case may be, is at least equal to
the Consolidated Net Worth of the Company immediately before such transaction
or series of transactions.
The Company shall deliver to the Trustee prior to the proposed
transaction an Officers' Certificate and an Opinion of Counsel, each of which
shall comply with Section 12.04 and each of which shall state in effect that
such consolidation, merger or transfer comply with this Article 7 and that
all conditions precedent herein provided for relating to such transaction
have been complied with.
SECTION 7.02. SUCCESSOR ENTITY SUBSTITUTED. Upon any consolidation or
merger, or any transfer of all or substantially all of the assets of the
Company in accordance with Section 7.01, the successor entity formed by such
consolidation or into which the Company is merged or to which such transfer
is made shall succeed to, and be substituted for, and may exercise every
right and power of, the Company under this Indenture with the same effect as
if such successor entity had been named as the Company herein.
ARTICLE VIII
DEFAULT AND REMEDIES
SECTION 8.01. EVENTS OF DEFAULT. An "Event of Default" shall occur
hereunder if:
(1) the Company Defaults in the payment of interest on any Note when
the same becomes due and payable and the Default continues for a period of
30 days;
(2) the Company Defaults in the payment of the Principal of any Note
when the same becomes due and payable at maturity, upon redemption or
otherwise;
(3) the Company fails to comply with any of its other agreements
contained in the Notes or this Indenture and the Default continues for the
period and after the notice specified below;
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(4) there shall be a Default under any bond, debenture, note or other
evidence of indebtedness for money borrowed or under any mortgage,
indenture or other instrument under which there may be issued or by which
there may be secured or evidenced any indebtedness for money borrowed by
the Company or under any guarantee of payment by the Company of
indebtedness for money borrowed, whether such indebtedness or guarantee now
exists or shall hereafter be created, which Default relates to (A) the
obligation to pay the Principal of or interest on any such indebtedness or
guarantee or (B) an obligation other than the obligation to pay the
Principal of or interest on any such indebtedness and the effect of such
Default is to cause such indebtedness to become due prior to its stated
maturity; provided, however, that no Default under this Section 8.01(4)
shall exist unless all such Defaults relating to such indebtedness or such
guarantees aggregate to a Principal amount in excess of $25,000,000;
(5) the Company or any Subsidiary pursuant to or within the meaning of
any Bankruptcy Law: (A) commences a voluntary case or proceeding; (B)
consents to the entry of an order for relief against it in an involuntary
case or proceeding; (C) consents to the appointment of a Custodian of it or
for all or substantially all of its property; or (D) makes a general
assignment for the benefit of its creditors; or
(6) a court of competent jurisdiction enters an order or decree under
any Bankruptcy Law that: (A) is for relief against the Company or any
Subsidiary in an involuntary case or proceeding; (B) appoints a Custodian
of the Company or any Subsidiary or for all or substantially all of the
property of any of them; or (C) orders the liquidation of the Company or
any Subsidiary;and in each case the order or decree remains unstayed and in
effect for 60 days.
A Default under clause (3) of this Section 8.01 shall not become an
Event of Default until the Trustee notifies the Company, or the Holders of at
least 25% in Principal amount of the Notes then Outstanding notify the
Company and the Trustee, of the Default, and the Company does not cure the
Default within 30 days after receipt of such notice; provided, that the
30-day cure period may be extended for a reasonable time in the discretion of
the Trustee or shall be extended for up to a maximum of 180 days until a cure
is accomplished if the Company begins work on a cure during the 30-day period
and diligently proceeds to accomplish the cure. The notice given pursuant to
this Section 8.01 must specify the Default, demand that it be remedied and
state that the notice is a "Notice of Default." When a Default is cured, it
ceases.
Defaults under clauses (2), (4) and (5) of this Section 8.01 shall
become Events of Default immediately, with no waiting period.
Subject to the provisions of Sections 9.01 and 9.02, the Trustee shall
not be charged with knowledge of any Event of Default unless written notice
thereof shall have been given to a Trust Officer at the corporate trust
office of the Trustee by the Company, the Paying Agent, any Holder or an
agent of any Holder.
SECTION 8.02. ACCELERATION. If an Event of Default (other than an Event
of Default specified in Section 8.01(5) or (6)) occurs and is continuing, the
Trustee may, by notice to the Company, or the Holders of at least 25% in
Principal amount of the Notes then Outstanding may,
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by notice to the Company and the Trustee, and the Trustee shall, upon the
request of such Holders, declare all unpaid Principal of and accrued interest
to the date of acceleration on the Notes then Outstanding (if not then due
and payable) to be due and payable and upon any such declaration, the same
shall become and be immediately due and payable. If an Event of Default
specified in Section 8.01(5) or (6) occurs, all unpaid Principal and accrued
interest on the Notes then Outstanding shall IPSO FACTO become and be
immediately due and payable without any declaration or other act on the part
of the Trustee or any Noteholder. The Holders of a majority in Principal
amount of the Notes then Outstanding by notice to the Trustee may rescind an
acceleration and its consequences if (i) all existing Events of Default,
other than the non-payment of the Principal of the Notes which has become due
solely by such declaration of acceleration, have been cured or waived; (ii)
to the extent the payment of such interest is lawful, interest on overdue
installments of interest and overdue Principal, which has become due
otherwise than by such declaration of acceleration, has been paid; (iii) the
rescission would not conflict with any judgment or decree of a court of
competent jurisdiction; and (iv) all payments due to the Trustee and any
predecessor Trustee under Section 9.07 have been made. Anything herein
contained to the contrary notwithstanding, in the event of any acceleration
pursuant to this Section 8.02, the Company shall not be obligated to pay any
premium which it would have had to pay if it had then elected to redeem the
Notes pursuant to paragraph 5 of the Notes. No such rescission shall affect
any subsequent default or impair any right consequent thereon.
SECTION 8.03. OTHER REMEDIES. If an Event of Default occurs and is
continuing, the Trustee may pursue any available remedy by proceeding at law
or in equity to collect the payment of the Principal of or interest on the
Notes or to enforce the performance of any provision of the Notes or this
Indenture.
The Trustee may maintain a proceeding even if it does not possess any of
the Notes or does not produce any of them in the proceeding. A delay or
omission by the Trustee or any Noteholder in exercising any right or remedy
accruing upon an Event of Default shall not impair the right or remedy or
constitute a waiver of or acquiescence in the Event of Default. No remedy is
exclusive of any other remedy. All available remedies are cumulative to the
extent permitted by law.
If the Trustee or any Holder has instituted any proceeding to enforce
any right or remedy under this Indenture and such proceeding has been
discontinued or abandoned for any reason, or has been determined adversely to
the Trustee or to such Holder, then and in every such case, subject to any
determination in such proceeding, the Company, the Trustee and the Holders
shall be restored severally and respectively to their former positions
hereunder and thereafter all rights and remedies of the Trustee and the
Holders shall continue as though no such proceeding had been instituted.
SECTION 8.04. WAIVER OF DEFAULT AND EVENTS OF DEFAULT. Subject to
Sections 8.07 and 11.02 hereof, the Holders of a majority in Principal amount
of the Notes then outstanding by notice to the Trustee may waive an existing
Default or Event of Default and its consequences, except a Default in the
payment of the Principal of or interest on any Note as specified in clauses
(1) and (2) of Section 8.01 hereof. When a Default or Event of Default is
waived, it is cured and ceases.
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SECTION 8.05. CONTROL BY MAJORITY. The Holders of a majority in Principal
amount of the Notes then Outstanding may direct the time, method and place of
conducting any proceeding for any remedy available to the Trustee or exercising
any trust or power conferred on it. However, the Trustee may refuse to follow
any direction that conflicts with law or this Indenture, that the Trustee
determines may be unduly prejudicial to the rights of another Noteholder, or
that may involve the Trustee in personal liability; provided that the Trustee
may take any other action deemed proper by the Trustee which is not inconsistent
with such direction.
SECTION 8.06. LIMITATION ON SUITS. A Noteholder may not pursue any remedy
with respect to this Indenture or the Notes unless:
(a) the Holder has given to the Trustee written notice of a continuing
Event of Default;
(b) the Holders of at least 25% in Principal amount of the Outstanding
Notes have made a written request to the Trustee to pursue the remedy;
(c) such Holder has offered to the Trustee indemnity satisfactory to
the Trustee against any loss, liability or expense;
(d) the Trustee has not complied with the request within 60 days after
receipt of the request and the offer of indemnity; and
(e) no direction inconsistent with such written request has been given
to the Trustee during such 60-day period by the Holders of a majority in
Principal amount of the Notes then Outstanding.
A Noteholder may not use this Indenture to prejudice the rights of another
Noteholder or to obtain a preference or priority over such other Noteholder.
SECTION 8.07. RIGHTS OF HOLDERS TO RECEIVE PAYMENT. Notwithstanding any
other provision of this Indenture, the right of any Holder of a Note to receive
payment of the Principal of or the interest on the Note, on or after the
respective due dates expressed in the Note, or to bring suit for the enforcement
of any such payment on or after such respective dates, is absolute and
unconditional and shall not be impaired or affected without the consent of the
Holder.
