FORM 10-K
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
(Mark one)
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934 [FEE REQUIRED]
For the fiscal year ended December 31, 1995
or
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 [NO FEE REQUIRED]
For the transition period from to
Commission file number: 0-16497
CAPITAL SOURCE L.P.
(Exact name of registrant as specified
in its Agreement of Limited Partnership)
Delaware 52-1417770
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
Suite 400, 1004 Farnam Street, Omaha, Nebraska 68102
(Address of principal executive offices) (Zip Code)
(402) 444-1630
(Registrant's telephone number, including area code)
Securities Registered Pursuant to Section 12(b) of the Act:
None.
Securities Registered Pursuant to Section 12(g) of the Act:
Beneficial Assignment Certificates ("BACs") representing the beneficial
assignment of limited partnership interests.
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports) and (2) has been subject to such
filing requirements for the past 90 days.
Yes X No
Indicate by check mark if disclosure of delinquent filers pursuant to
Item 405 of Regulation S-K (Section 229.405 of the chapter) is not contained
herein, and will not be contained, to the best of the registrant's knowledge,
in definitive proxy or information statements incorporated by reference in
Part III of this Form 10-K or any amendment to this Form 10-K. [X]
BACs are not currently traded in any market. Therefore, there is no
market price or average bid and asked price for BACs within the 60 days prior
to the date of this filing.
DOCUMENTS INCORPORATED BY REFERENCE
None.
<PAGE> i
TABLE OF CONTENTS
Page
PART I
Item 1. Business 1
Item 2. Properties 2
Item 3. Legal Proceedings 3
Item 4. Submission of Matters to a Vote of Security Holders 3
PART II
Item 5. Market for Registrant's Common Equity and Related
Stockholder Matters 3
Item 6. Selected Financial Data 4
Item 7. Management's Discussion and Analysis of Financial Condition and
Results of Operations 5
Item 8. Financial Statements and Supplementary Data 12
Item 9. Changes in and Disagreements With Accountants on Accounting and
Financial Disclosure 12
PART III
Item 10. Directors and Executive Officers of Registrant 12
Item 11. Executive Compensation 13
Item 12. Security Ownership of Certain Beneficial Owners and Management 13
Item 13. Certain Relationships and Related Transactions 14
PART IV
Item 14. Exhibits, Financial Statement Schedules and Reports on Form 8-K 14
SIGNATURES 32
<PAGE> ii
PART I
Item 1. Business. Capital Source L.P. (the "Registrant" or the
"Partnership") was formed in August 1985 under the Delaware Uniform Limited
Partnership Act to invest principally in federally-insured mortgages on
multifamily housing properties and to acquire, hold, sell, dispose of and
otherwise deal with limited partnership interests ("Partnership Equity
Investments") in the limited partnerships (the "Operating Partnerships") which
construct and operate these properties. The Registrant's investment
objectives are to: (i) achieve long-term capital appreciation through
increases in the value of the Partnership Equity Investments; (ii) provide
quarterly cash distributions to investors; (iii) provide investors with
federal income tax deductions that may offset, in part, taxable cash
distributions subsequent to the initial closing on Beneficial Assignment
Certificates ("BACs") representing a beneficial assignment of limited
partnership interests in the Registrant; (iv) provide the potential for
increases in cash distributions from income from Operating Partnerships and
sale of the multifamily housing properties; and (v) preserve and protect the
Registrant's capital.
A total of 3,374,222 BACs were sold at $20 per BAC for total capital
contributions of $67,484,440 prior to the payment of certain organization and
offering costs.
The Registrant originally acquired (i) five mortgage-backed securities
(the "GNMA Certificates") 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 by the Federal Housing Administration (the
"FHA Loans") on multifamily housing properties located in two states and (iii)
Partnership Equity Investments in eight limited partnerships which own the
multifamily housing properties financed by the GNMA Certificates and the FHA
Loans. The Partnership has been repaid by the FHA on one of its first
mortgage loans. The Partnership has also been repaid by GNMA on one of its
GNMA Certificates. 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, the FHA Loans and the Partnership Equity Investments are
referred to as the "Permanent Investments." A description of the properties
financed by the Registrant at December 31, 1995, appears in Item 7 hereof.
