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AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON JUNE 15, 2000.
REGISTRATION NO. 333-52117
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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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POST-EFFECTIVE AMENDMENT NO. 1
TO
FORM S-4
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
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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
jurisdiction of organization) Classification Number) No.)
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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 LLP
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.
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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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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. These securities may not be sold nor may offers to
buy be accepted prior to the time this prospectus/consent solicitation statement
is delivered in final form. 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.
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SUBJECT TO COMPLETION, DATED JUNE 15, 2000
AMENDED AND RESTATED
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 amended and restated 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 formed 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 "AFREZ". 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 in multifamily residential properties, by
acquiring securities of other entities engaged in similar real estate businesses
and by actively managing the makeup of the company's 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 21 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.
- An unaffiliated third party has not been retained to represent your
interests in the transaction. Had a representative been retained, they
may have been able to negotiate, on your behalf, more favorable terms for
the transaction and different consideration may have been distributed to
you.
- If the transaction is completed, compensation, reimbursements and
distributions to our successor, as the company's general partner, may
increase.
- There can be no guarantee of the level of the company's cash
distributions after the distributions required by the settlement are
made.
- 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 and to fund a portion of the cash distributions to
unitholders and noteholders required by the settlement. 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
, 2000, 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.
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The date of the prospectus/consent solicitation statement is , 2000.
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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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SUMMARY..................................................... 3
The Amended Consent Solicitation.......................... 3
The Transaction........................................... 3
Summary Risk Factors...................................... 4
Benefits of the Transaction............................... 6
Fairness.................................................. 7
Fairness Opinion.......................................... 7
Our Recommendation; Fairness Determination................ 7
Appraisals................................................ 8
Contacts Regarding Fairness Opinions, Valuations and Other
Reports................................................. 8
The Units................................................. 8
The Notes................................................. 8
Consent Procedures........................................ 9
Communicating With Other Investors........................ 10
No Dissenters' Rights..................................... 10
The Company............................................... 10
Background and Reasons for the Transaction................ 11
Exchange Values........................................... 11
Consideration of Alternatives............................. 12
Conflicts of Interests and Benefits to Insiders........... 14
Compensation, Reimbursements and Distributions to the Cap
Source General Partners................................. 14
Federal Income Tax Consequences........................... 16
Accounting Treatment...................................... 16
Ratio of Earnings to Fixed Charges........................ 16
Organizational Structure.................................. 17
Comparison of BACs and Units.............................. 20
RISK FACTORS................................................ 21
Risks Associated with the Transaction..................... 21
No prior market for the units; Market price may decrease
after the transaction.................................. 21
No prior market for the notes; Price may decrease after
the transaction........................................ 21
Conflicts of interest of the Cap Source General
Partners............................................... 21
Lack of representation may affect the terms of the
transaction and its fairness to you.................... 21
Compensation, reimbursements and distributions to the
general partner may increase........................... 22
Possible lower distributions............................ 22
Lack of operating history............................... 22
No dissenters' rights................................... 22
Possible alternatives to the transaction will not be
pursued................................................ 22
A majority in interest will bind all investors in each
partnership............................................ 22
Notes are unsecured obligations of the company.......... 22
Subsequent distributions may reduce assets available to
satisfy obligations.................................... 22
Contingent or undisclosed liabilities................... 23
Investors who elect to receive notes could receive
units.................................................. 23
Risks Associated with the Company's Business.............. 23
Leveraging strategy..................................... 23
No assurance of successful implementation of new
business plan.......................................... 24
Real estate investments................................. 24
Dependence on available investments..................... 24
Competition............................................. 24
Illiquidity of real estate.............................. 24
Unspecified acquisitions................................ 25
Title defects........................................... 25
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Environmental laws may impose additional liability...... 25
Registration under the Investment Company Act........... 25
Potential liability under the Americans with
Disabilities Act....................................... 25
Regulatory and Legislative Risks.......................... 26
BENEFITS OF, AND BACKGROUND AND REASONS FOR, THE
TRANSACTION................................................ 26
History of the Partnerships............................... 26
The Decision to Pursue the Transaction.................... 29
Preparation for and Chronology of Events Leading to the
Transaction............................................. 30
Restructuring of the Transaction to a Publicly Traded
Partnership............................................. 32
Alternatives Considered................................... 32
Reasons for, and Benefits of, the Transaction............. 34
Consequences if Transaction Not Completed................. 36
THE TRANSACTION............................................. 36
General................................................... 36
Terms of the Settlement................................... 36
Terms of the Merger Agreement............................. 38
Issuance of Units and Notes of the Company................ 38
No Fractional Units....................................... 39
Fractional Notes.......................................... 39
Transaction Expenses...................................... 39
Accounting Treatment...................................... 40
Regulatory Matters........................................ 40
Recommendation of the Cap Source General Partners......... 40
Amendments to the Partnership Agreements.................. 40
Effect of the Transaction on Dissenting Investors......... 41
Effective Time............................................ 41
Conflicts of Interest and Benefits to Insiders............ 41
Legal Proceedings......................................... 42
FAIRNESS.................................................... 43
Belief as to Fairness..................................... 43
Material Factors Underlying Belief as to Fairness......... 44
Alternatives to the Transaction........................... 46
Comparison of Alternatives to the Transaction............. 48
The Cap Source General Partners' Analysis for the
Transaction............................................. 51
FAIRNESS OPINION AND APPRAISALS............................. 51
Fairness Opinion.......................................... 51
Bringdown Fairness Opinion................................ 55
Appraisals................................................ 56
Compensation and Material Relationships................... 60
EXCHANGE VALUES............................................. 60
COMPARISON OF BACS AND UNITS................................ 62
Business.................................................. 62
Duration of Existence..................................... 62
Investment Objectives and Policies........................ 62
Borrowing Policies........................................ 63
Management................................................ 63
Compensation, Fees and Expenses........................... 63
Voting Rights............................................. 65
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THE COMPANY................................................. 66
Overview.................................................. 66
The General Partner....................................... 66
Investment Strategy....................................... 67
Financing Strategies...................................... 68
Operating Restrictions.................................... 68
Distribution Policy....................................... 68
Policy with Respect to Certain Activities................. 69
MANAGEMENT OF THE GENERAL PARTNER........................... 69
General................................................... 69
Indemnification........................................... 71
PRIOR PARTNERSHIPS.......................................... 71
CONSENT SOLICITATION........................................ 73
Solicitation by the Cap Source General Partners........... 73
Consent Procedures........................................ 73
Record Date and Outstanding BACs.......................... 75
Solicitation of Consents; Solicitation Expenses........... 75
Communicating With Other Investors........................ 76
No Right of Appraisal..................................... 76
RESPONSIBILITIES OF GENERAL PARTNERS........................ 76
PRO FORMA FINANCIAL INFORMATION............................. 77
THE PARTNERSHIPS............................................ 94
Cap Source I.............................................. 94
Cap Source II............................................. 96
SECONDARY MARKET AND OWNERSHIP OF PARTNERSHIP BACS.......... 98
Sale Prices of BACs....................................... 98
BAC Holders............................................... 100
Partnership Distributions................................. 101
Third Party Tender Offers................................. 102
SELECTED FINANCIAL DATA OF THE PARTNERSHIPS................. 103
DESCRIPTION OF THE UNITS.................................... 104
General................................................... 104
Units Eligible for Future Sale............................ 105
THE NOTES................................................... 105
General................................................... 105
Allocation of Notes....................................... 105
Notes..................................................... 106
FEDERAL INCOME TAX CONSEQUENCES............................. 109
General................................................... 109
Opinions of Counsel....................................... 110
Certain Tax Differences Between the Ownership of BACs and
the Units............................................... 110
Tax Treatment of the Transaction.......................... 110
Taxation of the Company Subsequent to the Transaction..... 113
Taxation of Unitholders................................... 114
Considerations for Tax-Exempt Unitholders................. 116
Considerations for Non-U.S. Unitholders................... 116
Tax Issues Associated with Notes.......................... 117
General Partner Liabilities............................... 120
Termination of Trade Processing........................... 120
EMPLOYEE RETIREMENT INCOME SECURITY ACT..................... 120
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INDEPENDENT PUBLIC ACCOUNTANTS.............................. 121
LEGAL MATTERS............................................... 121
AVAILABLE INFORMATION....................................... 122
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 FAIRNESS OPINION
APPENDIX C BRINGDOWN FAIRNESS OPINION
APPENDIX D PRIOR PARTNERSHIPS PERFORMANCE TABLES
APPENDIX E 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 AMENDED CONSENT SOLICITATION
This amended and restated prospectus/consent solicitation statement amends
and restates the prospectus/consent solicitation statement of the partnerships
dated November 10, 1999. The transaction proposed in the November 10, 1999,
prospectus/consent solicitation statement was challenged by a purported class
action lawsuit initiated in the Delaware Court of Chancery. We continue to
believe the original transaction was entirely fair to the investors. However, we
decided to change the proposed transaction in some respects, as described in
this prospectus/consent solicitation statement, in order to settle the purported
class action litigation that was pending against the company, the partnerships
and their general partners, as described in this prospectus/consent solicitation
statement. The original transaction terms remain the same, but have been
enhanced by providing for special cash distributions and the start of a unit
repurchase program by the company following the merger. Transaction terms like
the record date for investors entitled to grant their consent to the transaction
of October 28, 1999, and the exchange values, determined as of December 31,
1998, will remain the same. We believe there have been no material changes in
the assets of the partnerships since December 31, 1998, that would materially
affect the exchange values.
In order to give all investors the opportunity to consider the additional
transaction terms and the updated financial information about the partnerships
contained in this prospectus/consent solicitation statement, the consents of the
investors are being re-solicited. Your original consent card is no longer valid.
Prior oral or written requests to change a consent will not be recognized. To
grant your consent on the transaction you must return the enclosed amended and
restated consent card. The enclosed consent card is asking for your consent to
the transaction. If the transaction is approved, you will receive a follow-up
election card asking whether you wish to receive units or notes.
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 formed 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.
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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 "AFREZ."
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 in
multifamily residential properties, by acquiring securities of other entities
engaged in similar real estate businesses and by actively managing the makeup of
the company's 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 and approval of the settlement by the Delaware Chancery Court. 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.
To comply with the rules and regulations of the Securities and Exchange
Commission governing the transaction, to comply with the settlement described
below 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 a number of days before the time at which the consent of the
investors is being solicited in the general partners' reasonable discretion 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.
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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." If the
company's partnership agreement had been in place, we would have received
more total consideration for the years ending December 31, 1999 and 1998,
and for the three months ended March 31, 2000. See "--Compensation,
Reimbursements and Distributions to the Cap Source General Partners".
- We did not retain an unaffiliated third party to represent your interests
in the structuring of the transaction. Had we retained a party to
represent your interests, that party may have been able to negotiate, on
your behalf, more favorable terms for the structure of the transaction and
for different consideration to have been distributed to you.
- If the transaction is completed, compensation, reimbursements and
distributions to the company's general partner, which will be our
successor, may increase.
- There can be no guarantee of the level of the company's distributions
after the distributions to unitholders and noteholders required by the
settlement are made. 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 formed 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."
- 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 formation 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.
- The company intends to fund the settlement distributions of cash
subsequent to the transaction with available cash and by borrowings
secured by the company's existing assets. This will reduce the company's
total assets available to satisfy the company's other obligations.
Therefore, if you elect to receive notes, the assets available to repay
the notes will be reduced to the extent of the cash distributions.
- 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
5
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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 for unitholders
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, you will receive a partial return of
capital in the first year of operations of the company in the form of cash
distributions. See "THE TRANSACTION--Terms of the Settlement."
- 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, 1999, these amounts totaled $3,236,033.
- 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.
6
<PAGE>
- 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 fairness opinion dated
September 23, 1999, rendered by Sutro & Co., Inc.; (6) the Bringdown Fairness
Opinion dated June , 2000, rendered by Sutro & Co.; (7) the independent
appraisals prepared by Valuation Research Corporation, which were used in part
in the determination of the exchange values; (8) the lack of material
differences with respect to the assets of the partnerships and the consistent
valuation methodology applied to the assets; and (9) 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."
FAIRNESS OPINION
We retained Sutro & Co. to render the fairness opinion as to the fairness,
from a financial point of view, of the transaction. Based on the analysis
described under "FAIRNESS OPINION AND APPRAISALS--Fairness Opinion," and subject
to the assumptions, limitations and qualifications noted in the fairness
opinion, Sutro & Co. concluded that the aggregate consideration to be received
by you, the 1% interest in the company to be received by the company's general
partner and the allocation of the consideration and 1% interest among the
company's general partner and the investors in each partnership, and the
principal allocation of the notes, in the transaction, is fair to you and the
company's general partner from a financial point of view. We also retained Sutro
& Co. to render a bringdown fairness opinion, dated as of June , 2000, to
re-confirm the matters contained in the original fairness opinion dated
September 23, 1999.
The full text of the fairness opinion and the bringdown fairness opinion and
the assumptions and qualifications made, matters considered and limitations
imposed on the review and analysis, are included as Appendices B and C,
respectively, to this prospectus/consent solicitation statement, and should be
read in their entireties.
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."
7
<PAGE>
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."
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 selected
Sutro & Co. over these other firms to render a fairness opinion based on Sutro &
Co.'s experience in similar transactions, its familiarity with the partnerships
and its research capabilities, reputation, resources and more competitive fee
structure.
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 annually, using a 12 month average of the rates published monthly by
the IRS, and paid annually. If the notes had been issued on May 31, 2000, the
interest rate would have been 7.72%. The notes will mature on January 15, 2008,
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."
8
<PAGE>
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 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."
CONSENT PROCEDURES
The enclosed consent card is asking for your consent to approve the
transaction. If the transaction is approved, we will send you a follow-up
election card asking whether you wish to receive units or notes. The election
card is not included in this mailing.
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
grant your consent with respect to the transaction if you hold BACs of record at
the close of business on October 28, 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 the tabulation
agent, Georgeson Shareholder Communications Inc., in the enclosed envelope as
soon as possible. To be valid, consents must be received by Georgeson by
5:00 p.m. Eastern Time on , 2000, the approval date, unless we extend
this date, which we may do in our sole discretion. Any consent cards that were
previously submitted in connection with the prior consent solicitation relating
to this transaction are no longer valid. All investors must re-submit the
enclosed consent card to vote on the transaction. See "CONSENT SOLICITATION."
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 granting your consent.
If the transaction is approved, we will send you an election card asking
whether you wish to receive units or notes. If the transaction is approved, you
will receive units representing equity ownership in the new company unless you
elect to receive notes representing debt on the election card we will send you
following the expiration of the consent period. You may elect to receive notes
regardless of whether you mark your consent card "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 "CONSENT
SOLICITATION."
If you do not approve of your partnership's participation in the
transaction, you may either withhold your consent by marking your consent card
"NO" or abstain from granting your consent. If you mark your consent card "NO"
and your partnership approves the transaction, you will receive units, unless
you elect to receive notes as indicated on the follow-up election card. If you
abstain from granting your consent, you will also receive units if the
transaction is approved by your partnership, unless you elect to receive notes
as indicated on the follow-up election card. If you do not return your election
card, you will receive units if the transaction is completed. You may withdraw
or revoke your consent at any time by giving notice to your broker or Georgeson
prior to the expiration of the consent solicitation.
If you sign and return your consent card without indicating a vote, it will
be deemed to be marked "YES" granting consent to the transaction. In which case,
and if you mark your consent card "YES" granting consent to the transaction, you
will also be deemed to have ratified and consented to the
9
<PAGE>
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 marking
your consent card or you mark your consent card "YES" in favor of the
transaction, you will also be deemed to have consented 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 MARK YOUR CONSENT CARD "YES"
GRANTING YOUR CONSENT TO THE TRANSACTION.
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 formed 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 the units. The company expects to achieve this objective by
listing the units on NASDAQ, by making equity investments in multifamily
residential properties and by acquiring securities of other entities engaged in
similar real estate businesses. 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
10
<PAGE>
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.
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 formed 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. If you elect to receive units, you will receive 1.3957 of the
company's units for each Cap Source I BAC you own and 0.7620 of the company's
units for each Cap Source II BAC you own. The company will not issue any
fractional units. See "THE TRANSACTION--No Fractional Units." As of March 31,
2000, approximately 98.6% 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 partner 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." We believe there have been no material changes in the assets of the
partnerships since December 31, 1998, that would materially affect the exchange
values.
The following table shows the exchange values attributable to the
partnerships for purposes of the transaction.
11
<PAGE>
EXCHANGE VALUES
<TABLE>
<CAPTION>
INVESTOR EXCHANGE VALUE
PER $1,000
TOTAL INVESTOR ORIGINAL INVESTMENT
PARTNERSHIP EXCHANGE VALUE EXCHANGE 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
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
12
<PAGE>
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
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 described above as reasons for
the lack of attractiveness of a new company as a single REIT are increased 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.
13
<PAGE>
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 agreement of limited partnership.
See "COMPARISON OF BACS AND UNITS--Compensation, Fees and Expenses." For an
estimate of the compensation potentially payable to the general partner during
the company's initial years of operations, see "THE COMPANY--The General
Partner."
America First Properties Management L.L.C., an affiliate of America First
Companies, currently provides property management services for the partnerships
and will be retained to provide property management services for the company.
America First Companies is the parent entity of the company's general partner
and the entity that controls us. Properties Management also provides property
management services for America First Apartment Investors, L.P., which engages
in similar real estate businesses to those planned by the company. The general
partner of Apartment Investors is America First Capital Associates Limited
Partnership Four, which is also controlled by America First Companies. For the
fiscal year ended December 31, 1999, and the three months ended March 31, 2000,
the partnerships collectively paid $252,978 and $60,272, respectively, to
Properties Management for its services rendered to the partnerships. For the
fiscal year ended December 31, 1999, and the three months ended March 31, 2000,
Apartment Investors paid $970,998 and $246,897, respectively, to Properties
Management. The services provided by Properties Management are necessary for the
effective management and operation of the apartment complexes in which the
partnerships invest. These fees are no higher than the fees an unaffiliated
party would charge for providing similar services to the partnerships. We base
this belief on a review of annual nationwide surveys published by the National
Apartment Association and the Institute of Real Estate Management that list
average annual apartment complex management fees for most major markets in the
United States. The amounts the company pays to Properties Management in the
future may increase if the company acquires additional properties.
Because we will receive these economic benefits as a result of the
transaction, this could create the implication that we may not be acting in your
best interests in proposing the transaction. For a description of our duties to
exercise good faith and fair dealing in handling the partnerships' and the
company's affairs, see "RESPONSIBILITIES OF GENERAL PARTNERS".
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.
14
<PAGE>
COMPARISON OF COMPENSATION,
REIMBURSEMENTS AND DISTRIBUTIONS TO
CAP SOURCE GENERAL PARTNERS
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31, THREE MONTHS
------------------------------ ENDED
1997 1998 1999 MARCH 31, 2000
---- ---- ---- ---------------
<S> <C> <C> <C> <C>
ACTUAL AMOUNTS PAID TO CAP SOURCE GENERAL
PARTNERS(1)
Capital Source I
1% Share of Cash Distributions............... $ 34,424 $ 34,425 $ 34,424 $ 8,606
Asset Management and Partnership
Administrative Fee......................... 0 0 0 0
Reimbursements............................... 243,973 319,874 272,544 153,755
-------- -------- -------- --------
Subtotal................................... $278,397 $354,299 $306,968 $162,361
-------- -------- -------- --------
Capital Source II
1% Share of Cash Distributions............... $ 32,818 $ 26,741 $ 18,232 $ 4,558
Asset Management and Partnership
Administrative Fee......................... 166,000 50,000 50,000 12,500
Reimbursements............................... 225,782 266,946 207,904 115,206
-------- -------- -------- --------
Subtotal................................... $424,600 $343,687 $276,136 $132,264
-------- -------- -------- --------
Total........................................ $702,997 $697,986 $583,104 $294,625
======== ======== ======== ========
COMPANY--AMOUNTS PAYABLE TO THE GENERAL
PARTNER(2)
1% Share of Cash Distributions................. $ 67,242 $ 61,166 $ 52,656 $ 13,164
Acquisition Fee................................ 0 0 0 0
Administrative Fee............................. 100,000 100,000 100,000 25,000
Reimbursements................................. 469,755 586,820 480,448 268,961
-------- -------- -------- --------
Total........................................ $636,997 $747,986 $633,104 $307,125
======== ======== ======== ========
</TABLE>
------------
(1) Calculated based upon the compensation, fees and expenses we are currently
entitled to receive under the Cap Source partnership agreements. For a
description of this structure under the partnership agreements, see
"COMPARISON OF BACS AND UNITS--Compensation, Fees and Expenses--THE
PARTNERSHIPS."
(2) Calculated based upon the compensation, fees and expenses the company's
general partner would have been entitled to receive under the company's
partnership agreement for the periods indicated. For a description of this
structure under the company's partnership agreement, see "COMPARISON OF BACS
AND UNITS--Compensation, Fees and Expenses--THE COMPANY."
The historical reimbursements for Cap Source I for 1997, 1998, 1999 and the
three months ended March 31, 2000, consisted of salaries and benefits of
$211,324, $256,101, $261,526 and $151,150, respectively, board member and
consulting fees of $13,934, $38,937, $0 and $0, respectively, and miscellaneous
expenses of $18,715, $24,836, $11,018 and $2,605, respectively. The historical
reimbursements for Cap Source II for 1997, 1998, 1999 and the three months ended
March 31, 2000, consisted of salaries and benefits of $192,973, $223,939,
$200,277 and $113,433, respectively, board member and consulting fees of
$13,934, $25,963, $0 and $0, respectively, and miscellaneous expenses of
$18,875, $17,044, $7,676 and $1,773, respectively.
The table above reflects the fact that no acquisition fees would have been
paid to the company during the periods indicated because no new assets were
purchased or permitted to be purchased
15
<PAGE>
during those periods. Since the company will be permitted to acquire new assets,
this fee will increase in future years if the transaction is completed.
The total amounts that would have been paid to us under the company's
partnership agreement would have been higher than the amounts we actually
received during 1998, 1999 and the three months ended March 31, 2000, because
the general partner of the company is entitled to an annual base administrative
fee of $100,000. The Cap Source I partnership agreement does not provide for a
base administrative fee, and the Cap Source II partnership agreement provides
for a base asset management and partnership administrative fee of $50,000, which
corresponds to the company's administrative fee. See "COMPARISON OF BACS AND
UNITS--Compensation, Fees and Expenses." Therefore, under the company's
partnership agreement the general partner would have received an additional
$50,000, $50,000 and $12,500 in total compensation without any corresponding
increase in its duties for the years ended December 31, 1999 and 1998, and the
three months ended March 31, 2000, respectively.
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. In addition, the investors in Cap
Source II could recognize gain in the event that the settlement distributions
are deemed part of a disguised sale of the assets of Cap Source II. 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, 1999, because
Cap Source I and Cap Source II had no fixed charges for these periods.
16
<PAGE>
Chart depicting the organizational structure of Cap Source I before the
Transaction, including the General Partners.
17
<PAGE>
Chart depicting the organizational structure of Cap Source II before the
Transaction, including the General Partners.
18
<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.
[LOGO]
19
<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 D 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
Distributions - Quarterly or monthly cash - Quarterly distributions of
distributions of available cash available cash flow
flow
Duration - Up to 45 to 49 years from - Up to 40 years
formation
Borrowing - New borrowing generally not - Generally permitted
permitted
Management - Vested in two Cap Source General - Vested in one General Partner
Partner
</TABLE>
20
<PAGE>
RISK FACTORS
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 the
transaction. Even though we plan to list the 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 Companies. Because the company's agreement
of limited partnership compensates the general partner for the acquisition of
properties and the administration of all of the company's properties, the
compensation we receive under the company's agreement of limited partnership may
be higher than the compensation we currently receive if the company acquires new
properties, as it currently intends to do to carry out its business plan. See
"THE TRANSACTION--Conflicts of Interest and Benefits to Insiders."
LACK OF REPRESENTATION MAY AFFECT THE TERMS OF THE TRANSACTION AND ITS
FAIRNESS TO YOU. We did not retain an unaffiliated, independent third party to
represent your interests in the structuring of the transaction. Had we retained
an independent party to represent your interests, that party may have been able
to negotiate, on your behalf, for more favorable terms for the structure of the
transaction
21
<PAGE>
and for different consideration to have been distributed to you. This lack of
representation could affect the transaction's fairness to you.
COMPENSATION, REIMBURSEMENTS AND DISTRIBUTIONS TO THE GENERAL PARTNER MAY
INCREASE. The company's limited partnership agreement contains a different
structure for compensating, reimbursing and making distributions to the
company's general partner. If the transaction is completed, this structure may
result in compensation, reimbursements and distributions to the company's
general partner being higher than the amounts that we are currently entitled to
receive.
POSSIBLE LOWER DISTRIBUTIONS. There is no guarantee of the level of the
company's cash distributions after the distributions to the unitholders and
noteholder required by the settlement are made. Regardless of the initial level
of regular 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 formed 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 mark your consent card "NO" withholding your
consent to 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 withhold your consent to 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."
SUBSEQUENT DISTRIBUTIONS MAY REDUCE ASSETS AVAILABLE TO SATISFY
OBLIGATIONS. Distributions of cash subsequent to the transaction, such as the
cash distributions required under the settlement agreement, will
22
<PAGE>
be funded with available cash and by borrowings secured by the company's assets
and will therefore reduce the company's total assets available to satisfy the
company's other obligations. Therefore, if you elect to receive notes, the
assets available to repay the notes will be reduced to the extent of the funds
used and borrowings made to pay the cash distributions.
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 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 mark their consent card "YES" granting consent to 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 mark your follow-up election card "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.
The company intends to make new investments with the objective of limiting
the amount of company borrowings to 50% of the total assets of the company. The
company may change this objective at any time. This moderate use of leverage, or
debt, 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.
23
<PAGE>
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 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
24
<PAGE>
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 partner 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 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.
25
<PAGE>
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.
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.
26
<PAGE>
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 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, 2000, Cap Source I has distributed to its investors an aggregate
of approximately $61,314,909, and Cap Source II has distributed to its investors
an aggregate of approximately $60,071,504. 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, 2000:
HISTORICAL INFORMATION CONCERNING THE PARTNERSHIPS
<TABLE>
<CAPTION>
DISTRIBUTIONS DATE OF LAST
TO INVESTORS DISTRIBUTIONS TO ADMISSION
TOTAL INVESTOR THROUGH INVESTORS IN MOST OF ORIGINAL
PARTNERSHIP CAPITAL RAISED MARCH 31, 2000 RECENT QUARTER INVESTORS
----------- -------------- --------------- ----------------- ------------
<S> <C> <C> <C> <C>
Cap Source I......................... $ 67,484,440 $ 61,314,909 $ 851,991 5/13/86
Cap Source II........................ 62,372,621(1) 60,071,504 451,249 1/04/88
------------ ------------ ----------
Total.............................. $129,857,061 $121,386,413 $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.
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<PAGE>
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 $61,314,909 as of March 31, 2000, and a net asset value of
$47,569,968 as of December 31, 1998, 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 $60,071,504
as of March 31, 2000, and a net asset value of $30,872,167 as of December 31,
1998, 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").
28
<PAGE>
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 30
Cap Source II...................................... 8/86 12/35 49 35
</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 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
29
<PAGE>
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.
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 then 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.
30
<PAGE>
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.
On September 8, 1999, at a special telephonic meeting of the Cap Source
general partners, the Cap Source general partners discussed the possibility of
retaining an independent investment banking firm to render a fairness opinion
relating to the transaction and various other issues relating to the
transaction. At this meeting, Sutro & Co. was selected as the fairness opinion
provider for the transaction. Sutro & Co. was selected in large part based on
Sutro & Co.'s experience in similar transactions, its familiarity with the
partnerships, its research capabilities, resources and more competitive fee
structure. Sutro & Co. was also selected because of its reputation in connection
with companies involved in real estate activities and real estate assets.
On September 24, 1999, at a special telephonic meeting of the Cap Source
general partners, Sutro & Co. made a presentation regarding their analysis of
the transaction. Sutro & Co. also discussed various issues regarding their
fairness opinion, which was delivered to the partnerships on September 23, 1999.
On September 28, 1999, the company filed with the Commission Pre-Effective
Amendment No. 4 to the Registration Statement on Form S-4 in response to
comments issued by the Commission with respect to the Registration Statement.
On October 27, 1999, the company filed with the Commission Pre-Effective
Amendment No. 5 to the Registration Statement on Form S-4 in response to
comments issued by the Commission with respect to the Registration Statement.
On November 8, 1999, the company filed with the Commission Pre-Effective
Amendment No. 6 to the Registration Statement on Form S-4 in response to
comments issued by the Commission with respect to the Registration Statement.
On November 10, 1999, the company filed with the Commission Pre-Effective
Amendment No. 7 to the Registration Statement on Form S-4 in response to
comments issued by the Commission with respect to the Registration Statement.
On November 16, 1999, the partnerships distributed a prospectus/consent
solicitation statement describing the transaction to the investors.
31
<PAGE>
On April 25, 2000, representatives of the partnerships and their general
partners and the Panzers filed a stipulation of settlement with the Delaware
Court of Chancery to settle the purported class action litigation described
below under "THE TRANSACTION--Legal Proceedings".
On June 15, 2000, the company filed with the Commission Post-Effective
Amendment No. 1 to the Registration Statement on Form S-4 to amend the
Registration Statement to include the terms of the settlement agreement.
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 original filings with the Commission relating to the proposed
corporate merger. 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:
32
<PAGE>
- 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
- 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
33
<PAGE>
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 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
34
<PAGE>
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 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, 1999, these amounts totaled
$3,236,033 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."
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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.
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 and the
cash distributions and unit repurchases in connection with the settlement
described below will not be made. There will be no change in the partnerships'
investment objectives, policies and operating 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 and the approval of the settlement by the court. 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
, 2000, unless waived by the Cap Source General Partners, the merger
agreement may be terminated. In addition, the merger agreement may be terminated
by the Cap Source General Partners or the general partner of the company before
or after the receipt of consents from investors at any time before the effective
date of the merger agreement.
TERMS OF THE SETTLEMENT
On April 24, 2000, the partnerships, their general partners and other named
defendants entered into a stipulation of settlement with counsel for Alvin M.
Panzer and Sandra G. Panzer, the plaintiffs in a purported class action lawsuit
filed by the Panzers on behalf of the BAC holders of Capital Source L.P. and
Capital Source II L.P.-A, described under the heading "THE TRANSACTION--Legal
Proceedings". Under the terms of the settlement, if the merger is approved by a
majority in interest of the investors in each partnership, the company has
agreed to change the transaction by adding the additional terms described below
to the terms of the transaction described in this prospectus. The settlement is
subject to confirmatory discovery by the plaintiffs, approval of the court, and
the transaction being approved by the majority in interest of the investors in
each partnership.
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Therefore, if the transaction, as changed to comply with the settlement, is
approved by a majority in interest of the investors in each partnership, and the
court subsequently approves the settlement agreement, the company will:
- make a pro rata cash distribution of $6,000,000, less the amounts paid to
attorneys representing the plaintiffs described below, to the unitholders
and noteholders of the company as soon as practicable after the merger is
effective. This amount will be approximately $0.74 for each unit of the
company and approximately $74.04 for each $1,000 principal balance of
notes. Any amounts distributed to noteholders will reduce their notes'
aggregate outstanding principal amount. This distribution will be in
addition to any regular quarterly distribution to unitholders, if any;
- make a second pro rata cash distribution of $5,000,000, less the amounts
paid to attorneys representing the plaintiffs described below, to the
unitholders and noteholders of the company as of the end of the first full
fiscal quarter of the company's operations. This amount will be
approximately $0.61 for each unit of the company and approximately $61.17
for each $1,000 principal balance of notes. Any amounts distributed to
noteholders will reduce their notes' aggregate outstanding principal
amount. This distribution will include the regular quarterly distribution
to unitholders, if any; and
- begin a unit repurchase program to repurchase $3,500,000 worth of units on
the open market from time to time during the first twelve full months of
operations, at the then market price of the units. If the company does not
purchase the full $3,500,000 worth of units, it will make an additional
special distribution of cash to the company's unitholders and noteholders
in the amount of $3,500,000, less the cost of any units purchased by the
company during the first twelve full months of operations.
The company intends to fund the above cash distributions and repurchases of
units from available cash and from borrowings secured by the company's interests
in GNMA certificates and FHA Loans. The company intends to treat these
distributions as a return of capital for tax purposes.
The proposed settlement of the lawsuit is subject, among other things, to
approval of the revised transaction by a majority in interest of the investors
of each partnership, and approval by the court. If the revised transaction is
approved by the investors of each partnership, the parties to the lawsuit will
request the court to schedule a hearing to consider approval of the proposed
settlement and to consider an application by the plaintiffs' counsel for an
award of attorneys' fees and expenses as discussed below. The parties will also
request the court to preliminarily certify a settlement class and to approve a
form of notice of the hearing and the settlement which will be sent to investors
to advise them regarding the settlement, the time for the hearing and the
procedures for objecting to the settlement. Because of the nature of the
benefits provided by the proposed settlement, the proposed settlement does not
provide investors with a right not to participate in the settlement class, which
is defined as all investors of the partnerships who were holders of record as of
October 28, 1999.
If the proposed settlement is approved by the court, the plaintiffs' counsel
intends to apply to the court for, and the defendants have agreed not to object
to, an award of attorneys' fees and expenses in the total amount of $1,600,000.
Any fee award must be approved and made by the court. Under the terms of the
proposed settlement, the first $600,000 of any fee award will be paid by the Cap
Source General Partners and will not be paid from partnership funds. The balance
of the fee award will be paid $500,000 by the company and $500,000 from the
distributions of capital made to unitholders and noteholders under the terms of
the proposed settlement.
If the proposed settlement is approved by the court, under the currently
proposed terms, the court will enter an order and final judgment which will
provide, among other things, that the lawsuit and any and all claims, rights,
causes of action and suits that have been or could have been asserted, either
directly, individually, representatively, derivatively or in any other capacity,
by the Panzers and any other members of the class against the defendants, or any
of their respective present or former directors, officers, agents,
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employees, attorneys, financial advisers, commercial bank lenders, investment
bankers, representatives, associates, parents, subsidiaries, general or limited
partners, shareholders, limited partners, administrators, successors and
assigns, whether under state or federal law, and whether directly,
representatively, or in any other capacity in connection with, or that arise out
of the subject matter of the lawsuit, shall be fully, finally and forever
compromised, settled, released, discharged and dismissed. Investors are urged to
read carefully the section entitled "--Legal Proceedings" below regarding
specific pending claims that will be released upon approval of the settlement.