SECTION 8.08. COLLECTION SUIT BY TRUSTEE. If an Event of Default in the
payment of Principal or interest specified in Section 8.01(1) or (2) hereof
occurs and is continuing, the Trustee may recover judgment in its own name and
as trustee of an express trust against the Company or any other obligor on the
Notes for the whole amount of Principal and accrued interest remaining unpaid,
together with interest on overdue Principal and, to the extent that payment of
such interest is lawful, interest on overdue installments of interest, in each
case at the rate per annum borne by the Notes, and such further amount as shall
be sufficient to cover the costs and expenses of collection, including the
reasonable compensation, expenses, disbursements and advances of the Trustee,
its agents and legal counsel.
SECTION 8.09. TRUSTEE MAY FILE PROOFS OF CLAIM. The Trustee may file such
proofs of claim and other papers or documents as may be necessary or advisable
in order to have the
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claims of the Trustee (including any claim for the reasonable compensation,
expenses, disbursements and advances of the Trustee, its agents and legal
counsel) and the Noteholders allowed in any judicial proceedings relative to
the Company (or any other obligor on the Notes), its creditors or its
property and shall be entitled and empowered to collect and receive any
moneys or other property payable or deliverable on any such claims and to
distribute the same, and any Custodian in any such judicial proceeding is
hereby authorized by each Noteholder to make such payments to the Trustee
and, in the event that the Trustee shall consent to the making of such
payments directly to the Noteholders, to pay to the Trustee any amount due to
it for the reasonable compensation, expenses, disbursements and advances of
the Trustee, its agents and legal counsel, and any other amounts due the
Trustee under Section 9.07 hereof. Nothing herein contained shall be deemed
to authorize the Trustee to authorize or consent to or accept or adopt on
behalf of any Noteholder any plan of reorganization, arrangement, adjustment
or composition affecting the Notes or the rights of any Holder thereof, or to
authorize the Trustee to vote in respect of the claim of any Noteholder in
any such proceeding.
SECTION 8.10. APPLICATION OF MONEY COLLECTED. If the Trustee collects any
money pursuant to this Article 8, it shall pay out the money in the following
order:
FIRST: to the Trustee for amounts due under Section 9.07 hereof;
SECOND: to Noteholders for amounts due and unpaid on the Notes for
Principal and interest, ratably, without preference or priority of any
kind, according to the amounts due and payable on the Notes for Principal
and interest, respectively; and
THIRD: to the Company.
The Trustee may fix a Special Record Date and payment date for any payment to
Noteholders pursuant to this Section 8.10.
SECTION 8.11. UNDERTAKING FOR COSTS. All parties to this Indenture agree,
and each Holder of any Note, by his acceptance thereof shall be deemed to have
agreed, that in any suit for the enforcement of any right or remedy under this
Indenture or in any suit against the Trustee for any action taken or omitted by
it as Trustee, a court in its discretion may require the filing by any party
litigant in the suit of an undertaking to pay the costs of the suit, and the
court in its discretion may assess reasonable costs, including reasonable
attorneys' fees, against any party litigant in the suit, having due regard to
the merits and good faith of the claims or defenses made by the party litigant.
This Section 8.11 does not apply to a suit by the Trustee, a suit by a Holder
pursuant to Section 8.06 hereof or a suit by Holders of more than 10% in
Principal amount of the Notes then outstanding.
ARTICLE IX
TRUSTEE
SECTION 9.01. DUTIES OF TRUSTEE.
(a) If an Event of Default has occurred and is continuing, the Trustee
shall exercise such of the rights and powers vested in it by this Indenture
and use the same
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degree of care and skill in their exercise as a prudent Person would
exercise or use under the circumstances in the conduct of his own affairs.
(b) Except during the continuance of an Event of Default: (i) the
Trustee need perform only those duties as are specifically set forth in
this Indenture and no others; and (ii) in the absence of bad faith on its
part, the Trustee may conclusively rely, as to the truth of the statements
and the correctness of the opinions expressed therein, upon certificate or
opinions furnished to the Trustee and conforming to the requirements of
this Indenture. The Trustee, however, shall examine the certificates and
opinions to determine whether or not they conform to the requirements of
this Indenture.
(c) The Trustee may not be relieved from liability for its own
negligent action, its own negligent failure to act, or its own willful
misconduct, except that: (i) this paragraph does not limit the effect of
paragraph (b) of this Section 9.01; (ii) the Trustee shall not be liable
for any error of judgment made in good faith by a Trust Officer, unless it
is proved that the Trustee was negligent in ascertaining the pertinent
facts; and (iii) the Trustee shall not be liable with respect to any action
it takes or omits to take in good faith in accordance with a direction
received by it pursuant to Section 8.05 hereof.
(d) The Trustee may refuse to perform any duty or exercise any right
or power unless it receives indemnity satisfactory to it against any loss,
liability, expense or fee, unless the reasonably expected amount of any
such loss, liability, expense or fee is under $10,000.
(e) Every provision of this Indenture that in any way relates to the
Trustee is subject to paragraphs (a), (b) (c) and (d) of this Section 9.01.
(f) The Trustee shall not be liable for interest on any money received
by it except as the Trustee may agree with the Company. Money held in trust
by the Trustee need not be segregated from other funds except to the extent
required by law.
SECTION 9.02. RIGHTS OF TRUSTEE. Subject to Section 9.01 above:
(a) The Trustee may rely on any document believed by it to be genuine
and to have been signed or presented by the proper Person. The Trustee need
not investigate any fact or matter stated in the document.
(b) Before the Trustee acts or refrains from acting, it may require an
Officers' Certificate or an Opinion of Counsel, which shall conform to
Section 12.04(b) hereof. The Trustee shall not be liable for any action it
takes or omits to take in good faith in reliance on such Certificate or
Opinion.
(c) The Trustee may act through its agents and shall not be
responsible for the misconduct or negligence of any agent appointed with
due care.
(d) The Trustee shall not be liable for any action it takes or omits
to take in good faith which it reasonably believes to be authorized or
within its rights or powers.
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(e) The Trustee may consult with counsel and the advice or opinion of
such counsel as to matters of law shall be full and complete authorization
and protection in respect of any action taken, omitted or suffered by it
hereunder in good faith and in accordance with the advice or opinion of
such counsel.
SECTION 9.03. INDIVIDUAL RIGHTS OF TRUSTEE. The Trustee in its individual
or any other capacity may become the owner or pledgee of Notes and may otherwise
deal with the Company or an affiliate of the Company with the same rights it
would have if it were not Trustee. Any Agent may do the same with the like
rights. However, the Trustee is subject to Sections 9.10 and 9.11 hereunder.
SECTION 9.04. TRUSTEE'S DISCLAIMER. The Trustee makes no representation as
to the validity or adequacy of this Indenture or the Notes, it shall not be
accountable for the Company's use of the proceeds from the Notes and it shall
not be responsible for any statement in the Notes other than the Trustee's
certificate of authentication.
SECTION 9.05. NOTICE OF DEFAULTS OR EVENTS OF DEFAULT. If a Default or an
Event of Default occurs and is continuing and if it is known to the Trustee, the
Trustee shall mail to each Noteholder written notice of the Default or Event of
Default within 90 days after it occurs. Except in the case of a Default or an
Event of Default in payment of the Principal of (including payment of sinking
fund installments) or interest on any Note, the Trustee may withhold the notice
if and so long as a committee of its Trust Officers in good faith determines
that withholding the notice is in the interest of Noteholders.
SECTION 9.06. REPORTS BY TRUSTEE TO HOLDERS. Within 60 days after each May
15 beginning with the May 15 following the date of this Indenture, the Trustee
shall mail to each Noteholder a brief report dated as of such May 15 that
complies with TIA Section 313(a). The Trustee also shall mail to each Noteholder
reports which comply with TIA Section 313(b).
A copy of each report at the time of its mailing to Noteholders shall be
mailed to the Company and filed with the SEC and each stock exchange, if any, on
which the Notes are listed or, in the event the Notes are listed on NASDAQ, with
the National Association of Notes Dealers, Inc., if such filing is required. The
Company shall notify the Trustee whenever the Notes become listed on any stock
exchange or on NASDAQ.
SECTION 9.07. COMPENSATION AND INDEMNITY. The Company shall pay to the
Trustee from time to time reasonable compensation for its services (which
compensation shall not be limited by any provision of law in regard to the
compensation of a trustee of an express trust). The Company shall reimburse the
Trustee upon request for all reasonable disbursements, expenses and advances
incurred or made by it. Such expenses may include the reasonable compensation,
disbursements and expenses of the Trustee's agents and counsel.
The Company shall indemnify the Trustee for, and hold it harmless against,
any loss, liability or expense incurred by it in connection with its duties
under this Indenture. The Trustee shall notify the Company promptly of any claim
asserted against the Trustee for which it may seek indemnity. The Company shall
defend the claim and the Trustee shall cooperate in the defense. The Trustee may
have separate counsel and the Company shall pay the reasonable fees
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and expenses of such counsel. The Company need not pay for any settlement
made without its written consent.