While principal of and interest on the GNMA Certificates and the FHA Loan
are ultimately guaranteed by the United States government, the amount of cash
distributions received by the Registrant from the Partnership Equity
Investments is a function of the net rental revenues generated by the
properties owned by the Operating Partnerships. Net rental revenues from a
multifamily apartment complex depend on the rental and occupancy rates of the
property and on the level of operating expenses. Occupancy rate and rents are
directly affected by the supply of, and demand for, apartments in the market
areas in which a property is located. This, in turn, is affected by several
factors such as local or national economic conditions, the amount of new
apartment construction and interest rates on single-family mortgage loans. In
addition, factors such as government regulation (such as zoning laws),
inflation, real estate and other taxes, labor problems and natural disasters
can affect the economic operations of a property.
In each city in which the Registrant's properties are located, such
properties compete with a substantial number of other apartment complexes.
Apartment complexes also compete with single-family housing that is either
owned or leased by potential tenants. The principal method of competition is
to offer competitive rental rates. The Registrant's properties also compete
by emphasizing regular maintenance and property amenities.
The Registrant believes that each of its properties is in compliance in
all material respects with federal, state and local regulations regarding
hazardous waste and other environmental matters and the Registrant is not
aware of any environmental contamination at any of such properties that would
require any material capital expenditure by the Registrant for the remediation
thereof.
The Registrant is engaged solely in the business of providing financing
for the acquisition and improvement of multifamily real estate. Accordingly,
the presentation of information about industry segments is not applicable and
would not be material to an understanding of the Registrant's business taken
as a whole.
<PAGE> 1
The Registrant has no employees. Certain services are provided to the
Registrant by employees of an affiliate of the managing general partner of the
Registrant, and the Registrant reimburses such affiliate for such services at
cost. The Registrant is not charged and does not reimburse for the services
performed by managers and officers of the managing general partner of the
Registrant.
Item 2. Properties. The Registrant does not directly own or lease any
physical properties. However, by virtue of its interest in the Partnership
Equity Investments in the Operating Partnerships, the Registrant indirectly
owns the seven multifamily apartment projects described in the following table:
<TABLE>
<CAPTION>
Average
Number Square Feet Federal
Property Name Location of Units Per Unit Tax Basis
- -------------------------- ------------------- -------- ----------- ---------------
<S> <C> <C> <C> <C>
Bluff Ridge Apartments Jacksonville, NC 108 873 $ 3,076,441
Fox Hollow Apartments High Point, NC 184 877 4,825,172
Highland Park Apartments Columbus, OH 252 891 6,604,745
Misty Springs Apartments Daytona Beach, FL 128 786 3,357,031
The Ponds at Georgetown Ann Arbor, MI 134 1,002 1,788,700
Waterman's Crossing Newport News, VA 260 944 8,269,797
Water's Edge Apartments Lake Villa, IL 108 814 4,343,006
-------- ---------------
1,174 $ 32,264,892
======== ===============
</TABLE>
Depreciation is taken on each property on a straight-line basis over the
estimated useful life of the properties ranging from five to 40 years.
The average annual occupancy rate and average effective rental rate per
unit for each of the properties for each of the last five years are listed in
the following table:
<TABLE>
<CAPTION>
1995 1994 1993 1992 1991
---------- ---------- ---------- ---------- ----------
<S> <C> <C> <C> <C> <C>
BLUFF RIDGE APARTMENTS
Average Occupancy Rate 94% 92% 94% 95% 91%
Average Effective Annual Rental Per Unit $5,755 $5,622 $5,623 $5,423 $5,045
FOX HOLLOW APARTMENTS
Average Occupancy Rate 97% 97% 96% 93% 84%
Average Effective Annual Rental Per Unit $6,176 $6,102 $5,687 $5,376 $4,699
HIGHLAND PARK APARTMENTS
Average Occupancy Rate 97% 97% 96% 96% 91%
Average Effective Annual Rental Per Unit $6,071 $5,974 $5,701 $5,486 $5,039
MISTY SPRINGS APARTMENTS
Average Occupancy Rate 97% 97% 93% 84% 88%
Average Effective Annual Rental Per Unit $5,809 $5,589 $5,129 $4,588 $4,873
THE PONDS AT GEORGETOWN
Average Occupancy Rate 95% 95% 90% 88% 89%
Average Effective Annual Rental Per Unit $9,174 $8,955 $8,398 $7,970 $8,089
WATERMAN'S CROSSING
Average Occupancy Rate 95% 96% 95% 96% 94%
Average Effective Annual Rental Per Unit $6,737 $6,580 $6,436 $6,415 $6,094
WATER'S EDGE APARTMENTS
Average Occupancy Rate 97% 98% 94% 91% 93%
Average Effective Annual Rental Per Unit $8,559 $8,123 $7,786 $7,381 $7,533
</TABLE>
<PAGE> 2
In the opinion of the Partnership's management, each of the properties is
adequately covered by insurance. For additional information concerning the
properties, see "Management's Discussion and Analysis of Financial Condition
and Results of Operations" and Note 5 to the Partnership's Financial
Statements. A discussion of general competitive conditions to which these
properties is included in Item 1 hereof.