If the transaction is not approved by investors holding a majority in
interest in each partnership, the partnerships will each continue their separate
operations and the cash distributions and unit repurchases described above will
not be made. In this case, the partnerships would continue to make distributions
at the current levels, subject to adequate cash available for distributions.
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, the solicitation period relating
to the transaction has ended and the court has approved the settlement. The
receipt of the consent by no later than , 2000, 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 may be
terminated. 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.
TERMINATION OF THE MERGER AGREEMENT. The merger agreement may be terminated
by the Cap Source General Partners or the general partner of the company 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
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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.
FRACTIONAL NOTES
The principal balance of the notes to which an investor is entitled is
determined by multiplying the number of lots of 50 BACs held by the investor 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. See
"THE NOTES."
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........................................... $265,000
Printing, postage and brochure.............................. 380,000
--------
Subtotal.................................................. $645,000
--------
</TABLE>
PRECLOSING TRANSACTION COSTS
<TABLE>
<S> <C>
Legal Fees.................................................. $245,000
Appraisals (including fees and expenses).................... 100,000
Fairness Opinion (including fees and expenses).............. 361,000
Registration, Listing and Filing Fees....................... 125,000
Accounting.................................................. 45,000
Contingency................................................. 25,000
--------
Subtotal.................................................. $901,000
--------
</TABLE>
CLOSING TRANSACTION COSTS
<TABLE>
<S> <C>
Transfer Fees, Taxes and Title.............................. $50,000
-------
</TABLE>
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COSTS TO WIND UP AND DISSOLVE PARTNERSHIPS
<TABLE>
<S> <C>
Dissolution Expenses........................................ $ 20,000
----------
Total Transaction Costs..................................... $1,616,000
==========
</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 general partners if the transaction is
rejected.
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"), unless waived by the Cap Source General
Partners. 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.
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
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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, and to
comply with the terms of the settlement, 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 days but not more than a number of days before the final date
on which the solicitation of the consent of the investors takes place that is in
the reasonable discretion of the general partners. 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 mark their consent card "NO" against the transaction and
investors who abstain from granting their consent 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" if the
transaction is approved. 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 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, the court approves the settlement and the other conditions to the
transaction have been satisfied or waived, if permitted under the merger
agreement.
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 agreement of limited partnership.
See "COMPARISON OF BACS AND UNITS--Compensation, Fees and Expenses." For an
estimate of the compensation potentially payable to the general partner during
the company's initial years of operations, see "THE COMPANY--The General
Partner."
America First Properties Management L.L.C., an affiliate of America First
Companies, currently provides property management services for the partnerships
and will be retained to provide property management services for the company.
America First Companies is the parent entity of the company's general partner
and the entity that controls us. Properties Management also provides property
management services for America First Apartment Investors, L.P., which engages
in similar real estate businesses to those planned by the company. The general
partner of Apartment Investors is America First Capital Associates Limited
Partnership Four, which is also controlled by America First Companies. For the
fiscal year ended December 31, 1999, and the three months ended March 31, 2000,
the partnerships collectively paid $252,978 and $60,272, respectively, to
Properties Management for its services rendered to the partnerships. For the
fiscal year ended December 31, 1999, and the three months ended March 31, 2000,
Apartment Investors paid $970,998 and $246,897, respectively, to Properties
Management. The services
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provided by Properties Management are necessary for the effective management and
operation of the apartment complexes in which the partnerships invest. These
fees are no higher than the fees an unaffiliated party would charge for
providing similar services to the partnerships. We base this belief on a review
of annual nationwide surveys published by the National Apartment Association and
the Institute of Real Estate Management that list average annual apartment
complex management fees for most major markets in the United States. The amounts
the company pays to Properties Management in the future may increase if the
company acquires additional properties.
Because we will receive these economic benefits as a result of the
transaction, this could create the implication that we may not be acting in your
best interests in proposing the transaction. For a description of our duties to
exercise good faith and fair dealing in handling the partnerships' and the
company's affairs, see "RESPONSIBILITIES OF GENERAL PARTNERS".
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 Defendants") the partnerships, Paul L. Abbott
and Lehman Brothers, Inc. (the "Lehman Defendants") 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
similarly situated 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, (d) the defendants have breached their
fiduciary duties of loyalty and good faith to the investors, and (e) that the
partnerships should be dissolved for the benefit of 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. On
December 8, 1999, the Panzers filed an amended class action complaint. The
amended class action complaint added allegations directed to the then revised
proposed transaction involving the merger of the partnerships into the company,
a newly-formed limited partnership, including that the America First Defendants
had wrongfully expended partnership funds in connection with the abandoned
transaction. The amended class action complaint also repeated the claims in the
original complaint and added the company as a party defendant. A second amended
complaint was filed on February 4, 2000. This amended complaint added
allegations concerning the availability of a revocation option for investors and
added a claim for corrected disclosure and injunctive and other relief directed
to the right to revoke consents.
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 and Abbott Defendants
in breach of the partnership agreements and Lehman and Abbott'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
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defendants deny all allegations of wrongdoing in the Panzer Complaint and
believe the allegations are without merit.
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 "Books and
Records Complaints"). The Books and Records Complaints allege that the
Defendants have improperly denied the Panzers access to partnership information
and documents. The Books and Records 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 Books and Records
Complaints and believe the allegations are without merit.
In February and March, 2000, counsel for the parties engaged in extensive
settlement negotiations. These negotiations resulted in an agreement to settle
the Panzer complaints, subject to approval of the court, satisfactory completion
by plaintiffs' counsel of confirmatory discovery, approval of the revised
transaction described in this prospectus/consent solicitation statement by a
majority in interest of the investors of record as of October 28, 1999, in each
partnership, and the approval of the settlement by the court. On April 24, 2000
the parties entered into a stipulation of settlement regarding all of the Panzer
complaints, as described above under "--Terms of the Settlement."
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 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 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 fairness opinion rendered by Sutro & Co.; (7) the bringdown fairness
opinion rendered by Sutro & Co.; (8) the independent Appraisals prepared by
Valuation Research, which were used in part in the determination of the exchange
values; and (9) the fact that all investors, including dissenting investors,
will be given the opportunity to elect to receive notes, with some limitations.
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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 partnerships prior to the
transaction.
CONSENT PROCEDURES AND OPPORTUNITY TO ELECT TO RECEIVE NOTES. The Cap
Source General Partners believe that the consent 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 "CONSENT SOLICITATION." All investors,
including dissenting investors, will also be given the opportunity to elect
to receive notes instead of units in exchange for their BACs, if the
transaction is approved, 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. See "--Comparison of
Alternatives to the Transaction." 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
44
<PAGE>
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.
FAIRNESS OPINION. The Cap Source General Partners have relied, in part,
upon the fairness opinion and bringdown fairness opinion, both rendered by
Sutro & Co., to support their conclusion that the transaction is fair.
Sutro & Co. was retained by the Cap Source General Partners without any
conditions or restrictions. See "FAIRNESS." The qualifications, limitations
and assumptions in the fairness opinion and bringdown fairness opinion did
not limit the Cap Source General Partner's reliance on the fairness opinion.
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. Sutro & Co. also reviewed the
Appraisals in connection with its issuance of the fairness opinion. 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, if the transaction is approved,
whereas an abstaining or consenting investor who wishes to receive notes
will 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 formed, 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
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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.
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."
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<PAGE>
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. 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 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 as of December 31, 1998. The general partners do not believe
there have been any material changes in the assets of the partnerships since
December 31, 1998, that would materially affect these estimates.
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>
47
<PAGE>
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 partner 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
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<PAGE>
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 VALUE ESTIMATED LIQUIDATION ESTIMATED MARKET
OF VALUE VALUE OF
UNITS(1) OF BACS IF ASSETS BACS BASED ON
------------------- ESTIMATED VALUE OF SOLD AT ADJUSTED NET WEIGHTED
BACS ASSUMING ASSET VALUE(3) AVERAGE OF
HIGH LOW CONTINUATION OF THE --------------------- SECONDARY
PARTNERSHIP VALUE VALUE PARTNERSHIPS(2) RANGE MIDPOINT MARKET TRADES(4)
----------- -------- -------- ------------------- --------- --------- ----------------
<S> <C> <C> <C> <C> <C> <C>
Cap Source I................. $727 $643 $678 $669-684 $676 $558
Cap Source II................ $379 $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 partner
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 limited partner interests
were valued using an FFO multiple of 7.6. The FFO multiple of 7.6 was
derived by taking the average 1999 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 partner interests in the
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<PAGE>
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 partner 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 partner interest. Second, discounts of 37.5% were taken to reflect
the subordinated nature of the limited partner 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.
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<PAGE>
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.
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.
FAIRNESS OPINION AND APPRAISALS
Sutro & Co. has rendered its opinion, dated September 23, 1999, that the
Consideration, as defined in the fairness opinion, which is attached as Appendix
B to this prospectus/consent solicitation statement, to be received by
investors, the allocation of such Consideration among the investors in each
partnership, and the principal allocation of the notes in the transaction, is
fair to the investors from a financial point of view.
FAIRNESS OPINION
GENERAL. The partnerships engaged Sutro & Co. to conduct an analysis of the
proposed merger of Cap Source I and Cap Source II based upon Sutro & Co.'s
qualifications, expertise and reputation, as well as the firm's prior investment
banking relationship and familiarity with the partnerships. On September 23,
1999, Sutro & Co. rendered its opinion that the units to be received by the BAC
holders, the 1% interest in the company to be received by the Cap Source General
Partners, the allocation of the units and the 1% interest among the BAC holders
and the Cap Source General Partners and the principal allocation of the notes in
the merger is fair to the BAC holders and the Cap Source General Partners from a
financial point of view.
The full text of Sutro & Co.'s opinion, dated September 23, 1999, which sets
forth, among other things, assumptions made, procedures followed, matters
considered and limitations on the review undertaken, is attached as Appendix B
to this prospectus/consent solicitation statement. BAC holders are urged to, and
should, read Sutro & Co.'s opinion carefully and in its entirety. Sutro & Co.'s
opinion is issued to the partnerships, and it does not address any aspect of the
transaction other than its fairness, nor does it constitute a recommendation to
any holder of BACs as to how to vote for the proposed transaction. The
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<PAGE>
summary of the opinion of Sutro & Co. below is qualified in its entirety by
reference to the full text of the fairness opinion.
In connection with rendering its written opinion, Sutro & Co. reviewed:
- a draft of Amendment 4 to the Registration Statement on Form S-4 of the
Company substantially as it was filed on September 28, 1999, including the
preliminary prospectus/consent solicitation statement included therein;
- the appraisals prepared by Valuation Research dated December 31, 1998;
- individual Partnership Annual Reports and Reports on Forms 10-K and 10-Q
for the years ended December 31, 1997 and December 31, 1998 as amended,
and for the period ended June 30, 1999;
- the Prospectus of Capital Source I dated January 10, 1986;
- the Prospectus of Capital Source II dated February 6, 1987;
- the Agreement and Plan of Merger among the partnerships and the company;
- other publicly available business, financial and other information
concerning the partnerships;
- internal information, primarily financial in nature, including estimates,
prepared by or on behalf of the management of the partnerships; and
- information provided to Sutro & Co. by the management of the partnerships
concerning the distributions on, the trading of, and the trading market
for, the equity securities of the partnerships.
In the course of Sutro & Co.'s engagement, Sutro & Co. held discussions with
the senior management of the partnerships concerning the historical, current and
projected future operations, business plans, financial conditions and results,
and prospects of the partnerships. Additionally, Sutro & Co. discussed with
representatives of Valuation Research the results, methodology and limitations
of the appraisals. Sutro & Co. did not, however, independently verify the
accuracy or completeness of the appraisals.
In conducting its review, Sutro & Co. relied upon and assumed the accuracy
and completeness of the financial and other information, including the
appraisals, provided to Sutro & Co. or which were publicly available, without
independent verification. Sutro & Co. relied upon the statements and information
provided by the management of the partnerships as to the reasonableness and
achievability of the financial and operating forecasts and projections, and the
assumptions and bases therefor, contained in the Appraisals rendered by
Valuation Research provided to Sutro & Co. Sutro & Co. assumed that the
financial models and the financial projections contained in the Appraisals that
project future operating results of the partnerships are the best currently
available estimates and good faith judgments of the Cap Source General Partners
as to the future performance of the partnerships.
Sutro & Co., in conducting its review and arriving at its opinion, noted
that the exchange ratios for Cap Source I and Cap Source II in the transaction
are based, in part, on the appraisals dated December 31, 1998 and the market
values of the partnerships' remaining assets and liabilities at December 31,
1998 and before transaction costs or other costs associated with the
transaction. The exchange ratios are used to determine the allocation of units
to be received by the BAC holders in Cap Source I and Cap Source II in the
transaction and the principal allocation of the notes to be received by BAC
holders in Cap Source I and Cap Source II in the transaction.
The following is a summary of the various methodologies underlying the
analyses conducted by Sutro & Co.
MARKED TO MARKET VALUATION OF ASSETS AND LIABILITIES. Sutro & Co. analyzed
the marked to market values of the assets and liabilities of each of the
partnerships. Cash and temporary cash investments, investments in FHA Loans and
GNMA Certificates, interest receivable, accounts payable and distributions
payable
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were valued at the stated values shown at June 30, 1999 in the unaudited balance
sheets in the quarterly report on Form 10-Q for the period ending June 30, 1999
of each of the partnerships. Values for the investments in the operating
partnerships were based on the low and high of the range of appraised values for
the fee simple ownership of the individual real estate properties net of the
outstanding mortgage indebtedness of the real estate properties and other
related property level liabilities at June 30, 1999. These marked to market
value evaluations indicated a range of marked to market values for Cap Source I
of $45.6 million to $50.3 million or for Cap Source I BAC holders a value of
$676 to $745 per $1,000 of original investment and a range of marked to market
values for Cap Source II of $29.6 million to $32.8 million or for Cap Source II
BAC holders a value of $370 to $409 per $1,000 of original investment.
LIQUIDATION VALUATION OF ASSETS AND LIABILITIES. Sutro & Co. calculated
liquidation values as net book values less costs associated with disposing of
the investments in the operating partnerships and winding down costs for the
partnerships. Such liquidation value evaluations indicated a range of
liquidation values for Cap Source I of $43.7 million to $47.8 million or for Cap
Source I BAC holders a liquidation value of $648 to $708 per $1,000 of original
investment and a range of liquidation values for Cap Source II of $28.2 million
to $31.0 million or for Cap Source II BAC holders a liquidation value of $351 to
$387 per $1,000 of original investment.
GOING CONCERN VALUATION. Sutro & Co. analyzed the going concern values for
the partnerships to approximate the pro forma values of the partnerships "as
is." A five-year discounted cash flow analysis was calculated based upon pro
forma dividends projected to be received by the BAC holders plus a pro forma
projected liquidation of the partnerships at the end of year five. Such cash
flows were discounted at a range of 10% to 13%. Such pro forma "as is" value
evaluations indicated a range of "as is" values for Cap Source I of
$40.7 million to $45.7 million or for Cap Source I BAC holders an "as is" value
of $603 to $679 per $1,000 of original investment and a range of "as is" values
for Cap Source II of $26.7 million to $30.1 million or for Cap Source II BAC
holders an "as is" value of $332 to $375 per $1,000 of original investment. Pro
forma projected dividends were provided by the general partners and were based,
in part, on five-year pro forma projected income statements and balance sheets
derived from property level projections by Valuation Research and partnership
level projections by the general partners.
PEER GROUP ANALYSIS. Sutro & Co. reviewed a peer group of publicly traded
multifamily REITs with market capitalizations of less than $500 million. The
low, high, median and average stock price to estimated 1999 funds from
operations for this peer group were 5.0x, 9.7x, 7.8x and 7.6x, respectively. The
following REITs were considered by Sutro & Co. in its peer group analysis: AMLI
Residential Properties Trust, Associated Estates Realty Corporation, Berkshire
Realty Company, Inc., Cornerstone Realty Income Trust Inc., Lexford Residential
Trust, Mid-America Apartment Communities, Inc., Roberts Realty Investors Inc.,
Town and Country Trust and Walden Residential Properties, Inc.
OTHER CONSIDERATIONS. Sutro & Co. also considered the following financial
and other factors it deemed important under the circumstances: (a) the
historical and current operating results of the partnerships including, among
other things, the cash flow from the investments in FHA Loans and GNMA
Certificates and the cash flow from the investments in the partnerships,
(b) distributions over the life of each of the partnerships including
distributions and return of capital to the BAC holders, and (c) various balance
sheet items of the partnerships. Sutro & Co. also took into account its
assessment of general economic, market and financial conditions and its
experience in other transactions, as well as its experience in the securities
industry and knowledge of real estate generally.
Additionally, Sutro & Co. was requested to provide an opinion as to the
fairness, from a financial point of view, of the principal allocation of the
notes that may be elected by the BAC holders. As used herein, principal
allocation refers solely to the method of allocation, as determined by the
exchange values, of the notes among the BAC holders in the partnerships.
Sutro & Co. in arriving at its opinion as to the fairness, from a financial
point of view, of the allocation of the consideration to be received by the BAC
53
<PAGE>
holders, and with respect to each partnership individually, assumed that the
maximum amount of notes that may be issued in the transaction is $20.0 million.
ASSUMPTIONS, LIMITATIONS AND QUALIFICATIONS OF FAIRNESS OPINIONS. The
preparation of a fairness opinion is a complex process and is not necessarily
susceptible to a partial analysis or summary description. Sutro & Co. has
advised the partnerships that no aspect of the fairness opinion alone is
susceptible to partial analysis, and its entire analysis must be considered as a
whole. Selecting portions of its analyses and the factors considered by it,
without considering all analyses and factors, could create an incomplete view of
the evaluation process underlying its opinion.
Sutro & Co.'s opinion is based upon conditions as of September 23, 1999, the
date of Sutro & Co.'s opinion, and the information made available to Sutro & Co.
as of the date the information made available to Sutro & Co. was prepared.
Sutro & Co.'s opinion does not constitute a recommendation of the
transaction over any alternative transactions which may be possible for the
partnerships and does not address the partnerships' underlying business decision
to effect the proposed transaction. Furthermore, Sutro & Co.'s opinion did not
consider any other aspect of the proposed transaction or any agreements or other
matters, which include, but are not limited to, the terms or fairness of the
compensation and fees as defined in the amended and restated Agreement of
Limited Partnership of America First Real Estate Investment Partners, L.P.
included as Appendix D to this prospectus/consent solicitation statement.
However, while Sutro & Co. did not consider the fairness of the compensation and
fees and the terms of the transaction on a separate and individual basis, it did
consider the terms of the transaction and the effects of the fees payable under
the Company's limited partnership agreement, to the extent necessary, in
determining the fairness of the units to be received by BAC holders and the 1%
interest in the Company to be held by its general partner and the allocation of
the notes in the transaction. Sutro & Co. was not asked to opine on and did not
express an opinion as to: (a) the terms of the transaction, (b) the tax
consequences of the transaction to the BAC holders, and (c) the prices at which
the company's securities may trade at in the future.
The partnerships retained Sutro & Co., based upon its experience and
expertise. As part of its investment banking business, Sutro & Co. is regularly
engaged in the evaluation of capital structures, the valuation of businesses and
their securities in connection with mergers and acquisitions, firm commitment
underwriting, secondary distributions of listed and unlisted securities, private
placements, financial restructurings and other financial services. The
partnerships selected Sutro & Co. based on its experience in similar
transactions, its familiarity with the partnerships, its research capabilities,
resources and more competitive fee structure. Sutro & Co. was also selected
because of its reputation in connection with companies involved in real estate
activities and real estate assets. In the course of its business, Sutro & Co.
and its affiliates may actively trade the securities of America First Real
Estate Investment Partners, L.P. for their own accounts and for the accounts of
customers and, accordingly, may at any time hold a long or short position in
such securities. In the past, Sutro & Co. has provided financial advisory and
investment banking services to the partnerships for which services Sutro & Co.
received customary fees.
Except for the assumptions described more fully above, which the
partnerships advised Sutro & Co. that it would be reasonable to make, the
partnerships did not impose conditions or limitations on the scope of Sutro &
Co.'s investigation or the methods and procedures to be followed in rendering
its opinion. There were no factors considered by Sutro & Co. that did not
support their fairness determination with respect to the transaction. The
partnerships have agreed to indemnify Sutro & Co. against some liabilities
arising out of its engagement to prepare and deliver its opinion. Upon
completion of the transaction, such indemnity obligations will be obligations of
the company.
If a material amendment is made to the merger agreement, a revised fairness
opinion will be obtained. There have been no significant changes to the
information considered by Sutro & Co. since the date of the fairness opinion
that would or could alter Sutro & Co.'s fairness determination.
54
<PAGE>
BRINGDOWN FAIRNESS OPINION
In connection with its Bringdown Fairness Opinion delivered on June ,
2000, Sutro & Co. performed the following procedures to update some of the
analyses made in connection with the delivery of the Fairness Opinion.
Sutro & Co., among other things, reviewed:
- a draft of post-effective amendment no. 1 to the registration statement of
the company on Form S-4 that includes the amended and restated
prospectus/consent solicitation statement, dated June , 2000 that amends
the prospectus/consent solicitation statement dated November 11, 1999;
- the Form 10-K for each partnership for the year ended December 31, 1999;
- the Form 10-Q for each partnership for the quarter ended March 31, 2000;
- pro forma financial statements of the company;
- a business plan of the company;
- information provided to Sutro & Co. by the general partners concerning the
distributions on, the trading of, and the trading market for, the equity
securities of the partnerships, and
- financial and other information that was publicly available or furnished
to Sutro & Co. by the partnerships, the general partners and the company.
In addition, Sutro & Co. held discussions with representatives of the
partnerships and the company concerning the partnerships' and the company's
historical and current operations, financial conditions and prospects, reviewed
a peer group of publicly traded multifamily REITs with market capitalizations of
less than $500 million, and conducted other investigations, financial analysis
and studies, and reviewed other information and factors as it deemed appropriate
for the purposes of the Bringdown Fairness Opinion.
In rendering the Bringdown Fairness Opinion, Sutro & Co. relied, without
assuming responsibility for independent verification, on the accuracy and
completeness of the information it reviewed. The Bringdown Fairness Opinion is
subject to the same qualifications and limitations as the Fairness Opinion. The
Bringdown Fairness Opinion did not consider the fairness of the terms of the
settlement. The full text of the Bringdown Fairness Opinion, which contains a
description of the assumptions and qualifications made, matters considered and
limitations imposed on the review and analysis, is included as Appendix C to
this prospectus/consent solicitation statement, and should be read in its
entirety.
The Bringdown Fairness Opinion was based solely upon information available
to Sutro & Co. and the economic market and other circumstances that existed as
of the date of the Bringdown Fairness Opinion. Sutro & Co. used historical
financial information through March 31, 2000, for the partnership's assets and
other liabilities.
In performing its analysis, Sutro & Co. observed that the (1) market to
market valuation of assets and liabilities, (2) liquidation valuation of assets
and liabilities, and (3) going concern valuation analyses continued to support
its original fairness determination.
Based upon and subject to the foregoing and following, Sutro & Co. confirmed
that, based upon its analysis and assumptions, and as of the date of the
information considered in the Bringdown Fairness Opinion, that the consideration
to be received by the investors, the 1% interest in the company to be received
by the general partners, the allocation of the consideration and 1% interest
among the investors and the general partners, and the principal allocation of
the notes, in the transaction, is fair to the investors and the general partners
from a financial point of view.
55
<PAGE>
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; 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, or 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, or 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.
56
<PAGE>
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, 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
57
<PAGE>
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:
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>
58
<PAGE>
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 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
59
<PAGE>
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>
COMPENSATION AND MATERIAL RELATIONSHIPS
Neither Valuation Research, Sutro & Co. nor any of their 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 Sutro & Co. or any of their respective 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 partnerships paid Sutro & Co. a fee of
$250,000 plus expenses to deliver the fairness opinion, and a fee of $100,000
plus expenses to deliver the bringdown fairness opinion. The fees paid to Sutro
& Co. in connection with its delivery of the fairness opinion and bringdown
fairness opinion and the fees paid to Valuation Research in connection with the
preparation of the Appraisals were determined through arm's-length negotiations
between the Cap Source General Partners and Sutro & Co. or Valuation Research,
respectively. Copies of the fairness opinion and bringdown fairness opinion are
included as Appendicies B and C, respectively, to this prospectus/consent
solicitation statement. 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
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<PAGE>
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.
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.
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(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.
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 45 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,
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<PAGE>
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. Under the partnership agreements, the limited partners may not
participate in the control of the business of the partnerships. The Cap Source
General Partners have general liability for all partnership obligations. The
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 or a breach of a duty
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. Under the
company's limited partnership agreement, the unitholders may not participate in
the control of the business 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 or a breach of duty under the company's
limited partnership agreement. The General Partner may be removed by a vote of a
majority of the limited partner 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.
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<PAGE>
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.
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.
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<PAGE>
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 unless the General Partner elects
to convert its interest. 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 winding up of the company, assuming that the dissolution or winding up
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; (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. 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.
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<PAGE>
THE COMPANY
OVERVIEW
The company was formed 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, by making
equity investments in multifamily residential properties and by acquiring
securities of other entities engaged in similar real estate business. 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
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 Administrative Fee
is computed is $64,745,000, which is approximately equal to the total exchange
value of $78,442,000, less distributions made to unitholders and noteholders and
legal costs paid under the settlement that total $13,697,000, (2) the company
will initially have $46,000,000 available to invest from internal sources
including borrowings 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 $23,000,000 each year for a two year total of
$46,000,000, (5) total assets at the end of year 1 are $87,745,000, (6) total
assets at the end of year 2 are $110,745,000, (7) no assets are sold, (8) there
is no appreciation or depreciation of asset values, and (9) reimbursable
expenses remain constant and are 8% less than the historical reimbursements in
1999 due to consolidation of management and administration of the partnerships.
The following table
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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................................... $ 381,225 $ 496,225
Acquisition Fee...................................... 287,500 287,500
Reimbursement of Expenses............................ 440,000 440,000
---------- ----------
Total................................................ $1,108,725 $1,223,725
========== ==========
</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.
The company's agreement of limited partnership does not limit the total
amount of compensation the General Partner may receive. 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--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. The company also intends to acquire securities of
other entities engaged in similar real estate businesses. 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;
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<PAGE>
(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 partner 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 (1) by using its initial
cash and short-term investments; (2) borrow against or sell the existing
properties; (3) borrow against or sell the GNMA certificates and FHA loans by
entering into "reverse repo agreements"; and (4) 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.
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 objectives. 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.
DISTRIBUTION POLICY
In addition to the distributions required to be made to unitholders and
noteholders under the settlement, the company intends to pay regular quarterly
distributions to unitholders, beginning with the first full fiscal quarter of
operations following the completion of the transaction. The company initially
intends to distribute substantially all of its net cash flow from operations,
after giving effect to any
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reasonable reserves. The company may, in its discretion, re-invest a portion or
all of net cash flow in accordance with its investment objectives, which may
cause distributions to the unitholders to be reduced. The company anticipates
that the initial level of distributions for the first year of operations will be
approximately $.60 per unit annually, not including the first distribution to
unitholders and noteholders required by the settlement. A portion of this amount
may include a return of capital. The actual amount of distributions may vary
significantly from this level depending on numerous factors like economic
conditions or a change in the company's distribution policy. The General
Partner, in its sole discretion, may change the company's distribution policy at
any time.
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, other than repurchases made under the
terms of the settlement. 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................ 66 Chairman of the Board, President, Chief
Executive Officer and Manager
Michael Thesing.................. 45 Vice President, Secretary, Treasurer and
Manager
William S. Carter, M.D........... 73 Manager
Martin A. Massengale............. 66 Manager
Alan Baer........................ 77 Manager
Gail Walling Yanney.............. 63 Manager
Mariann Byerwalter............... 39 Manager
Lisa Yanney Roskens.............. 33 Manager
</TABLE>
The business experience during the past five (5) years of each of the
current managers and executive officers is as follows:
MICHAEL B. YANNEY, 66 has served as the Chairman, President and Chief
Executive Officer of America First Companies L.L.C. and its predecessors since
1984. From 1977 until the organization of the first such fund in 1984,
Mr. Yanney was principally engaged in the ownership and management of commercial
banks. Mr. Yanney also has investments in private corporations engaged in a
variety of businesses. From 1961 to 1977, Mr. Yanney was employed by Omaha
National Bank and Omaha National Corporation (now part of U.S. Bank), where he
held various positions, including the position of Executive Vice President and
Treasurer of the holding company. Mr. Yanney also serves as a member of the
boards of directors of
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Burlington Northern Santa Fe Corporation, Forest Oil Corporation, Level 3
Communications, Inc., Freedom Communications, Inc., Magnum Resources, Inc.,
America First Mortgage Investments, Inc., RCN Corporation, Rio Grande Medical
Technologies, Inc. and Telecom Technologies, Inc. Mr. Yanney is the husband of
Gail Walling Yanney and the father of Lisa Yanney Roskens.
MICHAEL THESING, 45, has been Vice President and Chief Financial Officer of
affiliates of America First Companies L.L.C. 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 L.L.C. and America First Investment
Advisors, L.L.C.. 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., 73, 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, 66, 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 1991 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, 77, 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, 63, 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 and mother of Lisa Yanney Roskens.
MARIANN BYERWALTER, 39, 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. ("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., SRI International,
Stanford Management Company and Stanford Hospitals and Clinics.
LISA YANNEY ROSKENS, 33 is a Managing Director of Twin Compass, LLC a small
business consulting firm. From 1997 to 1999, Ms. Roskens was employed by Inacom
Corporation, where she held the position of Director of Business Development and
Director of Field Services Development. From 1995 to 1997, Ms. Roskens served as
Finance Director for the U.S. Senate campaign of Senator Charles Hagel of
Nebraska. From 1992 to 1995, Ms. Roskens was an attorney with the Kutak Rock law
firm in Omaha, Nebraska, specializing in commercial litigation. Ms. Roskens is
the daughter of Michael Yanney and Gail Walling Yanney.
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, Gail Walling Yanney and Lisa Yanney Roskens, there are no
family relationships among any managers and officers of America First Companies.
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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, 53, 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 duty under the company's limited partnership agreement.
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 D" 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 formed 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 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
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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.
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 5 1/4 on May 23, 2000. 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
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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.
CONSENT SOLICITATION
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.
CONSENT PROCEDURES
In order to give all investors the opportunity to consider the additional
transaction terms described above under "THE TRANSACTION--Terms of the
Settlement" and the updated financial information about the partnerships
contained in this prospectus/consent solicitation statement, the consents of the
investors are being re-solicited. As part of the company's settlement with the
plaintiffs described above, the record date for investors entitled to grant
their consent to the transaction remains October 28, 1999, the original record
date. Your original consent card is no longer valid. You must return the
enclosed amended and restated consent card by , 2000, for your consent
to be valid. Even if you have previously requested to change your original
consent, you still must submit the enclosed consent card. Prior oral or written
consents or requests to change a consent will not be recognized. 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 grant your
consent with respect to the transaction if you hold BACs of record at the close
of business on October 28, 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 the tabulation agent,
Georgeson Shareholder Communications Inc., in the enclosed envelope as soon as
possible. To be valid, consents must be received by Georgeson by 5:00 p.m.
Eastern Time on , 2000, the approval date, unless we extend this date,
which we may do in our sole discretion.
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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"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 granting their consent.
If the transaction is approved, we will send you an election card asking
whether you wish to receive units or notes. If the transaction is approved, you
will receive units representing equity ownership in the new company unless you
elect to receive notes representing debt on the election card we will send you
following the expiration of the consent period. You may elect to receive notes
regardless of whether you mark your consent card "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.
If you do not approve of your partnership's participation in the
transaction, you may either withhold your consent by marking your consent card
"NO" or abstain from granting your consent. If you vote "NO" and your
partnership approves the transaction, you will receive units, unless you elect
to receive notes as indicated on the follow-up election card. If you abstain
from granting your consent, you will also receive units if the transaction is
approved by your partnership, unless you elect to receive notes as indicated on
the follow-up election 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 by giving notice to your broker or Georgeson prior to the
expiration of the consent solicitation.
Investors, including dissenting investors and investors who abstain from
granting their consent 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
follow-up election card. An investor may elect to receive notes regardless of
whether he marks his consent card "YES" or "NO" with respect to the transaction.
An investor who does not return the consent card and/or the follow-up election
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 granting their
consent or marked their consent card "YES" consenting to the transaction. Thus,
an investor could choose notes but receive units instead. To be assured of
receiving notes, an investor must mark his election card "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 the number of BACs, which represent the
assigned limited partner interests, held by the investor. The Initial Limited
Partner is required to vote as directed 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 Georgeson 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 marked the consent card
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"YES" granting their consent to the transaction. These investors and investors
marking their consent card "YES" in favor of the transaction will also be deemed
to have ratified and consented to the amendments to the partnership agreements
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 return the consent card without indicating a vote and
those marking their consent card "YES" granting their consent to the transaction
will also be deemed to have consented 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, consent cards must be received by Georgeson by the approval
date, which is 5:00 p.m. Eastern Time on , 2000, 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 Georgeson at the following
address:
Georgeson Shareholder Communications Inc.
Wall Street Station
P.O. Box 1100
New York, New York 10268-1006
Abstentions and broker nonvotes will have the same effect as withholding
consent to the transaction. Investors who withhold their consent to the
transaction or abstain from granting their consent 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 consents of the investors with respect to the transaction will be
tabulated by Georgeson on , 2000, unless this date is extended by
the Cap Source General Partners in their sole discretion. Georgeson 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
October 28, 1999, will be entitled to receive this notice and to grant their
consent with respect to the transaction. Under the terms of the partnership
agreements, investors are entitled to grant one consent 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 consent of the holders of 1,687,112 Cap Source I BACs is required to
approve the transaction, and the affirmative consent 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 CONSENTS; SOLICITATION EXPENSES
Consents 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." Some of the 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,
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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 consent.
If any material conditions to the transaction are waived, the consent of the
investors to the transaction will be resolicited.