The Company need not reimburse the Trustee for any expense or indemnify it
against any loss or liability incurred by it through its negligence, bad faith
or willful misconduct.
To secure the Company's payment obligations in this Section 9.07, the
Trustee shall have a senior claim to which the Notes are hereby made subordinate
on all money or property held or collected by the Trustee, except such money or
property held in trust to pay the Principal of and interest on particular Notes.
When the Trustee incurs expenses or renders services after an Event of
Default specified in Section 8.01(5) and (6) occurs, the expenses and the
compensation for the services are intended to constitute expenses of
administration under any Bankruptcy Law.
SECTION 9.08. REPLACEMENT OF TRUSTEE. The Trustee may resign by so
notifying the Company; provided, that such resignation shall become effective
only upon the appointment of a successor trustee and such successor's acceptance
of the appointment. The Holders of a majority in Principal amount of the Notes
then Outstanding may remove the Trustee by so notifying the Trustee and may
appoint a successor Trustee with the Company's written consent. The Company may
remove the Trustee if: (a) the Trustee fails to comply with Section 9.10 hereof;
(b) the Trustee is adjudged a bankrupt or an insolvent; (c) a receiver or other
public officer takes charge of the Trustee or its property; or (d) the Trustee
otherwise becomes incapable of acting hereunder.
If the Trustee resigns, is removed by the Company, or is removed by Holders
of a majority in Principal amount of the Notes then Outstanding and such Holders
do not appoint a successor Trustee, or if a vacancy exists in the office of
Trustee for any other reason, the Company shall promptly appoint a successor
Trustee.
If a successor Trustee does not take office within 45 days after the
retiring Trustee resigns or is removed, the retiring Trustee, the Company or the
Holders of 10% in Principal amount of the Notes then Outstanding may petition
any court of competent jurisdiction for the appointment of a successor Trustee.
If the Trustee at any time fails to comply with Section 9.10 hereof, the
Trustee shall resign. If the Trustee fails to resign after such an occurrence,
any Noteholder may petition any court of competent jurisdiction for the removal
of the Trustee and the appointment of a successor Trustee. If the Trustee has or
shall acquire any conflicting interest within the meaning of Section 310(b) of
the TIA with respect to the Notes, it shall either eliminate such conflicting
interest or resign with respect to the Notes, to the extent and in the manner
provided by, and subject to the provisions of, the TIA and this Indenture.
A successor Trustee shall deliver a written acceptance of its appointment
to the retiring Trustee and to the Company. Immediately after that, the retiring
Trustee shall transfer all property held by it as Trustee to the successor
Trustee, the resignation or removal of the retiring Trustee shall become
effective, and the successor Trustee shall have all the rights, powers and
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duties of the Trustee under this Indenture. A successor Trustee shall mail
notice of its succession to each Noteholder.
Notwithstanding replacement of the Trustee pursuant to this Section 9.08,
the Company's obligations under Section 9.07 hereof shall continue for the
benefit of the retiring Trustee.
SECTION 9.09. SUCCESSOR TRUSTEE BY MERGER, ETC. If the Trustee consolidates
with, merges or converts into, or transfers all or substantially all of its
corporate trust assets to, another corporation, the resulting, surviving or
transferee corporation without any further act shall be the successor Trustee,
provided such transferee corporation shall qualify and be eligible under Section
9.10 hereof.
SECTION 9.10. ELIGIBILITY; DISQUALIFICATION. This Indenture shall always
have a Trustee that satisfies the requirements of TIA Section 310(a)(1). The
Trustee shall have a combined capital and surplus of at least $50,000,000 as
set forth in its most recent published annual report of condition. No obligor
upon the Notes or person directly or indirectly controlling, controlled by,
or under common control with, such obligor shall serve as Trustee for the
Notes. The Trustee shall comply also with TIA Section 310(b).
SECTION 9.11. PREFERENTIAL COLLECTION OF CLAIMS AGAINST COMPANY. If and
when the Trustee becomes a creditor of the Company (or any other obligor on
the Notes), the Trustee shall comply with TIA Section 311(a), excluding from
the operation of TIA Section 311(a) any creditor relationship listed in TIA
Section 311(b). A trustee who has resigned or been removed shall be subject
to TIA Section 311(a) to the extent indicated therein.
ARTICLE X
SATISFACTION AND DISCHARGE OF INDENTURE
SECTION 10.01. TERMINATION OF COMPANY'S OBLIGATIONS. The Company may
terminate all of its obligations under the Notes and this Indenture (except
those obligations referred to in the immediately succeeding paragraph) if all
Notes previously authenticated and delivered (other than destroyed, lost or
stolen Notes which have been replaced or paid or Notes for whose payment money
has theretofore been held in trust and thereafter repaid to the Company, as
provided in Section 10.03 hereof) have been delivered to the Trustee for
cancellation and the Company has paid all sums payable and to be paid by it
hereunder, or if the Company irrevocably deposits in trust with the Trustee
within 10 days of the applicable payment date, money or U.S. Government
Obligations maturing as to Principal and interest in such amounts and at such
times as are sufficient, without consideration of any reinvestment of such
interest, to pay the Principal of and interest on the Notes then Outstanding to
maturity and to pay all other sums payable by it hereunder.
The Company's obligations in paragraph 12 of the Notes and in Sections
2.03, 2.04, 2.05, 2.06, 2.07, 6.01, 9.07, 9.08 and 10.04 and in Article IV
hereof shall survive until the Notes are no longer Outstanding. Thereafter, the
Company's obligations in such paragraph 12 and in Section 9.07 hereof shall
survive.
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After an irrevocable deposit by the Company under this Section 10.01, the
Trustee upon request shall acknowledge in writing the discharge of the Company's
obligations under the Notes and this Indenture, except for those surviving
obligations specified above.
SECTION 10.02. APPLICATION OF TRUST MONEY. The Trustee or Paying Agent
shall hold in trust, for the benefit of the Holders, money or U.S. Government
Obligations deposited with it pursuant to Section 10.01 hereof, and shall apply
the deposited money and the money from U.S. Government Obligations in accordance
with this Indenture to the payment of the Principal of and interest on the
Notes.
SECTION 10.03. REPAYMENT TO COMPANY. Subject to Section 10.01, the Trustee
and the Paying Agent shall promptly pay to the Company upon request any excess
money or U.S. Government Obligations held by them at any time after no Notes
remain Outstanding.
The Trustee and the Paying Agent shall pay to the Company upon written
request any money held by them for the payment of Principal or interest that
remains unclaimed for two years after a right to such money on the part of
Holders of the Notes has matured; provided, however, that the Trustee or such
Paying Agent, before being required to make any such payment, may at the expense
of the Company cause to be published once in a newspaper of general circulation
in the City of New York or mail to each Holder entitled to such money, notice
that such money remains unclaimed and that after a date specified therein, which
shall be at least 30 days from the date of such publication or mailing, any
unclaimed balance of such money then remaining will be repaid to the Company.
After payment to the Company, Noteholders entitled to money must look to the
Company for payment as general creditors unless otherwise prohibited by law.
SECTION 10.04. REINSTATEMENT. If the Trustee or Paying Agent is unable to
apply any money or U.S. Government Obligations in accordance with Section 10.01
hereof by reason of any legal proceeding or by reason of any order or judgment
of any court or governmental authority enjoining, restraining or otherwise
prohibiting such application, the Company's obligations under this Indenture and
the Notes shall be revived and reinstated as though no deposit had occurred
pursuant to Section 10.01 hereof until such time as the Trustee or Paying Agent
is permitted to apply all such money or U.S. Government Obligations in
accordance with Section 10.01 hereof; provided, however, that if the Company has
made any payment of the Principal of or interest on any Notes because of the
reinstatement of its obligations, the Company shall be subrogated to the rights
of the Holders of such Notes to receive such payment from the money or U.S.
Government Obligations held by the Trustee or Paying Agent.
ARTICLE XI
AMENDMENTS, SUPPLEMENTS AND WAIVERS
SECTION 11.01. WITHOUT CONSENT OF HOLDERS. The Company and the Trustee may
amend or supplement this Indenture or the Notes without notice to or consent of
any Noteholder:
(a) to comply with Section 6.04 or 7.01 hereof;
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(b) to provide for uncertificated Notes in addition to or in place of
certificated Notes;
(c) to add covenants and events of default for the protection of the
Holders of the Notes;
(d) to evidence the acceptance of appointment by a successor trustee;
or
(e) to cure any ambiguity, defect or inconsistency, or to make any
other change that does not adversely affect the rights of any Noteholder.