Item 3. Legal Proceedings. There are no material pending legal
proceedings to which the Registrant is a party or to which any of its property
is subject.
Item 4. Submission of Matters to a Vote of Security Holders. No matter
was submitted during the fourth quarter of 1995 to a vote of the Registrant's
security holders.
PART II
Item 5. Market for Registrant's Common Equity and Related Stockholder
Matters.
(a) Market Information. The BACs are subject to various transfer
restrictions imposed to prevent the Registrant from being treated as a
publicly traded partnership for federal income tax purposes and,
accordingly, there is no public trading market for the BACs.
(b) Investors. The approximate number of BAC Holders on December
31, 1995, was 6,217.
(c) Distributions. Cash distributions are paid on a quarterly
basis to the record holders of BACs as of the last day of each month.
Total cash distributions paid or accrued to BAC Holders during the fiscal
years ended December 31, 1995, and December 31, 1994, equaled $3,407,964
and $3,407,963, respectively. The cash distributions paid per BAC during
the fiscal years ended December 31, 1995, and December 31, 1994 were as
follows:
<TABLE>
<CAPTION>
Per BAC
Year Ended Year Ended
December 31, 1995 December 31, 1994
----------------- -----------------
<S> <C> <C>
Income $ .8309 $ 1.0100
Return of Capital .1791 -
----------------- -----------------
Total $ 1.0100 $ 1.0100
================= =================
</TABLE>
See Item 7, Management's Discussion and Analysis of Financial Condition
and Results of Operations, for information regarding the sources of funds
used for cash distributions and for a discussion of factors, if any, which may
adversely affect the Registrant's ability to make cash distributions at the
same levels in 1996 and thereafter.
<PAGE> 3
Item 6. Selected Financial Data. Set forth below is selected financial
data for the Partnership. The information set forth below should be read in
conjunction with the Financial Statements and Notes thereto filed in response
to Item 8 hereof.
<TABLE>
<CAPTION>
For the For the For the For the For the
Year Ended Year Ended Year Ended Year Ended Year Ended
Dec. 31, 1995 Dec. 31, 1994 Dec. 31, 1993 Dec. 31, 1992 Dec. 31, 1991
------------- ------------- ------------- ------------- -------------
<S> <C> <C> <C> <C> <C>
Rental income $ 7,210,114 $ 7,748,867 $ 7,530,940 $ 7,418,665 $ 7,105,700
Mortgage-backed securities income 132,211 77,012 - - -
Interest on FHA Debentures - - - 163,918 -
Interest on GNMA securities 519,970 446,103 - - -
Interest on temporary cash investments and
U.S. government securities 225,135 159,005 184,042 121,149 211,424
Other income 219,376 306,903 202,831 106,113 161,087
Unusual item - gain from disposition of
Falcon Point assets and related liabilities - 2,746,326 - - -
Expenses (including depreciation) (5,477,264) (6,167,516) (5,437,478) (5,387,016) (6,222,569)
Minority interest in (income) losses of
operating partnerships 2,571 (19,772) 6,889 8,665 14,155
------------- ------------- ------------- ------------- -------------
Net income $ 2,832,113 $ 5,296,928 $ 2,487,224 $ 2,431,494 $ 1,269,797
============= ============= ============= ============= =============
Net income per BAC $ .83 $ 1.55 $ .73 $ .71 $ .37
============= ============= ============= ============= =============
Cash distributions per BAC $ 1.0100 $ 1.0100 $ 2.6825 $ 1.1000 $ 1.1000
============= ============= ============= ============= =============
Total assets $ 47,193,984 $ 48,103,699 $ 48,098,722 $ 54,742,900 $ 49,287,137
============= ============= ============= ============= =============
Mortgage loan payable $ 6,392,007 $ 6,395,004 $ 6,395,004 $ 6,395,004 $ -
============= ============= ============= ============= =============
</TABLE>
<PAGE>
<PAGE> 4
Item 7. Management's Discussion and Analysis of Financial Condition and
Results of Operations
Liquidity and Capital Resources
The Partnership originally acquired: (i) five GNMA Certificates which are
guaranteed as to principal and interest by the Government National Mortgage
Association (GNMA) and collateralized by first mortgage loans on multifamily
housing properties located in five states; (ii) three FHA Loans which are
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 Operating 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 on January 5, 1993. On October
28, 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, on November 17, 1995, the
Partnership received $7,118,805 from GNMA representing payment in full of the
GNMA Certificate related to Falcon Point Apartments. 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 and U.S. government securities ("Reserve
Investments"). The obligations of GNMA and FHA are backed by the full faith
and credit of the United States government.