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 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 RIGHT OF APPRAISAL
Neither dissenting investors nor investors who abstain from granting their
consent with respect to the transaction will be entitled to dissenters' or
appraisal rights under the partnership agreements or the Delaware Partnership
Law. 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 the
transaction is completed. If a dissenting investor withholds his consent to the
transaction but does not elect to receive notes, the dissenting investor will
receive units if the transaction is completed.
RESPONSIBILITIES OF GENERAL PARTNERS
Under Delaware law, the General Partner is accountable to the company and
the unitholders and consequently must exercise good faith and fair dealing in
handling the company's affairs. Under Delaware law, the Cap Source General
Partners are accountable to the partnerships and the investors and consequently
must exercise good faith and fair dealing 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.
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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
misconduct or a breach of a duty under the company's limited partnership
agreement. 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, 1999, and for the three months ended March 31,
2000, have been prepared to reflect the transaction and related adjustments and
assumptions described in the accompanying notes as if the transaction occurred
on January 1, 1999. The pro forma balance sheet has been prepared assuming the
transaction occurred on March 31, 2000. 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.
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AMERICA FIRST REAL ESTATE INVESTMENT PARTNERS, L.P.
PRO FORMA BALANCE SHEET
MARCH 31, 2000
(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>
ASSETS
Cash and temporary cash investments,
at cost which approximates market
value............................. $ 8,430,065 $ 193,725 $ (765,605)(A) $ 2,016,620
(5,841,565)(D)
Investment in FHA Loans............. 12,316,940 6,460,719 -- (B) 18,777,659
Investment in GNMA Certificates..... 23,038,648 20,333,125 39,631 (B) 43,411,404
Investment in Operating
Partnerships...................... -- -- 3,809,948 (B) 3,809,948
Interest receivable................. 304,886 193,074 -- 497,960
Other assets........................ 464,387 20,480 (20,480)(B) 924,000
459,613 (A)
----------- ----------- ------------ -----------
$44,554,926 $27,201,123 $ (2,318,458) $69,437,591
=========== =========== ============ ===========
LIABILITIES AND PARTNERS' CAPITAL
(DEFICIT)
Liabilities
Accounts payable.................. $ 197,079 $ 155,073 $ -- $ 352,152
Distributions payable............. 860,597 303,871 -- 1,164,468
Long-term borrowings.............. -- -- 7,855,195 (D) 7,855,195
----------- ----------- ------------ -----------
1,057,676 458,944 7,855,195 9,371,815
=========== =========== ============ ===========
Partners' Capital (Deficit)
General Partners.................. (180,687) (299,036) 38,291 (B) (441,432)
Limited Partners.................. 43,677,937 27,041,215 3,790,808 (B) 60,507,208
(305,992)(A) --
(12,696,760)(D) --
(1,000,000)(D) --
----------- ----------- ------------ -----------
43,497,250 26,742,179 (10,173,653) 60,065,776
----------- ----------- ------------ -----------
$44,554,926 $27,201,123 $ (2,318,458) $69,437,591
=========== =========== ============ ===========
</TABLE>
See accompanying Notes to Pro Forma Financial Statements
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AMERICA FIRST REAL ESTATE INVESTMENT PARTNERS, L.P.
PRO FORMA STATEMENTS OF INCOME
FOR THE YEAR ENDED DECEMBER 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.... $3,215,472 $2,318,543 $ -- $5,534,015
Interest income on temporary cash
investments........................ 431,111 14,505 -- 445,616
Equity in losses of Operating
Partnerships....................... (325,245) -- (257,973)(E) (583,218)
Other income......................... 2,000 400 -- 2,400
---------- ---------- --------- ----------
Total income....................... 3,323,338 2,333,448 (257,973) 5,398,813
========== ========== ========= ==========
Expenses
Operating and administrative......... 629,037 880,808 (62,376)(F) 1,584,429
100,000 (G)
36,960 (H)
519,228 (D),
Interest expense....................... -- -- (J) 519,228
---------- ---------- --------- ----------
629,037 880,808 593,812 2,103,657
---------- ---------- --------- ----------
Net income............................. $2,694,301 $1,452,640 $(851,785) $3,295,156
========== ========== ========= ==========
Net income per unit.................... $ 0.79 $ 0.36 $ 0.42
========== ========== ==========
Weighted average number of units
outstanding during the year.......... 3,374,222 4,011,101 7,765,772
========== ========== ==========
</TABLE>
See accompanying Notes to Pro Forma Financial Statements
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AMERICA FIRST REAL ESTATE INVESTMENT PARTNERS, L.P.
PRO FORMA STATEMENTS OF CASH FLOWS
FOR THE YEAR ENDED DECEMBER 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............................. $ 2,694,301 $ 1,452,640 $ (851,785) $ 3,295,156
Adjustments to reconcile net income to
net cash provided by (used in)
operating activities:
Equity in losses of Operating
Partnerships......................... 325,245 -- 257,973 583,218
Amortization........................... -- -- (25,416) (25,416)
Amortization of discount on mortgage-
backed securities.................... (2,216) (316) -- (2,532)
Payment of legal fees pursuant to
settlement agreement................. -- -- (1,000,000) (1,000,000)
Decrease in interest receivable........ 1,916 1,506 -- 3,422
Decrease in other assets............... 207,037 100,140 -- 307,177
Decrease in accounts payable........... (69,225) (51,847) -- (121,072)
Other non-cash adjustments............. -- -- 619,228 619,228
----------- ----------- ------------ ------------
Net cash provided by (used in)
operating activities............... 3,157,058 1,502,123 (1,000,000) 3,659,181
----------- ----------- ------------ ------------
Cash flows from investing activities
FHA Loan and GNMA Certificate principal
payments received.................... 417,853 166,239 -- 584,092
Deferred transaction costs paid........ (452,975) -- -- (452,975)
Distributions received from Operating
Partnerships......................... 59,755 -- -- 59,755
Investment in Operating Partnerships... (385,000) -- -- (385,000)
----------- ----------- ------------ ------------
Net cash provided by (used in)
investing activities............... (360,367) 166,239 -- (194,128)
----------- ----------- ------------ ------------
Cash flows from financing activities
Scheduled distributions................ (3,442,388) (1,823,227) -- (5,265,615)
Distributions pursuant to settlement
agreement............................ -- -- (12,696,760) (12,696,760)
Proceeds from long-term borrowings..... -- -- 7,855,195 7,855,195
----------- ----------- ------------ ------------
Net cash used in financing
activities......................... (3,442,388) (1,823,227) (4,841,565) (10,107,180)
----------- ----------- ------------ ------------
Net decrease in cash and temporary
cash investments................... (645,697) (154,865) (5,841,565) (6,642,127)
Cash and temporary cash investments at
beginning of year...................... 9,304,694 432,999 (765,605) 8,972,088
----------- ----------- ------------ ------------
Cash and temporary cash investments at
end of year............................ $ 8,658,997 $ 278,134 $ (6,607,170) $ 2,329,961
=========== =========== ============ ============
Distributions--income.................... $ 3,284,189
Distributions--return of capital......... 1,981,426
------------
$ 5,265,615
============
</TABLE>
80
<PAGE>
AMERICA FIRST REAL ESTATE INVESTMENT PARTNERS, L.P.
PRO FORMA STATEMENTS OF INCOME
FOR THE THREE MONTHS ENDED MARCH 31, 2000
(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..... $ 798,656 $ 577,368 $ -- $1,376,024
Interest income on temporary cash
investments......................... 114,330 3,248 -- 117,578
Equity in earnings (losses) of
Operating Partnerships.............. 15,488 35,127 (132,251)(E) (81,636)
---------- ---------- --------- ----------
Total income........................ 928,474 615,743 (132,251) 1,411,966
---------- ---------- --------- ----------
Expenses
Operating and administrative.......... 151,150 167,059 (15,594)(F) 336,855
25,000 (G)
9,240 (H)
Interest expense...................... -- -- 129,807 (D),(J) 129,807
---------- ---------- --------- ----------
151,150 167,059 148,453 466,662
---------- ---------- --------- ----------
Net income.............................. $ 777,324 $ 448,684 $(280,704) $ 945,304
========== ========== ========= ==========
Net income per unit..................... $ 0.23 $ 0.11 $ 0.12
========== ========== ==========
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
81
<PAGE>
AMERICA FIRST REAL ESTATE INVESTMENT PARTNERS, L.P.
PRO FORMA STATEMENTS OF CASH FLOWS
FOR THE THREE MONTHS ENDED MARCH 31, 2000
(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............................. $ 777,324 $ 448,684 $ (280,704) $ 945,304
Adjustments to reconcile net income to
net cash provided by (used in)
operating activities:
Equity in (earnings) losses of
Operating Partnerships............... (15,488) (35,127) 132,251 81,636
Amortization........................... -- -- (6,354) (6,354)
Amortization of discount on mortgage-
backed securities.................... (308) (83) -- (391)
Payment of legal fees pursuant to
settlement agreement................. -- -- (1,000,000) (1,000,000)
Decrease (increase) in interest
receivable........................... (143) 860 -- 717
Decrease (increase) in other assets.... (6,521) 18,584 -- 12,063
Decrease in accounts payable........... (223,781) (140,526) -- (364,307)
Other non-cash adjustments............. -- -- 154,807 154,807
---------- --------- ------------ ------------
Net cash provided by (used in)
operating activities............... 531,083 292,392 (1,000,000) (176,525)
---------- --------- ------------ ------------
Cash flows from investing activities
FHA Loan and GNMA Certificate principal
payments received.................... 85,094 43,879 -- 128,973
Distributions received from Operating
Partnerships......................... 15,488 35,127 -- 50,615
---------- --------- ------------ ------------
Net cash provided by investing
activities......................... 100,582 79,006 -- 179,588
---------- --------- ------------ ------------
Cash flows from financing activities
Scheduled distributions................ (860,597) (455,807) -- (1,316,404)
Distributions pursuant to settlement
agreement............................ -- -- (12,696,760) (12,696,760)
Proceeds from long-term borrowings..... -- -- 7,855,195 7,855,195
---------- --------- ------------ ------------
Net cash used in financing
activities......................... (860,597) (455,807) (4,841,565) (6,157,969)
---------- --------- ------------ ------------
Net decrease in cash and temporary
cash investments................... (228,932) (84,409) (5,841,565) (6,154,906)
Cash and temporary cash investments at
beginning of period.................... 8,658,997 278,134 (765,605) 8,171,526
---------- --------- ------------ ------------
Cash and temporary cash investments at
end of period.......................... $8,430,065 $ 193,725 $ (6,607,170) $ 2,016,620
========== ========= ============ ============
Distributions--income.................... $ 945,304
Distributions--return of capital......... 371,100
------------
$ 1,316,404
============
</TABLE>
See accompanying Notes to Pro Forma Financial Statements
82
<PAGE>
AMERICA FIRST REAL ESTATE INVESTMENT PARTNERS, L.P.
NOTES TO PRO FORMA FINANCIAL STATEMENTS
WITHOUT 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 $765,605; (ii) goodwill of $459,613
resulting from Cap Source I's share of the remaining transaction costs; and
(iii) a $305,992 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 To record the payment of distributions to unit holders, legal fees to the
plaintiffs' attorneys and the financing thereof pursuant to the settlement
agreement which is more fully described in the section entitled "THE
TRANSACTION--Terms of the Settlement".
The following assumptions were made for purposes of the pro forma financial
statements:
(i) the three payments of distributions to unit holders and the payment of
legal fees pursuant to the settlement agreement will be made on the date
of the merger
(ii) the company will not acquire any of its units in the unit repurchase
program, but rather will distribute to unit holders funds that would
have been used to acquire units
(iii) total distributions to unit holders and total legal fees payable by the
company will be as follows:
<TABLE>
<S> <C>
DISTRIBUTIONS TO UNIT HOLDERS
First post closing distribution to unit holders............. $ 6,000,000
Second post closing distribution to unit holders............ 5,000,000
Third post closing distribution to unit holders............. 3,500,000
Less: Legal fees to be paid out of amounts distributable to
unit holders.............................................. (500,000)
Less: One regular quarterly distribution to unit holders.... (1,303,240)
-----------
$12,696,760
===========
LEGAL FEES TO PLAINTIFFS' ATTORNEYS
Payable out of amounts distributable to unit holders........ $ 500,000
Other amount payable out of the company..................... 500,000
-----------
$ 1,000,000
===========
</TABLE>
83
<PAGE>
AMERICA FIRST REAL ESTATE INVESTMENT PARTNERS, L.P.
NOTES TO PRO FORMA FINANCIAL STATEMENTS (CONTINUED)
WITHOUT NOTES ISSUED
(iv) the company will finance the payments of distributions and legal fees
with cash of $5,841,565 and long-term borrowings of $7,855,195. The
long-term borrowings will be collateralized by certain of the company's
mortgage-backed securities. The company anticipates that the borrowings
will bear interest based on the 10-year Treasury rate plus 100 - 200
basis points. The 10-year Treasury rate was 5.61% as of May 1, 2000.
The $1,000,000 in legal fees have not been reflected in the pro forma income
statement as such costs are non-recurring. Interest expense on borrowings
utilized to pay the legal fees and distributions to unit holders has been
reflected in the pro forma income statement as the company aniticipates that
the related borrowings will be outstanding for greater than 12 months after
the transaction is completed. Accordingly, the company will incur interest
expense on such borrowings beyond the first 12 months after the transaction
is completed. (See Note J).
E Represents the adjustment to 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).
F 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.
G 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 paid
each year, with the balance payable only during years that funds from
operations (net income plus depreciation expense per the Partnership's
audited financial statements) calculated before administrative fees, exceeds
7% of the limited partners average capital (per the Partnership's financial
statements computed quarterly) for that year. Such Administrative Fee will
be paid on a monthly basis. The Administrative Fee is limited to $100,000
annually for all periods presented.
H Represents the amortization of $924,000 of goodwill using the straight line
method over a period of 25 years.
I Not used
J Represents interest on the long-term borrowings at an assumed rate of 6.61%
84
<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 NET INCOME
EXCHANGE AS OF ENDED ENDED DEC. 31, YEAR ENDED
VALUE MARCH 31, 2000 MARCH 31, 2000 MARCH 31, 2000 1999 DEC. 31, 1999
-------- -------------- -------------- -------------- ------------- -------------
<S> <C> <C> <C> <C> <C> <C>
Pro forma--the Company (Per
Unit)...................... $10.00 $ 7.73 $0.1678 $ 0.12 $0.6713 $0.42
Historical--Cap Source I (Per
Unit)...................... $ 12.94 $0.2525 $ 0.23 $1.0100 $0.79
Equivalent pro forma--Cap
Source I (Per Unit)........ $13.96 $ 10.79 $0.2342 $ 0.17 $0.9369 $0.59
Historical--Cap Source II
(Per Unit)................. $ 6.74 $0.1125 $ 0.11 $0.4500 $0.36
Equivalent pro forma--Cap
Source II (Per Unit)....... $ 7.62 $ 5.89 $0.1279 $ 0.09 $0.5115 $0.32
</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>
85
<PAGE>
AMERICA FIRST REAL ESTATE INVESTMENT PARTNERS, L.P.
PRO FORMA BALANCE SHEET
MARCH 31, 2000
(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............................. $ 8,430,065 $ 193,725 $ (765,605)(A) $ 2,016,620
(5,841,565)(D)
Investment in FHA Loans............. 12,316,940 6,460,719 -- (B) 18,777,659
Investment in GNMA Certificates..... 23,038,648 20,333,125 39,631 (B) 43,411,404
Investment in Operating
Partnerships...................... -- -- 3,809,948 (B) 3,809,948
Interest receivable................. 304,886 193,074 -- 497,960
Other assets........................ 464,387 20,480 (20,480)(B) 924,000
459,613 (A)
----------- ----------- ------------ -----------
$44,554,926 $27,201,123 $ (2,318,458) $69,437,591
=========== =========== ============ ===========
LIABILITIES AND PARTNERS' CAPITAL
(DEFICIT)
Liabilities
Accounts payable.................. $ 197,079 $ 155,073 $ -- $ 352,152
Distributions payable............. 860,597 303,871 -- 1,164,468
Long-term borrowings.............. -- -- 7,855,195 (D) 7,855,195
Notes payable..................... -- -- 20,000,000 (C) 20,000,000
----------- ----------- ------------ -----------
1,057,676 458,944 27,855,195 29,371,815
----------- ----------- ------------ -----------
Partners' Capital (Deficit)
General Partners.................. (180,687) (299,036) 38,291 (B) (441,432)
Limited Partners.................. 43,677,937 27,041,215 3,790,808 (B) 40,507,208
(305,992)(A)
(20,000,000)(C) --
(12,696,760)(D) --
(1,000,000)(D) --
----------- ----------- ------------ -----------
43,497,250 26,742,179 (30,173,653) 40,065,776
----------- ----------- ------------ -----------
$44,554,926 $27,201,123 $ (2,318,458) $69,437,591
=========== =========== ============ ===========
</TABLE>
See accompanying Notes to Pro Forma Financial Statements
86
<PAGE>
AMERICA FIRST REAL ESTATE INVESTMENT PARTNERS, L.P.
PRO FORMA STATEMENTS OF INCOME
FOR THE YEAR ENDED DECEMBER 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... $3,215,472 $2,318,543 $ -- $5,534,015
Interest income on temporary cash
investments....................... 431,111 14,505 -- 445,616
Equity in losses of Operating
Partnerships...................... (325,245) -- (257,973)(E) (583,218)
Other income........................ 2,000 400 -- 2,400
---------- ---------- ------------ ----------
Total income...................... 3,323,338 2,333,448 (257,973) 5,398,813
---------- ---------- ------------ ----------
Expenses
Operating and administrative........ 629,037 880,808 (62,376)(F) 1,584,429
100,000 (G)
36,960 (H)
Interest expense.................... -- -- 1,544,000 (I) 2,063,228
519,228 (D),(J)
---------- ---------- ------------ ----------
629,037 880,808 2,137,812 3,647,657
---------- ---------- ------------ ----------
Net income............................ $2,694,301 $1,452,640 $ (2,395,785) $1,751,156
========== ========== ============ ==========
Net income per share.................. $ 0.79 $ 0.36 $ 0.30
========== ========== ==========
Weighted average number of units
outstanding during the year......... 3,374,222 4,011,101 5,765,772
========== ========== ==========
</TABLE>
See accompanying Notes to Pro Forma Financial Statements
87
<PAGE>
AMERICA FIRST REAL ESTATE INVESTMENT PARTNERS, L.P.
PRO FORMA STATEMENTS OF CASH FLOWS
FOR THE YEAR ENDED DECEMBER 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............................. $ 2,694,301 $ 1,452,640 $ (2,395,785) $ 1,751,156
Adjustments to reconcile net income to
net cash provided by (used in)
operating activities:
Equity in losses of Operating
Partnerships......................... 325,245 -- 257,973 583,218
Amortization........................... -- -- (25,416) (25,416)
Amortization of discount on mortgage-
backed securities.................... (2,216) (316) -- (2,532)
Payment of legal fees pursuant to
settlement agreement................. -- -- (1,000,000) (1,000,000)
Decrease in interest receivable........ 1,916 1,506 -- 3,422
Decrease in other assets............... 207,037 100,140 -- 307,177
Decrease in accounts payable........... (69,225) (51,847) -- (121,072)
Other non-cash adjustments............. -- -- 2,163,228 2,163,228
----------- ----------- ------------ ------------
Net cash provided by (used in)
operating activities............... 3,157,058 1,502,123 (1,000,000) 3,659,181
----------- ----------- ------------ ------------
Cash flows from investing activities
FHA Loan and GNMA Certificate principal
payments received.................... 417,853 166,239 -- 584,092
Deferred transaction costs paid........ (452,975) -- -- (452,975)
Distributions received from Operating
Partnerships......................... 59,755 -- -- 59,755
Investment in Operating Partnerships... (385,000) -- -- (385,000)
----------- ----------- ------------ ------------
Net cash provided by (used in)
investing activities............... (360,367) 166,239 -- (194,128)
----------- ----------- ------------ ------------
Cash flows from financing activities
Scheduled distributions................ (3,442,388) (1,823,227) -- (5,265,615)
Distributions pursuant to settlement
agreement............................ -- -- (12,696,760) (12,696,760)
Proceeds from long-term borrowings..... -- -- 7,855,195 7,855,195
----------- ----------- ------------ ------------
Net cash used in financing
activities......................... (3,442,388) (1,823,227) (4,841,565) (10,107,180)
----------- ----------- ------------ ------------
Net decrease in cash and temporary
cash investments................... (645,697) (154,865) (5,841,565) (6,642,127)
Cash and temporary cash investments at
beginning of year...................... 9,304,694 432,999 (765,605) 8,972,088
----------- ----------- ------------ ------------
Cash and temporary cash investments at
end of year............................ $ 8,658,997 $ 278,134 $ (6,607,170) $ 2,329,961
=========== =========== ============ ============
Distributions--income.................... $ 1,751,156
Distributions--return of capital......... 3,514,459
------------
$ 5,265,615
============
</TABLE>
88
<PAGE>
AMERICA FIRST REAL ESTATE INVESTMENT PARTNERS, L.P.
PRO FORMA STATEMENTS OF INCOME
FOR THE THREE MONTHS ENDED MARCH 31, 2000
(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..... $ 798,656 $ 577,368 $ -- $1,376,024
Interest income on temporary cash
investments......................... 114,330 3,248 -- 117,578
Equity in earnings (losses) of
Operating Partnerships.............. 15,488 35,127 (132,251)(E) (81,636)
Other income.......................... -- -- -- --
--------- --------- ---------- ----------
Total income........................ 928,474 615,743 (132,251) 1,411,966
--------- --------- ---------- ----------
Expenses
Operating and administrative.......... 151,150 167,059 (15,594)(F) 336,855
25,000 (G)
9,240 (H)
Interest expense...................... -- -- 386,000 (I) 515,807
129,807 (D),(J)
--------- --------- ---------- ----------
151,150 167,059 534,453 852,662
--------- --------- ---------- ----------
Net income.............................. $ 777,324 $ 448,684 $ (666,704) $ 559,304
========= ========= ========== ==========
Net income per share.................... $ 0.23 $ 0.11 $ 0.10
========= ========= ==========
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
89
<PAGE>
AMERICA FIRST REAL ESTATE INVESTMENT PARTNERS, L.P.
PRO FORMA STATEMENTS OF CASH FLOWS
FOR THE THREE MONTHS ENDED MARCH 31, 2000
(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................................. $ 777,324 $ 448,684 $ (666,704) $ 559,304
Adjustments to reconcile net income to net
cash provided by (used in) operating
activities:
Equity in (earnings) losses of Operating
Partnerships............................. (15,488) (35,127) 132,251 81,636
Amortization............................... -- -- (6,354) (6,354)
Amortization of discount on mortgage-backed
securities............................... (308) (83) -- (391)
Payment of legal fees pursuant to
settlement agreement..................... -- -- (1,000,000) (1,000,000)
Decrease (increase) in interest
receivable............................... (143) 860 -- 717
Decrease (increase) in other assets........ (6,521) 18,584 -- 12,063
Decrease in accounts payable............... (223,781) (140,526) -- (364,307)
Other non-cash adjustments................. -- -- 540,807 540,807
---------- --------- ----------- -----------
Net cash provided by (used in) operating
activities............................. 531,083 292,392 (1,000,000) (176,525)
---------- --------- ----------- -----------
Cash flows from investing activities
FHA Loan and GNMA Certificate principal
payments received........................ 85,094 43,879 -- 128,973
Deferred transaction costs paid............ -- -- -- --
Distributions received from Operating
Partnerships............................. 15,488 35,127 -- 50,615
Investment in Operating Partnerships....... -- -- -- --
---------- --------- ----------- -----------
Net cash provided by investing
activities............................. 100,582 79,006 -- 179,588
---------- --------- ----------- -----------
Cash flows from financing activities
Scheduled distributions.................... (860,597) (455,807) -- (1,316,404)
Distributions pursuant to settlement
agreement................................ -- -- (12,696,760) (12,696,760)
Proceeds from long-term borrowings......... -- -- 7,855,195 7,855,195
---------- --------- ----------- -----------
Net cash used in financing activities.... (860,597) (455,807) (4,841,565) (6,157,969)
---------- --------- ----------- -----------
Net decrease in cash and temporary cash
investments............................ (228,932) (84,409) (5,841,565) (6,154,906)
Cash and temporary cash investments at
beginning of period........................ 8,658,997 278,134 (765,605) 8,171,526
---------- --------- ----------- -----------
Cash and temporary cash investments at end of
period..................................... $8,430,065 $ 193,725 $(6,607,170) $ 2,016,620
========== ========= =========== ===========
Distributions--income........................ $ 559,304
Distributions--return of capital............. 757,100
-----------
$ 1,316,404
===========
</TABLE>
See accompanying Notes to Pro Forma Financial Statements
90
<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 $765,605; (ii) goodwill of $459,613
resulting from Cap Source I's share of the remaining transaction costs; and
(iii) a $305,992 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
January 15, 2008 and bear interest at 120% of the applicable federal rate
for debt instruments with a term of not over three years (assumed to be
7.72%).
D To record the payment of distributions to unit holders, legal fees to the
plaintiffs' attorneys and the financing thereof pursuant to the settlement
agreement which is more fully described in the section entitled "THE
TRANSACTION--Terms of the Settlement".
The following assumptions were made for purposes of the pro forma financial
statements:
(i) the three payments of distributions to unit holders and the payment of
legal fees pursuant to the settlement agreement will be made on the
date of the merger
(ii) the company will not acquire any of its units in the unit repurchase
program, but rather will distribute to unit holders funds that would
have been used to acquire units
(iii) total distributions to unit holders and total legal fees payable by
the company will be as follows:
<TABLE>
<S> <C>
DISTRIBUTIONS TO UNIT HOLDERS
First post closing distribution to unit holders............. $ 6,000,000
Second post closing distribution to unit holders............ 5,000,000
Third post closing distribution to unit holders............. 3,500,000
Less: Legal fees to be paid out of amounts distributable to
unit holders.............................................. (500,000)
Less: One regular quarterly distribtution to unit holders... (1,303,240)
-----------
$12,696,760
===========
LEGAL FEES TO PLAINTIFFS' ATTORNEYS
Payable out of amounts distributable to unit holders........ $ 500,000
Other amount payable out of the company..................... 500,000
-----------
$ 1,000,000
===========
</TABLE>
91
<PAGE>
AMERICA FIRST REAL ESTATE INVESTMENT PARTNERS, L.P.
NOTES TO PRO FORMA FINANCIAL STATEMENTS (CONTINUED)
WITH NOTES ISSUED
(iv) the company will finance the payments of distributions and legal fees
with cash of $5,841,565 and long-term borrowings of $7,855,195. The
long-term borrowings will be collateralized by certain of the
company's mortgage-backed securities. The company anticipates that the
borrowings will bear interest based on the 10-year Treasury rate plus
100--200 basis points. The 10-year Treasury rate was 5.61% as of
May 1, 2000.
The $1,000,000 in legal fees have not been reflected in the pro forma income
statement as such costs are non-recurring. Interest expense on borrowings
utilized to pay the legal fees and distributions to unit holders has been
reflected in the pro forma income statement as the company aniticipates that
the related borrowings will be outstanding for greater than 12 months after
the transaction is completed. Accordingly, the company will incur interest
expense on such borrowings beyond the first 12 months after the transaction
is completed. (See Note J).
E Represents the adjustment to 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).
F 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.
G 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 paid
each year, with the balance payable only during years that funds from
operations (net income plus depreciation expense per the Company's audited
financial statements) calculated before administrative fees, exceeds 7% of
the limited partners average capital (per the Company's financial statements
computed quarterly) for that year. Such Administrative Fee will be paid on a
monthly basis. The Administrative Fee is limited to $100,000 annually for
all periods presented.
H Represents the amortization of $924,000 of goodwill using the straight line
method over a period of 25 years.
I Represents interest on the notes at an assumed rate of 7.72%
J Represents interest on the long-term borrowings at an assumed rate of 6.61%
92
<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, 2000 MARCH 31, 2000 MARCH 31, 2000 DEC. 31, 1999 DEC. 31, 1999
-------- -------------- -------------- -------------- -------------- -------------
<S> <C> <C> <C> <C> <C> <C>
Pro forma--the Company
(Per Unit)............. $10.00 $ 6.95 $0.2260 $ 0.10 $0.9041 $0.30
Historical--Cap Source I
(Per Unit)............. $ 12.94 $0.2525 $ 0.23 $1.0100 $0.79
Equivalent pro forma--
Cap Source I (Per
Unit).................. $13.96 $ 9.70 $0.3154 $ 0.14 $1.2619 $0.42
Historical--Cap Source II
(Per Unit)............. $ 6.74 $0.1125 $ 0.11 $0.4500 $0.36
Equivalent pro forma--
Cap Source II (Per
Unit).................. $ 7.62 $ 5.30 $0.1722 $ 0.08 $0.6889 $0.23
</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>
93
<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 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. Also, in the Fox Hollow Operating Partnership, Cap
Source I is a 99.9% limited partner.
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, Misty Springs, Waterman's Crossing and The Ponds at Georgetown,
have been restructured with CS Properties I, Inc. succeeding to the general
partner 1% interest, or a co-general partner interest with CS
Properties II, Inc. in the case of The Ponds at Georgetown. In the case of Fox
Hollow, CS Properties I, Inc. is both the general partner and the special
limited partner with a total 0.01% interest.
As a result of the foregoing, at December 31, 1999, 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
94
<PAGE>
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").
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, 1999.
<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 $ 3,462,315
Highland Park Apartments................ FHA 8.75 11/01/2028 8,878,132
Misty Springs Apartments................ GNMA 8.75 6/15/2029 4,219,029
The Ponds at Georgetown................. GNMA 7.50 12/15/2029 2,419,507
Waterman's Crossing..................... GNMA 10.00 9/15/2028 10,815,058
Water's Edge Apartments................. GNMA 8.75 12/15/2028 5,000,688
</TABLE>
The following table shows the occupancy levels and effective rental rates of
the properties financed by Cap Source I in 1999:
<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% $ 6,734
Fox Hollow Apartments........... High Point, NC 184 96 6,781
Highland Park Apartments........ Columbus, OH 252 94 6,852
Misty Springs Apartments........ Daytona Beach, FL 128 99 6,752
The Ponds at Georgetown......... Ann Arbor, MI 134 99 10,732
Waterman's Crossing............. Newport News, VA 260 99 7,822
Water's Edge Apartments......... Lake Villa, IL 108 95 9,587
-----
1,174
=====
</TABLE>
In the opinion of the Cap Source I General Partners, each of the properties
is adequately covered by insurance.
95
<PAGE>
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, 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. One of the Cap
Source II Operating Partnerships, The Ponds at Georgetown, has been restructured
with CS Properties II, Inc. succeeding with CS Properties I, Inc. as co-general
partners to the 1% general partner interest in this Operating Partnership.
As a result of the foregoing, at December 31, 1999, 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 (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
96
<PAGE>
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 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, 1999. 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 $10,119,375
Delta Crossing.......................... FHA 9.10 10/01/2030 6,470,165
Monticello Apartments................... GNMA 8.75 11/15/2029 5,264,973
The Ponds at Georgetown................. GNMA 7.50 12/15/2029 5,022,840
</TABLE>
The following table shows the occupancy levels and effective rental rates of
the properties financed by Cap Source II in 1999:
<TABLE>
<CAPTION>
PERCENTAGE OF AVERAGE EFFECTIVE
NUMBER OF UNITS ANNUAL RENTAL RATE
PROPERTY NAME LOCATION UNITS OCCUPIED PER UNIT
------------- --------------- --------- ------------- ------------------
<S> <C> <C> <C> <C>
Crane's Landing...................... Winter Park, FL 252 96% $ 8,090
Delta Crossing....................... Charlotte, NC 178 94 7,634
Monticello Apartments................ Southfield, MI 106 90 9,120
The Ponds at Georgetown.............. Ann Arbor, MI 134 99 10,732
---
670
===
</TABLE>
In the opinion of the Cap Source II General Partners, each of the properties
is adequately covered by insurance.
97
<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, which excludes transactions believed to be between related
parties, family members or the same beneficial owner, was as follows:
98
<PAGE>
SECONDARY MARKET PARTNERSHIP NET BAC PRICES
FROM JANUARY 1, 1997 THROUGH DECEMBER 31, 1997
CAPITAL SOURCE L.P.
<TABLE>
<CAPTION>
ADJUSTED
BAC SALES PRICE CAPITAL
PER $1,000 ORIGINAL PER ORIGINAL
INVESTMENT $1,000 PRICE VERSUS ADJUSTED CAPITAL
------------------------------------ INVESTMENT ------------------------------------
MONTH WEIGHTED HIGH LOW AS OF 12/31/96 WEIGHTED HIGH LOW
----- -------- -------- -------- -------------- -------- -------- --------
<S> <C> <C> <C> <C> <C> <C> <C>
January.............. $565.00 $568.00 $563.50 $917.50 (38.4)% (38.1)% (38.6)%
February............. 568.50 583.00 463.00 917.50 (38.0) (36.5) (49.5)
March................ 542.00 545.00 529.50 917.50 (40.9) (40.6) (42.3)
April................ 541.50 550.00 537.50 917.50 (41.0) (40.1) (41.4)
May.................. 476.50 537.50 450.00 917.50 (48.1) (41.4) (51.0)
June................. N/A N/A N/A 917.50 N/A N/A N/A
July................. 410.00 537.50 387.50 917.50 (55.3) (41.4) (57.8)
August............... 454.00 537.50 374.50 917.50 (50.5) (41.4) (59.2)
September............ 568.50 606.00 482.50 917.50 (38.0) (34.0) (47.4)
October.............. 588.50 625.00 512.50 917.50 (35.9) (31.9) (44.1)
November............. 405.00 405.00 405.00 917.50 (55.9) (55.9) (55.9)
December............. N/A N/A N/A 917.50 N/A N/A N/A
<CAPTION>
NUMBER
OF
MONTH BACS
----- --------
<S> <C>
January.............. 1,183
February............. 1,602
March................ 2,130
April................ 300
May.................. 1,860
June................. N/A
July................. 5,865
August............... 914
September............ 2,740
October.............. 6,355
November............. 1,875
December............. N/A
</TABLE>
SECONDARY MARKET PARTNERSHIP NET BAC PRICES
FROM JANUARY 1, 1998 THROUGH AUGUST 31, 1998
CAPITAL SOURCE L.P.