SECTION 11.02. WITH CONSENT OF HOLDERS. The Company and the Trustee may
amend or supplement this Indenture or the Notes without notice to any Noteholder
but with the written consent of the Holders of a majority in Principal amount of
the Notes then Outstanding. The Holders of a majority in Principal amount of the
Notes then Outstanding may waive compliance in a particular instance by the
Company with any provision of this Indenture or the Notes without notice to any
Noteholder. Subject to Section 11.04 hereof, without the consent of each
Noteholder affected, however, an amendment, supplement or waiver, including a
waiver pursuant to Section 8.04 hereof, may not:
(a) reduce the amount of Notes whose Holders must consent to an
amendment, supplement or waiver;
(b) reduce the rate of or change the time for payment of interest on
any Note;
(c) reduce the Principal of or change the fixed maturity of any Note
or alter the redemption provisions with respect thereto;
(d) waive a Default in the payment of the Principal of or interest on
any Note;
(e) make any changes in Section 8.04 or 8.07 or this sentence;
(f) modify the provisions of Article V hereof in a manner adverse to
the Holders; or
(g) make any Note payable in money other than that stated in the Note.
It shall not be necessary for the consent of the Holders under this Section
11.02 to approve the particular form of any proposed amendment, supplement or
waiver, but it shall be sufficient if such consent approves the substance
thereof.
After an amendment, supplement or waiver under this Section 11.02 becomes
effective, the Company shall mail to the Holders affected thereby a notice
briefly describing the amendment, supplement or waiver. Any failure of the
Company to mail such notice, or any defect therein, shall not, however, in any
way impair or affect the validity of such amendment, supplement or waiver,
provided that the failure to mail notice does not impair the rights of the
Holders affected thereby.
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SECTION 11.03. COMPLIANCE WITH TRUST INDENTURE ACT. Every amendment to or
supplement of this Indenture or the Notes shall comply with the TIA as then in
effect.
SECTION 11.04. REVOCATION AND EFFECT OF CONSENTS. Until an amendment or
waiver becomes effective, a consent to it by a Holder is a continuing consent by
the Holder and every subsequent Holder of a Note or portion of a Note that
evidences the same debt as the consenting Holder's Note, even if notation of the
consent is not made on any Note. However, any such Holder or subsequent Holder
may revoke the consent as to his Note or portion of a Note if the Trustee
receives the notice of revocation before the date the amendment, supplement or
waiver becomes effective.
After an amendment, supplement or waiver becomes effective, it shall bind
every Noteholder, unless it makes a change described in any of clauses (a)
through (g) of Section 11.02. In that case the amendment, supplement or waiver
shall bind each Holder of a Note or portion of a Note that evidences the same
debt as the consenting Holder's Note.
SECTION 11.05. NOTATION ON OR EXCHANGE OF NOTES. If an amendment,
supplement or waiver changes the terms of a Note, the Trustee may require the
Holder of the Note to deliver it to the Trustee. The Trustee may place an
appropriate notation on the Note about the changed terms and return it to the
Holder. Alternatively, if the Company or the Trustee so determines, the Company
in exchange for the Note shall issue and the Trustee shall authenticate a new
Note that reflects the changed terms.
SECTION 11.06. TRUSTEE TO SIGN AMENDMENTS, ETC. The Trustee shall sign any
amendment or supplement authorized pursuant to this Article XI if the amendment
or supplement does not adversely affect the rights, duties, liabilities or
immunities of the Trustee. If it does, the Trustee may but need not sign it. In
signing or refusing to sign such amendment or supplement, the Trustee shall be
entitled to receive and, subject to Section 9.01 hereof, shall be fully
protected in relying upon an Opinion of Counsel stating that such amendment or
supplement is authorized or permitted by this Indenture. The Company may not
sign an amendment or supplement until its General Partner approves it.
ARTICLE XII
MISCELLANEOUS
SECTION 12.01. TRUST INDENTURE ACT CONTROLS. If any provision of this
Indenture limits, qualifies or conflicts with another provision which is
required to be included in this Indenture by the TIA, the required provision
shall control; provided, however, that if any provision of this Indenture
modifies or excludes any provision of the TIA that may be so modified or
excluded, such provision as so modified or excluded, as the case may be, shall
control.
SECTION 12.02. NOTICES. Any notice or communication shall be given in
writing and delivered in person or mailed by certified or registered mail,
return receipt requested, addressed as follows:
If to the Company: America First Real Estate
Investment Partners, L.P.
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-----------------------------------
-----------------------------------
Attention: President
If to the Trustee:
-----------------------------------
-----------------------------------
-----------------------------------
-----------------------------------
Attention:
------------------------
Such notice or communication shall be effective when received.
The Company or the Trustee by notice to the other may designate additional
or different addresses for subsequent notices or communications.
Any notice or communication mailed to a Noteholder shall be mailed by
first-class mail to him at his address shown on the Notes Register kept by the
Registrar.
Failure to mail a notice or communication to a Noteholder or any defect in
it shall not affect its sufficiency with respect to other Noteholders. If a
notice or communication to a Noteholder is mailed in the manner provided above,
it is duly given, whether or not the addressee receives it.
SECTION 12.03. COMMUNICATIONS BY HOLDERS WITH OTHER HOLDERS. Noteholders
may communicate pursuant to TIA Section 312(b) with other Noteholders with
respect to their rights under this Indenture or the Notes and the Trustee
shall provide the information required by TIA Section 312(b) under the
circumstances required. The Company, the Trustee, the Registrar and any other
Person shall have the protection of TIA Section 312(c).
SECTION 12.04. CERTIFICATE AND OPINION AS TO CONDITIONS PRECEDENT.
(a) Upon any request or application by the Company to the Trustee to
take any action under this Indenture, the Company shall furnish to the
Trustee at the request of the Trustee: (i) an Officers' Certificate stating
that, in the opinion of the signers, all conditions precedent, if any,
provided for in this Indenture relating to the proposed action have been
complied with; and (ii) an Opinion of Counsel stating that, in the opinion
of such counsel, all such conditions precedent have been complied with.
(b) Each Officers' Certificate and Opinion of Counsel with respect to
compliance with a condition or covenant provided for in this Indenture
shall include: (i) a statement that the Person making such certificate or
opinion has read such covenant or condition; (ii) a brief statement as to
the nature and scope of the examination or investigation upon which the
statements or opinions contained in such certificate or opinion are based;
(iii) a statement that, in the opinion of such Person, he has made such
examination or investigation as is necessary to enable him to express an
informed opinion as to whether or not such covenant or condition has been
complied with; and (iv) a statement as to whether or not, in the opinion of
such Person, such condition or covenant
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has been complied with; provided, however, that with respect to matters
of fact an Opinion of Counsel may rely on an Officers' Certificate or
certificates of public officials.
SECTION 12.05. RULES BY TRUSTEE, PAYING AGENT, REGISTRAR. The Trustee may
make reasonable rules for action by or at a meeting of Noteholders. The
Registrar or Paying Agent may make reasonable rules for its functions.
SECTION 12.06. LEGAL HOLIDAYS. If a payment date is a Legal Holiday at a
place of payment, payment may be made at that place on the next succeeding day
that is not a Legal Holiday, and no interest shall accrue for the intervening
period.
SECTION 12.07. GOVERNING LAW. The laws of the State of Delaware shall
govern this Indenture and the Notes without regard to principles of conflicts of
law. Each of the parties hereto agrees (a) that this Indenture involves at least
$100,000 and (b) that this Indenture has been entered into by the parties hereto
in express reliance upon 6 DEL. C. Section 2708.
SECTION 12.08. NO RECOURSE AGAINST OTHERS. As stated in paragraph 17 of the
Notes, any and all liability of any director, officer, employee or stockholder,
as such, of the Company under or because of the Notes is waived and released by
the Holders upon their acceptance of the Notes.
SECTION 12.09. SUCCESSORS. All agreements of the Company in this Indenture
and the Notes shall bind its successor. All agreements of the Trustee in this
Indenture shall bind its successor.
SECTION 12.10. MULTIPLE COUNTERPARTS. The parties may sign multiple
counterparts of this Indenture. Each signed counterpart shall be deemed an
original, but all of them together represent the same agreement.
SECTION 12.11. SEPARABILITY. In case any provision in this Indenture or in
the Notes shall be invalid, illegal or unenforceable, the validity, legality and
enforceability of the remaining provisions shall not in any way be affected or
impaired thereby.
SECTION 12.12. TABLE OF CONTENTS, HEADINGS, ETC. The table of contents,
cross-reference sheet and headings of the Articles and Sections of this
Indenture have been inserted for convenience of reference only, are not to be
considered a part hereof and shall in no way modify or restrict any of the terms
or provisions hereof.
SECTION 12.13. SUBMISSION TO JURISDICTION; APPOINTMENT OF AGENT FOR SERVICE
OF PROCESS. Each party hereto irrevocably and unconditionally agrees (a) to be
subject to the jurisdiction of the courts of the State of Delaware and of the
federal courts sitting in the State of Delaware, and (b)(1) to the extent that
such party is not otherwise subject to service of process in the State of
Delaware, to appoint and maintain an agent in the State of Delaware as such
party's agent for acceptance of legal process, and (2) that service of process
may also be made on such party by prepaid certified mail with a proof of mailing
receipt validated by the United States Postal Service constituting evidence of
valid service, and that service made pursuant to (b)(1) or (2) above shall have
the same legal force and effect as if served upon such party personally within
the State of Delaware. For purposes of implementing the parties' agreement to
appoint
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and maintain an agent for service of process in the State of Delaware, each
such party does hereby appoint ______________________________, as such agent.