The FHA Loans, GNMA Certificates, U.S. government securities, and Partnership
Equity Investments in operating partnerships represent the Partnership's
principal assets as shown in the Parent Company Only Financial Information in
Note 6 to the financial statements. The parent company information is
presented using the equity method of accounting for the investment in
operating partnerships. Generally accepted accounting principles, however,
require that the Partnership's financial statements consolidate the Operating
Partnerships, since the Partnership holds a majority ownership in each
Operating Partnership and can influence decisions of the general partners in
certain circumstances.
The following FHA Loans, GNMA Certificates, and U.S. government securities
were owned by the Partnership at December 31, 1995. Interest income from the
FHA Loans, GNMA Certificates, and U.S. government securities is the primary
source of cash available for distribution to investors.
<TABLE>
<CAPTION>
Guaranteed Interest Maturity Carrying
Property Name or Insured By Rate Date Value
- ---------------------------------------- --------------- ---------- --------------- ---------------
<S> <C> <C> <C> <C>
Bluff Ridge Apartments FHA 8.72% 11-01-2028 $ 3,550,065
Highland Park Apartments FHA 8.75% 11-01-2028 9,104,123
Misty Springs Apartments GNMA 8.75% 06-15-2029 4,316,208
The Ponds at Georgetown GNMA 9.00% 12-15-2029 2,254,724
Waterman's Crossing GNMA 10.00% 09-15-2028 11,018,608
Water's Edge Apartments GNMA 8.75% 12-15-2028 5,121,577
Pools of single-family properties GNMA 7.58%(1) 2008 to 2009 815,185
Pools of single-family properties GNMA 7.58%(1) 2007 to 2008 862,618
U.S. government securities U.S. government 6.41%(1) 03-31-1996 1,005,000
---------------
$ 38,048,108
===============
</TABLE>
(1) Represents yield to the Partnership.
<PAGE> 5
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, 1995 Dec. 31, 1994 Dec. 31, 1993
--------------- --------------- ---------------
<S> <C> <C> <C>
Regular monthly distributions
Income $ .8309 $ 1.0100 $ .7298
Return of capital .1791 - 1.9527
--------------- --------------- ---------------
$ 1.0100 $ 1.0100 $ 2.6825
=============== =============== ===============
Distributions
Paid out of cash flow $ 1.0100 $ 1.0100 $ 2.6825
=============== =============== ===============
</TABLE>
Regular quarterly distributions to BAC Holders consist primarily of interest
received on FHA Loans, GNMA Certificates and the Reserve Investments.
Additional cash for distributions is received from other investments. The
Partnership may draw on reserves to pay operating expenses or to supplement
cash distributions to investors. The Partnership is permitted to replenish
reserves with cash flows in excess of distributions paid. For the year ended
December 31, 1995, a net amount of $538,524 of undistributed cash flow was
added to reserves. In addition, $7,118,805 from the payoff of the GNMA
Certificate related to Falcon Point Apartments was placed in reserves. The
total amount held in reserves at December 31, 1995, was $10,795,119 of which
$2,682,803 was invested in mortgage-backed securities and U.S. government
securities.
The Partnership believes that cash provided by operating 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. The Company has no other internal
or external sources of liquidity. Under the terms of the Partnership
agreement, the Partnership is not authorized to enter into short-term or
long-term debt financing arrangements or 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 following table shows the occupancy levels of the properties financed by
the Partnership at December 31, 1995:
<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 108 100 93%
Fox Hollow Apartments High Point, NC 184 175 95%
Highland Park Apartments Columbus, OH 252 243 96%
Misty Springs Apartments Daytona Beach, FL 128 123 96%
The Ponds at Georgetown Ann Arbor, MI 134 132 99%
Waterman's Crossing Newport News, VA 260 249 96%
Water's Edge Apartments Lake Villa, IL 108 100 93%
------------ ------------ ------------
1,174 1,122 96%
============ ============ ============
</TABLE>
<PAGE> 6
Bluff Ridge Apartments
Bluff Ridge Apartments is a 108-unit complex located in Jacksonville, North
Carolina. Average occupancy was 94% in 1995, compared to 92% in 1994.