<TABLE>
<CAPTION>
ADJUSTED
BAC SALES PRICE CAPITAL
PER $1,000 ORIGINAL PER ORIGINAL
INVESTMENT $1,000 PRICE VERSUS ADJUSTED CAPITAL
------------------------------------ INVESTMENT ------------------------------------
MONTH WEIGHTED HIGH LOW AS OF 8/31/98 WEIGHTED HIGH LOW
----- -------- -------- -------- ------------- -------- -------- --------
<S> <C> <C> <C> <C> <C> <C> <C>
January.............. $514.06 $617.50 $405.00 $917.50 (44.0)% (32.7)% (55.9)%
February............. 513.77 565.00 405.00 917.50 (44.0) (38.4) (55.9)
March................ 421.00 605.00 405.00 917.50 (54.1) (34.1) (55.9)
April................ 604.00 637.50 500.00 917.50 (34.2) (30.5) (45.5)
May.................. 608.00 705.50 500.00 917.50 (33.7) (23.1) (45.5)
June................. 551.00 635.50 500.00 917.50 (39.9) (30.7) (45.5)
July................. 612.00 645.00 403.00 917.50 (33.3) (29.7) (56.1)
August............... 604.00 630.00 500.00 917.50 (34.2) (31.3) (45.5)
<CAPTION>
NUMBER
OF
MONTH BACS
----- --------
<S> <C>
January.............. 15,773
February............. 19,948
March................ 6,283
April................ 3,400
May.................. 29,621
June................. 40,838
July................. 16,017
August............... 5,692
</TABLE>
99
<PAGE>
SECONDARY MARKET PARTNERSHIP NET BAC PRICES
FROM JANUARY 1, 1997 THROUGH DECEMBER 31, 1997
CAPITAL SOURCE II L.P.-A
<TABLE>
<CAPTION>
ADJUSTED
BAC SALES PRICE CAPITAL
PER $1,000 ORIGINAL PER ORIGINAL
INVESTMENT $1,000 PRICE VERSUS ADJUSTED CAPITAL
------------------------------------ INVESTMENT ------------------------------------
MONTH WEIGHTED HIGH LOW AS OF 12/31/96 WEIGHTED HIGH LOW
----- -------- -------- -------- -------------- -------- -------- --------
<S> <C> <C> <C> <C> <C> <C> <C>
January.............. $333.50 $342.50 $300.00 $619.50 (46.2)% (44.7)% (51.6)%
February............. 343.00 349.50 337.50 619.50 (44.6) (43.6) (45.5)
March................ 329.50 345.00 200.00 619.50 (46.8) (44.3) (67.7)
April................ 378.50 387.50 355.00 619.50 (38.9) (37.4) (42.7)
May.................. 383.50 387.50 307.50 619.50 (38.1) (37.4) (50.4)
June................. 359.00 370.00 314.00 619.50 (42.1) (40.3) (49.3)
July................. 285.00 364.00 275.00 619.50 (54.0) (41.2) (55.6)
August............... 338.50 350.00 334.00 619.50 (45.4) (43.5) (46.1)
September............ 372.00 407.00 362.50 619.50 (40.0) (34.3) (41.5)
October.............. 363.50 368.00 225.50 619.50 (41.3) (40.6) (63.6)
November............. 387.50 387.50 387.50 619.50 (37.4) (37.4) (37.4)
December............. 305.00 305.00 305.00 619.50 (50.8) (50.8) (50.8)
<CAPTION>
NUMBER
OF
MONTH BACS
----- --------
<S> <C>
January.............. 3,250
February............. 3,589
March................ 1,254
April................ 9,160
May.................. 16,613
June................. 2,375
July................. 10,339
August............... 850
September............ 4,636
October.............. 3,350
November............. 1,000
December............. 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
BAC SALES PRICE PER $1,000 ORIGINAL PER ORIGINAL
INVESTMENT $1,000 PRICE VERSUS ADJUSTED CAPITAL
------------------------------------ INVESTMENT ------------------------------------
MONTH WEIGHTED HIGH LOW AS OF 8/31/98 WEIGHTED HIGH LOW
----- -------- -------- -------- ------------- -------- -------- --------
<S> <C> <C> <C> <C> <C> <C> <C>
January.............. $325.50 $325.50 $325.50 $619.50 (47.5)% (47.5)% (47.5)%
February............. 372.93 387.50 350.00 619.50 (39.8) (37.4) (43.5)
March................ 313.00 350.00 300.00 619.50 (49.5) (43.5) (51.6)
April................ 391.00 402.50 300.00 619.50 (36.9) (35.0) (51.6)
May.................. 369.50 400.00 342.50 619.50 (40.4) (35.4) (44.7)
June................. 316.50 384.50 300.00 619.50 (48.9) (37.9) (51.6)
July................. 373.50 385.00 255.50 619.50 (39.7) (37.9) (58.8)
August............... 341.50 385.00 300.00 619.50 (44.9) (37.9) (51.6)
<CAPTION>
NUMBER
OF
MONTH BACS
----- --------
<S> <C>
January.............. 17,203
February............. 5,500
March................ 11,740
April................ 4,100
May.................. 8,248
June................. 26,186
July................. 33,476
August............... 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 5,560 investors. Cap
Source II had outstanding 4,011,101 BACs which were held of record by
approximately 5,278 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.
100
<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, 2000:
<TABLE>
<CAPTION>
FOR THE THREE MONTHS
ENDED FOR THE YEAR ENDED FOR THE YEAR ENDED
MARCH 31, 2000 DECEMBER 31, 1999 DECEMBER 31, 1998
-------------------- ------------------ ------------------
<S> <C> <C> <C>
Regular quarterly distributions
Income.............................. $.2281 $ .7905 $ .5582
Return of capital................... .0244 .2195 .4518
------ ------- -------
$.2525 $1.0100 $1.0100
====== ======= =======
Distributions
Paid out of cash flow............... $.2525 $1.0085 $1.0100
Paid out of reserves................ -- .0015 --
------ ------- -------
$.2525 $1.0100 $1.0100
====== ======= =======
</TABLE>
Cumulative cash distributions as of March 31, 2000, totaled $18.29 and
$18.08 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 investments. Cap Source I is permitted to replenish reserves
with cash flows in excess of distributions paid. For the three months ended
March 31, 2000, a net amount of $13,667 was withdrawn from reserves. The total
amount held in reserves at March 31, 2000, was $9,025,709, of which $640,606 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, 2000:
<TABLE>
<CAPTION>
FOR THE THREE MONTHS
ENDED FOR THE YEAR ENDED FOR THE YEAR ENDED
MARCH 31, 2000 DECEMBER 31, 1999 DECEMBER 31, 1998
-------------------- ------------------ ------------------
<S> <C> <C> <C>
Regular monthly distributions
Income.............................. $.1107 $.3585 $.2175
Return of capital................... .0018 .0915 .4425
------ ------ ------
$.1125 .4500 $.6600
====== ====== ======
Distributions
Paid out of cash flow............... $.1125 $.4149 $.4005
Paid out of reserves................ $ -- .0351 .2595
------ ------ ------
$.1125 $.4500 $.6600
====== ====== ======
</TABLE>
Cumulative cash distributions as of March 31, 2000, totaled $19.73 and
$18.76 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
101
<PAGE>
months ended March 31, 2000, $17,223 was placed into reserves for cash flow in
excess of the regular monthly cash distributions.
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 2000. 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 2000
<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 2000
<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>
102
<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, 1999 and 1998, and for each of the three years in the period ended
December 31, 1999, 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, 1999 and 2000, 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,
------------------------------------------------------------------- -------------------------
1995 1996 1997 1998 1999 1999 2000
----------- ----------- ----------- ----------- ----------- ----------- -----------
<S> <C> <C> <C> <C> <C> <C> <C>
Mortgage-backed securities
income........................ $ 3,895,475 $ 3,340,747 $ 3,302,727 $ 3,262,922 $ 3,215,472 $ 807,466 $ 798,656
Interest income on temporary
cash investments and U.S.
government securities......... 193,257 523,636 554,604 530,396 431,111 104,026 114,330
Equity in losses of Operating
Partnerships.................. (255,500) (257,512) (178,550) (186,942) (325,245) (50,000) 15,488
Other income.................... 3,950 9,749 5,334 6,300 2,000 2,000 --
Operating and administrative
expenses...................... (365,125) (429,313) (632,894) (1,710,173) (629,037) (144,121) (151,150)
----------- ----------- ----------- ----------- ----------- ----------- -----------
Net income...................... $ 3,472,057 $ 3,187,307 $ 3,051,221 $ 1,902,503 $ 2,694,301 $ 719,371 $ 777,324
=========== =========== =========== =========== =========== =========== ===========
Net income, basic and diluted,
per BAC....................... $ 1.02 $ 0.94 $ 0.90 $ 0.56 $ 0.79 $ 0.21 $ 0.23
=========== =========== =========== =========== =========== =========== ===========
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......... $12,654,188 $12,585,755 $12,511,046 $12,429,485 $12,340,477 $12,407,952 $12,316,940
=========== =========== =========== =========== =========== =========== ===========
Investment in GNMA
Certificates.................. $24,388,920 $23,937,795 $23,588,139 $23,454,411 $23,105,420 $23,370,123 $23,038,648
=========== =========== =========== =========== =========== =========== ===========
Total assets.................... $47,541,721 $47,248,776 $46,965,808 $45,707,177 $44,867,473 $45,276,693 $44,554,926
=========== =========== =========== =========== =========== =========== ===========
</TABLE>
103
<PAGE>
SELECTED FINANCIAL DATA
CAPITAL SOURCE II L.P.-A
<TABLE>
<CAPTION>
THREE MONTHS ENDED
YEAR ENDED DECEMBER 31, MARCH 31,
------------------------------------------------------------------- -------------------------
1995 1996 1997 1998 1999 1999 2000
----------- ----------- ----------- ----------- ----------- ----------- -----------
<S> <C> <C> <C> <C> <C> <C> <C>
Mortgage-backed securities
income........................ $ 2,561,901 $ 2,520,727 $ 2,499,844 $ 2,426,356 $ 2,318,543 $ 580,957 $ 577,368
Interest income on temporary
cash investments and U.S.
government securities......... 200,678 147,530 91,327 42,339 14,505 4,151 3,248
Equity in losses of Operating
Partnerships.................. (109,900) -- (121,450) (407,218) -- -- 35,127
Other income.................... 4,650 6,950 3,800 4,750 400 400 --
Gain on sale of mortgage-backed
securities.................... 15,670 -- -- 35,101 -- -- --
Operating and administrative
expenses...................... (499,903) (552,170) (819,516) (1,220,213) (880,808) (133,446) (167,059)
----------- ----------- ----------- ----------- ----------- ----------- -----------
Net income...................... $ 2,173,096 $ 2,123,037 $ 1,654,005 $ 881,115 $ 1,452,640 $ 452,062 $ 448,684
=========== =========== =========== =========== =========== =========== ===========
Net income, basic and diluted,
per BAC....................... $ 0.54 $ 0.52 $ 0.41 $ 0.22 $ 0.36 $ 0.11 $ 0.11
=========== =========== =========== =========== =========== =========== ===========
Cash distributions paid or
accrued per BAC............... $ 0.8100 $ 0.8100 $ 0.8100 $ 0.6600 $ 0.4500 $ 0.1125 $ 0.1125
=========== =========== =========== =========== =========== =========== ===========
Investment in FHA Loan.......... $ 6,595,251 $ 6,568,139 $ 6,538,424 $ 6,505,857 $ 6,470,165 $ 6,497,238 $ 6,460,719
=========== =========== =========== =========== =========== =========== ===========
Investment in GNMA
Certificates.................. $22,142,421 $21,895,675 $21,674,940 $20,497,706 $20,367,475 $20,466,193 $20,333,125
=========== =========== =========== =========== =========== =========== ===========
Total assets.................... $32,541,767 $31,340,155 $29,829,534 $27,771,206 $27,348,772 $27,647,050 $27,201,123
=========== =========== =========== =========== =========== =========== ===========
</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 E 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 "AFREZ". 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 take appropriate action with respect to the manner in which the units
are or may be transferred or traded in order to preserve the status of the
company as a limited 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. This may include the General Partner suspending or deferring 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
104
<PAGE>
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 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, except for the restrictions on transfer contained in the
company's limited partnership agreement, 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, the court approves the settlement 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. In this case, all investors will be given the
opportunity to elect to receive either units or notes on a follow-up election
card that you will receive after the expiration of the consent solicitation
period. An investor who fails to return a completed election 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 and follow-up election card. See "CONSENT SOLICITATION." 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 "CONSENT SOLICITATION--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
105
<PAGE>
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 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 January 15, 2008 (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 number of notes with a $1,000 principal balance
to which an investor is entitled is determined by multiplying the number of the
investor's BACs by the exchange ratio for allocation of notes 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 May 31,
2000, 120% of the annual applicable federal rate for debt instruments with a
term of not over three years was 7.72%. Therefore, the interest rate on the
notes as of May 31, 2000, is 7.72%. 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 paid annually and computed on the
basis of a 360-day year for the actual number of days elapsed. The annual
interest rate on the notes will be calculated by averaging the interest rate for
each month published by the IRS, using 120% of the applicable federal rate for
debt instruments with a term of 3 years or less with annual compounding.
106
<PAGE>
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 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.
107
<PAGE>
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 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
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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 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
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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 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 LLP, counsel to the company, rendered 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
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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 recognized by the partnership of which he is a member even if he
receives units in connection with the transaction.
Under Section 707(a)(2)(B) of the Code, if there is a transfer of property
by a person to a partnership and a distribution of cash or other property to the
transferors, the transaction may be treated as a sale. If the transfer of
property to the partnership and the distribution to the partner occur with two
years of each other, then the transaction is presumed to be a sale. However,
Example 3 under Treasury Regulation 1.707-3(f) indicates that a person may rebut
the presumption that a transfer is part of a sale if the facts and circumstances
clearly establish that the transfer by the partnership to such person would have
been made without regard to such person's contribution to the partnership. In
addition, pro rata distributions of operating cash flow will not be deemed
distributions for the purposes of this analysis. The company, based on the
advice of counsel, will treat the portion of settlement distribution made to
former partners of Cap Source II as a distribution rather than a part of a
deemed sale of the assets of Cap Source II to the company.
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.
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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."
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.
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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 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
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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.
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.
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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.
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, or for example, 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," or 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
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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 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, for example, 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.
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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.
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, for example, any interest in a trade or business held as a limited
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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 "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," or generally, interest at the applicable federal
rate for the month of issuance, or (b) its "imputed principal amount," which is
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.
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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 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.
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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.
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
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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, 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," or "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, or 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," or for example, 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, 1999 and 1998, and for each of the years in the three year
period ended December 31, 1999, the balance sheet of America First Real Estate
Investment Partners, L.P. as of December 31, 1999, and the balance sheet of
America First Capital Source I L.L.C. as of December 31, 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 LLP, 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
LLP has relied on Richards, Layton & Finger, P.A. as to matters of Delaware law.
In addition, Kutak Rock LLP 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
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exchanges his or her BACs for units or notes. Kutak Rock LLP 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 LLP 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.
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 (collectively 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.
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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 Auditors'............................. FS-2
Balance Sheet at December 31, 1999.......................... FS-3
Notes to Balance Sheet...................................... FS-4
INDEX TO FINANCIAL STATEMENTS OF
AMERICA FIRST CAPITAL SOURCE I L.L.C.
Report of Independent Auditors'............................. FS-6
Balance Sheet at December 31, 1999.......................... FS-7
Notes to Balance Sheet...................................... FS-8
</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 AUDITORS'
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 December 31, 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 December 31, 1999 in conformity with generally
accepted accounting principles.
/s/ KPMG LLP
Omaha, Nebraska
March 27, 2000
FS-2
<PAGE>
AMERICA FIRST REAL ESTATE INVESTMENT PARTNERS, L.P.
BALANCE SHEET
DECEMBER 31, 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
DECEMBER 31, 1999
1. ORGANIZATION
America First Real Estate Investment Partners, L.P. (the "Partnership") was
formed on June 18, 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.
3. 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
Alvin M. Panzer and Sandra G. Panzer, against the Partnership, its general
partner, America First and various of their affiliates (including Capital Source
L.P., Capital Source II L.P.-A, and their general partners Capital Source L.P.
and Capital Source II L.P.-A are partnerships with general partners that are
affiliates of America First) and Lehman Brothers, Inc. Alvin M. Panzer and
Sandra G. Panzer are two Beneficial Assignment Certificates (BAC) holders of
Capital Source L.P. and Capital Source II L.P.-A. The plaintiffs seek to have
the lawsuit certified as a class action on behalf of all BAC holders of Capital
Source L.P. and Capital Source II L.P.-A. The lawsuit alleges, among other
FS-4
<PAGE>
AMERICA FIRST REAL ESTATE INVESTMENT PARTNERS, L.P.
NOTES TO BALANCE SHEET
DECEMBER 31, 1999
3. LEGAL PROCEEDINGS
things, that a proposed merger transaction involving the Partnership, Capital
Source L.P. and Capital Source II L.P.-A is deficient and coercive, that the
defendants have breached the terms of Capital Source L.P.'s and Capital Source
II L.P.-A's partnership agreement and that the defendants have acted in manners
which violate their fiduciary duties to the BAC holders. In this complaint, the
plaintiffs sought to enjoin the proposed merger transaction and seek to appoint
an independent BAC holder representative to investigate alternative
transactions. The lawsuit also requests a judicial dissolution of Capital Source
L.P. and Capital Source II L.P.-A, an accounting, and unspecified damages and
costs.
The general partners of the Partnership, Capital Source L.P. and Capital
Source II L.P.-A determined not to pursue the merger transaction which was the
subject of the initial lawsuit and proposed an alternative transaction to BAC
holders. A prospectus/consent solicitation statement outlining this alternative
transaction was sent to BAC holders on or about November 16, 1999. The
plaintiffs amended their complaint on December 8, 1999, and again on
February 22, 2000. The second amended complaint challenged this current
prospectus/consent solicitation statement on grounds similar to those alleged in
the original complaint, as well as on other procedural grounds. The second
amended complaint does not seek to enjoin the proposed merger transaction.
The general partners of the partnership, Capital Source L.P. and Capital
Source II L.P.-A have moved to dismiss these complaints, and they intend to
defend these lawsuits vigorously, but are unable to estimate the effect of
either of these lawsuits, if any, on the financial statements of the Partnership
or on the ability of the Partnership to consummate the proposed merger with
Capital Source L.P. and Capital Source II L.P.-A.
FS-5
<PAGE>
REPORT OF INDEPENDENT AUDITORS'
To Members
America First Capital Source I, L.L.C.:
We have audited the accompanying balance sheet of America First Capital
Source I, L.L.C. as of December 31, 1999. This financial statement is the
responsibility of the Company'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 balance sheet is free of material
misstatement. An audit of a balance sheet includes examining, on a test basis,
evidence supporting the amounts and disclosures in that balance sheet. An audit
of a balance sheet also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
balance sheet 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 Capital Source I,
L.L.C. as of December 31, 1999 in conformity with generally accepted accounting
principles.
/s/ KPMG LLP
Omaha, Nebraska
May 5, 2000
FS-6
<PAGE>
AMERICA FIRST CAPITAL SOURCE I L.L.C.
BALANCE SHEET
DECEMBER 31, 1999
<TABLE>
<S> <C>
Assets
Current assets:
Cash.................................................... $ 250
Distributions receivable................................ 4,303
Due from affiliates (Note 3)............................ 68,664
--------
Total current assets.................................. 73,217
--------
Investments in affiliates:
Investment in Capital Source L.P.......................... (89,900)
Investment in CS Properties I, Inc........................ 147,953
Investment in America First Real Estate Investment
Partners, L.P........................................... 10
--------
Total investments in affiliates......................... 58,063
--------
$131,280
========
Liabilities and Members' Capital (Deficit)
Current liabilities:
Due to affiliate (Note 3)............................... $ 8
Note payable to CS Properties I, Inc. (Note 1).......... 150,000
--------
Total current liabilities............................. 150,008
--------
Members Capital (Deficit)................................... (18,728)
--------
$131,280
========
</TABLE>
The accompanying notes are an integral part of the balance sheet.
FS-7
<PAGE>
AMERICA FIRST CAPITAL SOURCE I L.L.C.
NOTES TO BALANCE SHEET
DECEMBER 31, 1999
1. ORGANIZATION
America First Capital Source I, L.L.C. (the "Company") was formed as of
March 1, 1994, when America First Companies, L.L.C. ("AFCLLC") contributed
various assets and liabilities to the Company. No member is obligated personally
for any debt, obligation or liability of the Company solely by reason of being a
member or acting as a manager. The Company will continue in existence until
April 5, 2025, unless terminated earlier under the provisions of the operating
agreement.
The Company and Insured Mortgage Equities Inc. are general partners of
Capital Source L.P. (the "Partnership"). The Partnership Agreement of the
Partnership provides that the Company will be allocated a percentage of profits
and losses and a share of cash distributions. In addition, the Company receives
fees related to the administration of the Partnership.
The Company also owns 50% of the outstanding stock of CS Properties
I, Inc., the Special Limited Partner for operating partnerships in which the
Partnership has invested. CS Properties I, Inc. is also the general partner of
the operating partnerships which own Fox Hollow Apartments, Waterman's Crossing
and Misty Springs Apartments and as a co-general partner of The Ponds at
Georgetown. The Company was required to contribute $150,000 in the form of a
noninterest bearing demand note payable to CS Properties I, Inc.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
(A) Use of Estimates
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. Actual results could differ from those estimates.
(B) Income Taxes
No provision has been made for income taxes since the members are
required to report their share of the Company's income for federal and state
tax purposes.
(C) Investments in Affiliates
Investments in affiliates are included in the accompanying financial
statements using the equity method of accounting.
3. RELATED PARTY TRANSACTIONS
The Company incurs certain costs and expenses in connection with the
management of the Partnership, including legal and accounting fees and investor
communication costs, such as pricing and mailing charges which were reimbursed
by the Partnership.
A portion of the Company's general and administrative expenses were paid by
AFCLLC and reimbursed by the Company. The Company's cash requirements are
managed by AFCLLC and the net borrowing or excess cash is included in amounts
due to/from affiliates.
FS-8
<PAGE>
AMERICA FIRST CAPITAL SOURCE I L.L.C.
NOTES TO BALANCE SHEET
DECEMBER 31, 1999
The Company is entitled to receive, from the Partnership, an asset
management and partnership administration fee equal to 0.25% 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 year ended December 31, 1999, distributions to investors
represented less than an 8% return, accordingly, no fees were received or
accrued.
Amounts due to and from affiliates are summarized as follows:
<TABLE>
<S> <C>
Due from affiliates:
Capital Source L.P........................................ $28,325
America First Companies L.L.C............................. 40,339
-------
$68,664
=======
Due to affiliate:
CS Properties I, Inc...................................... $ 8
</TABLE>
4. INVESTMENTS IN AFFILIATES
The following summarizes financial information at December 31, 1999 for the
affiliates the Company has invested in:
<TABLE>
<CAPTION>
CAPITAL SOURCE L.P. CS PROPERTIES I, INC.
------------------- ----------------------
<S> <C> <C>
Assets..................................... $44,867,473 $295,905
Liabilities................................ (1,281,457) --
----------- --------
Equity..................................... $43,586,016 $295,905
=========== ========
</TABLE>
5. LEGAL PROCEEDINGS
In connection with a proposed merger transaction involving the Partnership
and Capital Source II L.P.-A, a similar partnership with general partners that
are affiliates of the Partnership's general partners, the Company has been named
as a defendant in a purported class action lawsuit. During April 2000, the
parties to the lawsuit entered into a settlement agreement under which the
general partners of the Partnership and Capital Source II L.P.-A agreed to pay a
total of $600,000 of the plaintiffs' legal fees, $500,000 of which is expected
to be reimbursed through insurance coverage. The settlement of the lawsuit and
payment of the plaintiffs' legal fees is contingent upon consummation of the
merger, which requires a majority vote of the limited partners of the
Partnership and Capital Source II L.P.-A. Therefore, it is not possible to
predict the ultimate resolution of this matter, as it is contingent upon the
outcome of the proposed merger transaction.
FS-9
<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
, 2000, 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 11.12 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 Merger, 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") on the
date and time specified in the certificate of merger (the "Certificate of
Merger"), such Effective Time to be at the same time as the effective time of
the merger of Insured Mortgage Equities Inc., America First Capital Source II
L.L.C. and Insured Mortgage Equities II L.P. with and into America First Capital
Source I L.L.C., with America First Capital Source I L.L.C. being the surviving
entity. 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.
A-1
<PAGE>
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.
Section 2.02. LIMITED PARTNERSHIP AGREEMENT. The Amended and Restated
Limited Partnership Agreement of the Company as filed as Appendix D 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........................................... 1.3957
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 and no consideration shall be issued in
respect thereof.
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 Merger,
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 Merger, 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 Merger. In such event, the Investors who voted for the
Merger or abstained from voting and who elected to receive Notes will
receive Units in an amount
A-2
<PAGE>
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 as follows:
<TABLE>
<CAPTION>
PARTNERSHIP NUMBER OF NOTES PER BAC
----------- -----------------------
<S> <C>
Cap Source I........................................... 0.013957
Cap Source II.......................................... 0.007620
</TABLE>
Each Note will be in a principal amount of $1,000.00. The Company may, at
its option, issue one note in a corresponding integral amount of $1,000.00 to an
Investor in lieu of issuing multiple Notes to that Investor.
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 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 Merger, 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 Merger, 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.
A-3
<PAGE>
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 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
A-4
<PAGE>
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, 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.
A-5
<PAGE>
(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 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 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
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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.
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.
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ARTICLE VIII
CONDITIONS TO THE MERGER
The obligation of the Company and each Partnership 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.
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 Merger 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 Merger, 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 Merger.
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
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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.
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.,
and Fox Hollow, Ltd. and co-general partner of The Ponds at Georgetown L.P., and
CS Properties II Inc., an affiliate of the general partners of Cap Source II
that also serves as a co-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.
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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 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.
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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.
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.
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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>
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APPENDIX B
FAIRNESS OPINION
September 23, 1999
Capital Source L.P. and Capital Source II L.P.-A
Suite 400
1004 Farnam Street
Omaha, NE 68102
Ladies and Gentlemen:
You have requested Sutro & Co., Inc.'s ("Sutro & Co.") opinion as investment
bankers as to the fairness, from a financial point of view, of the consideration
to be received by the holders (the "Investors") of beneficial assignment
certificates representing assigned limited partnership interests (the "BACs") in
Capital Source L.P. ("Cap Source I") and Capital Source II L.P.-A ("Cap Source
II") (collectively, the "Partnerships"), in connection with the proposed merger
(the "Transaction") of Cap Source I and Cap Source II with and into America
First Real Estate Investment Partners, L.P., a newly formed Delaware limited
partnership (the "Company").
Sutro & Co. has been advised by the Partnerships and the Company that in
connection with the proposed Transaction, (i) Investors will receive, at their
election and subject to certain limitations, either units of assigned limited
partner interests (the "Units" or "Consideration"), and in some situations cash,
promissory notes and Variable Rate Junior Notes Callable on or after the Date of
Issuance (the "Notes") in exchange for the assets of the partnerships, (ii) up
to 4,709,427 Units have been allocated to Investors in Cap Source I in exchange
for the Investors' BACs and up to 3,056,345 Units have been allocated to
Investors in Cap Source II in exchange for the Investors' BACs, (iii) a 1%
interest in the Company will be assigned to America First Capital Source I
L.L.C., as general partner to the Company, and (iv) the Company will be managed
by America First Capital Source I L.L.C.
Sutro & Co., in conducting its review and arriving at its opinion, noted
that the exchange ratios (the "Exchange Ratios") for Cap Source I and Cap Source
II in the Transaction are based on (i) the principal amount of the investments
in FHA loans and GNMA certificates at December 31, 1998 in the audited Balance
Sheets contained in the Annual Report on Form 10-K for the period ending
December 31, 1998 for each of the Partnerships, (ii) the value of the
Partnerships' investments in the operating partnerships (that owned the
underlying real estate properties of each of the Partnerships) based on certain
appraisals prepared by Valuation Research dated December 31, 1998 (the
"Appraisals"), and (iii) the market values of the Partnerships' remaining assets
and liabilities at December 31, 1998 and before transaction costs or other costs
associated with the Transaction (individually or collectively the "Exchange
Values"). The Exchange Ratios relating to the Exchange Values for Cap Source I
and Cap Source II are used to determine the allocation of Units to be received
by the Investors in Cap Source I and Cap Source II in the Transaction and the
principal allocation of the Notes to be received by Investors in Cap Source I
and Cap Source II in the Transaction.
Additionally, Sutro & Co. was requested to provide an opinion as to the
fairness, from a financial point of view, of the principal allocation of the
Notes that may be elected by the Investors. As used herein, principal allocation
refers solely to the method of allocation, as determined by the Exchange Values,
of the Notes among the investors in the Partnerships. Sutro & Co. in arriving at
its opinion as to the fairness, from a financial point of view, of the
Consideration to be received by the Investors, assumes that the maximum amount
of Notes that may be issued in the Transaction is $20.0 million.
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Based upon and subject to the foregoing and following, Sutro & Co. is of the
opinion, as investment bankers, that, as of the date hereof, the Consideration
to be received by the Investors, the 1% interest in the Company to be received
by the General Partners, the allocation of such Consideration and 1% interest
among the Investors and the General Partners, and the principal allocation of
the Notes, in the Transaction, is fair to the Investors and the General Partners
from a financial point of view.
Sutro & Co., as part of its investment banking business, is regularly
engaged in the evaluation of capital structures, the valuation of businesses and
their securities in connection with mergers and acquisitions, firm commitment
underwritings, secondary distributions of listed and unlisted securities,
private placements, financial restructurings and other financial services. Sutro
& Co. is currently acting as a fairness opinion provider to the Partnerships in
connection with the proposed Transaction and will receive a fee for delivering
this opinion. The Partnerships have agreed to indemnify Sutro & Co against
certain liabilities arising out of or in connection with the services rendered
by Sutro & Co. under such engagement. Sutro & Co., in the ordinary course of
business, may in the future trade securities of the Company for its own account
or for the accounts of its customers, and accordingly, may at any time hold a
long or short position in those securities.
Sutro & Co., in arriving at its opinion, reviewed and analyzed, among other
things, the following: (i) a draft of Amendment 4 of the Registration Statement
on Form S-4 of the Company which is expected to be filed on September 28, 1999,
including the Preliminary Prospectus/Consent Solicitation Statement included
therein, (ii) the Appraisals, (iii) individual Partnership Annual Reports and
Reports of Forms 10-K and 10-Q for the years ended December 31, 1997 and
December 31, 1998 as amended, and for the period ended June 30, 1999, (iv) the
Prospectus of Capital Source I dated January 10, 1986, (v) the Prospectus of
Capital Source II dated February 6, 1987, (vi) the Agreement and Plan of Merger
among the Partnerships, the General Partners and the Company, (vii) certain
other publicly available business, financial and other information concerning
the Partnerships, (viii) certain internal information, primarily financial in
nature (including estimates) prepared by or on behalf of the management of the
Partnerships, (ix) certain information provided to us by the management of the
Partnerships concerning the distributions on, the trading of, and the trading
market for, the equity securities of the Partnerships, and (x) such other
information which Sutro & Co. deemed to be relevant to provide the fairness
opinion.
In the course of Sutro & Co.'s engagement, Sutro & Co. held discussions with
the senior management of the Partnerships concerning the historical, current and
projected future operations, business plans, financial conditions and results,
and prospects of the Partnerships. Additionally, Sutro & Co. has discussed with
representatives of Valuation Research, the results, methodology, and limitations
of the Appraisals. Sutro & Co. has not, however, independently verified the
accuracy or completeness of the Appraisals.
In conducting its review, Sutro & Co. has relied upon and assumed the
accuracy and completeness of the financial and other information, including the
Appraisals, provided to Sutro & Co. or which were publicly available and have
not attempted to verify the same. Sutro & Co. has relied upon the statements and
information provided by the management of the Partnerships as to the
reasonableness and achievability of the financial and operating forecasts and
projections (and the assumptions and bases therefor) provided to Sutro & Co.
While the financial models and the financial projections, that were provided by
the management of the Partnerships, that project future results of the
Partnerships are inherently subject to uncertainty, we have assumed that such
forecasts and projections are the best currently available estimates and good
faith judgments of the management of the Partnerships as to the future
performance of the Partnerships.
In rendering its opinion, Sutro & Co. notes that the consummation of the
proposed Transaction is conditioned upon, among other things, the approval of
the majority of both Partnerships. Sutro & Co. is not recommending or
disapproving of any action that may be taken by the Investors, the Partnerships,
the Company or any other person in regard to the Transaction. This opinion does
not constitute a recommendation of the proposed Transaction over any alternative
transactions which may be possible for the
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Partnerships and does not address the Partnerships' underlying business decision
to effect the proposed Transaction. Furthermore, our analysis in this matter has
not considered any other aspect of the proposed Transaction or any agreement or
other matters which include, but are not limited to, the terms or fairness of
the compensation and fees as defined in the amended and restated Agreement of
Limited Partnership of America First Real Estate Investment Partners, L.P.
Sutro & Co. was not asked to opine on and is not expressing an opinion as to:
(i) the terms of the Transaction, (ii) the tax consequences of the Transaction
to the Investors, and (iii) the prices at which the Company's securities may
trade at in the future.
In connection with this opinion, we have assumed that the documents to be
prepared and used to effect the Transaction will be substantially on the terms
set forth in the Agreement and Plan of Merger among the Partnerships and the
Company. Sutro & Co. has not participated in the negotiation of the Transaction
or provided any legal or other advice with respect to the Transaction except as
otherwise described herein.
Sutro & Co.'s opinion is necessarily based upon conditions as they exist and
can be evaluated as of the date hereof and the information made available to
Sutro & Co. as of the dates that such information was prepared and based upon.
The preparation of a fairness opinion is a complex process and is not
necessarily susceptible to a partial analysis or summary description. Sutro &
Co. has advised the Partnerships that its entire analysis must be considered as
a whole and that selecting portions of its analyses and the factors considered
by it, without considering all analyses and factors, could create an incomplete
view of the evaluation process underlying its opinion.