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IN WITNESS WHEREOF, the parties hereto have hereunto set their hands
as of ___________________, 1999.
AMERICA FIRST REAL ESTATE
INVESTMENT PARTNERS, L.P.
By: AMERICA FIRST CAPITAL SOURCE I
L.L.C., general partner
By: ____________________________
________ ________, President
[SEAL]
Attest: ___________________________
Secretary
_____________________ as Trustee
By _____________________________
[SEAL]
Attest: ___________________________
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EXHIBIT A
[FACE OF NOTE]
Number _______________________________________________________________________
AMERICA FIRST REAL ESTATE INVESTMENT COMPANY, INC.
VARIABLE RATE JUNIOR NOTE due ________, 2007
AMERICA FIRST REAL ESTATE INVESTMENT PARTNERS, L.P., a Delaware limited
partnership (the "Company"), promises to pay to or registered assigns the
Principal sum of Dollars on ________, 2007.
Interest Payment Date: January 15
Record Date: December 31
Additional provisions of this Note are set forth on the reverse side of
this Note. All capitalized terms not otherwise defined herein shall have the
definitions set forth in the Indenture dated as of __________, 1999 (the
"Indenture"), between the Company and as trustee (the "Trustee").
Dated:___________ AMERICA FIRST REAL ESTATE INVESTMENT PARTNERS, L.P.
[SEAL] By: AMERICA FIRST CAPITAL SOURCE I L.L.C.,
general partner
__________________________, President
__________________________, Secretary
Certificate of Authentication:
______________________________
as Trustee, certifies that
this is one of the Notes
referred to in the Note.
______________________________
Authorized Signature
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[REVERSE SIDE]
AMERICA FIRST REAL ESTATE INVESTMENT PARTNERS, L.P.
VARIABLE RATE JUNIOR NOTE due ________, 2007
1. INTEREST. America First Real Estate Investment Partners, L.P., a
Delaware limited partnership (the "Company"), promises to pay interest on the
Principal amount of this Note at the Applicable Variable Rate, annually on the
fifteenth day of each January of each year, commencing on January 15, 2000,
until the Principal amount of this Note has been fully paid or provided for
pursuant to the Indenture, or if such date is not a Business Day, then the first
Business Day thereafter. The Applicable Variable Rate shall be ______% during
the Initial Rate Period, and thereafter shall be, for each subsequent Interest
Rate Period, a rate per annum equal to 120% of the Applicable Federal Rate for
debt instruments with a term of not over three years, which interest rate shall
be determined by the Trustee on each Interest Determination Date. Interest on
the Notes will accrue from the most recent date to which interest has been paid
or, if no interest has been paid, from the date of first issuance of the Notes
under the Indenture; provided that, if there is no existing Default in the
payment of interest, and if this Note is authenticated between a Record Date
referred to on the face hereof and the next succeeding Interest Payment Date,
interest shall accrue from such Interest Payment Date. The interest rate
applicable to any Interest Rate Period, determined on the immediately preceding
Interest Determination Date shall become effective on the Interest Payment Date,
which is the first day of such Interest Rate Period. Interest shall be computed
on the basis of a 360-day year for the actual number of days elapsed.
2. METHOD OF PAYMENT. The Company will pay interest on this Note (except
Defaulted interest) to the Person who is the registered Holder of this Note as
listed on the Notes Register maintained by the Registrar, at the close of
business on the Record Date next preceding the Interest Payment Date. The Holder
must surrender this Note to the Paying Agent to collect payment of Principal.
Payment of Principal of and interest on the Notes will be made in money of the
United States that at the time of payment is legal tender for payment of public
and private debts. Interest will be paid by means of mailing a check to the
Holder's registered address as listed on the Notes Register; provided, that
Holders of Notes having $__________ or more in aggregate outstanding Principal
amount of Notes may elect to have payments of interest on the Notes made by wire
transfer by providing to the Trustee a notice, together with wire transfer
instructions, in form acceptable to the Trustee.
3. PAYING AGENT AND REGISTRAR. Initially, the Trustee will act as Paying
Agent and Registrar. The Company may change any Paying Agent or Registrar
without notice to the Noteholders. The Company or any of its Subsidiaries may
act as Paying Agent or Registrar.
4. INDENTURE, LIMITATIONS. The Company issued this Note under the
Indenture. The terms of this Note include those stated in the Indenture and
those made part of the Indenture by reference to the Trust Indenture Act of
1939 (15 U.S.C. Section 77aaa-77bbbb) as in effect on the date of the
Indenture. This Note Is subject to all such terms, and the Holder of this
Note is referred to
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the Indenture and said Trust Indenture Act for a statement of them. The Notes
are unsecured obligations of the Company limited to $__________ aggregate
Principal amount. Promissory Notes of the Company are also being issued pursuant
to the Indenture, in a Principal amount of $__________. Such Promissory Notes
are being issued on a parity with the Notes.
5. OPTIONAL REDEMPTION. The Notes may be redeemed in whole or in part, at
any time, or from time to time, at the option of the Company, at a price equal
to the Principal amount thereof plus accrued and unpaid interest to the date
fixed for redemption.
6. MANDATORY REDEMPTION. The Company shall utilize 80% of any Net Proceeds
of any Sale or Refinancing of [Cap Source I/Cap Source II] Designated Assets,
occurring at any time after the Transaction, to redeem: (a) first, Promissory
Notes by lot, to the extent of such Net Proceeds and (b) second, Notes by lot,
to the extent of such Net Proceeds; provided, that such Net Proceeds of any Sale
or Refinancing of Designated Assets shall be accumulated by the Trustee in a
segregated trust account until the amount therein is at least $5,000,000 before
calling Promissory Notes and/or Notes for redemption. The Company shall fix a
Redemption Date pursuant to the Indenture which is no later than 90 days
following receipt of such net proceeds or the accumulation of $5,000,000, as the
case may be.
Such mandatory redemption is not at the discretion of the Company or of the
Holders of the Promissory Notes or the Notes.
7. NOTICE OF REDEMPTION. Notice of redemption will be mailed by first-class
mail at least 30 days but not more than 60 days before a redemption date to each
Holder of Notes to be redeemed at the Holder's registered address. On and after
the Redemption Date, interest ceases to accrue on Notes or portions of them
called for redemption.
8. SENIOR DEBT. The indebtedness evidenced by the Notes is on a par with,
and part of, the Senior Indebtedness of the Company, as defined in the
Indenture.
9. DENOMINATIONS, TRANSFER, EXCHANGE. The Notes are in registered form
without coupons in denominations of $1,000 and integral multiples thereof. A
Holder may register the transfer of or exchange Notes in accordance with the
Indenture. The Registrar may require a Holder, among other things, to furnish
appropriate endorsements and transfer documents and to pay any taxes or other
governmental charges that may be imposed by law or permitted by the Indenture.
10. PERSONS DEEMED OWNERS. The registered Holder of a Note may be treated
as the owner of it for all purposes.
11. UNCLAIMED MONEY. If money for the payment of Principal or interest
remains unclaimed for two years, the Trustee or Paying Agent will pay the money
back to the Company at its request. After that, Holders entitled to money must
look to the Company for payment.
12. AMENDMENT, SUPPLEMENT, WAIVER. Subject to certain exceptions, the
Indenture may be amended or supplemented with the consent of the Holders of a
majority in Principal amount of the Notes and Promissory Notes then Outstanding,
and any existing Default or compliance with any provision may be waived in a
particular instance with the consent of the
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Holders of a majority in Principal amount of the Notes and Promissory Notes
then Outstanding. Without the consent of or notice to any Noteholder, the
Company and the Trustee may amend or supplement the Indenture to, among other
things, provide for uncertificated Notes in addition to or in place of
certificated Notes, to cure any ambiguity, defect or inconsistency or make
any other change that does not adversely affect the rights of any Noteholder.
13. SUCCESSOR COMPANY. When a successor Company assumes all the obligations
of its predecessor Company under the Notes, the Promissory Notes and the
Indenture, the predecessor Company will be released from those obligations.
14. DEFAULTS AND REMEDIES. An Event of Default is defined in the Indenture
generally as: Default for 30 days in payment of interest on the Notes or the
Promissory Notes; Default in payment of Principal on them; failure by the
Company for 30 days after notice to it to comply with any of its other
agreements in the Indenture or the Notes or the Promissory Notes; certain events
of bankruptcy or insolvency of the Company or any of its Subsidiaries; and
certain Defaults on other indebtedness. If an Event of Default (other than as a
result of certain events of bankruptcy or insolvency) occurs and is continuing,
the Trustee or the Holders of at least 25% in Principal amount of the Notes and
Promissory Notes then Outstanding may declare all unpaid Principal of and
accrued interest to the date of acceleration on the Notes and Promissory Notes
then Outstanding to be due and payable immediately, all as and to the extent
provided in the Indenture. If an Event of Default occurs as a result of certain
events of bankruptcy or insolvency, all unpaid Principal of and accrued interest
on the Notes and Promissory Notes then Outstanding shall become due and payable
immediately without any declaration or other act on the part of the Trustee or
any Noteholder, all as and to the extent provided in the Indenture. Noteholders
may not enforce the Indenture or the Notes except as provided in the Indenture.