Operations at Bluff Ridge are heavily dependent on demand from the local
military personnel. The Jacksonville rental market has remained relatively
stable throughout 1995. Excluding interest, net cash flow generated by the
property increased approximately 2.7% from 1994 to 1995, due primarily to the
increase in occupancy. The property was current on its debt service payments
during 1995 and generated cash flow in excess of debt service.
Fox Hollow Apartments
Fox Hollow Apartments is a 184-unit apartment community located in High Point,
North Carolina. Average occupancy was 97% in 1995 and 1994. Although FHA has
paid the Partnership under the guarantee of the FHA loan, the Partnership has
retained its Partnership Equity Investment in the property as a result of a
Provisional Workout Agreement (PWA) entered into with HUD in 1993. Under the
terms of the PWA, FHA continued to hold a first mortgage loan on the property
but modified the terms thereof in order to enable the property to make full
debt service payments from cash flow. The PWA was to remain in effect until
April 30, 1996. However, HUD sold the mortgage in May 1995. The new mortgage
holder did not accept the terms of the PWA and notified the Operating
Partnership that foreclosure proceedings may be initiated should the property
be unable to pay any accrued interest on the mortgage to bring it current.
Despite this situation, the Operating Partnership continued to operate under
the terms of the PWA until January 1, 1996. On January 8, 1996, the General
Partners negotiated a Loan Modification Agreement (LMA) with the new mortgage
holder under which the PWA was dissolved and certain terms and conditions of
the mortgage payable were modified so that it operates as a conventional
mortgage. The new mortgage holder agreed to accept $229,745 ($161,745 of
which was paid by the Partnership) as payment of accrued unpaid interest.
Further, effective January 1, 1996, installments of interest and principal in
the amount of $49,947 are due on the first day of each month, with the balance
of principal and accrued interest due and payable by the earlier of the call
date or October 1, 2028. While there can be no assurance that the modified
terms of the Fox Hollow mortgage will enable the property to remain current on
its mortgage obligations, the restructuring allows the Partnership to retain
its Partnership Equity Investment in the Fox Hollow Apartments and improves
the property's ability to make its required mortgage payments from operating
cash flow.
Excluding interest, net cash flow generated by Fox Hollow Apartments decreased
approximately 3.8% from 1994 to 1995. This decrease is primarily due to an
increase in taxes and property improvements which was partially offset by an
increase in other income such as garage and washer-dryer rentals.
Highland Park Apartments
Highland Park Apartments contains 252 luxury garden apartments and is located
in Columbus, Ohio. Average occupancy was 97% in 1995 and 1994. Effective
on-site management, combined with a steady improvement in the Columbus market,
continues to have a positive impact on the property's performance. In
addition to maintaining occupancy levels, moderate rental rate increases were
implemented. However, net cash flow generated by the property, excluding
interest, was approximately 16.5% less in 1995, compared to 1994, due
primarily to increases in repairs and maintenance expenses, property
improvements and administrative expenses. Despite the decrease in net cash
flow, the property remained current on its mortgage obligations throughout
1995 and generated cash flow in excess of debt service.
Misty Springs Apartments
Misty Springs Apartments is a 128-unit apartment community located in Daytona
Beach, Florida. Average occupancy was 97% in 1995 and 1994. The net cash
flow generated by the property in 1995 approximated that of 1994.
<PAGE> 7
During July 1993, the general partner of the Operating Partnership and the
mortgage holder of the Misty Springs Apartment mortgage entered into a
Reinstatement Agreement in order to avoid foreclosure of the mortgage loan and
sale of the property. Under the terms of Reinstatement Agreement, the
Operating Partnership issued a non-interest bearing, surplus cash promissory
note to the mortgage holder in the amount of $131,268 for advances made by the
mortgage holder for unpaid accrued interest. In addition, surplus cash loans
were made to the Operating Partnership in the amount of $32,182 as approved by
the Reinstatement Agreement. Payments are to be made semiannually solely from
surplus cash as defined. No payments of principal and interest on the surplus
cash promissory note or the surplus cash loans were made in 1995. However,
during 1995, the Operating Partnership was able to make its debt service
payments on the mortgage loan, with a shortfall of $40,500 being funded by
Partnership reserves.