It is understood and agreed that this opinion is provided solely for the use
of the Partnerships and the Investors as one element of their consideration of
the Transaction, and may not be used for any other purpose or any other party,
or otherwise referred to, relied upon, quoted, summarized or circulated, except
with Sutro & Co.'s written consent. This opinion may be reproduced in full in
the Company's Prospectus/ Consent Solicitation Statement pertaining to the
Transaction.
Sutro & Co., Inc.
/s/ Sutro & Co., Inc.
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APPENDIX C
BRINGDOWN FAIRNESS OPINION
June , 2000
Capital Source L.P. and Capital Source II L.P.--A
Suite 400
1004 Farnam Street
Omaha, NE 68102
Ladies and Gentlemen:
As of September 23, 1999, Sutro & Co., Inc. ("Sutro & Co.") delivered to you
an initial fairness opinion (the "Initial Fairness Opinion") (a copy of which is
attached to the prospectus/consent solicitation statement as Appendix B and is
incorporated herein by this reference) as investment bankers as to the fairness,
from a financial point of view, of the consideration to be received by the
holders (the "Investors") of beneficial assignment certificates representing
assigned limited partnership interests (the "BACs") in Capital Source L.P. ("Cap
Source I") and Capital Source II L.P.--A ("Cap Source II") (collectively, the
"Partnerships"), in connection with the proposed merger (the "Transaction") of
Cap Source I and Cap Source II with and into America First Real Estate
Investment Partners, L.P., a newly formed Delaware limited partnership (the
"Company").
You have requested that Sutro & Co. confirm that the opinion set forth in
the Initial Fairness Opinion remains true and correct as of the date hereof. All
capitalized terms used herein, not otherwise defined, shall have the meanings
ascribed to them in the Initial Fairness Opinion. You have not requested that
Sutro & Co. consider the terms any legal settlements and, as such, Sutro & Co.
is not making any fairness opinion statements regarding any legal settlements.
Sutro & Co, in conducting its review and arriving at its confirmation of its
opinion, noted that the exchange ratios (the "Exchange Ratios") for Cap Source I
and Cap Source II in the Transaction are based in part on (i) the principal
amount of the investments in FHA loans and GNMA certificates at December 31,
1998 in the Balance Sheets contained in the Annual Report on Form 10-K for the
period ending December 31, 1998 for each of the Partnerships, (ii) the value of
the Partnerships' investments in the operating partnerships (that owned the
underlying real estate properties of each of the Partnerships) based on certain
appraisals prepared by Valuation Research dated December 31, 1998 (the
"Appraisals"), and (iii) the market values of the Partnerships' remaining assets
and liabilities at December 31, 1998 and before transaction costs or other costs
associated with the Transaction.
Sutro & Co. hereby confirms, subject to and based on all of the assumptions,
limitations, and qualifications set forth in the Initial Fairness Opinion and
such other updated and/or additional information that Sutro & Co. believed was
necessary or appropriate to render this opinion, that Sutro & Co. is of the
opinion that, as investment bankers as of the date hereof, the Consideration to
be received by the Investors, the 1% interest in the Company to be received by
the General Partners, the allocation of such Consideration and 1% interest among
the Investors and the General Partners, and the principal allocation of the
Notes, in the Transaction, is fair to the Investors and the General Partners
from a financial point of view.
Sutro & Co.'s opinion is necessarily based upon conditions as they exist and
can be evaluated as of the date hereof and the information made available to
Sutro & Co. as of the dates that such information was prepared and based upon.
The preparation of a fairness opinion is a complex process and is not
necessarily susceptible to a partial analysis or summary description. Sutro &
Co. has advised the Partnerships that its entire analysis must be considered as
a whole and that selecting portions of its analyses and the factors considered
by it, without considering all analyses and factors, could create an incomplete
view of the evaluation process underlying its opinion.
<PAGE>
It is understood and agreed that this opinion is provided solely for the use
of the Partnerships and the Investors as one element of their consideration of
the Transaction, and may not be used for any other purpose or any other party,
or otherwise referred to, relied upon, quoted, summarized or circulated, except
with Sutro & Co.'s written consent. This opinion may be reproduced in full and
summarized in the Company's Amended and Restated Prospectus/Consent Solicitation
Statement pertaining to the Transaction.
Sutro & Co., Inc.
/s/ Sutro & Co., Inc.
C-2
<PAGE>
APPENDIX D
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, 1999.
<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>
D-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, 1999.
<TABLE>
<CAPTION>
AFFGMF AFFGMF2 AFTEMF(4) AFTEMF2(1) AFPPEMF(2) AFPF2(2) AFPF2PS(2)
1/2/85 TO 7/8/85 TO 11/21/85 TO 10/17/86 TO 11/26/86 TO 3/25/88 TO 5/25/88 TO
11/17/86 3/16/92 12/31/99 12/31/99 4/9/98 4/9/98 4/9/98
------------ ------------ ------------ ------------ ------------ ----------- -----------
<S> <C> <C> <C> <C> <C> <C> <C>
Date offering commenced.... 11/30/84 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 62,681,757 126,040,481 69,402,351 106,076,519 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 3,037,940 2,779,644 714,677 425,245
Property management
fees................... 0 0 2,020,659 3,673,939 732,823 325,824 158,560
Distributions............ 237,461 412,419 1,610,026 577,804 541,359 236,782 129,653
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.
(4) On February 1, 1999, AFTEMF merged with and into America First Tax Exempt
Investors, L.P., a newly formed partnership. The operating results shown
above for AFTEMF include those of America First Tax Exempt Investors, L.P.
subsequent to February 1, 1999.
D-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,
1999.
<TABLE>
<CAPTION>
AFFGMF AFFGMF2 AFTEMF(4) AFTEMF2(1) AFPPEMF(2) AFPF2(2)
1/2/85 TO 7/8/85 TO 11/21/85 TO 10/17/86 TO 11/26/86 TO 3/25/88 TO
11/17/86 3/16/92 12/31/99 12/31/99 4/9/98 4/9/98
------------- ------------- ------------ ------------ ------------ -----------
<S> <C> <C> <C> <C> <C> <C>
Gross revenues.................. $ 26,662,820 $ 60,664,437 $167,830,245 $119,959,301 $77,311,094 $15,562,498
Profit on sale of properties.... 34,541,492 22,227,208 0 0 0 598,867
Less operating expenses,
interest & depreciation....... (2,916,959) (7,384,641) (89,783,132) (91,118,544) (36,766,311) (4,838,008)
------------- ------------- ------------ ------------ ------------ -----------
Net income...................... $ 58,287,353 $ 75,507,004 $ 78,047,113 $28,840,757 $40,544,783 $11,323,357
============= ============= ============ ============ ============ ===========
Cash generated from
operations.................... $ 33,182,228 $ 59,879,325 $122,346,160 $62,690,472 $102,564,052 $24,864,521
Cash generated from sales and
prepayments................... 216,222,929 204,077,436 0 12,750,000 56,593,532 598,867
Stock received from properties
transferred(3)................ 0 0 60,101,600 0 0 0
------------- ------------- ------------ ------------ ------------ -----------
Cash generated from operations
and sales..................... 249,405,157 263,956,761 182,447,760 75,440,472 159,157,584 25,463,388
Less distributions to investors:
Cash from operating cash
flow........................ (30,826,963) (57,461,354) (138,794,071) (66,960,446) (80,563,201) (25,157,165)
Cash from sales and
prepayments................. (210,772,039) (200,667,021) 0 (9,934,625) (24,159,992) (598,867)
Stock from properties
transferred(3).............. 0 0 (60,101,600) 0 0 0
------------- ------------- ------------ ------------ ------------ -----------
Cash generated after cash
distributions................. 7,806,155 5,828,386 (16,447,911) (1,454,599) 54,434,391 (292,644)
Less special items:
Amount withdrawn from (added
to) reserves................ 0 0 18,057,937 2,032,403 (53,893,032) 529,426
Amount withheld from income
for payment of mortgage
evaluation fees and
syndication costs........... (2,117,704) (1,885,072) 0 0 0 0
Distribution to sponsor......... (5,688,451) (3,943,314) (1,610,026) (577,804) (541,359) (236,782)
------------- ------------- ------------ ------------ ------------ -----------
Cash generated after cash
distributions and special
items......................... $ 0 $ 0 $ 0 $ 0 $ 0 $ 0
============= ============= ============ ============ ============ ===========
DISTRIBUTION DATA FOR $1,000
INVESTED
Cash distributions to investors:
From operations:
Income...................... $ 106.96 $ 240.25 $ 437.95 $ 345.47 $ 387.31 $ 383.84
Return of capital........... 47.20 32.99 257.47 292.79 287.14 369.09
From sales and prepayments:
Income...................... 145.45 94.34 0.00 0.00 3.10 17.78
Return of capital........... 908.39 911.76 0.00 94.69 199.16 0.00
From stock transferred:
Income...................... 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
============= ============= ============ ============ ============ ===========
Percentage of original total
acquisition cost of
properties remaining
invested at December 31,
1999........................ 40% 63%
============ ============
<CAPTION>
AFPF2PS(2) MFA(2)
5/25/88 TO 4/10/98 TO
4/9/98 12/31/99
----------- -----------
<S> <C> <C>
Gross revenues.................. $ 8,701,363 $37,969,996
Profit on sale of properties.... 226,587 0
Less operating expenses,
interest & depreciation....... (2,507,504) (27,439,047)
----------- -----------
Net income...................... $ 6,420,446 $10,530,949
=========== ===========
Cash generated from
operations.................... $14,866,801 $10,530,949
Cash generated from sales and
prepayments................... 226,587 0
Stock received from properties
transferred(3)................ 0 0
----------- -----------
Cash generated from operations
and sales..................... 15,093,388 10,530,949
Less distributions to investors:
Cash from operating cash
flow........................ (13,283,839) (11,874,980)
Cash from sales and
prepayments................. (226,587) 0
Stock from properties
transferred(3).............. 0 0
----------- -----------
Cash generated after cash
distributions................. 1,582,962 (1,344,031)
Less special items:
Amount withdrawn from (added
to) reserves................ (1,453,309) 1,344,031
Amount withheld from income
for payment of mortgage
evaluation fees and
syndication costs........... 0 0
Distribution to sponsor......... (129,653) 0
----------- -----------
Cash generated after cash
distributions and special
items......................... $ 0 $ 0
=========== ===========
DISTRIBUTION DATA FOR $1,000
INVESTED
Cash distributions to investors:
From operations:
Income...................... $ 419.21
Return of capital........... 313.92
From sales and prepayments:
Income...................... 12.51
Return of capital........... 0.00
From stock transferred:
Income...................... 0.00
Return of capital........... $ 0.00
=========== ===========
Percentage of original total
acquisition cost of
properties remaining
invested at December 31,
1999........................
</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.
(4) On February 1, 1999, AFTEMF merged with and into America First Tax Exempt
Investors, L.P., a newly formed partnership. The operating results shown
above for AFTEMF include those of America First Tax Exempt Investors, L.P.
subsequent to February 1, 1999.
D-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, 1999. The results are for the period from the date of commencement
of operations through the date of dissolution.
<TABLE>
<CAPTION>
AFFGMF AFFGMF2
1/2/85 TO 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>
D-4
<PAGE>
APPENDIX E
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............................................... E-1
ARTICLE II
NAME, PLACE OF BUSINESS, PURPOSE AND TERM
Section 2.01. Name.......................................... E-5
Section 2.02. Principal Office and Name and Address of
Registered Agent and Registered Office.......... E-5
Section 2.03. Purpose....................................... E-5
Section 2.04. Term.......................................... E-5
ARTICLE III
PARTNERS AND CAPITAL
Section 3.01. General Partner............................... E-5
Section 3.02. Limited Partners.............................. E-6
Section 3.03. Partnership Capital........................... E-6
Section 3.04. Liability of Partners and Unit Holders........ E-6
ARTICLE IV
DISTRIBUTIONS OF CASH; ALLOCATIONS OF INCOME AND LOSS
Section 4.01. Distributions of Net Operating Income......... E-7
Section 4.02. Distributions of Net Sale Proceeds and of
Liquidation Proceeds............................ E-7
Section 4.03. Allocation of Income and Loss................. E-7
Section 4.04. Determination of Allocations and Distributions
Among Limited Partners and Unit Holders......... E-8
Section 4.05. Capital Accounts.............................. E-8
Section 4.06. Rights to Distributions....................... E-9
Section 4.07. Limitation on Distributions................... E-9
ARTICLE V
RIGHTS, OBLIGATIONS AND POWERS OF THE GENERAL PARTNER
Section 5.01. Management of the Partnership................. E-9
Section 5.02. Authority of the General Partner.............. E-10
Section 5.03. Authority of General Partner and Its
Affiliates to Deal With the Partnership......... E-11
Section 5.04. General Restrictions on Authority of the
General Partner................................. E-12
Section 5.05. Compensation and Fees......................... E-13
Section 5.06. Duties and Obligations of the General
Partner......................................... E-15
Section 5.07. Delegation of Authority....................... E-15
Section 5.08. Other Activities.............................. E-16
Section 5.09. Limitation on Liability of the General Partner
and Initial Limited Partner; Indemnification.... E-16
Section 5.10. Special Amendments to the Agreement........... E-16
ARTICLE VI
CHANGES IN GENERAL PARTNERS
Section 6.01. Withdrawal of General Partner................. E-17
Section 6.02. Admission of a Successor or Additional General
Partner......................................... E-17
Section 6.03. Removal of a General Partner.................. E-17
Section 6.04. Effect of Incapacity of a General Partner..... E-18
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
PAGE
--------
<S> <C>
ARTICLE VII
TRANSFERABILITY OF UNITS AND LIMITED PARTNERS' INTERESTS
Section 7.01. Free Transferability of Units................. E-19
Section 7.02. Restrictions on Transfers of Interests of
Limited Partners Other Than the Initial Limited
Partner......................................... E-20
Section 7.03. Assignees of Limited Partners Other Than the
Initial Limited Partner......................... E-20
Section 7.04. Joint Ownership of Interests.................. E-21
ARTICLE VIII
DISSOLUTION AND LIQUIDATION OF THE PARTNERSHIP
Section 8.01. Events Causing Dissolution.................... E-21
Section 8.02. Liquidation................................... E-22
ARTICLE IX
BOOKS AND RECORDS, ACCOUNTING, REPORTS, TAX ELECTIONS
Section 9.01. Books and Records............................. E-22
Section 9.02. Accounting Basis, Fiscal Year and Tax
Elections....................................... E-23
Section 9.03. Reports....................................... E-23
Section 9.04. Designation of Tax Matters Partner............ E-23
Section 9.05. Expenses of Tax Matters Partner............... E-24
ARTICLE X
MEETINGS AND VOTING RIGHTS OF LIMITED PARTNERS AND UNIT HOLDERS
Section 10.01. Meetings..................................... E-24
Section 10.02. Voting Rights of Limited Partners and Unit
Holders......................................... E-25
Section 10.03. Other Activities............................. E-26
ARTICLE XI
ASSIGNMENT OF LIMITED PARTNER INTERESTS TO UNIT
HOLDERS AND RIGHTS OF UNIT HOLDERS
Section 11.01. Assignment of Limited Partner Interests to
Unit Holders.................................... E-26
Section 11.02. Rights of Unit Holders....................... E-27
Section 11.03. Voting by the Initial Limited Partner on
Behalf of Unit Holders.......................... E-27
Section 11.04. Preservation of Tax Status................... E-28
ARTICLE XII
MISCELLANEOUS PROVISIONS
Section 12.01. Appointment of the General Partner as
Attorney-in-Fact................................ E-28
Section 12.02. Signatures................................... E-28
Section 12.03. Amendments................................... E-29
Section 12.04. Binding Provisions........................... E-29
Section 12.05. Applicable Law............................... E-30
Section 12.06. Separability of Provisions................... E-30
Section 12.07. Captions..................................... E-30
Section 12.08. Entire Agreement............................. E-30
</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
, 2000, by and between America First Capital Source I L.L.C., as the
general partner (the "General Partner"), and
H/T Corp., as the initial limited partner (the "Initial Limited Partner"), who
by joining in this Agreement agree to continue as 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
of the 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. With respect to a General Partner, the foregoing
definition of "Bankruptcy" is intended to replace and shall supersede and
replace the definition of "Bankruptcy" set forth in Sections 17-402(a)(4) and
(5) of the Act.
E-1
<PAGE>
"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.
"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 duty under this Agreement.
"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.
"GAAP" means generally accepted accounting principles, consistently applied.
"General Partner" means AFCSI or any Person or Persons who, at the time of
reference thereto, have been admitted to the Partnership as general partners of
the Partnership and who succeed to the Partnership Interest of AFCSI or as
additional general partners of the Partnership, in each such Person's capacity
as a general partner of the Partnership.
"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
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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 limited partners of
the Partnership and who succeed to the Limited Partner Interest of H/T Corp.
"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 of the
Partnership, 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 to the
Partnership as a Limited Partner. For purposes of the Act, the Limited Partners
shall constitute a single class or group of limited partners.
"Limited Partner Interest" means the Partnership Interest held by a Limited
Partner, including the Limited Partner 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 winding up 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 ,
2000, 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
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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.
"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 continued 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 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.
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"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 Partner 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.
"Unit Holder" means any Person who has been assigned one or more Limited
Partner 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 AND
REGISTERED OFFICE. 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 and registered office of the Partnership
in the State of Delaware is The Corporation Trust Company, 1209 Orange Street,
Wilmington, Delaware 19801. The registered agent and registered office 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.
(b) Upon the dissolution 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
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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 Partner Interests on behalf of the Unit Holders. A Unit Holder will
be deemed a limited partner of the Partnership for federal income tax
purposes, but not for purposes of the Act. 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 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 and to acquire,
hold and dispose of a Limited Partner Interest, 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
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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.
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 or Unit Holder 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.
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(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.
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 4.03.
(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 Partner
Interest or Unit as of the Quarterly Record Date in the ratio that (i) the
number of Limited Partner 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 Partner 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 Partner 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 Partner 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
its 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
Partner 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 Partner Interest or Unit was acquired.
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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 of the Partnership. All distributions
pursuant to this Article IV are subject to the provisions of Section 3.04.
SECTION 4.07. LIMITATION ON DISTRIBUTIONS. Notwithstanding anything to the
contrary contained in this Agreement, the Partnership, and the General Partner
on behalf of the Partnership, shall not make a distribution to any Partner or
Unit Holder on account of his or its interest in the Partnership if such
distribution would violate the Act or other applicable law.
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 the Act and 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.
(c) The Partnership may merge with, or consolidate into, another
Delaware limited partnership or other business entity (as defined in
Section 17-211(a) of the Act) upon the approval by the General Partner and 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). In
accordance with Section 17-211 of the Act (including Section 17-211(g)),
notwithstanding anything to the contrary contained in this Agreement, an
agreement of merger or consolidation approved by the General Partner and 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) may
(i) effect any amendment to this Agreement, or (ii) effect the adoption of a
new partnership agreement for the Partnership if it is the surviving or
resulting limited partnership of the merger or consolidation. Any amendment
to this Agreement or adoption of a new partnership agreement made pursuant
to the foregoing sentence shall be effective at the effective time or date
of the merger or consolidation. For purposes of any vote required by the
Limited Partners in connection with any merger or consolidation, the Limited
Partners shall be treated for purposes of voting as a single class of
limited partners. The provisions of this Section 5.01(c) shall not be
construed to limit the accomplishment of a merger by any other means
otherwise permitted by law.
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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;
(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 accomplished in accordance with this
Agreement 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;
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(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;
(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
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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.
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;
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(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;
(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.
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(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
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
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Partner, its members or managers, or any officer or manager of its members
or managers, 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 permitted or 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 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 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.
(f) Whenever in this Agreement the General Partner is permitted or
required to make a decision (i) in its "discretion" or under a grant of
similar authority or latitude, the General Partner shall be entitled to
consider only such interest and factors as it desires, including its own
interests, and shall have no duty or obligation to give any consideration to
any interest of or factors affecting the Partnership or any other Person,
including the Limited Partners and the Unit Holders, or (ii) in its "good
faith" or under another expressed standard, the General Partner shall act
under such expressed standard and shall not be subject to any other or
different standard imposed by this Agreement or other applicable law.
(g) To the extent that, at law or in equity, a Partner, Unit Holder,
liquidator, officer, employee, representative or agent of the Partnership,
or any other Person (each, a "Covered Person" and collectively, the "Covered
Persons") has duties (including fiduciary duties) and liabilities relating
thereto to the Partnership or to any other Partner, a Covered Person acting
under this Agreement shall not be liable to the Partnership or to any other
Partner for its good faith reliance on the provisions of this Agreement. The
provisions of this Agreement, to the extent that they restrict the duties
and liabilities of a Covered Person otherwise existing at law or in equity,
are agreed by the Partners and the Unit Holders to replace such other duties
and liabilities of such Covered Person.
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
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Partner shall remain liable for any acts or omissions by such Person under the
standards of responsibility for the General Partner set forth herein.
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, Initial Limited Partner or Affiliate 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, Initial Limited Partner's or Affiliate's conduct did not
constitute Cause. The Partnership shall, to the fullest extent permitted by law,
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 obligations 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.
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(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.
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
acquired by the Limited Partners, it shall be
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converted to a Limited Partner Interest. If such Partnership Interest is not
acquired by any successor General Partner or by the Limited Partners, it
shall be converted to a limited partner 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 redeem 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 to have its Partnership Interest converted 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 winding up of the
Partnership, assuming that such dissolution and winding up 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 by any other General Partner or
General Partners, and such General Partner or General Partners are hereby
authorized and shall continue the business of the Partnership without
dissolution; 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 redeemed pursuant to
Section 6.03(b), such General Partner's Partnership Interest shall be
converted into a limited partner interest, with the same rights under
Article IV accorded to a General Partner to share in Income, Loss, Net
Operating Income, Net Sale Proceeds and Liquidation Proceeds, and such
Incapacitated General Partner shall be admitted to the Partnership as a
limited partner of the Partnership upon its execution of a counterpart of
this Agreement. However, any Incapacitated General Partner which becomes a
limited partner pursuant to this Section 6.04(b) 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 (including with
respect to a merger involving the Partnership and amendments to this
Agreement) and shall not be entitled to any portion of the
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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 partner interest
held by 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 6.04 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 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 liability company 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.
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(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 take any other actions
necessary to allow the resale of Units by the Unit Holders.
SECTION 7.02. RESTRICTIONS ON TRANSFERS 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 Partner 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 Partner Interests (other than by the Initial Limited Partner) which
occurs without a transfer of record ownership of such Limited Partner
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 Partner 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 Partner Interests and to join with the
assignee thereof in satisfying any conditions precedent to such assignee
becoming a Limited Partner.
(b) The Partnership need not recognize for any purpose any assignment of
all or any fraction of the Limited Partner 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 Partner Interests shall not cease to be a Limited
Partner unless and until a Limited Partner is admitted in his place.
(d) An assignee of Limited Partner 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 Partner
Interest in his place;
(ii) the assignee shall have fulfilled the requirements of Sections
7.03(b) and 12.03(b);
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(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 to his admission as a Limited Partner, which Consent the General
Partner may withhold in its sole discretion.
(e) This Agreement shall be amended as necessary to recognize the
admission of any Limited Partners. Assignees of Limited Partner 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 Partnership
has received the instrument of assignment and all of the other conditions to
the assignment are satisfied.
(f) An assignee of Limited Partner Interests (other than a Unit Holder)
who does not become a Limited Partner and who desires to make a further
assignment of his Limited Partner 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 Partner
Interests.
SECTION 7.04. JOINT OWNERSHIP OF INTERESTS. Subject to the other
provisions of this Agreement, a Limited Partner Interest or Unit may be acquired
by two or more Persons, who shall, at the time they acquire such Limited Partner
Interest or Unit, indicate to the Partnership whether the Limited Partner
Interest or Unit is being held by them as joint tenants with the right of
survivorship, as tenants-in-common, as tenants by the entirety or as community
property. In the absence of any such designation, joint owners shall be presumed
to hold such Limited Partner 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 Partner 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) the Incapacity of a General Partner or the occurrence of any
other event that results in the General Partner ceasing to be a general
partner of the Partnership under the Act, provided, the Partnership shall
not be dissolved and required to be wound up in connection with any of
the events specified in this clause (i) if (A) at the time of the
occurrence of such event there is at least one remaining General Partner
who is hereby authorized to and does carry on the business of the
Partnership, or (B) within ninety (90) days after the occurrence of such
event, 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 to the
appointment, effective as of the date of such event, if required, of one
or more additional general partners of the Partnership satisfying the
standards set forth in Section 6.02;
(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);
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(vi) at any time that there are no limited partners of the
Partnership, unless the business of the Partnership is continued in
accordance with the Act; or
(vii) the entry of a decree of judicial dissolution under Section
17-802 of the Act.
(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 the assets of the Partnership are distributed as
provided in Section 8.02 and a certificate of cancellation of the
Certificate is filed with the Delaware Secretary of State. 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.
SECTION 8.02. LIQUIDATION.
(a) Upon dissolution of the Partnership, 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 satisfaction 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, to the extent
otherwise permitted by law), including the General Partner or liquidator
setting aside as a reserve such amount as it deems reasonably necessary for
any contingent, conditional or unmatured contractual liabilities or
obligations of the Partnership which may be paid over by the General Partner
or liquidator to a bank, to be held in escrow for the purpose of paying any
such contingent, conditional or unmatured contractual liabilities or
obligations, and, at the expiration of such period as the General Partner
may deem advisable, the remaining assets and liabilities shall be
distributed in the manner set forth in Section 4.02(b) among the Partners
and Unit Holders.
(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, in each case for any purpose reasonably related to such
Partner's or Unit Holder's interest in the Partnership, 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;
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(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).
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 Partner 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 and its Affiliates
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
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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, to the fullest extent permitted by law, 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 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
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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) 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 Partner 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
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.
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(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.
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 PARTNER INTERESTS TO UNIT HOLDERS AND RIGHTS OF UNIT
HOLDERS
SECTION 11.01. ASSIGNMENT OF LIMITED PARTNER 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 Interest. 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 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 Partner 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 Partner 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
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privileges of the Initial Limited Partner in respect of the Limited Partner
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 Partner Interests assigned
to the Unit Holders may be exercised by the Unit Holders, including, without
limitation, those listed in Section 11.01(a).
SECTION 11.02. RIGHTS OF UNIT HOLDERS.
(a) Limited Partners (including the Initial Limited Partner but only
with respect to its own Limited Partner Interests) and Unit Holders shall
share PARI PASSU on the basis of one Limited Partner 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 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 Partner 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.
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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.
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 and each of its members, managers and officers 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 Partner 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 Partner 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
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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.
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 or
registered office 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.
E-29
<PAGE>
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.
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 , 2000.
GENERAL PARTNER:
AMERICA FIRST CAPITAL SOURCE I L.L.C.
--------------------------------------
Michael B. Yanney, President
INITIAL LIMITED PARTNER:
H/T CORP.
--------------------------------------
Michael B. Yanney, President
E-30
<PAGE>
SCHEDULE 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
E-31
<PAGE>
FINANCIAL STATEMENTS SUPPLEMENT
TO
PROSPECTUS/CONSENT
SOLICITATION STATEMENT
----------------
AMERICA FIRST REAL ESTATE
INVESTMENT PARTNERS, L.P.
<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, 1999......... 1
Independent Auditors' Report................................ 7
Balance Sheets as of December 31, 1999 and 1998............. 8
Statements of Income and Comprehensive Income for the Years
Ended December 31, 1999, 1998, 1997....................... 9
Statements of Partners' Capital for the Years Ended December
31, 1999, 1998, 1997...................................... 10
Statements of Cash Flows for the Years Ended December 31,
1999, 1998, and 1997...................................... 11
Notes to Financial Statements............................... 12
Management's Discussion and Analysis of Financial Condition
and Results of Operations as of March 31, 2000............ 21
Balance Sheets as of March 31, 2000 (Unaudited)............. 24
Statements of Income and Comprehensive Income for the Three
Months Ended March 31, 2000 (Unaudited)................... 25
Statements of Partners' Capital for the Three Months Ended
March 31, 2000 (Unaudited)................................ 26
Statements of Cash Flows for the Three Months Ended
March 31, 2000 (Unaudited)................................ 27
Notes to Financial Statements (Unaudited)................... 28
CAPITAL SOURCE II L.P.-A
Management's Discussion and Analysis of Financial Condition
and Results of Operations as of December 31, 1999......... 33
Independent Auditors' Report................................ 38
Balance Sheets as of December 31, 1999 and 1998............. 39
Statements of Income and Comprehensive Income for the Years
Ended December 31, 1999, 1998, 1997....................... 40
Statements of Partners' Capital for the Years Ended December
31, 1999, 1998, 1997...................................... 41
Statements of Cash Flows for the Years Ended December 31,
1999, 1998, and 1997...................................... 42
Notes to Financial Statements............................... 43
Management's Discussion and Analysis of Financial Condition
and Results of Operations as of March 31, 2000............ 52
Balance Sheets as of March 31, 2000 (Unaudited)............. 55
Statements of Income and Comprehensive Income for the Three
Months Ended March 31, 2000 (Unaudited)................... 56
Statements of Partners' Capital for the Three Months Ended
March 31, 2000 (Unaudited)................................ 57
Statements of Cash Flows for the Three Months Ended
March 31, 2000 (Unaudited)................................ 57
Notes to Financial Statements (Unaudited)................... 58
</TABLE>
<PAGE>
CAPITAL SOURCE L.P.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
DECEMBER 31, 1999
Capitalized terms not otherwise defined herein shall have the meanings set
forth in the accompanying Prospectus/Consent Solicitation Statement.
LIQUIDITY AND CAPITAL RESOURCES
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 BAC were as follows:
<TABLE>
<CAPTION>
FOR THE FOR THE FOR THE
YEAR ENDED YEAR ENDED YEAR ENDED
DEC. 31, 1999 DEC. 31, 1998 DEC. 31, 1997
------------- ------------- -------------
<S> <C> <C> <C>
Regular monthly distributions
Income................................................. $ .7905 $ .5582 $ .8952
Return of capital...................................... .2195 .4518 .1148
------- ------- -------
$1.0100 $1.0100 $1.0100
======= ======= =======
Distributions
Paid out of cash flow.................................. $1.0085 $1.0100 $1.0100
Paid out of reserves................................... .0015 -- --
------- ------- -------
$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, 1999, a net amount
of $4,989 was withdrawn from reserves. The total amount held in reserves at
December 31, 1999, was $9,053,549 of which $670,268 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, 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 184 168 91%
Highland Park Apartments..................... Columbus, OH 252 229 91%
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 260 259 100%
Water's Edge Apartments...................... Lake Villa, IL 108 95 88%
----- ------ ---
1,174 1,120 95%
===== ====== ===
</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 1999 and 1998. Operations at Bluff Ridge
are heavily dependent on demand from the local military personnel. The
Jacksonville rental market has remained relatively stable throughout 1999.
Operating revenue increased 1.8% primarily as a result of rental rate increases
while real estate operating costs decreased 1.5% 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 5% from 1998 to 1999. The property was current on its debt service
payments during 1999.
FOX HOLLOW APARTMENTS
Fox Hollow Apartments is a 184-unit apartment community located in High
Point, North Carolina. Average occupancy was 96% in 1999, compared to 95% in
1998. Excluding interest, depreciation and amortization, net operating income
increased approximately 7% from 1998 to 1999. This increase was
2
<PAGE>
primarily due to a 2.6% increase in revenue and a 2.1% decrease in real estate
operating expenses resulting from lower repairs and maintenance expenses and
property improvements. The property remained in compliance with the terms of the
Loan Modification Agreement (LMA) entered into with the mortgage holder in 1996.
During December 1999, the Partnership acquired the sole remaining limited
partner's 1% limited partnership interest in the Operating Partnership which
owns Fox Hollow Apartments. As a result of this acquisition, the Partnership now
owns a 99.99% limited partnership interest in the Fox Hollow Operating
Partnership. The Partnership also acquired the right to receive any and all
payments of principal and interest on certain advances made to the Operating
Partnership by such limited partner. The Partnership paid an aggregate amount of
$325,000 for these acquisitions. The Partnership recorded these acquisitions as
an additional investment in the Operating Partnership which owns Fox Hollow
Apartments.
HIGHLAND PARK APARTMENTS
Highland Park Apartments contains 252 luxury garden apartments and is
located in Columbus, Ohio. Average occupancy was 94% in 1999, compared to 95% in
1998. Excluding interest, depreciation and amortization, net operating income
increased approximately 11% from 1998 to 1999. This increase is due to a 7.8%
increase in revenue attributable primarily to rental rate increases. The
increase in revenue was partially offset by a 2.8% increase in real estate
operating expenses resulting from higher repairs and maintenance expenses,
property improvements and labor costs. The property remained current on its
mortgage obligations throughout 1999.
MISTY SPRINGS APARTMENTS
Misty Springs Apartments is a 128-unit apartment community located in
Daytona Beach, Florida. Average occupancy was 99% in 1999 and 1998. Net
operating income, excluding interest, depreciation and amortization, was
approximately 4% higher in 1999, compared to 1998. This increase resulted from a
4.1% increase in revenue attributable to higher rental rates which was partially
offset by a 4% increase in operating expenses, primarily repairs and maintenance
expenses and property improvements.
At December 31, 1999, 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
1999; however, shortfalls of $35,000 were funded by the Partnership's reserves.
THE PONDS AT GEORGETOWN
The Ponds at Georgetown consists of 134 apartments located in Ann Arbor,
Michigan. Average occupancy was 99% in 1999 and 1998. Excluding interest,
depreciation and amortization, operating income generated by the property in
1999 approximated that of 1998. 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%. Since the restructuring, cash flow generated
from operations has generally been sufficient to cover all the Operating
Partnership's cash needs. The property was current on its mortgage obligations
as of December 31, 1999.
WATERMAN'S CROSSING
Waterman's Crossing is a 260-unit apartment community located in Newport
News, Virginia. Average occupancy was 99% in 1999, compared to 100% in 1998.
Excluding interest, depreciation and amortization, operating income increased 2%
from 1998 to 1999. This increase was due to an increase in revenue of 2.9%
resulting primarily from rental rate increases which was partially offset by
higher operating expenses, primarily repairs and maintenance expenses, property
improvements and labor costs. The Operating Partnership was current on its
mortgage obligations in 1999; however, shortfalls of $25,000 were funded by the
Partnerships reserves.