The Trustee may require indemnity satisfactory to it before it takes action to
enforce the agreements in the Indenture or the Notes. Subject to certain
limitations, Holders of a majority in Principal amount of the Notes and
Promissory Notes then Outstanding may direct the Trustee in its exercise of any
trust or power. The Trustee may withhold from Noteholders notice of any
continuing Default (except a Default in payment of Principal or interest) if it
determines that withholding notice is in their interests.
15. TRUSTEE DEALINGS WITH THE COMPANY. The Trustee, in its individual or
any other capacity, may make loans to, accept deposits from and perform services
for the Company or an Affiliate of the Company, and may otherwise deal with the
Company or an Affiliate of the Company, as if it were not Trustee.
16. NO RECOURSE AGAINST OTHERS. A director, officer, employee or
stockholder, as such, of the Company shall not have any liability for any
obligations of the Company under the Notes, the Promissory Notes or the
Indenture or for any claim based on, or in respect or by reason of, such
obligations or their creation. The holder of this Note by accepting this Note
waives and releases all such liability. The waiver and release are part of the
consideration for the issue of this Note.
17. DISCHARGE PRIOR TO MATURITY. If the Company deposits with the Trustee
or Paying Agent within 10 days of the payment date, money or U.S. Government
Obligations sufficient to
4
<PAGE>
pay the Principal of and interest on the Notes to maturity, the Company will
be discharged from the Indenture except for certain Sections thereof.
18. AUTHENTICATION. This Note shall not be valid until the Trustee or an
authenticating agent signs the certificate of authentication on the other side
of this Note.
19. ABBREVIATIONS AND DEFINITIONS. Customary abbreviations may be used in
the name of a Noteholder or an assignee, such as: TEN COM (=tenants in common),
TEN ENT (=tenants by the entireties), JT TEN (=joint tenants with right of
survivorship and not as tenants in common), CUST (=Custodian), and U/G/M/A
(=Uniform Gifts to Minors Act).
20. INDENTURE TO CONTROL. In the case of any conflict between the
provisions of this Note and the Indenture, the provisions of the Indenture shall
control.
The Company will furnish to any Noteholder, upon written request and
without charge, a copy of the Indenture. Requests may be made to: America
First Real Estate Investment Partners, L.P.,
_________________________________Attention: Secretary.
5
<PAGE>
FORM OF ASSIGNMENT
To assign this Note, fill in the form below:
I or we assign and transfer this Promissory Note to _______________
____________
____________
____________
(Print or type name, address, zip code and social security or other
identifying number of assignee)
and irrevocably appoint(s) _____
(agent)
to transfer this Note on the books of the Company. The agent may substitute
another to act for him.
Dated: __________________________________________________________________
(Sign exactly as name appears on the other
side of this Note)
6
<PAGE>
EXHIBIT B
[FACE OF PROMISSORY NOTE]
Number ______________________________________________________________________
AMERICA FIRST REAL ESTATE INVESTMENT PARTNERS, L.P.
PROMISSORY NOTE due ________, 2007
AMERICA FIRST REAL ESTATE INVESTMENT PARTNERS, L.P., a Delaware limited
partnership (the "Company"), promises to pay to _______________ or registered
assigns the Principal sum of _______________ Dollars on ________, 2007.
Interest Payment Date: January 15
Record Date: December 31
Additional provisions of this Promissory Note are set forth on the
reverse side of this Promissory Note. All capitalized terms not otherwise
defined herein shall have the definitions set forth in the Indenture dated as
of __________, 1999 (the "Indenture"), between the Company and _______________
as trustee (the "Trustee").
Dated:___________ AMERICA FIRST REAL ESTATE INVESTMENT PARTNERS, L.P.
[SEAL] By: AMERICA FIRST CAPITAL SOURCE I L.L.C.,
general partner
__________________________, President
__________________________, Secretary
Certificate of Authentication:
______________________________
as Trustee, certifies that
this is one of the Notes
referred to in the Note.
______________________________
Authorized Signature
1
<PAGE>
[REVERSE SIDE]
AMERICA FIRST REAL ESTATE INVESTMENT PARTNERS, L.P.
PROMISSORY NOTE due ________, 2007
1. INTEREST. America First Real Estate Investment Partners, L.P., a
Delaware limited partnership (the "Company"), promises to pay interest on the
Principal amount of this Promissory Note at the Applicable Variable Rate,
annually on the fifteenth day of each January of each year, commencing on
January 15, 2000, until the Principal amount of this Promissory Note has been
fully paid or provided for pursuant to the Indenture, or if such date is not a
Business Day, then the first Business Day thereafter. The Applicable Variable
Rate shall be ______% during the Initial Rate Period, and thereafter shall be,
for each subsequent Interest Rate Period, a rate per annum equal to 120% of the
Applicable Federal Rate for debt instruments with a term of not over three
years, which interest rate shall be determined by the Trustee on each Interest
Determination Date. Interest on the Promissory Notes will accrue from the most
recent date to which interest has been paid or, if no interest has been paid,
from the date of first issuance of the Promissory Notes under the Indenture;
provided that, if there is no existing Default in the payment of interest, and
if this Promissory Note is authenticated between a Record Date referred to on
the face hereof and the next succeeding Interest Payment Date, interest shall
accrue from such Interest Payment Date. The interest rate applicable to any
Interest Rate Period, determined on the immediately preceding Interest
Determination Date shall become effective on the Interest Payment Date, which is
the first day of such Interest Rate Period. Interest shall be computed on the
basis of a 360-day year for the actual number of days elapsed.
2. METHOD OF PAYMENT. The Company will pay interest on this Promissory Note
(except Defaulted interest) to the Person who is the registered Holder of this
Promissory Note as listed on the Notes Register maintained by the Registrar, at
the close of business on the Record Date next preceding the Interest Payment
Date. The Holder must surrender this Promissory Note to the Paying Agent to
collect payment of Principal. Payment of Principal of and interest on the
Promissory Notes will be made in money of the United States that at the time of
payment is legal tender for payment of public and private debts. Interest will
be paid by means of mailing a check to the Holder's registered address as listed
on the Notes Register.
3. PAYING AGENT AND REGISTRAR. Initially, the Trustee will act as Paying
Agent and Registrar. The Company may change any Paying Agent or Registrar
without notice to the Holders of the Promissory Notes. The Company or any of its
Subsidiaries may act as Paying Agent or Registrar.
4. INDENTURE, LIMITATIONS. The Company issued this Promissory Note under
the Indenture. The terms of this Promissory Note include those stated in the
Indenture and those made part of the Indenture by reference to the Trust
Indenture Act of 1939 (15 U.S.C. Section 77aaa-77bbbb) as in effect on the
date of THe Indenture. This Promissory Note is subject to all such terms, and
the Holder of this Promissory Note is referred to the Indenture and said
Trust Indenture Act for a statement of them. The Promissory Notes are
unsecured obligations of the
2
<PAGE>
Company limited to $__________ aggregate Principal amount. Notes of the
Company are also being issued pursuant to the Indenture, in a Principal
amount of $__________. Such Notes are also unsecured obligations of the
Company, and are therefore pari passu with the Promissory Notes.
5. OPTIONAL REDEMPTION. The Promissory Notes may be redeemed in whole or in
part, at any time, or from time to time, at the option of the Company, at a
price equal to the Principal amount thereof plus accrued and unpaid interest to
the date fixed for redemption.
6. MANDATORY REDEMPTION. The Company shall utilize 80% of any Net Proceeds
of any Sale or Refinancing of [Cap Source I/Cap Source II] Designated Assets,
occurring at any time after the Transaction, to redeem: (a) first, Promissory
Notes by lot, to the extent of such Net Proceeds, and (b) second, Notes by lot,
to the extent of such Net Proceeds; provided, that such Net Proceeds of any Sale
or Refinancing of Designated Assets shall be accumulated by the Trustee in a
segregated trust account until the amount therein is at least $5,000,000 before
calling Promissory Notes and/or Notes for redemption. The Company shall fix a
Redemption Date pursuant to the Indenture which is no later than 90 days
following receipt of such net proceeds or the accumulation of $5,000,000, as the
case may be.
Such mandatory redemption is not at the discretion of the Company or of the
Holders of the Promissory Notes or the Promissory Notes.
7. NOTICE OF REDEMPTION. Notice of redemption will be mailed by first-class
mail at least 30 days but not more than 60 days before a redemption date to each
Holder of Promissory Notes to be redeemed at the Holder's registered address. On
and after the Redemption Date, interest ceases to accrue on Promissory Notes or
portions of them called for redemption.