The Ponds at Georgetown
The Ponds at Georgetown consists of 134 apartments located in Ann Arbor,
Michigan. Average occupancy was 95% in 1995 and 1994. In the past, the
property has relied heavily on university students, who are generally
short-term tenants. Recently, aggressive marketing strategies have been
implemented which target more long-term tenants, resulting in a stabilization
in the property's occupancy. Despite this, the persistent sluggishness of the
Ann Arbor rental market is preventing the property from generating sufficient
cash flow from operations to fully pay its mortgage obligations, and the
mortgage on the property remains in default. Despite the default, the
Partnership has continued to receive full payments with respect to the GNMA
Certificate, due to the co-insurer's (HUD's) funding of the deficits. The
co-insurer has the option to suspend its funding of the property's deficits
and assign its mortgage to GNMA, which would result in a return to the
Partnership of the outstanding principal balance of the GNMA Certificate and
the possible loss of the Partnership Equity Investment in the property. To
date, the co-insurer has not indicated plans to suspend funding of the
property's deficits. There can be no assurance, however, that the co-insurer
will not make such an election in the future if the property remains in
default. Excluding interest, the property's net cash flow was approximately
9.7% less in 1995, compared to 1994. This decrease is due to an increase in
operating expenses which was partially offset by an increase in rental
revenues.
Waterman's Crossing
Waterman's Crossing is a 260-unit apartment community located in Newport News,
Virginia. Average occupancy was 95% in 1995, compared to 96% in 1994. During
July 1993, the Partnership contributed $238,446 to bring the mortgage current
in order to avoid foreclosure of the mortgage loan and sale of the property.
Since that time, the Operating Partnership has remained current on its
mortgage obligations, with shortfalls of $215,000 and $220,860 being funded by
the Partnership in 1995 and 1994, respectively. The operating performance of
the property has gradually been improving as net cash flow generated by the
property in 1995, excluding interest, increased approximately 9% from 1994.
This increase is primarily due to a decrease in repairs and maintenance
expenses and property improvements.
Water's Edge Apartments
Water's Edge Apartments is a 108-unit apartment complex located in Lake Villa,
Illinois. Average occupancy was 97% in 1995, compared to 98% in 1994. Due to
the property's resort-like appeal, performance has historically declined
during the winter months. During 1995 and 1994, however, occupancy levels
remained strong year-round, and the property has continued to meet its
mortgage obligations on a timely basis from cash flow. Excluding interest,
the property's net cash flow was approximately 2% less in 1995, compared to
1994. This decrease is due to an increase in real estate taxes which more
than offset an increase in rental revenues that resulted from higher average
rental rates.
<PAGE> 8
Results of Operations
The tables below compares the results of operations for each year shown.
<TABLE>
<CAPTION>
For the For the For the
Year Ended Year Ended Year Ended
Dec. 31, 1995 Dec. 31, 1994 Dec. 31, 1993
--------------- --------------- ---------------
<S> <C> <C> <C>
Rental income $ 7,210,114 $ 7,748,867 $ 7,530,940
Mortgage-backed securities income 132,211 77,012 -
Interest on GNMA securities 519,970 446,103 -
Interest income on temporary cash investments
and U.S. government securities 225,135 159,005 184,042
Other income 219,376 306,903 202,831
Unusual item - gain from disposition of
Falcon Point assets and related liabilities - 2,746,326 -
--------------- --------------- ---------------
8,306,806 11,484,216 7,917,813
--------------- --------------- ---------------
Real estate operating expenses 3,569,892 4,105,677 3,344,398
Depreciation 896,420 990,377 1,066,623
Interest expense 571,801 613,814 570,542
Property development and management fees - 7,649 4,031
Investor servicing 238,667 213,212 192,330
Professional fees 53,121 70,175 106,542
Other expenses 5,849 8,714 17,115
Amortization 141,514 157,898 135,897
--------------- --------------- ---------------
5,477,264 6,167,516 5,437,478
--------------- --------------- ---------------
Minority interest in (income) losses of operating partnerships 2,571 (19,772) 6,889
--------------- --------------- ---------------
Net income $ 2,832,113 $ 5,296,928 $ 2,487,224
=============== =============== ===============
</TABLE>
<TABLE>
<CAPTION>
Increase Increase
(Decrease) (Decrease)
From 1994 From 1993
--------------- ---------------
<S> <C> <C>
Rental income $ (538,753) $ 217,927
Mortgage-backed securities income 55,199 77,012
Interest on GNMA securities 73,867 446,103
Interest income on temporary cash investments
and U.S. government securities 66,130 (25,037)
Other income (87,527) 104,072
Unusual item - gain from disposition of
Falcon Point assets and liabilities (2,746,326) 2,746,326
--------------- ---------------
(3,177,410) 3,566,403
--------------- ---------------
Real estate operating expenses (535,785) 761,279
Depreciation (93,957) (76,246)
Interest expense (42,013) 43,272
Property development and management fees (7,649) 3,618
Investor servicing 25,455 20,882
Professional fees (17,054) (36,367)
Other expenses (2,865) (8,401)
Amortization (16,384) 22,001
--------------- ---------------
(690,252) 730,038
--------------- ---------------
Minority interest in (income) losses of operating partnerships 22,343 (26,661)
--------------- ---------------
Net income $ (2,464,815) $ 2,809,704
=============== ===============
</TABLE>
<PAGE> 9
Rental income is recognized net of any vacancy losses and rental concessions
offered. Rental income, net of real estate operating expenses, depreciation
and amortization, increased $107,373 from 1994 to 1995. Excluding the
decrease in rental income due to the foreclosure of Falcon Point Apartments,
rental income increased approximately $180,000 from 1994 to 1995. This
increase resulted from an increase in rental revenue of approximately $195,000
due to an increase in rental rates which was partially offset by a decrease in
rental revenue of approximately $15,000 due to a slight decrease in average
occupancy. Real estate operating expenses, net of real estate operating
expenses related to Falcon Point Apartments, increased approximately $88,000
(approximately 2.5%) from 1994 to 1995, due to overall expense increases.