3
<PAGE>
WATER'S EDGE APARTMENTS
Water's Edge Apartments is a 108-unit apartment complex located in Lake
Villa, Illinois. Average occupancy was 95% in 1999 compared to 96% in 1998.
Although 1999 operating revenue approximated that of 1998, net operating income,
excluding interest, depreciation and amortization, increased approximately 11%
in 1999 compared to 1998. This increase is attributable to decreases in property
taxes, utilities, administrative expenses, repairs and maintenance expenses and
property improvements. The Operating Partnership remained current on its
mortgage obligations in 1999. The Partnership received a $59,755 distribution of
excess cash flow from this property during 1999.
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, 1999 DEC. 31, 1998 DEC. 31, 1997
------------- ------------- -------------
<S> <C> <C> <C>
Mortgage-backed securities income........................ $3,215,472 $3,262,922 $3,302,727
Interest income on temporary cash investments............ 431,111 530,396 554,604
Equity in losses of Operating Partnerships............... (325,245) (186,942) (178,550)
Other income............................................. 2,000 6,300 5,334
---------- ---------- ----------
3,323,338 3,612,676 3,684,115
Operating and administrative expenses.................... 629,037 1,710,173 632,894
---------- ---------- ----------
Net income............................................... $2,694,301 $1,902,503 $3,051,221
========== ========== ==========
</TABLE>
<TABLE>
<CAPTION>
INCREASE INCREASE
(DECREASE) (DECREASE)
FROM 1998 FROM 1997
----------- -----------
<S> <C> <C>
Mortgage-backed securities income........................... $ (47,450) $ (39,805)
Interest income on temporary cash investments............... (99,285) (24,208)
Equity in losses of Operating Partnerships.................. (138,303) (8,392)
Other income................................................ (4,300) 966
----------- -----------
(289,338) (71,439)
Operating and administrative expenses....................... (1,081,136) 1,077,279
----------- -----------
Net income.................................................. $ 791,798 $(1,148,718)
=========== ===========
</TABLE>
Mortgage-backed securities income decreased by $47,450 from 1998 to 1999.
Such decrease was attributable to the fourth quarter 1998 payoff of the GNMA
Certificate of the Ponds at Georgetown at 9.25% and the issuance of a new GNMA
Certificate at 7.25%, as well as the continued amortization of the principal
balances of the Partnership's mortgage-backed securities.
Mortgage-backed securities income decreased by $39,805 from 1997 to 1998,
due to the continued amortization of the principal balances of the Partnership's
mortgage-backed securities.
Interest income on temporary cash investments decreased by $99,285 from 1998
to 1999 and $24,208 from 1997 to 1998 due to a decrease in the average cash
balance held by the Partnership. This decrease resulted primarily from the use
of cash to make additional equity contributions to the Ponds at Georgetown in
September 1998 and to increase the investment in the Ponds at Georgetown GNMA
Certificate in October 1998.
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
4
<PAGE>
extent of additional contributions, net of distributions received, to the
Operating Partnerships by the Partnership.
The Partnership made additional contributions to certain Operating
Partnerships of $385,000, $186,942, and $178,550 during 1999, 1998 and 1997,
respectively. During 1999, the Partnership received a distribution of $59,755
from one of the Operating Partnerships. No such distributions were received in
1998 or 1997. The Partnership recorded equity in losses of Operating
Partnerships in 1999, 1998, and 1997 to the extent of the additional
contributions to Operating Partnerships, net of distributions received.
Accordingly, equity in losses of Operating Partnerships decreased $138,303 from
1998 to 1999 and decreased $8,392 from 1997 to 1998.
Operating and administrative expenses decreased $1,081,136 from 1998 to
1999. This decrease was due to: (i) the 1998 write-off of approximately $767,000
in transaction costs incurred in conjunction with a proposed merger which was no
longer under consideration; (ii) decreases of $218,000 in salaries and related
expenses and $57,000 in consulting expenses due to a reduction of personnel time
and consulting fees incurred in connection with developing and evaluating
alternatives for restructuring the Partnership; (iii) a decrease of
approximately $52,000 in amortization expenses as certain deferred costs became
fully amortized in 1998; and (iv) a decrease of $77,000 in other general and
administrative expenses. These expense decreases were partially offset by an
increase of approximately $90,000 in legal fees resulting from the defense of a
class action lawsuit filed against the Partnership as more fully described in
Note 9 to the financial statements.
Operating and administrative expenses increased $1,077,279 from 1997 to
1998. This increase was due to: (i) the write-off in 1998 of approximately
$767,000 in transaction costs incurred in conjunction with a proposed merger
which was no longer under consideration; (ii) an increase of approximately
$273,000 in salaries and related expenses primarily due to additional personnel
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.
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. 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. To date, the Partnership has not
experienced any significant problems with such systems and equipment arising
from the inability of computer programs and embedded circuitry to correctly
recognize dates occurring after December 31, 1999. Although the Partnership does
not anticipate that so-called "Year 2000 problems" will surface, there can be no
assurance that such problems will not arise. The Partnership has not incurred
any significant costs in rectifying Year 2000 problems.
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
5
<PAGE>
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.
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 are 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>
2000 251,152 8.85%
2001 275,138 8.85%
2002 301,431 8.84%
2003 330,255 8.84%
2004 361,849 8.83%
Thereafter 33,935,875 9.02%
</TABLE>
The aggregate fair value of the Partnership's investment securities at
December 31, 1999 was $35,464,997.
As the above table incorporates only those positions or exposures that
existed as of December 31, 1999, it does not consider those exposures or
positions that could arise after that date. Moreover, because future commitments
are not presented in the table above, the information presented has limited
predictive value. As a result, the Partnership's ultimate economic impact with
respect to interest rate fluctuations will depend on the exposures that arise
during the period, the Partnership's risk mitigating strategies at that time and
interest rates.
6
<PAGE>
INDEPENDENT AUDITORS' REPORT
To the Partners
Capital Source L.P.:
We have audited the accompanying balance sheets of Capital Source L.P. as of
December 31, 1999 and 1998, 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, 1999. 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, 1999 and 1998, and the results of its operations and its cash flows
for each of the three years in the period ended December 31, 1999, in conformity
with generally accepted accounting principles.
/s/ KPMG LLP
Omaha, Nebraska
March 17, 2000
7
<PAGE>
CAPITAL SOURCE L.P.
BALANCE SHEETS
<TABLE>
<CAPTION>
DECEMBER 31, 1999 DECEMBER 31, 1998
------------------ -----------------
<S> <C> <C>
ASSETS
Cash and temporary cash investments, at cost which
approximates market value............................... $ 8,658,997 $ 9,304,694
Investment in FHA Loans (Note 5).......................... 12,340,447 12,429,485
Investment in GNMA Certificates (Note 5).................. 23,105,420 23,454,411
Investment in Operating Partnerships (Note 6)............. -- --
Interest receivable....................................... 304,743 306,659
Other assets.............................................. 457,866 211,928
----------- -----------
$44,867,473 $45,707,177
=========== ===========
LIABILITIES AND PARTNERS' CAPITAL (DEFICIT)
Liabilities
Accounts payable (Note 7)............................... $ 420,860 $ 490,085
Distribution payable (Note 4)........................... 860,597 860,597
----------- -----------
1,281,457 1,350,682
----------- -----------
Partners' Capital (Deficit)
General Partner......................................... (179,799) (172,094)
Beneficial Assignment Certificate Holders
($12.97 per BAC in 1999 and $13.20 in 1998)........... 43,765,815 44,528,589
----------- -----------
43,586,016 44,356,495
----------- -----------
$44,867,473 $45,707,177
=========== ===========
</TABLE>
The accompanying notes are an integral part of the financial statements.
8
<PAGE>
CAPITAL SOURCE L.P.
STATEMENTS OF INCOME AND COMPREHENSIVE INCOME
<TABLE>
<CAPTION>
FOR THE YEAR ENDED DECEMBER 31,
------------------------------------
1999 1998 1997
---------- ---------- ----------
<S> <C> <C> <C>
Income
Mortgage-backed securities income (Note 5)............. $3,215,472 $3,262,922 $3,302,727
Interest income on temporary cash investments.......... 431,111 530,396 554,604
Equity in losses of Operating Partnerships (Note 6).... (325,245) (186,942) (178,550)
Other income........................................... 2,000 6,300 5,334
---------- ---------- ----------
3,323,338 3,612,676 3,684,115
Expenses
Operating and administrative expenses (Note 7)......... 629,037 1,710,173 632,894
---------- ---------- ----------
Net income............................................... 2,694,301 $1,902,503 $3,051,221
Other comprehensive income:
Unrealized gains on securities
Unrealized holding gains (losses) arising during the
year............................................... (22,392) (4,699) 2,114
---------- ---------- ----------
Net comprehensive income................................. $2,671,909 $1,897,804 $3,053,335
========== ========== ==========
Net income allocated to:
General Partner........................................ $ 26,943 $ 19,025 $ 30,512
BAC Holders............................................ 2,667,358 1,883,478 3,020,709
---------- ---------- ----------
$2,694,301 $1,902,503 $3,051,221
========== ========== ==========
Net income, basic and diluted, per BAC................... $ .79 $ .56 $ .90
========== ========== ==========
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.
9
<PAGE>
CAPITAL SOURCE L.P.
STATEMENTS OF PARTNERS' CAPITAL (DEFICIT)
FROM DECEMBER 31, 1996 TO DECEMBER 31, 1999
<TABLE>
<CAPTION>
GENERAL BAC
PARTNERS HOLDERS TOTAL
--------- ----------- -----------
<S> <C> <C> <C>
Partners' Capital (Deficit) (excluding accumulated other
comprehensive income)
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)
--------- ----------- -----------
Balance at December 31, 1998.......................... (172,483) 44,490,061 44,317,578
Net income............................................ 26,943 2,667,358 2,694,301
Cash distributions paid or accrued (Note 4)........... (34,424) (3,407,964) (3,442,388)
--------- ----------- -----------
(179,964) 43,749,455 43,569,491
Accumulated Other Comprehensive Income
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)
--------- ----------- -----------
Balance at December 31, 1998.......................... 389 38,528 38,917
Other comprehensive income............................ (224) (22,168) (22,392)
--------- ----------- -----------
165 16,360 16,525
--------- ----------- -----------
Balance at December 31, 1999............................ $(179,799) $43,765,815 $43,586,016
========= =========== ===========
</TABLE>
The accompanying notes are an integral part of the financial statements.
10
<PAGE>
CAPITAL SOURCE L.P.
STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
FOR THE FOR THE FOR THE
YEAR ENDED YEAR ENDED YEAR ENDED
DECEMBER 31, 1999 DECEMBER 31, 1998 DECEMBER 31, 1997
------------------ ------------------ ------------------
<S> <C> <C> <C>
Cash flows from operating activities
Net income................................. $ 2,694,301 $ 1,902,503 $ 3,051,221
Adjustments to reconcile net income to
net cash provided by operating activities
Equity in losses of Operating
Partnerships........................... 325,245 186,942 178,550
Amortization of discount on
mortgage-backed securities............. (2,216) (2,287) (2,665)
Decrease in interest receivable.......... 1,916 14,826 275
Decrease (increase) in other assets...... 207,037 (77,354) (3,605)
(Decrease) increase in accounts
payable................................ (69,225) 285,943 106,086
----------- ----------- -----------
Net cash provided by operating activities.... 3,157,058 2,310,573 3,329,862
----------- ----------- -----------
Cash flows from investing activities
FHA Loan and GNMA principal payments
received................................. 417,853 2,635,396 429,144
Distributions received from Operating
Partnerships............................. 59,755 -- --
Acquisition of GNMA Certificate............ -- (2,422,519) --
Investments in Operating Partnerships...... (385,000) (186,942) (178,550)
Deferred transaction costs paid............ (452,975) -- --
----------- ----------- -----------
Net cash (used in) provided by investing
activities............................... (360,367) 25,935 250,594
----------- ----------- -----------
Cash flow from financing activity
Distributions paid......................... (3,442,388) (3,442,378) (3,442,389)
----------- ----------- -----------
Net (decrease) increase in cash and temporary
cash investments........................... (645,697) (1,105,870) 138,067
Cash and temporary cash investments at
beginning of year........................ 9,304,694 10,410,564 10,272,497
----------- ----------- -----------
Cash and temporary cash investments at end
of year.................................. $ 8,658,997 $ 9,304,694 $10,410,564
=========== =========== ===========
</TABLE>
The accompanying notes are an integral part of the financial statements.
11
<PAGE>
CAPITAL SOURCE L.P.
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1999
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
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 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 distributions received, to the Operating Partnerships by the Partnership. The
Operating Partnerships are not insured or guaranteed.
12
<PAGE>
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 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 $10,629,471 and $10,331,740 at
December 31, 1999, and December 31, 1998, 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) NEW ACCOUNTING PRONOUNCEMENT. 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 use of derivative
instruments. Adoption of this statement, as amended, is required by the
Partnership effective January 1, 2001. Management believes that the impact of
such adoption will not be material to the financial statements.
3. PARTNERSHIP RESERVE ACCOUNT.
The Partnership maintains a reserve account which consisted of the following
at December 31, 1999:
<TABLE>
<S> <C>
Cash and temporary cash investments......................... $8,383,281
GNMA Certificates........................................... 670,268
----------
$9,053,549
==========
</TABLE>
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 GNMA Certificates.
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 change in 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.
13
<PAGE>
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, 1999, the total amortized cost, gross unrealized holding
gains, and aggregate fair value of available-for-sale securities were $653,743,
$16,525 and $670,268, respectively. The total amortized cost, gross unrealized
holding gains and aggregate fair value of held-to-maturity securities were
$34,775,599, $19,130 and $34,794,729, respectively.
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.
Descriptions of the Partnership's mortgage-backed securities held during the
year ended December 31, 1999, are as follows:
<TABLE>
<CAPTION>
INCOME
NUMBER INTEREST CARRYING EARNED IN
TYPE OF SECURITY AND NAME LOCATION OF UNITS RATE MATURITY DATE AMOUNT 1999
------------------------- ----------------- -------- -------- ------------- ----------- ----------
<S> <C> <C> <C> <C> <C> <C>
Held-to-Maturity
GNMA Certificates:
Misty Springs Apartments Daytona Beach, FL 128 8.75% 06-15-2029 $ 4,219,029 $ 370,292
The Ponds at Georgetown Ann Arbor, MI 134 7.50%(1) 12-15-2029 2,400,377 182,287
Waterman's Crossing Newport News, VA 260 10.00% 09-15-2028 10,815,058 1,084,256
Water's Edge Apartments Lake Villa, IL 108 8.75% 12-15-2028 5,000,688 438,962
----------- ----------
22,435,152 2,075,797
FHA Loans:
Bluff Ridge Apartments Jacksonville, NC 108 8.72% 11-15-2028 3,462,315 302,925
Highland Park Apartments Columbus, OH 252 8.75% 11-01-2028 8,878,132 779,449
----------- ----------
12,340,447 1,082,374
----------- ----------
34,775,599 3,158,171
----------- ----------
Available-for-Sale
GNMA Certificates:
Pools of single-family mortgages 7.58%(2) 2008 to 2009 348,945(3) 29,245
Pools of single-family mortgages 7.58%(2) 2007 to 2008 321,323(3) 28,056
----------- ----------
670,268 57,301
----------- ----------
Balance at December 31, 1999 $35,445,867 $3,215,472
=========== ==========
</TABLE>
---------------
(1) During the fourth quarter of 1998, the GNMA Certificate backed by a first
mortgage loan on this property 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.
14
<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, 1999 DEC. 31, 1998 DEC. 31, 1997
-------------- ------------- -------------
<S> <C> <C> <C>
Balance at beginning of year.......................... $35,883,896 $36,099,185 $36,523,550
Additions
Acquisition of GNMA Certificate................... -- 2,422,519 --
Amortization of discount on mortgage-backed
securities...................................... 2,216 2,287 2,665
Deductions
FHA Loan and GNMA principal payments received..... (417,853) (2,635,396) (429,144)
Change in net unrealized holding gains on
available-for-sale mortgage-backed securities... (22,392) (4,699) 2,114
----------- ----------- -----------
Balance at end of year................................ $35,445,867 $35,883,896 $36,099,185
=========== =========== ===========
</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 provide 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, 1999, are as
follows:
<TABLE>
<CAPTION>
1999 EQUITY IN
LOSSES OF
CARRYING OPERATING
NAME LOCATION PARTNERSHIP NAME AMOUNT PARTNERSHIPS
---- ----------------- -------------------------- -------- --------------
<S> <C> <C> <C> <C>
Bluff Ridge Apartments Jacksonville, NC Bluff Ridge Associates
Limited Partnership $ -- $ --
Fox Hollow Apartments High Point, NC Fox Hollow Limited
Partnership (325,000)(1)
Highland Park Apartments Columbus, OH Interstate Limited
Partnership -- --
Misty Springs Apartments Daytona Beach, FL Cypress Landings II, LTD. -- (35,000)
The Ponds at Georgetown Ann Arbor, MI Ponds at Georgetown
Limited Partnership -- --
Waterman's Crossing Newport News, VA Oyster Cove Limited
Partnership -- (25,000)
Water's Edge Apartments Lake Villa, IL Water's Edge Limited
Partnership -- 59,755
---- ---------
Balance at December 31, 1999 $ -- $(325,245)
==== =========
</TABLE>
------------
(1) During December 1999, the Partnership acquired the sole remaining limited
partner's 1% limited partnership interest in the Operating Partnership which
owns Fox Hollow Apartments. As a result of this acquisition, the Partnership
now owns a 99.99% limited partnership interest in the Fox Hollow Operating
Partnership. The Partnership also acquired the right to receive any and all
payments of principal and interest on certain advances made to the Operating
Partnership by such limited partner. The Partnership paid an aggregate
amount of $325,000 for these acquisitions. The Partnership recorded these
acquisitions as an additional investment in the Operating Partnership which
owns Fox Hollow Apartments.
15
<PAGE>
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, 1999 DEC. 31, 1998 DEC. 31, 1997
------------- ------------- -------------
<S> <C> <C> <C>
Balance at beginning of year............................. $ -- $ -- $ --
Addition
Investment in Operating Partnerships................. 385,000 186,942 178,550
Deductions
Equity in losses of Operating Partnerships........... (325,245) (186,942) (178,550)
Distributions received from Operating Partnerships... (59,755) -- --
--------- --------- ---------
Balance at end of year................................... $ -- $ -- $ --
========= ========= =========
</TABLE>
Combined Financial Statements of the Operating Partnerships are as follows:
CAPITAL SOURCE L.P.
OPERATING PARTNERSHIPS BALANCE SHEETS
<TABLE>
<CAPTION>
DEC. 31, 1999 DEC. 31, 1998
------------- -------------
<S> <C> <C>
Assets
Investment in real estate:
Land.................................................... $ 3,098,171 $ 3,098,171
Buildings............................................... 38,090,720 38,090,720
Personal Property....................................... 1,673,094 1,663,961
------------ ------------
42,861,985 42,852,852
Less accumulated depreciation........................... (13,173,956) (12,219,492)
------------ ------------
Net investment in real estate........................... 29,688,029 30,633,360
Cash and temporary cash investments, at cost which
approximates market value............................. 556,730 358,887
Escrow deposits and property reserves................... 664,474 567,420
Interest and other receivables.......................... 29,929 56,782
Deferred mortgage issuance cost, net of accumulated
amortization.......................................... 1,986,492 2,061,678
Other assets............................................ 518,161 448,844
------------ ------------
$ 33,443,815 $ 34,126,971
============ ============
Liabilities and Partners' Capital (Deficit)
Liabilities
Accounts payable and accrued expenses................... $ 1,003,466 $ 1,194,470
Mortgage loan payable................................... 40,886,773 41,100,810
Intercompany interest payable........................... 252,081 254,370
Due to general partners and their affiliates............ 3,919,323 3,941,467
------------ ------------
46,061,643 46,491,117
------------ ------------
Partners' Capital (Deficit)
General Partners........................................ (12,617,828) (12,364,146)
Limited Partners........................................ -- --
------------ ------------
(12,617,828) (12,364,146)
------------ ------------
$ 33,443,815 $ 34,126,971
============ ============
</TABLE>
16
<PAGE>
CAPITAL SOURCE L.P.
OPERATING PARTNERSHIPS INCOME STATEMENTS
<TABLE>
<CAPTION>
FOR THE FOR THE FOR THE
YEAR ENDED YEAR ENDED YEAR ENDED
DEC. 31, 1999 DEC. 31, 1998 DEC. 31, 1997
------------- ------------- -------------
<S> <C> <C> <C>
Income
Rental income.......................................... $8,075,019 $7,739,350 $7,555,700
Interest on temporary cash investment.................. 26,338 23,807 29,277
Other income........................................... 255,456 374,279 246,723
---------- ---------- ----------
8,356,813 8,137,436 7,831,700
---------- ---------- ----------
Expenses
Real estate operating expenses......................... 3,618,813 3,674,740 3,601,141
Depreciation expense................................... 954,464 952,305 960,062
Interest expense....................................... 3,976,989 4,067,738 4,073,157
Amortization........................................... 75,186 75,201 73,980
---------- ---------- ----------
8,625,452 8,769,984 8,708,340
---------- ---------- ----------
Net Loss................................................. $ (268,639) $ (632,548) $ (876,640)
========== ========== ==========
Net Loss allocated to:
General Partners....................................... $ 56,606 $ (445,606) $ (698,090)
Limited partners....................................... (325,245) (186,942) (178,550)
---------- ---------- ----------
$ (268,639) $ (632,548) $ (876,640)
========== ========== ==========
</TABLE>
17
<PAGE>
CAPITAL SOURCE L.P.
OPERATING PARTNERSHIPS STATEMENTS OF CASH FLOW
<TABLE>
<CAPTION>
FOR THE FOR THE FOR THE
YEAR ENDED YEAR ENDED YEAR ENDED
DEC. 31, 1999 DEC. 31, 1998 DEC. 31, 1997
------------- ------------- -------------
<S> <C> <C> <C>
Cash flows from operating activities
Net loss................................................. $ (268,639) $ (632,548) $ (876,640)
Adjustments to reconcile net loss to net cash
provided by operating activities:
Depreciation and amortization........................ 1,029,650 1,027,506 1,034,042
Decrease (increase) in interest and other
receivables........................................ 26,853 (40,679) (7,298)
Decrease (increase) in escrow deposits and property
reserves........................................... 97,054 (33,333) (358)
Decrease (increase) in other assets.................. (69,317) 69,817 21,962
Increase (decrease) in accounts payable and accrued
expenses........................................... (191,004) (109,402) 9,152
Decrease in interest payable......................... (2,289) (36,860) (1,173)
Decrease in due to general partners and their
affiliates......................................... (22,144) (72,159) (103,479)
---------- ---------- ----------
Net cash provided by operating activities.............. 600,164 172,342 76,208
---------- ---------- ----------
Cash flows from investing activities:
Acquisition of real estate........................... -- (378,315) (19,652)
Acquisition of personal property..................... (9,133) 337,990 (8,971)
---------- ---------- ----------
Net cash used in investing activities................ (9,133) (40,325) (28,623)
---------- ---------- ----------
Cash flows from financing activities:
Principal payments on mortgage loan payable.......... (214,037) (230,869) (219,993)
Contributions received............................... 60,000 186,942 178,550
Distributions paid................................... (60,359) -- --
Other, net........................................... (178,792) (23,436) (29,310)
---------- ---------- ----------
Net cash used in financing activities................ (393,188) (67,363) (70,753)
---------- ---------- ----------
Net increase (decrease) in cash and temporary cash
investments............................................ 197,843 64,654 (23,168)
Cash and temporary cash investments at beginning of
year................................................... 358,887 294,233 317,401
---------- ---------- ----------
Cash and temporary cash investments at end of year....... $ 556,730 $ 358,887 $ 294,233
========== ========== ==========
</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, 1999, 1998 and 1997, distributions to investors represented
less than an 8% return; accordingly, no fees were paid or accrued during these
years.
18
<PAGE>
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
and costs reimbursed to the General Partner was $657,861, $1,305,744, and
$533,419 for the years ended December 31, 1999, 1998 and 1997, respectively. The
reimbursements 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. The fees for services provided
were $210,137, $196,606 and $183,069 for 1999, 1998 and 1997, 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. Refer to the table below for carrying amounts and estimated fair
values of such investments.
<TABLE>
<CAPTION>
AT DECEMBER 31, 1999 AT DECEMBER 31, 1998
------------------------- -------------------------
CARRYING ESTIMATED CARRYING ESTIMATED
AMOUNT FAIR VALUE AMOUNT FAIR VALUE
----------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
Investment in FHA Loans................... $12,340,447 $12,340,447 $12,429,485 $12,500,047
Investment in GNMA Certificates........... $23,105,420 $23,124,550 $23,454,411 $23,629,076
</TABLE>
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 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.
In this complaint, the plaintiffs sought to enjoin the proposed merger
transaction and seek 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.
The General Partners determined not to pursue the merger transaction which
was the subject of the initial lawsuit and proposed an alternative transaction
to BAC holders. A prospectus/consent solicitation statement outlining this
alternative transaction was sent to BAC holders on or about November 16, 1999.
The plaintiffs amended their complaint on December 8, 1999, and again on
February 22, 2000. The second amended complaint challenges this current
prospectus/consent solicitation statement on grounds similar to those alleged in
the original complaint, as well as on other procedural grounds. The second
amended complaint does not seek to enjoin the proposed merger transaction.
19
<PAGE>
On July 12, 1999, Sandra G. Panzer, one of the named plaintiffs in the
action described above, filed an additional complaint against the Partnership,
its General Partners and America First in the Delaware Court of Chancery. The
complaint seeks to compel the General Partners to supply the plaintiff with a
list of all BAC holders of the Partnership and copies of the limited partnership
agreements of the Operating Partnerships.
The General Partners have moved to dismiss these complaints, and they intend
to defend these lawsuits vigorously, but are unable to estimate the effect of
either of these lawsuits, if any, on the financial statements of the Partnership
or on the ability of the Partnership to consummate the proposed merger with
Capital Source II L.P.-A.
10. SUMMARY OF UNAUDITED QUARTERLY RESULTS OF OPERATIONS.
<TABLE>
<CAPTION>
FIRST SECOND THIRD FOURTH
FROM JANUARY 1, 1999, TO DECEMBER 31, 1999 QUARTER QUARTER QUARTER QUARTER
------------------------------------------ --------- --------- --------- ---------
<S> <C> <C> <C> <C>
Total income.............................. $ 863,492(1) $ 907,900 $ 971,738(2) $ 580,208(1)
Total expenses............................ (144,121) (179,413) (117,480) (188,023)
--------- --------- --------- ---------
Net income................................ $ 719,371 $ 728,487 $ 854,258 $ 392,185
========= ========= ========= =========
Net income, basic and diluted, per BAC.... $ .21 $ .21 $ .26 $ .11
========= ========= ========= =========
</TABLE>
------------
(1) The Partnership recorded equity in losses of Operating Partnerships of
$50,000 and $335,000 during the first and fourth quarters, respectively.
(2) The Partnership recorded equity in earnings of Operating Partnerships of
$59,755.
<TABLE>
<CAPTION>
FIRST SECOND THIRD FOURTH
FROM JANUARY 1, 1998, TO DECEMBER 31, 1998 QUARTER QUARTER QUARTER QUARTER
------------------------------------------ --------- --------- --------- -----------
<S> <C> <C> <C> <C>
Total income.............................. $ 949,619 $ 956,546 $ 797,305(1) $ 909,206
Total expenses............................ (222,804) (196,565) (220,104) (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 a proposed merger which was no longer under
consideration.
20
<PAGE>
CAPITAL SOURCE L.P.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
MARCH 31, 2000
Capitalized terms not otherwise defined herein shall have the meanings set
forth in the accompanying Prospectus/Consent Solicitation Statement.
LIQUIDITY AND CAPITAL RESOURCES
The Partnership originally acquired: (a) 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; (b) 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 (c) Partnership Equity
Investments in eight limited partnerships which own the multifamily properties
financed by the GNMA Certificates and FHA Loans. The Partnership has been repaid
by GNMA on one of its GNMA Certificates and by FHA on one of its first mortgage
loans. In addition, the Partnership no longer holds a Partnership Equity
Investment in the Operating Partnership which owned the property collateralizing
the repaid GNMA Certificate. 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
MAR. 31, 2000 MAR. 31, 1999
-------------- --------------
<S> <C> <C>
Regular quarterly distributions
Income.......................................... $.2281 $.2111
Return of capital............................... .0244 .0414
------ ------
.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 BAC Holders. The
Partnership is permitted to replenish reserves with cash flows in excess of
distributions paid. For the three months ended March 31, 2000, $13,667 was
withdrawn from reserves to supplement distributions to BAC Holders. The total
amount held in reserves at March 31, 2000 was $9,025,709 of which $640,606 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.
21
<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 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, 1999.
The following table shows the occupancy levels of the properties financed by
the Partnership at March 31, 2000:
<TABLE>
<CAPTION>
NUMBER
NUMBER OF UNITS PERCENTAGE OF
PROPERTY NAME LOCATION OF UNITS OCCUPIED UNITS OCCUPIED
------------- -------- -------- -------- --------------
<S> <C> <C> <C> <C>
Bluff Ridge Apartments........ Jacksonville, NC 108 105 97%
Fox Hollow Apartments......... High Point, NC 184 184 100%
Highland Park Apartments...... Columbus, OH 252 233 92%
Misty Springs Apartments...... Daytona Beach, FL 128 128 100%
The Ponds at Georgetown....... Ann Arbor, MI 134 134 100%
Waterman's Crossing........... Newport News, VA 260 257 99%
Water's Edge Apartments....... Lake Villa, IL 108 100 93%
----- ----- ---
1,174 1,141 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)
MAR. 31, 2000 MAR. 31, 1999 FROM 1999
-------------- -------------- ----------
<S> <C> <C> <C>
Mortgage-backed securities income....................... $798,656 $807,466 $(8,810)
Interest income on temporary cash investments........... 114,330 104,026 10,304
Equity in earnings (losses) of Operating Partnerships... 15,488 (50,000) 65,488
Other income............................................ -- 2,000 (2,000)
-------- -------- -------
928,474 863,492 64,982
Operating and administrative expenses................... 151,150 144,121 7,029
-------- -------- -------
Net income.............................................. $777,324 $719,371 $57,953
======== ======== =======
</TABLE>
Mortgage-backed securities income decreased for the three months ended
March 31, 2000, compared to the same period in 1999 due to the continued
amortization of the principal balances of the Partnership's mortgage-backed
securities.
Interest income on temporary cash investments increased for the three months
ended March 31, 2000, compared to the same period in 1999 due to an increase in
the average interest rate earned on reserve investments.
22
<PAGE>
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. Any distributions received by the Partnership from the
Operating Partnerships are recorded as income.
During the three months ended March 31, 2000, the Partnership received a
distribution of $15,488 from one of the Operating Partnerships whereas no such
distribution was received during the comparable period in 1999. In addition, the
Partnership did not make additional contributions to any Operating Partnerships
during the three months ending March 31, 2000, while additional contributions
totaling $50,000 were made to certain Operating Partnerships during the same
period in 1999. The Partnership recorded equity in earnings (losses) of
Operating Partnerships for the respective periods to the extent of the
additional investments in Operating Partnerships, net of distributions received.
Accordingly, equity in earnings (losses) of operating Partnerships increased
$65,488 for the three months ended March 31, 2000 compared to the same period in
1999.
Operating and administrative expenses increased for the three months ended
March 31, 2000, compared to the same period in 1999 primarily due to an increase
in legal fees.
QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
There have been no material changes in the Partnership's market risk since
December 31, 1999.
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.
23
<PAGE>
CAPITAL SOURCE L.P.
BALANCE SHEETS
<TABLE>
<CAPTION>
MAR. 31, 2000
(UNAUDITED) DEC. 31, 1999
------------- -------------
<S> <C> <C>
ASSETS
Cash and temporary cash investments, at cost which
approximates market value............................... $ 8,430,065 $ 8,658,997
Investment in FHA Loans (Note 5).......................... 12,316,940 12,340,447
Investment in GNMA Certificates (Note 5).................. 23,038,648 23,105,420
Investment in Operating Partnerships (Note 6)............. -- --
Interest receivable....................................... 304,886 304,743
Other assets.............................................. 464,387 457,866
----------- -----------
$44,554,926 $44,867,473
=========== ===========
LIABILITIES AND PARTNERS' CAPITAL (DEFICIT)
Liabilities
Accounts payable (Note 7)............................... $ 197,079 $ 420,860
Distribution payable (Note 4)........................... 860,597 860,597
----------- -----------
1,057,676 1,281,457
----------- -----------
Partners' Capital (Deficit)
General Partner........................................... (180,687) (179,799)
Beneficial Assignment Certificate Holders
($12.94 per BAC in 2000 and $12.97 in 1999)........... 43,677,937 43,765,815
----------- -----------
43,497,250 43,586,016
----------- -----------
$44,554,926 $44,867,473
=========== ===========
</TABLE>
The accompanying notes are an integral part of the financial statements.
24
<PAGE>
CAPITAL SOURCE L.P.
STATEMENTS OF INCOME AND COMPREHENSIVE INCOME
(UNAUDITED)
<TABLE>
<CAPTION>
FOR THE THREE FOR THE THREE
MONTHS MONTHS
ENDED ENDED
MAR. 31, 2000 MAR. 31, 1999
-------------- --------------
<S> <C> <C>
Income
Mortgage-backed securities income......................... $798,656 $807,466
Interest income on temporary cash investments............. 114,330 104,026
Equity in earnings (losses) of Operating Partnerships..... 15,488 (50,000)
Other income.............................................. -- 2,000
-------- --------
928,474 863,492
Expenses
Operating and administrative expenses (Note 7)............ 151,150 144,121
-------- --------
777,324 719,371
Net income
Other comprehensive income:
Unrealized holding gains (losses) on securities arising
during the period....................................... (5,493) 2,995
-------- --------
Net comprehensive income.................................... $771,831 $722,366
======== ========
Net income allocated to:
General Partner........................................... 7,773 7,194
Limited Partner........................................... 769,551 712,177
-------- --------
$777,324 $719,371
======== ========
Net income, basic and diluted, per BAC...................... $ .23 $ .21
======== ========
</TABLE>
The accompanying notes are an integral part of the financial statements.