8. SENIOR DEBT. The indebtedness evidenced by the Promissory Notes is on a
par with, and part of, the Senior Indebtedness of the Company, as defined in the
Indenture.
9. DENOMINATIONS, TRANSFER, EXCHANGE. The Promissory Notes are in
registered form without coupons in denominations of such amounts less than
$1,000 as the Company shall direct. A Holder may register the transfer of or
exchange Promissory Notes in accordance with the Indenture. The Registrar may
require a Holder, among other things, to furnish appropriate endorsements and
transfer documents and to pay any taxes or other governmental charges that may
be imposed by law or are permitted by the Indenture.
10. PERSONS DEEMED OWNERS. The registered Holder of a Promissory Note may
be treated as the owner of it for all purposes.
11. UNCLAIMED MONEY. If money for the payment of Principal or interest
remains unclaimed for two years, the Trustee or Paying Agent will pay the money
back to the Company at its request. After that, Holders entitled to money must
look to the Company for payment.
12. AMENDMENT, SUPPLEMENT, WAIVER. Subject to certain exceptions, the
Indenture may be amended or supplemented with the consent of the Holders of a
majority in Principal amount of the Promissory Notes and Promissory Notes then
Outstanding, and any existing Default or compliance with any provision may be
waived in a particular instance with the
3
<PAGE>
consent of the Holders of a majority in Principal amount of the Promissory
Notes and Promissory Notes then Outstanding. Without the consent of or notice
to any Promissory Noteholder, the Company and the Trustee may amend or
supplement the Indenture to, among other things, provide for uncertificated
Promissory Notes in addition to or in place of certificated Promissory Notes,
to cure any ambiguity, defect or inconsistency or make any other change that
does not adversely affect the rights of any Promissory Noteholder.
13. SUCCESSOR COMPANY. When a successor Company assumes all the obligations
of its predecessor Company under the Promissory Notes, the Promissory Notes and
the Indenture, the predecessor Company will be released from those obligations.
14. DEFAULTS AND REMEDIES. An Event of Default is defined in the Indenture
generally as: Default for 30 days in payment of interest on the Promissory Notes
or the Promissory Notes; Default in payment of Principal on them; failure by the
Company for 30 days after notice to it to comply with any of its other
agreements in the Indenture or the Promissory Notes or the Promissory Notes;
certain events of bankruptcy or insolvency of the Company or any of its
Subsidiaries; and certain Defaults on other indebtedness. If an Event of Default
(other than as a result of certain events of bankruptcy or insolvency) occurs
and is continuing, the Trustee or the Holders of at least 25% in Principal
amount of the Promissory Notes and the Promissory Notes then Outstanding may
declare all unpaid Principal of and accrued interest to the date of acceleration
on the Promissory Notes and the Promissory Notes then Outstanding to be due and
payable immediately, all as and to the extent provided in the Indenture. If an
Event of Default occurs as a result of certain events of bankruptcy or
insolvency, all unpaid Principal of and accrued interest on the Promissory Notes
and the Promissory Notes then Outstanding shall become due and payable
immediately without any declaration or other act on the part of the Trustee or
any Promissory Noteholder, all as and to the extent provided in the Indenture.
Noteholders may not enforce the Indenture or the Promissory Notes except as
provided in the Indenture. The Trustee may require indemnity satisfactory to it
before it takes action to enforce the agreements in the Indenture or the
Promissory Notes. Subject to certain limitations, Holders of a majority in
Principal amount of the Promissory Notes and the Promissory Notes then
Outstanding may direct the Trustee in its exercise of any trust or power. The
Trustee may withhold from Noteholders notice of any continuing Default (except a
Default in payment of Principal or interest) if it determines that withholding
notice is in their interests.
15. TRUSTEE DEALINGS WITH THE COMPANY. The Trustee, in its individual or
any other capacity, may make loans to, accept deposits from and perform services
for the Company or an Affiliate of the Company, and may otherwise deal with the
Company or an Affiliate of the Company, as if it were not Trustee.
16. NO RECOURSE AGAINST OTHERS. A director, officer, employee or
stockholder, as such, of the Company shall not have any liability for any
obligations of the Company under the Notes, the Promissory Notes or the
Indenture or for any claim based on, or in respect or by reason of, such
obligations or their creation. The holder of this Promissory Note by accepting
this Promissory Note waives and releases all such liability. The waiver and
release are part of the consideration for the issue of this Promissory Note.
4
<PAGE>
17. DISCHARGE PRIOR TO MATURITY. If the Company deposits with the Trustee
or Paying Agent within 10 days of the payment date, money or U.S. Government
Obligations sufficient to pay the Principal of and interest on the Promissory
Notes to maturity, the Company will be discharged from the Indenture except for
certain Sections thereof.
18. AUTHENTICATION. This Promissory Note shall not be valid until the
Trustee or an authenticating agent signs the certificate of authentication on
the other side of this Promissory Note.
19. ABBREVIATIONS AND DEFINITIONS. Customary abbreviations may be used in
the name of a Promissory Noteholder or an assignee, such as: TEN COM (=tenants
in common), TEN ENT (=tenants by the entireties), JT TEN (=joint tenants with
right of survivorship and not as tenants in common), CUST (=Custodian), and
U/G/M/A (=Uniform Gifts to Minors Act).
20. INDENTURE TO CONTROL. In the case of any conflict between the
provisions of this Promissory Note and the Indenture, the provisions of the
Indenture shall control.
The Company will furnish to any Promissory Noteholder, upon written
request and without charge, a copy of the Indenture. Requests may be made to:
America First Real Estate Investment Partners, L.P., __________________
Attention: Secretary.
5
<PAGE>
FORM OF ASSIGNMENT
To assign this Promissory Note, fill in the form below:
I or we assign and transfer this Note to _______________
____________
____________
____________
(Print or type name, address, zip code and social security or other
identifying number of assignee)
and irrevocably appoint(s) ____________
(agent)
to transfer this Promissory Note on the books of the Company. The agent may
substitute another to act for him.
Dated: _______________________________________________
(Sign exactly as name appears on the other
side of this Promissory Note)
6
<PAGE>
EXHIBIT 12.01
RATIO OF EARNINGS TO FIXED CHARGES
CAPITAL SOURCE L.P.
<TABLE>
<CAPTION>
Three Months Year Year Year Year Year
Ended Ended Ended Ended Ended Ended
March 31, 1999 Dec. 31, 1998 Dec. 31, 1997 Dec. 31, 1996 Dec. 31, 1995 Dec. 31, 1994
-------------- ------------- ------------- ------------- ------------- -------------
<S> <C> <C> <C> <C> <C> <C>
Net Income 722,366 1,902,503 3,051,221 3,187,307 3,472,057 3,464,875
Interest -- -- -- -- -- --
------- --------- --------- --------- --------- ---------
722,366 1,902,503 3,051,221 3,187,307 3,472,057 3,464,875
------- --------- --------- --------- --------- ---------
------- --------- --------- --------- --------- ---------
Ratio** N/A N/A N/A N/A N/A N/A
</TABLE>
CAPITAL COURSE II L.P.-A
<TABLE>
<CAPTION>
Three Months Year Year Year Year Year
Ended Ended Ended Ended Ended Ended
March 31, 1999 Dec. 31, 1998 Dec. 31, 1997 Dec. 31, 1996 Dec. 31, 1995 Dec. 31, 1994
-------------- ------------- ------------- ------------- ------------- -------------
<S> <C> <C> <C> <C> <C> <C>
Net Income 452,062 881,115 1,654,005 2,123,037 2,173,096 2,021,288
Interest -- -- -- -- -- --
------- --------- --------- --------- --------- ---------
452,062 881,115 1,654,005 2,123,037 2,173,096 2,021,288
------- --------- --------- --------- --------- ---------
------- --------- --------- --------- --------- ---------
Ratio** N/A N/A N/A N/A N/A N/A
</TABLE>
** Pretax income plus interest/interest
* (Pretax income = net income)
<PAGE>
INDEPENDENT ACCOUNTANTS' CONSENT
To the Unitholders:
America First Real Estate Investment Partners, L.P.
We consent to the use of our report included herein and to the reference to
our firm under the heading "Independent Public Accountants" in the
registration statement.
/s/ KPMG LLP
KPMG LLP
Omaha, Nebraska
July 19, 1999
<PAGE>
INDEPENDENT ACCOUNTANTS' CONSENT
To the Partners:
Capital Source II L.P.-A
We consent to the use of our report included herein and to the references to
our firm under the headings "Independent Public Accountants" and "Selected
Financial Data of the Partnerships" in the registration statement.
/s/ KPMG LLP
KPMG LLP
Omaha, Nebraska
July 19, 1999
<PAGE>
INDEPENDENT ACCOUNTANTS' CONSENT
To the Partners:
Capital Source L.P.
We consent to the use of our report included herein and to the references to
our firm under the headings "Independent Public Accountants" and "Selected
Financial Data of the Partnerships" in the registration statement.