Depreciation expense, net of the depreciation expense related to Falcon Point
Apartments, increased approximately $33,000 from 1994 to 1995, due to
adjustments made to depreciation expense for certain properties. Amortization
expense, net of the amortization expense related to Falcon Point Apartments,
remained relatively constant from 1994 to 1995. See the discussion of each
property in the Asset Quality section for additional information.
Rental income, net of real estate operating expenses, depreciation and
amortization, decreased $489,107 from 1993 to 1994. Rental income increased
$217,927 from 1993 to 1994, consisting of: (i) an increase of approximately
$313,000, due to rental rate increases in most markets; (ii) an increase of
approximately $112,000, due to increases in average occupancy of six of the
Partnership's properties; offset by, (iii) a decrease of approximately
$207,000 due to the earth slide at Falcon Point Apartments and the resulting
foreclosure. Real estate operating expenses increased $761,279 from 1993 to
1994, primarily due to capital improvements, including exterior painting and
appliance replacements, and expenses incurred in 1994 at Falcon Point
Apartments related to the earth slide. Depreciation decreased $76,246 from
1993 to 1994, due to some personal property being fully depreciated.
Amortization expense increased $22,001 from 1993 to 1994 due to adjustments
made to certain properties' amortization.
Interest on GNMA securities for 1994 and 1995 resulted from the recognition of
the GNMA Certificate related to Falcon Point Apartments for financial
statement purposes effective November 1, 1994. Prior to the foreclosure, the
Partnership's investment in the GNMA Certificate was eliminated in
consolidation. This GNMA Certificate was paid off in November 1995;
therefore, the Partnership will not receive interest from this source in the
future.
Mortgage-backed securities income increased $55,199 from 1994 to 1995 and
$77,012 from 1993 to 1994 as a result of interest earned on mortgage-backed
securities acquired in June and July 1994. Interest income on temporary cash
investments and U.S. government securities increased $66,130 from 1994 to
1995. This increase is the result of: (i) interest income of approximately
$39,000 earned on U.S. government securities purchased in March 1995; and (ii)
and increase in other cash investments due to an increase in cash reserves as
the result of receiving proceeds from the payoff of the GNMA Certificate
related to Falcon Point Apartments in November 1995. Interest income on
temporary cash investments and U.S. government securities decreased $25,037
from 1993 to 1994, primarily due to the investment of surplus cash in
mortgage-backed securities in June and July 1994, as discussed above.
Other income consists primarily of garage rentals, washer/dryer and vending
income generated by the Partnership's properties. Notwithstanding the
decrease related to Falcon Point Apartments, other income decreased $11,367
(approximately 5%) from 1994 to 1995. Other income increased $104,072 from
1993 to 1994, primarily due to proceeds received on insurance claims.
Due to the earth slide at Falcon Point Apartments in April 1994, the property
was not able to generate sufficient cash flow to service its mortgage loan.
Foreclosure proceedings were initiated against the property on October 28,
1994, thereby eliminating the Partnership's equity in the property. On that
date, the liabilities of the property exceeded the related assets by
$2,746,326, resulting in an unusual gain to the Partnership of $2,746,326.