25
<PAGE>
CAPITAL SOURCE L.P.
STATEMENT OF PARTNERS CAPITAL (DEFICIT)
FOR THE THREE MONTHS ENDED MARCH 31, 2000
(UNAUDITED)
<TABLE>
<CAPTION>
GENERAL BAC
PARTNER HOLDERS TOTAL
--------- ----------- -----------
<S> <C> <C> <C>
Partners' Capital (Deficit)
(excluding accumulated other comprehensive income)
Balance at December 31, 1999.......................... $(179,964) $43,749,455 $43,569,491
Net income............................................ 7,773 769,551 777,324
Cash distributions paid or accrued (Note 4)........... (8,606) (851,991) (860,597)
--------- ----------- -----------
(180,797) 43,667,015 43,486,218
--------- ----------- -----------
Accumulated other comprehensive income
Balance at December 31, 1999.......................... 165 16,360 16,525
Other comprehensive income............................ (55) (5,438) (5,493)
--------- ----------- -----------
110 10,922 11,032
--------- ----------- -----------
Balance at March 31, 2000............................... $(180,687) $43,677,937 $43,497,250
========= =========== ===========
</TABLE>
26
<PAGE>
CAPITAL SOURCE L.P.
STATEMENTS OF CASH FLOWS
(UNAUDITED)
<TABLE>
<CAPTION>
FOR THE THREE FOR THE THREE
MONTHS ENDED MONTHS ENDED
MAR. 31, 2000 MAR. 31, 1999
-------------- --------------
<S> <C> <C>
Cash flows from operating activities
Net income................................................ $ 777,324 $ 719,371
Adjustments to reconcile net income to net cash
from operating activities
Equity in (earnings) losses of Operating
Partnerships........................................ (15,488) 50,000
Amortization of discount on mortgage-backed
securities.......................................... (308) (628)
Increase (decrease) in interest receivable............ (143) 3,260
Increase in other assets.............................. (6,521) (63,336)
Decrease in accounts payable.......................... (223,781) (292,253)
---------- ----------
Net cash provided by operating activities................... 531,083 416,414
---------- ----------
Cash flows from investing activities
FHA Loan and GNMA principal payments received............. 85,094 109,444
Distributions received from Operating Partnerships........ 15,488 --
Investment in Operating Partnerships...................... -- (50,000)
---------- ----------
Net cash provided by investing activities................... 100,582 59,444
---------- ----------
Cash flow used in financing activity
Distributions paid........................................ (860,597) (860,597)
---------- ----------
Net decrease in cash and temporary cash investments......... (228,932) (384,739)
Cash and temporary cash investments at beginning of
period.................................................... 8,658,997 9,304,694
---------- ----------
Cash and temporary cash investments at end of period........ $8,430,065 $8,919,955
========== ==========
</TABLE>
The accompanying notes are an integral part of the financial statements.
27
<PAGE>
CAPITAL SOURCE L.P.
NOTES TO FINANCIAL STATEMENTS
MARCH 31, 2000
(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: (a) two in North Carolina; and, (b) 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, 1999. In the opinion of management, all normal and recurring
adjustments necessary to present fairly the financial position at March 31, 2000
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
28
<PAGE>
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. Any distributions received by the Partnership
from the Operating Partnerships are recorded as income. 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.
3. PARTNERSHIP RESERVE ACCOUNT.
The Partnership maintains a reserve account which consisted of the following
at March 31, 2000:
<TABLE>
<S> <C>
Cash and temporary cash investments......................... $8,385,103
GNMA Certificates........................................... 640,606
----------
$9,025,709
==========
</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 mortgage-backed
securities and the operation of the Partnership. See Note 5 regarding the
investment in GNMA Certificates.
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 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.
29
<PAGE>
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, 2000, the total amortized cost, gross unrealized holding gains
and aggregate fair value of available-for-sale securities were $629,574, $11,032
and $640,606, respectively. At March 31, 2000, the total amortized cost, gross
unrealized holding gains and aggregate fair value of held-to-maturity securities
were $34,714,982, $19,090 and $34,734,072, respectively.
Descriptions of the Partnership's mortgage-backed securities at March 31,
2000 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>
Held-to-Maturity
GNMA Certificates:
Misty Springs Apartments........... Daytona Beach, FL 128 8.75% 06-15-2029 $ 4,211,720
The Ponds at Georgetown............ Ann Arbor, MI 134 7.50% 12-15-2029 2,395,363
Waterman's Crossing................ Newport News, VA 260 10.00% 09-15-2028 10,799,363
Water's Edge Apartments............ Lake Villa, IL 108 8.75% 12-15-2028 4,991,596
-----------
22,398,042
FHA Loans:
Bluff Ridge Apartments............. Jacksonville, NC 108 8.72% 11-15-2028 3,455,738
Highland Park Apartments........... Columbus, OH 252 8.75% 11-01-2028 8,861,202
-----------
12,316,940
-----------
34,714,982
-----------
Available-for-Sale
GNMA Certificates:
Pools of single-family mortgages 7.58%(1) 2008 to 2009 338,337(2)
Pools of single-family mortgages 7.58%(1) 2007 to 2008 302,269(2)
-----------
640,606
-----------
Balance at March 31, 2000 $35,355,588
===========
</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>
<CAPTION>
<S> <C>
Balance at December 31, 1999................................ $35,445,867
Addition
Amortization of discount on mortgage-backed
securities............................................ 308
Deductions
FHA Loan and GNMA principal payments received........... (85,094)
Change in net unrealized holding gains (losses) on
available-for-sale mortgage-backed securities......... (5,493)
-----------
Balance at March 31, 2000................................... $35,355,588
===========
</TABLE>
30
<PAGE>
6. INVESTMENT IN OPERATING PARTNERSHIPS.
The Partnership's Investment in Operating Partnerships consists 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 provide 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 March 31, 2000, 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. $ --
Fox Hollow Apartments.................... High Point, NC Fox Hollow Limited Partnership --
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, 2000 $ --
===========
</TABLE>
Reconciliation of the carrying amount of the Operating Partnerships is as
follows:
<TABLE>
<CAPTION>
FOR THE THREE
MONTHS ENDED
MAR. 31, 2000
--------------
<S> <C>
Balance at beginning of year................................ $ --
Addition
Equity in earnings of Operating Partnerships............ 15,488
Deduction
Distributions received from Operating Partnerships...... (15,488)
--------
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, 2000, distributions to investors represented less than an
8% return; accordingly, no fees were paid or accrued during these periods.
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
and costs reimbursed to the General Partner for the three months ended
March 31, 2000, was $405,673. 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.
31
<PAGE>
The fees for services provided were $49,738 for the three months ended
March 31, 2000, 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. 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.
In this complaint, the plaintiffs sought to enjoin the proposed merger
transaction and seek 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.
The General Partners determined not to pursue the merger transaction which
was the subject of the initial lawsuit and proposed an alternative transaction
to BAC holders. A prospectus/consent solicitation statement outlining this
alternative transaction was sent to BAC holders on or about November 16, 1999.
The plaintiffs amended their complaint on December 8, 1999, and again on
February 22, 2000. The second amended complaint challenges this current
prospectus/consent solicitation statement on grounds similar to those alleged in
the original complaint, as well as on other procedural grounds. The second
amended complaint does not seek to enjoin the proposed merger transaction.
On July 12, 1999, Sandra G. Panzer, one of the named plaintiffs in the
action described above, filed an additional complaint against the Partnership,
its General Partners and America First in the Delaware Court of Chancery (the
Books and Records Action). The complaint seeks to compel the General Partners to
supply the plaintiff with a list of all BAC holders of the Partnership and
copies of the limited partnership agreements of the Operating Partnerships.
To resolve these lawsuits, the Partnership and affiliates, on April 24,
2000, entered into a settlement agreement (the Settlement) with the plaintiffs.
The Settlement remains subject to approval by the Court. In connection with the
Settlement, which, if approved, will also result in the dismissal of the Book
and Records Action, the Partnership expects to submit a revised transaction to
BAC holders for approval. The complete terms of the Settlement, along with the
updated consent solicitation material describing the revised merger transaction,
will be filed with the Securities and Exchange Commission (the SEC). As soon as
it receives SEC clearance, the Partnership will deliver to BAC holders materials
that fully describe the Settlement and revised transaction.
32
<PAGE>
CAPITAL SOURCE II L.P.-A
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
DECEMBER 31, 1999
Capitalized terms not otherwise defined herein shall have the meanings set
forth in the accompanying Prospectus/Consent Solicitation Statement.
LIQUIDITY AND CAPITAL RESOURCES
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 such
property. Collectively, the remaining GNMA Certificates, the FHA Loan, and the
Partnership Equity Investments are referred to as the "Permanent Investments".
The Partnership also invested amounts held in its reserve account in certain
GNMA securities backed by pools of single-family mortgages (Reserve
Investments); however, the Partnership has not held any GNMA securities in its
reserve account since the third quarter of 1998. 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
DEC. 31, 1999 DEC. 31, 1998 DEC. 31, 1997
-------------- -------------- --------------
<S> <C> <C> <C>
Regular monthly distributions
Income................................................. $.3585 $.2175 $.4082
Return of capital...................................... .0915 .4425 .4018
------ ------ ------
$.4500 $.6600 $.8100
====== ====== ======
Distributions
Paid out of cash flow.................................. $.4149 $.4005 $.5172
Paid out of reserves................................... .0351 .2595 .2928
------ ------ ------
$.4500 $.6600 $.8100
====== ====== ======
</TABLE>
Regular monthly distributions to BAC Holders consist primarily of interest
received on the FHA Loan and the 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 BAC
Holders. The Partnership is permitted to replenish reserves with cash flows in
excess of distributions paid. During 1999, $141,972 was withdrawn from reserves.
The Partnership believes 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 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.
33
<PAGE>
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, 1999:
<TABLE>
<CAPTION>
NUMBER PERCENTAGE
NUMBER OF UNITS OF UNITS
PROPERTY NAME LOCATION OF UNITS OCCUPIED OCCUPIED
------------- --------------- -------- -------- ----------
<S> <C> <C> <C> <C>
Crane's Landing................................. Winter Park, FL 252 244 97%
Delta Crossing.................................. Charlotte, NC 178 166 93%
Monticello Apartments........................... Southfield, MI 106 98 92%
The Ponds at Georgetown......................... Ann Arbor, MI 134 134 100%
--- --- ---
670 642 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 1999 and 1998. Operating revenue increased 7.5% from
1998 to 1999, due to increases in rental rates while real estate operating
expenses decreased 6.9% for the same period. The decrease in real estate
operating expenses is primarily attributable to a 29.8% decrease in repairs and
maintenance expenses and property improvements which was partially offset by an
increase in labor and insurance costs. As a result, net operating income before
depreciation, interest and amortization increased approximately 21% from 1998 to
1999. The property remained current on its mortgage obligations during 1999.
DELTA CROSSING
Delta Crossing is a 178-unit apartment complex located in Charlotte, North
Carolina. Average occupancy was 94% in 1999 and 1998. As a result of rental rate
increases, rental income increased approximately 2.5% in 1999, compared to 1998.
The increase in rental income was partially offset by a 4.5% increase in real
estate operating expenses. The increase in real estate operating expenses is
attributable to increases in administrative and labor costs offset by a decrease
in repairs and maintenance expense and property improvements. As a result, net
operating income before depreciation, interest and amortization increased
approximately 1% from 1998 to 1999. The property was current on its mortgage
obligations during 1999.
34
<PAGE>
MONTICELLO APARTMENTS
Monticello Apartments, located in Southfield, Michigan, contains 106 rental
units. Average occupancy was 90% in 1999, compared to 98% in 1998. The decrease
in average occupancy resulted in a 5% decrease in rental revenue in 1999
compared to 1998. In addition, real estate operating expenses increased
approximately 35% due primarily to increases in repairs and maintenance
expenses, property improvements, advertising expenses and administrative costs.
As a result of the decrease in revenue and increase in expenses, net operating
income before depreciation, interest and amortization decreased approximately
31% from 1998 to 1999. Despite the decrease in net operating income the property
remained current on its mortgage obligations during 1999.
THE PONDS AT GEORGETOWN
The Ponds at Georgetown consists of 134 apartments located in Ann Arbor,
Michigan. Average occupancy was 99% in 1999 and 1998. Excluding interest,
depreciation and amortization, operating income generated by the property in
1999 approximated that of 1998. 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%. Since the restructuring, cash flow generated
from operations has generally been sufficient to cover all the Operating
Partnership's cash needs. The property was current on its mortgage obligations
as of December 31, 1999.
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, 1999 DEC. 31, 1998 DEC. 31, 1997
------------- ------------- -------------
<S> <C> <C> <C>
Mortgage-backed securities income........................ $2,318,543 $2,426,356 $2,499,844
Interest income on temporary cash investments and U.S.
government securities.................................. 14,505 42,339 91,327
Equity in losses of Operating Partnerships............... -- (407,218) (121,450)
Other income............................................. 400 4,750 3,800
Gain on sale of mortgage-backed securities............... -- 35,101 --
---------- ---------- ----------
2,333,448 2,101,328 2,473,521
Operating and administrative expenses.................... 880,808 1,220,213 819,516
---------- ---------- ----------
Net income............................................... $1,452,640 $ 881,115 $1,654,005
========== ========== ==========
</TABLE>
<TABLE>
<CAPTION>
INCREASE INCREASE
(DECREASE) (DECREASE)
FROM 1998 FROM 1997
---------- ----------
<S> <C> <C>
Mortgage-backed securities income........................... $(107,813) $ (73,488)
Interest income on temporary cash investments and
U.S. government securities................................ (27,834) (48,988)
Equity in losses of Operating Partnerships.................. 407,218 (285,768)
Other income................................................ (4,350) 950
Gain on sale of mortgage-backed securities.................. (35,101) 35,101
--------- ---------
232,120 (372,193)
Operating and administrative expenses....................... (339,405) 400,697
--------- ---------
Net income.................................................. $ 571,525 $(772,890)
========= =========
</TABLE>
35
<PAGE>
Mortgage-backed securities income decreased by $107,813 from 1998 to 1999.
Approximately $55,000 of such decrease was attributable to the fourth quarter of
1998 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 $53,000 decrease was due to: (i) a reduction of approximately $39,000
resulting from the sales of Reserve Investments during 1998 and (ii) the
continued amortization of the Partnership's other mortgage-backed securities.
Mortgage-backed securities income decreased by $73,488 from 1997 to 1998.
Approximately $43,000 of such decrease was due to the aforementioned sales of
the Partnership's Reserve Investments. The remaining decrease of $30,000
resulted from the restructuring of The Ponds at Georgetown GNMA certificate
discussed above and the continued amortization of the principal balances of the
Partnership's other mortgage-backed securities.
Interest income on temporary cash investments decreased by $27,834 from 1998
to 1999 and $48,988 from 1997 to 1998. These decreases were due to withdrawals
made from the Partnership's reserves to supplement distributions to BAC Holders.
The Partnership's 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 contributions to 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 1999. As
a result, equity in losses of Operating Partnerships increased $407,218 from
1998 to 1999 and decreased $285,768 from 1997 to 1998.
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 1999 or 1997.
Operating and administrative expenses decreased $339,405 from 1998 to 1999.
Such decrease was due to: (i) a decrease of approximately $164,000 in
transaction costs incurred in conjunction with proposed mergers under
consideration in the respective years; (ii) decreases of approximately $182,000
in salaries and related expenses and $31,000 in consulting expenses due to a
reduction in personnel time and consulting fees incurred in connection with
developing and evaluating alternatives for restructuring the Partnership;
(iii) net decreases of approximately $22,000 in other general and administrative
expenses; offset by (iv) an increase of approximately $60,000 in legal fees
resulting from the defense of a class action lawsuit filed against the
Partnership as more fully described in Note 8 to the financial statements.
Operating and administrative expenses increased $400,697 from 1997 to 1998.
Such increase was due to: (i) an increase of approximately $341,000 in
transaction costs incurred in conjunction with a proposed merger (which is no
longer under consideration); (ii) an increase of approximately $152,000 in
salaries and related expenses primarily due to additional personnel time
incurred in conjunction with the aforementioned merger; (iii) and increase of
approximately $31,000 in consulting fees 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; (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.
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. In addition, the Partnership has business relationships with a
36
<PAGE>
number of third parties whose ability to perform their obligations to the
Partnership depend on such systems and equipment. To date, the Partnership has
not experienced any significant problems with such systems and equipment arising
from the inability of computer programs and embedded circuitry to correctly
recognize dates occurring after December 31, 1999. Although the Partnership does
not anticipate that so-called "Year 2000 problems" will surface, there can be no
assurance that such problems will not arise. The Partnership has not incurred
any significant costs in rectifying Year 2000 problems.
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.
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 are 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>
2000 181,456 8.6%
2001 198,021 8.6%
2002 216,085 8.6%
2003 235,858 8.6%
2004 257,360 8.6%
Thereafter 25,788,573 8.6%
</TABLE>
The aggregate fair value of the Partnership's investment securities at
December 31, 1999 was $26,877,353.
As the above table incorporates only those positions or exposures that
existed as of December 31, 1999, it does not consider those exposures or
positions that could arise after that date. Moreover, because future commitments
are not presented in the table above, the information presented has limited
predictive value. As a result, the Partnership's ultimate economic impact with
respect to interest rate fluctuations will depend on the exposures that arise
during the period, the Partnership's risk mitigating strategies at that time and
interest rates.
37
<PAGE>
INDEPENDENT AUDITORS' 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, 1999 and 1998, 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, 1999. 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, 1999 and 1998, and the results of its operations and its cash
flows for each of the three years in the period ended December 31, 1999, in
conformity with generally accepted accounting principles.
/s/ KPMG LLP
Omaha, Nebraska
March 17, 2000
38
<PAGE>
CAPITAL SOURCE II L.P.-A
BALANCE SHEETS
<TABLE>
<CAPTION>
DECEMBER 31, 1999 DECEMBER 31, 1998
----------------- ------------------
<S> <C> <C>
ASSETS
Cash and temporary cash investments, at cost which
approximates market value............................... $ 278,134 $ 432,999
Investment in FHA Loan (Note 4)........................... 6,470,165 6,505,857
Investment in GNMA Certificates (Note 4).................. 20,367,475 20,497,706
Investment in Operating Partnerships (Note 5)............. -- --
Interest receivable....................................... 193,934 195,440
Other assets.............................................. 39,064 139,204
----------- -----------
$27,348,772 $27,771,206
=========== ===========
LIABILITIES AND PARTNERS' CAPITAL (DEFICIT)
Liabilities
Accounts payable (Note 6)................................. $ 295,599 $ 347,446
Distribution payable (Note 3)............................. 303,871 303,871
----------- -----------
599,470 651,317
----------- -----------
Partners' Capital (Deficit)
General Partner........................................... (298,965) (295,259)
Beneficial Assignment Certificate Holders
($6.74 per BAC in 1999 and $6.83 in 1998)............... 27,048,267 27,415,148
----------- -----------
26,749,302 27,119,889
----------- -----------
$27,348,772 $27,771,206
=========== ===========
</TABLE>
The accompanying notes are an integral part of the financial statements.
39
<PAGE>
CAPITAL SOURCE II L.P.-A
STATEMENTS OF INCOME AND COMPREHENSIVE INCOME
<TABLE>
<CAPTION>
FOR THE YEAR ENDED DECEMBER 31,
------------------------------------
1999 1998 1997
---------- ---------- ----------
<S> <C> <C> <C>
Income
Mortgage-backed securities income (Note 4)............. $2,318,543 $2,426,356 $2,499,844
Interest income on temporary cash investments and U.S.
government securities................................ 14,505 42,339 91,327
Equity in losses of Operating Partnerships (Note 5).... -- (407,218) (121,450)
Other income........................................... 400 4,750 3,800
Gain on sale of mortgage-backed securities............. -- 35,101 --
---------- ---------- ----------
2,333,448 2,101,328 2,473,521
Expenses
Operating and administrative expenses (Note 6)......... 880,808 1,220,213 819,516
---------- ---------- ----------
Net income............................................... 1,452,640 881,115 $1,654,005
Other comprehensive income:
Unrealized gains on securities
Net unrealized holding gains (losses) arising during
the year........................................... -- (7,110) 5,969
Plus: reclassification adjustment for losses included
in net income...................................... -- (35,101) --
---------- ---------- ----------
Change in net unrealized holding gains (losses)...... -- (42,211) 5,969
---------- ---------- ----------
Net comprehensive income............................... $1,452,640 $ 838,904 $1,659,974
========== ========== ==========
Net income allocated to:
General Partner........................................ $ 14,526 $ 8,811 $ 16,540
BAC Holders............................................ 1,438,114 872,304 1,637,465
---------- ---------- ----------
$1,452,640 $ 881,115 $1,654,005
========== ========== ==========
Net income, basic and diluted, per BAC................... $ .36 $ .22 $ .41
========== ========== ==========
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.
40
<PAGE>
CAPITAL SOURCE II L.P.-A
STATEMENTS OF PARTNERS' CAPITAL (DEFICIT)
FROM DECEMBER 31, 1996 TO DECEMBER 31, 1999
<TABLE>
<CAPTION>
GENERAL
PARTNERS BAC HOLDERS TOTAL
--------- ----------- -----------
<S> <C> <C> <C>
Partners' Capital (Deficit) (excluding accumulated other
comprehensive income)
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, 1997.......................... (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)
--------- ----------- -----------
Balance at December 31, 1998.......................... (295,259) 27,415,148 27,119,889
Net income............................................ 14,526 1,438,114 1,452,640
Cash distributions paid or accrued (Note 3)........... (18,232) (1,804,995) (1,823,227)
--------- ----------- -----------
Balance at December 31, 1999.......................... (298,965) 27,048,267 26,749,302
--------- ----------- -----------
Accumulated Other Comprehensive Income
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 and December 31, 1999.... -- -- --
--------- ----------- -----------
Balance at December 31, 1999............................ $(298,965) $27,048,267 $26,749,302
========= =========== ===========
</TABLE>
The accompanying notes are an integral part of the financial statements.
41
<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, 1999 DECEMBER 31, 1998 DECEMBER 31, 1997
------------------ ------------------ ------------------
<S> <C> <C> <C>
Cash flows from operating activities
Net income................................. $ 1,452,640 $ 881,115 $ 1,654,005
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 on
mortgage-backed securities............. (316) (1,471) (1,397)
Gain on sale of mortgage-backed
securities............................. -- (35,101) --
Decrease interest receivable............. 1,506 17,584 6,637
Decrease in other assets................. 100,140 22,950 63,589
Increase (decrease) in accounts
payable................................ (51,847) 19,933 111,215
----------- ----------- -----------
Net cash provided by operating
activities............................. 1,502,123 1,312,228 1,955,499
----------- ----------- -----------
Cash flows from investing activities
FHA Loan and GNMA principal payments
received................................. 166,239 271,807 257,816
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)
----------- ----------- -----------
Net cash provided by investing
activities............................. 166,239 796,944 136,366
----------- ----------- -----------
Cash flow from financing activity
Distributions paid......................... (1,823,227) (2,917,165) (3,281,810)
----------- ----------- -----------
Net decrease in cash and temporary cash
investments................................ (154,865) (807,993) (1,189,945)
Cash and temporary cash investments at
beginning of year.......................... 432,999 1,240,992 2,430,937
----------- ----------- -----------
Cash and temporary cash investments at end of
year....................................... $ 278,134 $ 432,999 $ 1,240,992
=========== =========== ===========
</TABLE>
The accompanying notes are an integral part of the financial statements.
42
<PAGE>
CAPITAL SOURCE II L.P.-A
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1999
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 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 has not had investments classified as
available-for-sale since the second quarter of 1998. The Partnership does not
have investment securities classified as trading.
(c) INVESTMENT IN OPERATING PARTNERSHIPS. The Partnership's 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
Partnership 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.
43
<PAGE>
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 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 Partnership's assets
and liabilities exceeded the reported amounts by $826,459 and $1,236,222 at
December 31, 1999, and December 31, 1998, 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) NEW ACCOUNTING PRONOUNCEMENT. 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, as amended, 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.
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
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 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 December 31, 1999, the total amortized cost, gross unrealized holding
gains and aggregate fair value of held-to-maturity securities were $26,837,640,
$39,713 and $26,877,353, respectively. At December 31, 1998, the total amortized
cost, gross unrealized holding gains and aggregate fair value of held-to-
44
<PAGE>
maturity securities were $27,003,563, $245,407 and $27,248,970, respectively. At
December 31, 1999 and 1998, the Partnership did not have any available-for-sale
securities.
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, 1999, are as follows:
<TABLE>
<CAPTION>
INCOME
NUMBER INTEREST CARRYING EARNED IN
TYPE OF SECURITY AND NAME LOCATION OF UNITS RATE MATURITY DATE AMOUNT 1999
------------------------- ----------------- -------- -------- ------------- ----------- ----------
<S> <C> <C> <C> <C> <C> <C>
Held-to-Maturity
GNMA Certificates:
Crane's Landing Winter Park, FL 252 8.75% 12-15-2030 $10,119,375 $ 887,786
Monticello Apartments Southfield, MI 106 8.75% 11-15-2029 5,264,973 462,036
The Ponds at Georgetown Ann Arbor, MI 134 7.50%(1) 12-15-2029 4,983,127 378,423
----------- ----------
20,367,475 1,728,245
FHA Loan:
Delta Crossing Charlotte, NC 178 9.10% 10-01-2030 6,470,165 590,298
Balance at December 31, 1999 $26,837,640 $2,318,543
=========== ==========
</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.
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, 1999 DEC. 31, 1998 DEC. 31, 1997
------------- ------------- -------------
<S> <C> <C> <C>
Balance at beginning of year.......................... $27,003,563 $28,213,364 $28,463,814
Additions
Acquisition of GNMA Certificate................... -- 5,029,094 --
Amortization of discount on mortgage-backed
securities...................................... 316 1,471 1,397
Deductions
FHA Loan and GNMA principal payments received..... (166,239) (271,807) (257,816)
Disposition of mortgage-backed securities......... -- (5,011,336) --
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
----------- ----------- -----------
Balance at end of year................................ $26,837,640 $27,003,563 $28,213,364
=========== =========== ===========
</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.
45
<PAGE>
Descriptions of the Operating Partnerships held at December 31, 1999, 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 -- --
Partnership
----------- -----------
Balance at December 31,
1999...................... $ -- $ --
=========== ===========
</TABLE>
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, 1999 DEC. 31, 1998 DEC. 31, 1997
------------- ------------- -------------
<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>
46
<PAGE>
Combined Financial Statements of the Operating Partnerships are as follows:
CAPITAL SOURCE II L.P.-A
OPERATING PARTNERSHIPS BALANCE SHEET
<TABLE>
<CAPTION>
DEC. 31, 1999 DEC. 31, 1998
------------- -------------
<S> <C> <C>
Assets
Investment in real estate:
Land.................................................... $ 2,800,750 $ 2,800,750
Buildings............................................... 24,660,289 24,582,828
Personal Property....................................... 1,622,278 1,580,684
----------- -----------
29,083,317 28,964,262
Less accumulated depreciation........................... (7,967,609) (7,290,932)
----------- -----------
Net investment in real estate............................. 21,115,708 21,673,330
Cash and temporary cash investments, at cost which
approximates market value............................... 690,902 632,149
Escrow deposits and property reserves..................... 568,743 606,575
Interest and other receivables............................ 22,698 19,437
Deferred mortgage issuance cost, net of accumulated
amortization............................................ 1,348,151 1,394,161
Other assets.............................................. 263,640 193,964
----------- -----------
$24,009,842 $24,519,616
=========== ===========
Liabilities and Partners' Capital (Deficit)
Liabilities
Accounts payable and accrued expenses................... $ 441,036 $ 307,981
Mortgage loan payable................................... 27,019,503 27,186,893
Interest payable........................................ 115,382 294,222
Due to general partners and their affiliates............ 884,181 920,347
----------- -----------
28,460,102 28,709,443
----------- -----------
Partners' Capital (Deficit)
General Partners........................................ (4,450,260) (4,189,827)
Limited Partners........................................ -- --
----------- -----------
(4,450,260) (4,189,827)
----------- -----------
$24,009,842 $24,519,616
=========== ===========
</TABLE>
47
<PAGE>
CAPITAL SOURCE II L.P.-A
OPERATING PARTNERSHIPS INCOME STATEMENT
<TABLE>
<CAPTION>
FOR THE FOR THE FOR THE
YEAR ENDED YEAR ENDED YEAR ENDED
DEC. 31, 1999 DEC. 31, 1998 DEC. 31, 1997
------------- ------------- -------------
<S> <C> <C> <C>
Income
Rental income.......................................... $5,362,460 $5,220,888 $5,105,108
Interest on temporary cash investments................. 27,744 19,993 13,084
Other income........................................... 214,437 351,218 198,870
---------- ---------- ----------
5,604,641 5,592,099 5,317,062
---------- ---------- ----------
Expenses
Real estate operating expenses......................... 2,700,534 2,779,741 2,504,026
Depreciation expense................................... 705,432 692,357 700,297
Interest expense....................................... 2,413,266 2,493,145 2,476,272
Amortization........................................... 46,010 46,008 48,768
---------- ---------- ----------
5,865,242 6,011,251 5,729,363
---------- ---------- ----------
Net Loss................................................. $ (260,601) $ (419,152) $ (412,301)
========== ========== ==========
Net Loss allocated to:
General Partners....................................... (260,601) (11,934) (290,851)
Limited Partners....................................... -- (407,218) (121,450)
---------- ---------- ----------
$ (260,601) $ (419,152) $ (412,301)
========== ========== ==========
</TABLE>
48
<PAGE>
CAPITAL SOURCE II L.P.-A
OPERATING PARTNERSHIPS STATEMENTS OF CASH FLOW
<TABLE>
<CAPTION>
FOR THE FOR THE FOR THE
YEAR ENDED YEAR ENDED YEAR ENDED
DEC. 31, 1999 DEC. 31, 1998 DEC. 31, 1997
------------- ------------- -------------
<S> <C> <C> <C>
Cash flows from operating activities
Net loss............................................... $(260,601) $(419,152) $(412,301)
Adjustments to reconcile net loss to net cash
provided by (used in) operating activities
Depreciation and amortization...................... 751,442 738,365 749,065
Increase in interest and other receivables......... (3,261) (11,995) (1,992)
Decrease (increase) in escrow deposits and property
reserves......................................... 37,832 6,686 (125,385)
Decrease (increase) in other assets................ (69,676) 13,654 (22,669)
Increase (decrease) in accounts payable and accrued
expenses......................................... 133,055 (542,762) 110,274
Increase (decrease) in interest payable............ (178,840) 46,735 (794)
Decrease in due to general partners and their
affiliates....................................... (36,166) (41,216) (9,646)
--------- --------- ---------
Net cash provided by (used in) operating
activities......................................... 373,785 (209,685) 286,552
--------- --------- ---------
Cash flows used in investing activities
Acquisition of buildings and personal property, net.... (119,055) (100,104) --
--------- --------- ---------
Cash flows from financing activities
Principal payments on mortgage loan payable............ (167,390) (141,789) (129,902)
Capital contributions.................................. -- 407,218 121,450
Other, net............................................. (28,587) 184,947 (904)
--------- --------- ---------
Net cash provided by (used in) financing activities.... (195,977) 450,376 (9,356)
--------- --------- ---------
Net increase in cash and temporary cash investments...... 58,753 140,587 208,377
Cash and temporary cash investments at beginning of
year................................................... 632,149 491,562 283,185
--------- --------- ---------
Cash and temporary cash investments at end of year....... $ 690,902 $ 632,149 $ 491,562
========= ========= =========
</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 management and partnership administration fees amounted to
$50,000, $50,000 and $166,000 for the years ended December 31, 1999, 1998 and
1997, respectively.
49
<PAGE>
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, 1999, 1998 and 1997 amounted to $585,181, $842,272 and
$494,165, 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. The fees for services provided
were $42,842, $41,167 and $31,924 for 1999, 1998 and 1997, 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 and liabilities.
INVESTMENT IN FHA LOAN AND GNMA CERTIFICATES: Fair values are based on
prices obtained from an independent pricing source, adjusted for estimated
prepayments. Refer to the table below for carrying amounts and estimated fair
values of such instruments.
<TABLE>
<CAPTION>
AT DECEMBER 31, 1999 AT DECEMBER 31, 1998
------------------------- -------------------------
CARRYING ESTIMATED CARRYING ESTIMATED
AMOUNT FAIR VALUE AMOUNT FAIR VALUE
----------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
Investment in FHA Loan.................... $ 6,470,165 $ 6,470,165 $ 6,505,857 $ 6,531,230
Investment in GNMA Certificates........... $20,367,475 $20,407,188 $20,497,706 $20,717,740
</TABLE>
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 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. In this
complaint, the plaintiffs sought to enjoin the proposed merger transaction and
seek 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.
The General Partners determined not to pursue the merger transaction which
was the subject of the initial lawsuit and proposed an alternative transaction
to BAC holders. A prospectus/consent solicitation statement outlining this
alternative transaction was sent to BAC holders on or about November 16, 1999.
The plaintiffs amended their complaint on December 8, 1999, and again on
February 22, 2000. The second amended complaint challenges this current
prospectus/consent solicitation statement on grounds similar to those alleged in
the original complaint, as well as on other procedural grounds. The second
amended complaint does not seek to enjoin the proposed merger transaction.
On July 12, 1999, Alvin M. Panzer, one of the named plaintiffs in the action
described above, filed an additional complaint against the Partnership, its
General Partners and America First in the Delaware Court of Chancery. The
complaint seeks to compel the General Partners to supply the plaintiff with a
list
50
<PAGE>
of all BAC holders of the Partnership and copies of the limited partnership
agreements of the Operating Partnerships.
The General Partners have moved to dismiss these complaints, and they intend
to defend these lawsuits vigorously, but are unable to estimate the effect of
either of these lawsuits, if any, on the financial statements of the Partnership
or on the ability of the Partnership to consummate the proposed merger with
Capital Source L.P.