/s/ KPMG LLP
KPMG LLP
Omaha, Nebraska
July 19, 1999
<PAGE>
CONSENT OF VALUATION RESEARCH CORPORATION
We hereby consent to the use of our name, or to any references to or use
of our reports, wherever appearing, in this Pre-Effective Amendment No. 3 to
the Registration Statement and the related Prospectus/Consent Solicitation
Statement which is a part of this Pre-Effective Amendment No. 3 to the
Registration Statement, and any amendments thereto.
Dated: July 16, 1999 VALUATION RESEARCH CORPORATION
/s/ Robert J. Simpson
------------------------------
Robert J. Simpson
Executive Vice President
<PAGE>
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
-------------------
FORM T-1
Statement of Eligibility and Qualification under the
Trust Indenture Act of 1939, as amended by
Trust Indenture Reform Act of 1990 ("TIRA") of a Corporation
Designated to Act as Trustee
-------------------
U.S. BANK TRUST NATIONAL ASSOCIATION
(Exact name of trustee as specified in its charter)
41-0417860
(I.R.S. employer Identification No.)
180 E. FIFTH STREET
ST. PAUL, MINNESOTA 55101
(Address of principal executive offices and zip code)
-------------------
AMERICA FIRST REAL ESTATE INVESTMENT PARTNERS, L.P.
(Exact name of obligor as specified in its charter)
DELAWARE 39-1965590
(State or other jurisdiction of (I.R.S. employer
Incorporation or organization) Identification No.)
SUITE 400
1004 FARNAM STREET
OMAHA, NEBRASKA 68102
(Address of principal executive offices) (Zip code)
-------------------
VARIABLE RATE JUNIOR NOTES AND PROMISSORY NOTES
(Title of the indenture securities)
<PAGE>
GENERAL
1. GENERAL INFORMATION Furnish the following information as to the trustee.
(a) Name and address of each examining or supervising authority to which
it is subject.
Comptroller of the Currency
Washington D.C.
(b) Whether it is authorized to exercise corporate trust powers.
Yes
2. AFFILIATIONS WITH OBLIGOR AND UNDERWRITERS If the obligor or any
underwriter for the obligor is an affiliate of the trustee, describe each
such affiliation.
None
See Note following Item 16.
ITEMS 3-15 ARE NOT APPLICABLE BECAUSE TO THE BEST OF THE TRUSTEE'S
KNOWLEDGE THE OBLIGOR IS NOT IN DEFAULT UNDER ANY INDENTURE FOR WHICH THE
TRUSTEE ACTS AS TRUSTEE.
16. LIST OF EXHIBITS List below all exhibits filed as a part of this
statement of eligibility and qualification.
1. Copy of Articles of Association*
2. Copy of Certificate of Authority to Commence Business*
3. Copy of Trust Permit authorizing the exercise of corporate trust powers*
4. Copy of existing By-Laws*
5. Copy of each Indenture referred to in item 4. - N/A
6. The consents of the trustee required by Section 321(b) of the Act
7. Copy of the latest report of condition of the trustee published
pursuant to law or the requirements of its supervising or examining
authority**
* Incorporated by reference to the exhibit of the same number filed with the
registration statement number 22-27000.
** Incorporated by reference to the exhibit of the same number filed with the
registration statement number 333-53211.
<PAGE>
NOTE
The answers to this statement insofar as such answers relate to what
persons have been underwriters for any securities of the obligor within three
years prior to the date of filing this statement, or what persons are owners
of 10% or more of the voting securities of the obligor, or affiliates, are
based upon information furnished to the trustee by the obligor. While the
trustee has no reason to doubt the accuracy of any such information, it
cannot accept any responsibility therefor.
SIGNATURE
Pursuant to the requirements of the TIRA, the Trustee, U.S. Bank Trust
National Association, an Association organized and existing under the laws of
the United States, has duly caused this statement of eligibility and
qualification to be signed on its behalf by the undersigned, thereunto duly
authorized and attested, all in the City of Denver and State of Colorado on
the 16th day of July, 1999.
U.S. BANK TRUST
NATIONAL ASSOCIATION
/s/ Gretchen L. Middents
-----------------------------------
Gretchen L. Middents
Trust Officer
/s/ Patricia M. Peters
- -----------------------------
Patricia M. Peters
Assistant Secretary
<PAGE>
EXHIBIT 6
CONSENT
In accordance with Section 321(b) of the TIRA, the undersigned, U.S. Bank
Trust National Association, hereby consents that reports of examination of
the undersigned by Federal, State, Territorial or District authorities may be
furnished by such authorities to the Securities and Exchange Commission upon
its request therefor.
Dated: July 16, 1999
U.S. BANK TRUST
NATIONAL ASSOCIATION
/s/ Grethen L. Middents
------------------------------
Gretchen L. Middents
Trust Officer
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-END> JUN-25-1999
<CASH> 1,000
<SECURITIES> 0
<RECEIVABLES> 0
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 1,000
<PP&E> 0
<DEPRECIATION> 0
<TOTAL-ASSETS> 1,000
<CURRENT-LIABILITIES> 0
<BONDS> 0
0
0
<COMMON> 1,000
<OTHER-SE> 1,000
<TOTAL-LIABILITY-AND-EQUITY> 1,000
<SALES> 0
<TOTAL-REVENUES> 0
<CGS> 0
<TOTAL-COSTS> 0
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> 0
<INCOME-TAX> 0
<INCOME-CONTINUING> 0
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 0
<EPS-BASIC> 0
<EPS-DILUTED> 0
</TABLE>
<PAGE>
CONSENT
THIS CONSENT IS SOLICITED ON BEHALF OF THE GENERAL PARTNERS OF [CAPITAL
SOURCE L.P.] [CAPITAL SOURCE II L.P.-A]
Reference is made to the Prospectus/Consent solicitation Statement dated
, 1999, sent with this Consent Card relating to the proposed
consolidation by merger (the "Transaction") of Capital Source L.P. and Capital
Source II L.P.-A (the "Partnerships") with and into America First Real Estate
Investment Partners, L.P., a Delaware limited partnership (the "Company"). The
undersigned hereby directs the Initial Limited Partner to vote as indicated
below with respect to all Partnership BACs which the undersigned may be entitled
to vote. Please put an "X" in the appropriate box to vote "YES" in favor of the
Transaction, "NO" against the Transaction or to "ABSTAIN" from voting.
/ / "YES" I approve of my Partnership's participation in the Transaction and
the adoption of the Amendments to the partnership agreement [and consent to
the sale by Insured Mortgage Equities II, L.P. of its general partner
interest in my Partnership to America First Capital Source II L.L.C.]
/ / "NO" I do not approve of my Partnership's participation in the Transaction
or the adoption of the Amendments to the partnership agreement [and do not
consent to the sale by Insured Mortgage Equities II, L.P. of its general
partner interest in my Partnership to America First Capital Source II
L.L.C.]
/ / I wish to "ABSTAIN" from voting.
<TABLE>
<S> <C>
Signature of Investor Signature of Co-Owner (if any)
Dated: Dated:
</TABLE>
PLEASE DATE, SIGN EXACTLY AS YOUR NAME APPEARS ON THE MAILING LABEL, UNLESS
YOUR NAME IS PRINTED INCORRECTLY; AND MAIL THIS CONSENT CARD IN THE ENVELOPE
PROVIDED. NO POSTAGE IS REQUIRED IF MAILED IN THE UNITED STATES.
THIS CONSENT WHEN PROPERLY EXECUTED, WILL BE VOTED BY THE INITIAL LIMITED
PARTNER IN THE MANNER DIRECTED HEREIN BY THE UNDERSIGNED. IF NO DIRECTION IS
MADE, THIS CONSENT WILL BE VOTED FOR THE TRANSACTION.
(Continued on reverse side)
<PAGE>
INVESTORS WILL RECEIVE UNITS OF THE COMPANY UNLESS THE FOLLOWING ELECTION IS
MARKED:
/ / I wish to receive Variable Rate Junior Notes of the Company as described in
the Prospectus/Consent Solicitation Statement.
<TABLE>
<C> <S>
If you sign and return this Consent Card
without indicating a vote, you will be
deemed to have voted "YES" in favor of
the Transaction and you will receive
Units of the Company if the Transaction
is consummated.
By signing this Consent Card, you hereby
acknowledge receipt of the
Prospectus/Consent Solicitation
Statement dated , 1999, and
furnished herewith.
MAILING LABEL
[Includes name of Partnership] IF YOU HAVE ANY QUESTIONS OR NEED
ASSISTANCE IN COMPLETING THE CONSENT
CARD, PLEASE CALL AMERICA FIRST INVESTOR
SERVICES DEPARTMENT, TOLL-FREE AT (800)
239-8787, AND SELECT OPTION 2. YOU MAY
E-MAIL INVESTOR SERVICES AT
[email protected].
PLEASE MARK, SIGN, DATE AND RETURN THIS CONSENT CARD USING THE ENCLOSED
ENVELOPE SO THAT IT ARRIVES NO LATER THAN 5:00 P.M. EASTERN TIME ON ,
1999.
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