9. SUMMARY OF UNAUDITED QUARTERLY RESULTS OF OPERATIONS.
<TABLE>
<CAPTION>
FROM JANUARY 1, 1999 TO DECEMBER 31, 1999 FIRST QUARTER SECOND QUARTER THIRD QUARTER FOURTH QUARTER
----------------------------------------- ------------- -------------- ------------- --------------
<S> <C> <C> <C> <C>
Total income........................... $ 585,508 $ 583,429 $ 582,736 $ 581,775
Total expenses......................... (133,446) (183,429) (224,203)(1) (339,730)(1)
---------- ---------- ---------- ----------
Net income............................. $ 452,062 $ 400,000 $ 358,533 $ 242,045
========== ========== ========== ==========
Net income, basic and diluted, per BAC.. $ .11 $ .10 $ .09 $ .06
========== ========== ========== ==========
</TABLE>
<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 (2) $ 530,887 (3)
Total expenses......................... (417,488)(4) (273,959)(4) (158,660)(4) (370,106)(4)
---------- ---------- ---------- ----------
Net income............................. $ 216,862 $ 365,996 $ 137,476 $ 160,781
========== ========== ========== ==========
Net income, basic and diluted, per BAC $ .06 $ .09 $ .03 $ .04
========== ========== ========== ==========
</TABLE>
------------
(1) The Partnership incurred expenses of approximately $187,000 and $101,000
during the third and fourth quarters of 1999, respectively in conjunction
with a proposed merger under consideration during such periods.
(2) The Partnership had equity in losses of Operating Partnerships of $359,113
for the third quarter of 1998.
(3) 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.
(4) The Partnership incurred expenses of approximately $186,000, $66,000,
$38,000 and $177,000 during the first, second, third and fourth quarters of
1998, respectively, in conjunction with a proposed merger under
consideration during such time.
51
<PAGE>
CAPITAL SOURCE II L.P.-A
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
MARCH 31, 2000
Capitalized terms not otherwise defined herein shall have the meanings set
forth in the accompanying Prospectus/Consent Solicitation Statement.
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. Collectively, the remaining GNMA Certificates, the FHA Loan and the
Partnership Equity Investments are referred to as the "Permanent 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
MAR. 30, 2000 MAR. 30, 1999
------------- -------------
<S> <C> <C>
Regular monthly distributions
Income.................................................... $.1107 $.1116
Return of capital......................................... .0018 .0009
------ ------
$.1125 $.1125
====== ======
Distributions
Paid out of cash flow..................................... $.1125 $.1125
</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, 2000, $17,223 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.
52
<PAGE>
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 overall status of the Partnership's investments has remained relatively
constant since December 31, 1999.
The following table shows the occupancy levels of the properties financed by
the Partnership as of March 31, 2000:
<TABLE>
<CAPTION>
NUMBER OF NUMBER OF PERCENTAGE OF
PROPERTY NAME LOCATION UNITS UNITS OCCUPIED UNITS OCCUPIED
------------- --------------- ----------- -------------- --------------
<S> <C> <C> <C> <C>
Crane's Landing.................... Winter Park, FL 252 241 96%
Delta Crossing..................... Charlotte, NC 178 169 95
Monticello Apartments.............. Southfield, MI 106 95 90
The Ponds at Georgetown............ Ann Arbor, MI 134 134 100
--- --- ---
670 639 95%
=== === ===
</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)
MAR. 31, 2000 MAR. 31, 1999 FROM 1999
------------- ------------- ----------
<S> <C> <C> <C>
Mortgage-backed securities income....................... $577,368 $580,957 $(3,589)
Interest income on temporary cash investments........... 3,248 4,151 (903)
Equity in earnings of Operating Partnerships............ 35,127 -- 35,127
Other income............................................ -- 400 (400)
-------- -------- -------
615,743 585,508 30,235
Operating and administrative expenses................... 167,059 133,446 33,613
-------- -------- -------
Net income.............................................. $448,684 $452,062 $(3,378)
======== ======== =======
</TABLE>
Mortgage-backed securities income decreased for the three months ended
March 31, 2000, compared to the same period in 1999. This decrease is 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, 2000, compared to the same period in 1999, due to withdrawals
made from the Partnership's reserves during 1999 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 Partnerships by
the Partnership. Any distributions received by the Partnership from the
Operating Partnerships are recorded as income.
53
<PAGE>
During the three months ended March 31, 2000, the Partnership received a
distribution of $35,127 from The Ponds at Georgetown whereas no such
distributions were received from any of the Operating Partnerships during the
comparable period of 1999. No additional contributions were made to the
Operating Partnerships during the three months ended March 31, 2000 or 1999. As
such, equity in earnings of Operating Partnerships of $35,127 was recorded for
the three months ended March 31, 2000.
Operating and administrative costs for the three months ended March 31,
2000, increased approximately $33,613 compared to the same period in 1999. This
increase was primarily due to an increase in legal fees and salaries and related
expenses.
QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.
There have been no material changes in the Partnership's market risk since
December 31, 1999.
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.
54
<PAGE>
CAPITAL SOURCE II L.P.-A
BALANCE SHEETS
<TABLE>
<CAPTION>
MARCH 31, 2000
(UNAUDITED) DECEMBER 31, 1999
--------------- ------------------
<S> <C> <C>
ASSETS
Cash and temporary cash investments, at cost which
approximates market value............................... $ 193,725 $ 278,134
Investment in FHA Loan (Note 4)........................... 6,460,719 6,470,165
Investment in GNMA Certificates (Note 4).................. 20,333,125 20,367,475
Investment in Operating Partnerships (Note 5)............. -- --
Interest receivable....................................... 193,074 193,934
Other assets.............................................. 20,480 39,064
----------- -----------
$27,201,123 $27,348,772
=========== ===========
LIABILITIES AND PARTNERS' CAPITAL (DEFICIT)
Liabilities
Accounts payable (Note 6)............................... $ 155,073 $ 295,599
Distribution payable (Note 3)........................... 303,871 303,871
----------- -----------
458,944 599,470
----------- -----------
Partners' Capital (Deficit)
General Partner......................................... (299,036) (298,965)
Beneficial Assignment Certificate Holders ($6.74 per BAC
in 2000 and $6.74 in 1999)............................ 27,041,215 27,048,267
----------- -----------
26,742,179 26,749,302
----------- -----------
$27,201,123 $27,348,772
=========== ===========
</TABLE>
The accompanying notes are an integral part of the financial statements.
55
<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, 2000 MARCH 31, 1999
--------------- ---------------
<S> <C> <C>
Income
Mortgage-backed securities income......................... $577,368 $580,957
Interest income on temporary cash investments............. 3,248 4,151
Equity in earnings of Operating Partnerships (Note 5)..... 35,127 --
Other income.............................................. -- 400
-------- --------
615,743 585,508
Expenses
Operating and administrative expenses (Note 6)............ 167,059 133,446
-------- --------
Net income and net comprehensive income..................... 448,684 452,062
======== ========
Net income allocated to:
General Partners.......................................... $ 4,487 $ 4,521
Limited Partners.......................................... 444,197 447,541
-------- --------
$448,684 $452,062
======== ========
Net income, basic and diluted, per BAC...................... $ .11 $ .11
======== ========
</TABLE>
The accompanying notes are an integral part of the financial statements.
56
<PAGE>
CAPITAL SOURCE II L.P.-A
STATEMENT OF PARTNERS' CAPITAL (DEFICIT)
FOR THE THREE MONTHS ENDED MARCH 31, 2000
(UNAUDITED)
<TABLE>
<CAPTION>
GENERAL
PARTNER BAC HOLDERS TOTAL
--------- ----------- -----------
<S> <C> <C> <C>
Balance at December 31, 1999............................ $(298,965) $27,048,267 $26,749,302
Net income............................................ 4,487 444,197 448,684
Cash distributions paid or accrued (Note 3)........... (4,558) (451,249) (455,807)
--------- ----------- -----------
Balance at March 31, 2000............................... $(299,036) $27,041,215 $26,742,179
========= =========== ===========
</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, 2000 MARCH 31, 1999
--------------- ---------------
<S> <C> <C>
Cash flows from operating activities
Net income................................................ $ 448,684 $ 452,062
Adjustments to reconcile net income to net cash from
operating activities
Equity in earnings of Operating Partnerships............ (35,127) --
Amortization of discount on mortgage-backed
securities............................................ (83) (77)
Decrease in interest receivable......................... 860 438
Decrease in other assets................................ 18,584 15,164
Decrease in accounts payable............................ (140,526) (120,411)
--------- ---------
Net cash provided by operating activities................... 292,392 347,176
--------- ---------
Cash flow provided by investing activity
FHA Loan and GNMA Certificate principal payments
received................................................ 43,879 40,209
Distributions received from Operating Partnerships........ 35,127 --
--------- ---------
Net cash provided by investing activities................... 79,006 40,209
--------- ---------
Cash flow used in financing activity
Distributions paid........................................ (455,807) (455,807)
--------- ---------
Net decrease in cash and temporary cash investments......... (84,409) (68,422)
Cash and temporary cash investments at beginning of
period.................................................... 278,134 432,999
--------- ---------
Cash and temporary cash investments at end of period........ $ 193,725 $ 364,577
========= =========
</TABLE>
The accompanying notes are an integral part of the financial statements.
57
<PAGE>
CAPITAL SOURCE II L.P.-A
NOTES TO FINANCIAL STATEMENTS
MARCH 31, 2000
(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:(a) two in
Michigan; and, (b) 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, 1999. In the opinion of management, all normal and recurring
adjustments necessary to present fairly the financial position at March 31,
2000, 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. The Partnership
does not have investment securities classified as trading or available-for-sale.
(c) INVESTMENT IN OPERATING PARTNERSHIPS. The Partnership's 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
Partnership 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.
58
<PAGE>
CAPITAL SOURCE II L.P.-A
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
MARCH 31, 2000
(UNAUDITED)
Subsequently, losses have been recognized only to the extent of additional
contributions, net of distributions received, to the Operating Partnerships by
the Partnership. Any distributions received by the Partnership from the
Operating Partnerships are recorded as income. 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.
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 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, 2000, 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 $26,793,844,
$39,631 and $26,833,475, respectively.
59
<PAGE>
CAPITAL SOURCE II L.P.-A
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
MARCH 31, 2000
(UNAUDITED)
Descriptions of the Partnership's mortgage-backed securities at March 31,
2000, 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 $10,104,196
Monticello Apartments Southfield, MI 106 8.75% 11-15-2029 5,256,211
The Ponds at Georgetown Ann Arbor, MI 134 7.50% 12-15-2029 4,972,718
-----------
20,333,125
===========
FHA Loan:
Delta Crossing Charlotte, NC 178 9.10% 10-01-2030 6,460,719
-----------
Balance at March 31, 2000 $26,793,844
===========
</TABLE>
Reconciliation of the carrying amount of the mortgage-backed securities is
as follows:
<TABLE>
<S> <C>
Balance at December 31, 1999................................ $26,837,640
Addition
Amortization of discount on mortgage-backed
securities............................................ 83
Deduction
FHA Loan and GNMA Certificate principal payments
received.............................................. (43,879)
-----------
Balance at March 31, 2000................................... $26,793,844
===========
</TABLE>
5. INVESTMENT IN OPERATING PARTNERSHIPS.
The Partnership's Investment in Operating Partnerships consists 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 provide 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 March 31, 2000, 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, 2000.............. $ --
=======
</TABLE>
60
<PAGE>
CAPITAL SOURCE II L.P.-A
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
MARCH 31, 2000
(UNAUDITED)
Reconciliation of the carrying amount of the Operating Partnerships is as
follows:
<TABLE>
<CAPTION>
FOR THE THREE
MONTHS ENDED
MARCH 31, 2000
--------------
<S> <C>
Balance at beginning of year................................ $ --
Addition
Equity in earnings of Operating Partnerships............ 35,127
Deduction
Distributions received from Operating Partnerships...... (35,127)
--------
Balance at end of period.................................... $
========
</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, 2000.
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 such General Partner for three months
ended March 31, 2000 was $289,508. 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 $10,534 for the three months ended March 31, 2000 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
61
<PAGE>
CAPITAL SOURCE II L.P.-A
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
MARCH 31, 2000
(UNAUDITED)
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. In this
complaint, the plaintiffs sought to enjoin the proposed merger transaction and
seek 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.
The General Partners determined not to pursue the merger transaction which
was the subject of the initial lawsuit and proposed an alternative transaction
to BAC holders. A prospectus/consent solicitation statement outlining this
alternative transaction was sent to BAC holders on or about November 16, 1999.
The plaintiffs amended their complaint on December 8, 1999, and again on
February 22, 2000. The second amended complaint challenges this current
prospectus/consent solicitation statement on grounds similar to those alleged in
the original complaint, as well as on other procedural grounds. The second
amended complaint does not seek to enjoin the proposed merger transaction.
On July 12, 1999, Alvin M. Panzer, one of the named plaintiffs in the action
described above, filed an additional complaint against the Partnership, its
General Partners and America First in the Delaware Court of Chancery (the "Books
and Records Action"). The complaint seeks to compel the General Partners to
supply the plaintiff with a list of all BAC holders of the Partnership and
copies of the limited partnership agreements of the Operating Partnerships.
To resolve these lawsuits, the Partnership and affiliates, on April 24,
2000, entered into a settlement agreement (the "Settlement") with the
plaintiffs. The Settlement remains subject to approval by the Court. In
connection with the Settlement, which, if approved, will also result in the
dismissal of the Book and Records Action, the Partnership expects to submit a
revised transaction to BAC holders for approval. The complete terms of the
Settlement, along with the updated consent solicitation material describing the
revised merger transaction, will be filed with the Securities and Exchange
Commission (the "SEC"). As soon as it receives SEC clearance, the Partnership
will deliver to BAC holders materials that fully describe the Settlement and
revised transaction.
62
<PAGE>
AMERICA FIRST REAL ESTATE INVESTMENT PARTNERS, L.P.
SUPPLEMENT DATED , 2000
TO
AMENDED AND RESTATED PROSPECTUS/CONSENT SOLICITATION STATEMENT
DATED , 2000
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 formed 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 "AFREZ". 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 TRANSACTION INVOLVES MATERIAL RISKS THAT YOU SHOULD CONSIDER. SEE "RISK
FACTORS" BEGINNING ON PAGE 21 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.
- An unaffiliated third party has not been retained to represent your
interests in the transaction. Had a representative been retained, they may
have been able to negotiate, on your behalf, more favorable terms for the
transaction and different consideration may have been distributed to you.
- If the transaction is completed, compensation, reimbursements and
distributions to our successor may increase.
- There can be no guarantee of the level of the company's cash distributions
after the distributions required by the settlement are made.
- 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.
<PAGE>
- 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 and to fund a portion of the cash distributions to
unitholders and noteholders required by the settlement. 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 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.
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. As of March 31, 2000, cash, cash equivalents and net other assets and
liabilities make up approximately 18% of Cap Source I's assets, whereas less
than 1% 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.
Cap Source I Supp-2
<PAGE>
In 1999, 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 of which $.0015 was made
from reserves. 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 three months of
2000, of which $.0041 was made from reserves. Cap Source II made distributions
at the rate of 3.6% of its adjusted BAC value, which equaled $.45 per BAC for
1999, $.0351 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 three months of 2000. 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 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.
Cap Source I Supp-3
<PAGE>
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 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. If the company's partnership agreement had been in place, we
would have received more total consideration for the years ending December
31, 1998 and 1999, and for the three months ended March 31, 2000. See
"Compensation, Reimbursements and Distributions to the Cap Source General
Partners" below.
- We did not retain an unaffiliated third party to represent your interests
in the structuring of the transaction. Had we retained a party to
represent your interests, that party may have been able to negotiate, on
your behalf, more favorable terms for the structure of the transaction and
for different consideration to have been distributed to you.
- If the transaction is completed, compensation, reimbursements and
distributions to the company's general partner, which will be our
successor, may increase.
- 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.
Cap Source I Supp-4
<PAGE>
- The company was recently formed 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 formation 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.
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 January 15,
2008, a date approximately eight 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.
Cap Source I Supp-5
<PAGE>
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.
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>
TOTAL
NUMBER
INVESTOR OF UNITS PERCENT OF TOTAL INVESTOR NUMBER
TOTAL EXCHANGE EXCHANGE TO UNITS EXCHANGE 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.
Cap Source I Supp-6
<PAGE>
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.
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. If you elect to receive units, you will receive 1.3957 of the company's
units for each Cap Source I BAC you own. The company will not issue any
fractional units. See "THE TRANSACTION--No Fractional Units" in the
prospectus/consent solicitation statement. 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
Cap Source I Supp-7
<PAGE>
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 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 fairness opinion dated
Cap Source I Supp-8
<PAGE>
September 23, 1999, rendered by Sutro & Co., Inc.; (6) the bringdown fairness
opinion dated June , 2000, rendered by Sutro & Co.; (7) the independent
appraisals prepared by Valuation Research Corporation, which were used in part
in the determination of the exchange values; (8) the lack of material
differences with respect to the assets of the partnerships and the consistent
valuation methodology applied to the assets; and (9) 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-9
<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
1997 1998 1999 MARCH 31, 2000
-------- -------- -------- --------------
<S> <C> <C> <C> <C>
ACTUAL AMOUNTS PAID TO CAP SOURCE GENERAL
PARTNERS(1)
Capital Source I
1% Share of Cash Distributions............... $ 34,424 $ 34,425 $ 34,424 $ 8,606
Asset Management and Partnership
Administrative Fee......................... 0 0 0 0
Reimbursements............................... 243,973 319,874 272,544 153,755
-------- -------- -------- --------
Subtotal................................... $278,397 $354,299 $306,968 $162,361
-------- -------- -------- --------
Capital Source II
1% Share of Cash Distributions............... $ 32,818 $ 26,741 $ 18,232 $ 4,558
Asset Management and Partnership
Administrative Fee......................... 166,000 50,000 50,000 12,500
Reimbursements............................... 225,782 266,946 207,904 115,206
-------- -------- -------- --------
Subtotal................................... $424,600 $343,687 $276,136 $132,264
-------- -------- -------- --------
Total........................................ $702,997 $697,986 $583,104 $294,625
======== ======== ======== ========
COMPANY--AMOUNTS PAYABLE TO THE GENERAL
PARTNER(2)
1% Share of Cash Distributions................. $ 67,242 $ 61,166 $ 52,656 $ 13,164
Acquisition Fee................................ 0 0 0 0
Administrative Fee............................. 100,000 100,000 100,000 25,000
Reimbursements................................. 469,755 586,820 480,448 268,961
-------- -------- -------- --------
Total........................................ $636,997 $747,986 $633,104 $307,125
======== ======== ======== ========
</TABLE>
------------
(1) Calculated based upon the compensation, fees and expenses we are currently
entitled to receive under the Cap Source partnership agreements. For a
description of this structure under the partnership agreements, see
"COMPARISON OF BACS AND UNITS--Compensation, Fees and Expenses--THE
PARTNERSHIPS" in the prospectus/consent solicitation statement.
(2) Calculated based upon the compensation, fees and expenses the company's
general partner would have been entitled to receive under the company's
partnership agreement for the periods indicated. For a description of this
structure under the company's partnership agreement, see "COMPARISON OF BACS
AND UNITS--Compensation, Fees and Expenses--THE COMPANY" in the
prospectus/consent solicitation statement.
The historical reimbursements for Cap Source I for 1997, 1998, 1999 and the
three months ended March 31, 2000, consisted of salaries and benefits of
$211,324, $256,101, $261,526 and $151,150, respectively, board member and
consulting fees of $13,934, $38,937, $0 and $0, respectively, and miscellaneous
expenses of $18,715, $24,836, $11,018 and $2,605, respectively. The historical
reimbursements for Cap Source II for 1997, 1998, 1999 and the three months ended
March 31, 2000, consisted of salaries and benefits of $192,973, $223,939,
$200,277 and $113,433, respectively, board member and consulting
Cap Source I Supp-10
<PAGE>
fees of $13,934, $25,963, $0 and $0, respectively, and miscellaneous expenses of
$18,875, $17,044, $7,676 and $1,773, respectively.
The table above reflects the fact that no acquisition fees would have been
paid to the company during the periods indicated because no new assets were
purchased or permitted to be purchased during those periods. Since the company
will be permitted to acquire new assets, this fee will increase in future years
if the transaction is completed.
The total amounts that would have been paid to us under the company's
partnership agreement would have been higher than the amounts we actually
received during 1998, 1999 and the three months ended March 31, 2000, because
the general partner of the company is entitled to an annual base administrative
fee of $100,000. The Cap Source I partnership agreement does not provide for a
base administrative fee, and the Cap Source II partnership agreement provides
for a base asset management and partnership administrative fee of $50,000, which
corresponds to the company's administrative fee. See "COMPARISON OF BACS AND
UNITS--Compensation, Fees and Expenses" in the prospectus/ consent solicitation
statement. Therefore, under the company's partnership agreement the general
partner would have received an additional $50,000, $50,000 and $12,500 in total
compensation without any corresponding increase in its duties for the years
ended December 31, 1999 and 1998, and the three months ended March 31, 2000,
respectively.
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>
THREE MONTHS
YEAR ENDED DECEMBER 31, ENDED
---------------------------------------------------- MARCH 31,
1995 1996 1997 1998 1999 2000
-------- -------- -------- -------- -------- ------------
<S> <C> <C> <C> <C> <C> <C>
Distributions from Income............. $50.500 $47.230 $45.214 $27.910 $39.525 $11.405
Distributions from Return of
Capital............................. -- 3.270 5.286 22.590 10.975 1.220
------- ------- ------- ------- ------- -------
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, 2000, 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-11
<PAGE>
AMERICA FIRST REAL ESTATE INVESTMENT PARTNERS, L.P.
SUPPLEMENT DATED , 2000
TO
AMENDED AND RESTATED PROSPECTUS/CONSENT SOLICITATION STATEMENT
DATED , 2000
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 formed 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 "AFREZ". 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 TRANSACTION INVOLVES MATERIAL RISKS THAT YOU SHOULD CONSIDER. SEE "RISK
FACTORS" BEGINNING ON PAGE 21 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.
- An unaffiliated third party has not been retained to represent your
interests in the transaction. Had a representative been retained, they may
have been able to negotiate, on your behalf, more favorable terms for the
transaction and different consideration may have been distributed to you.
- If the transaction is completed, compensation, reimbursements and
distributions to our successor may increase.
- There can be no guarantee of the level of the company's cash distributions
after the distributions required by the settlement are made.
- 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.
<PAGE>
- 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 and to fund a portion of the cash distributions to
unitholders and noteholders required by the settlement. 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 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.
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. As of March 31, 2000, cash, cash equivalents and net other assets and
liabilities make up approximately 18% of Cap Source I's assets, whereas less
than 1% 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.
Cap Source II Supp-2
<PAGE>
In 1999, 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 of which $.0015 was made
from reserves. 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 three months of
2000 of which $.0041 was made from reserves. Cap Source II made distributions at
the rate of 3.6% of its adjusted BAC value, which equaled $.45 per BAC for 1999,
$.0351 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 three months of 2000. 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.
Cap Source II Supp-3
<PAGE>
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 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. If the company's partnership agreement had been in place, we
would have received more total consideration for the years ending
December 31, 1998 and 1999, and for the three months ended March 31, 2000.
See "Compensation, Reimbursements and Distributions to the Cap Source
General Partners" below.
- We did not retain an unaffiliated third party to represent your interests
in the structuring of the transaction. Had we retained a party to
represent your interests, that party may have been able to negotiate, on
your behalf, more favorable terms for the structure of the transaction and
for different consideration to have been distributed to you.
- If the transaction is completed, compensation, reimbursements and
distributions to the company's general partner, which will be our
successor, may increase.
- 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 formed 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.
Cap Source II Supp-4
<PAGE>
- 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 formation 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.
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 January 15,
2008, a date approximately eight 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.
Cap Source II Supp-5
<PAGE>
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.
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>
TOTAL
NUMBER
INVESTOR OF UNITS PERCENT OF TOTAL INVESTOR NUMBER
TOTAL EXCHANGE EXCHANGE TO UNITS EXCHANGE OF
VALUE(2) VALUE(3) INVESTORS(4) (EXCHANGE RATIO) VALUE UNITS(5)
----------- ----------- --------- ---- ---- -----
30,87$2,167...... $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.
Cap Source II Supp-6
<PAGE>
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.
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. If you elect to receive units, you will receive 0.7620 of the company's
units for each Cap Source II BAC you own. The company will not issue any
fractional units. See "THE TRANSACTION--No Fractional Units" in the
prospectus/consent solicitation statement. 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
Cap Source II Supp-7
<PAGE>
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 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 fairness opinion dated
Cap Source II Supp-8
<PAGE>
September 23, 1999, rendered by Sutro & Co., Inc.; (6) the bringdown fairness
opinion dated June , 2000, rendered by Sutro & Co., Inc.; (7) the independent
appraisals prepared by Valuation Research Corporation, which were used in part
in the determination of the exchange values; (8) the lack of material
differences with respect to the assets of the partnerships and the consistent
valuation methodology applied to the assets; and (9) 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-9
<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
1997 1998 1999 MARCH 31, 2000
-------- -------- -------- --------------
<S> <C> <C> <C> <C>
ACTUAL AMOUNTS PAID TO CAP SOURCE GENERAL
PARTNERS(1)
Capital Source I
1% Share of Cash Distributions............... $ 34,424 $ 34,425 $ 34,424 $ 8,606
Asset Management and Partnership
Administrative Fee......................... 0 0 0 0
Reimbursements............................... 243,973 319,874 272,544 153,755
-------- -------- -------- --------
Subtotal................................... $278,397 $354,299 $306,968 $162,361
Capital Source II
1% Share of Cash Distributions............... $ 32,818 $ 26,741 $ 18,232 $ 4,558
Asset Management and Partnership
Administrative Fee......................... 166,000 50,000 50,000 12,500
Reimbursements............................... 225,782 266,946 207,904 115,206
-------- -------- -------- --------
Subtotal................................... $424,600 $343,687 $276,136 $132,264
-------- -------- -------- --------
Total.......................................... $702,997 $697,986 $583,104 $294,625
======== ======== ======== ========
COMPANY--AMOUNTS PAYABLE TO THE GENERAL
PARTNER(2)
1% Share of Cash Distributions................. $ 67,242 $ 61,166 $ 52,656 $ 13,164
Acquisition Fee................................ 0 0 0 0
Administrative Fee............................. 100,000 100,000 100,000 25,000
Reimbursements................................. 469,755 586,820 480,448 268,961
-------- -------- -------- --------
Total........................................ $636,997 $747,986 $633,104 $307,125
======== ======== ======== ========
</TABLE>
------------
(1) Calculated based upon the compensation, fees and expenses we are currently
entitled to receive under the Cap Source partnership agreements. For a
description of this structure under the partnership agreements, see
"COMPARISON OF BACS AND UNITS--Compensation, Fees and Expenses--THE
PARTNERSHIPS" in the prospectus/consent solicitation statement.
(2) Calculated based upon the compensation, fees and expenses the company's
general partner would have been entitled to receive under the company's
partnership agreement for the periods indicated. For a description of this
structure under the company's partnership agreement, see "COMPARISON OF BACS
AND UNITS--Compensation, Fees and Expenses--THE COMPANY" in the
prospectus/consent solicitation statement.
The historical reimbursements for Cap Source I for 1997, 1998, 1999 and the
three months ended March 31, 2000, consisted of salaries and benefits of
$211,324, $256,101, $261,526 and $151,150, respectively, board member and
consulting fees of $13,934, $38,937, $0 and $0, respectively, and miscellaneous
expenses of $18,715, $24,836, $11,018 and $2,605, respectively. The historical
reimbursements for Cap Source II for 1997, 1998, 1999 and the three months ended
March 31, 2000, consisted of salaries and benefits of $192,973, $223,939,
$200,277 and $113,433, respectively, board member and consulting
Cap Source II Supp-10
<PAGE>
fees of $13,934, $25,963, $0 and $0, respectively, and miscellaneous expenses of
$18,875, $17,044, $7,676 and $1,773, respectively.
The table above reflects the fact that no acquisition fees would have been
paid to the company during the periods indicated because no new assets were
purchased or permitted to be purchased during those periods. Since the company
will be permitted to acquire new assets, this fee will increase in future years
if the transaction is completed.
The total amounts that would have been paid to us under the company's
partnership agreement would have been higher than the amounts we actually
received during 1998, 1999 and the three months ended March 31, 2000, because
the general partner of the company is entitled to an annual base administrative
fee of $100,000. The Cap Source I partnership agreement does not provide for a
base administrative fee, and the Cap Source II partnership agreement provides
for a base asset management and partnership administrative fee of $50,000, which
corresponds to the company's administrative fee. See "COMPARISON OF BACS AND
UNITS--Compensation, Fees and Expenses." Therefore, under the company's
partnership agreement the general partner would have received an additional
$50,000, $50,000 and $12,500 in total compensation without any corresponding
increase in its duties for the years ended December 31, 1999 and 1998, and the
three months ended March 31, 2000, respectively.
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>
THREE MONTHS
YEAR ENDED DECEMBER 31, ENDED
---------------------------------------------------- MARCH 31,
1995 1996 1997 1998 1999 2000
-------- -------- -------- -------- -------- ------------
<S> <C> <C> <C> <C> <C> <C>
Distributions from Income................. $27.089 $26.465 $20.410 $10.875 $17.925 $ 5.535
Distributions from Return of Capital...... 13.411 14.035 20.090 22.125 4.575 0.090
------- ------- ------- ------- ------- -------
Total................................... $40.500 $40.500 $40.500 $33.000 $22.500 $ 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, 2000, 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-11
<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.(1)
3.02 Limited Partnership Agreement of the company.(1)
3.03 Form of Amended and Restated Limited Partnership Agreement
of the company is incorporated herein by reference to
Appendix E 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.(2)
3.09 Amendment to Limited Partnership Agreement of Capital Source
II L.P.-A.(2)
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.(1)
4.03 Form of Units Certificate of the company.(1)
</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 LLP as to the legality of the units
and the validity of the notes.(1)
8.01 Opinion of Kutak Rock LLP as to certain tax matters.(1)
12.01 Ratio of Earnings to Fixed Charges.(2)
23.01 Consents of Independent Accountants.(2)
23.02 Consent of Kutak Rock LLP (included in Exhibits 5.01 and
8.01).
23.03 Consent of Valuation Research Corporation to being named in
the Registration Statement.(1)
23.04 Consent of Sutro & Co., Inc. to being named in the
Registration Statement.(2)
24.01 The Power of Attorney, included on Page II-4 of the
Registration Statement filed on July 21, 1999, is
incorporated herein by reference.
25.01 Statement of Eligibility of Trustee.(1)
27.01 Financial Data Schedule of the Company.(2)
99.01 Market Value Report of Valuation Research Corporation.(1)
99.02 Form of amended and restated consent card for Capital Source
I and Capital Source II.(2)
99.03 The Fairness Opinion of Sutro & Co., Inc. is incorporated
herein by reference from Appendix B to the
Prospectus/Consent Solicitation Statement.
99.04 The Bringdown Fairness Opinion of Sutro & Co., Inc. is
incorporated herein by reference from Appendix C to the
Prospectus/Consent Solicitation Statement.
99.04 Solicitation Materials.(2)
</TABLE>
------------
(1) Previously filed.
(2) Filed herewith.
(b) Not Applicable.
(c) The Fairness Opinion of Sutro & Co., Inc. is included as Appendix B
to the Prospectus/ Consent Solicitation Statement. The Bringdown Fairness
Opinion of Sutro & Co., Inc. is included as Appendix C to the
Prospectus/Consent Solicitation Statement. 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.
II-2
<PAGE>
(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.
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 Post-Effective Amendment No. 1 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 June 9, 2000.
<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>
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, June 9, 2000
------------------------------------------- President and Chairman of
Michael B. Yanney the Board of Managers of
America First
Companies L.L.C.
*** Chief Financial Officer, June 9, 2000
------------------------------------------- Principal Accounting
Michael Thesing Officer, Secretary,
Treasurer, and Manager of
America First
Companies L.L.C.
*** Manager of America First June 9, 2000
------------------------------------------- Companies L.L.C.
Martin A. Massengale
*** Manager of America First June 9, 2000
------------------------------------------- Companies L.L.C.
Alan Baer
*** Manager of America First June 9, 2000
------------------------------------------- Companies L.L.C.
Gail Walling Yanney
</TABLE>
II-4
<PAGE>
<TABLE>
<CAPTION>
NAME TITLE DATE
---- ----- ----
<C> <S> <C>
*** Manager of America First June 9, 2000
------------------------------------------- Companies L.L.C.
Mariann Byerwalter
</TABLE>
------------
<TABLE>
<S> <C> <C> <C>
***By: /s/ MICHAEL B. YANNEY
------------------------------------
Michael B. Yanney,
AS ATTORNEY-IN-FACT
</TABLE>
II-5
<PAGE>
EXHIBIT INDEX
<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.(1)
3.02 Limited Partnership Agreement of the company.(1)
3.03 Form of Amended and Restated Limited Partnership Agreement
of the company is incorporated herein by reference to
Appendix E 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.(2)
3.09 Amendment to Limited Partnership Agreement of Capital Source
II L.P.-A.(2)
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.(1)
4.03 Form of Units Certificate of the company.(1)
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 LLP as to the legality of the units
and the validity of the notes.(1)
8.01 Opinion of Kutak Rock LLP as to certain tax matters.(1)
12.01 Ratio of Earnings to Fixed Charges.(2)
23.01 Consents of Independent Accountants.(2)
23.02 Consent of Kutak Rock LLP (included in Exhibits 5.01 and
8.01).
23.03 Consent of Valuation Research Corporation to being named in
the Registration Statement.(1)
23.04 Consent of Sutro & Co., Inc. to being named in the
Registration Statement.(2)
24.01 The Power of Attorney, included on Page II-4 of the
Registration Statement filed on July 21, 1999, is
incorporated herein by reference.
25.01 Statement of Eligibility of Trustee.(1)
27.01 Financial Data Schedule of the Company.(2)
99.01 Market Value Report of Valuation Research Corporation.(1)
99.02 Form of amended and restated consent card for Capital Source
I and Capital Source II.(2)
99.03 The Fairness Opinion of Sutro & Co., Inc. is incorporated
herein by reference from Appendix B to the
Prospectus/Consent Solicitation Statement.
99.04 The Bringdown Fairness Opinion of Sutro & Co., Inc. is
incorporated herein by reference from Appendix C to the
Prospectus/Consent Solicitation Statement.
99.04 Solicitation Materials.(2)
</TABLE>
------------
(1) Previously filed.
(2) Filed herewith.