<PAGE> 10
Investor servicing costs increased $25,455 from 1994 to 1995 and $20,882 from
1993 to 1994. The increase from 1994 to 1995 was due to: (i) an increase of
approximately $24,000 in salaries and related expenses, (ii) an increase of
approximately $6,000 in insurance expense; offset by, (iii) a decrease of
approximately $5,000 in other investor servicing expenses. The increase from
1993 to 1994 was due to increases of: (i) approximately $7,000 in insurance
expense; (ii) approximately $7,000 in printing costs; (iii) approximately
$4,000 in salaries and related expenses; and, (iv) approximately $3,000 in
other investor servicing expenses.
Professional fees decreased $17,054 from 1994 to 1995 and $36,367 from 1993 to
1994, primarily due to a decrease in legal fees. The Partnership's legal fees
were higher in 1994, due primarily to the earth slide at Falcon Point
Apartments and the resulting foreclosure. Professional fees were higher in
1993, primarily due to expenses incurred in connection with negotiating
workout agreements on several of the properties' mortgage loans.
<PAGE> 11
Item 8. Financial Statements and Supplementary Data. The Financial
Statements and supporting schedules of the Registrant are set forth in Item 14
hereof and are incorporated herein by reference.
Item 9. Changes in and Disagreements With Accountants on Accounting and
Financial Disclosure. There were no disagreements with the Registrant's
independent accountants on accounting principles and practices or financial
disclosure during the fiscal years ended December 31, 1995 and 1994.
PART III
Item 10. Directors and Executive Officers of Registrant. The Registrant
has no directors or officers. The general partners of the Registrant are
America First Capital Source I, L.L.C., a Delaware Limited Liability Company
(the "America First General Partner"), and Insured Mortgage Equities Inc., a
Delaware corporation (the "IME General Partner") (collectively, the America
First General Partner and the IME General Partner are referred to as the
"General Partners").
The following individuals are the officers of the America First General
Partner, and each serves for a term of one year.
<TABLE>
<CAPTION>
Name Position Held Position Held Since
- ----------------------- -------------------------- -----------------------
<S> <C> <C>
Michael B. Yanney Chairman and Chief Executive Officer 1991
Stewart Zimmerman President 1991
Michael Thesing Vice President, 1991
Secretary, Treasurer
</TABLE>
Michael B. Yanney, 62, is the Chairman and Chief Executive Officer of
various affiliates of the America First General Partner which manage public
investment funds which have raised over $1.3 billion 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 (subsequently merged into FirsTier Financial,
Inc.), 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 Burlington Northern Santa Fe
Corporation, Forest Oil Corporation, MFS Communications Company, Inc., Lozier
Corporation, Mid-America Apartment Communities, Inc. and PKS Information
Services, Inc..
Stewart Zimmerman, 51, has been Executive Vice President of affiliates of
the America First General Partner since January 1989. In addition, Mr.
Zimmerman has served as a consultant to affiliates of the America First
General Partner beginning in September 1985. From September 1986 though
September 1988, he served as a director and managing director of Security
Pacific Merchant Bank and was responsible for ongoing sales, trading and
finance group activities. Prior thereto, he served in various capacities with
E.F. Hutton & Company Inc. and with Lehman Brothers, where he was responsible
for sales and trading of mortgage-backed securities. From 1968 to 1972, Mr.
Zimmerman was an officer with Zenith Mortgage Company and Zenith East, a
national mortgage banking and brokerage firm engaged in the servicing of
single-family and multifamily residential mortgages as well as the financing
of real estate properties throughout the United States.
Michael Thesing, 41, has been Vice President and Chief Financial Officer
of affiliates of the America First General Partner since July 1984. 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.
<PAGE> 12
The following individuals are the officers and directors of the IME
General Partner, and each serves for a term of one year.
<TABLE>
<CAPTION>
Directors
Name Position Held Position Held Since
- ----------------------- -------------------------- -----------------------
<S> <C> <C>
Paul Abbott Director 1989
Officers
Name Position Held Position Held Since
- ----------------------- -------------------------- -----------------------
Paul Abbott President, Chief 1989
Operating Officer,
Chief Financial Officer
Donald E. Petrow Vice President 1992
Elizabeth I. Rubin Vice President 1995
</TABLE>
Paul L. Abbott, 50, is a Managing Director of Lehman Brothers Inc.
("Lehman"), which he joined in 1988. At Lehman, Mr. Abbott is responsible for
the investment management of residential, commercial and retail real estate.
Prior to joining Lehman, Mr. Abbott was a real estate consultant and, from
1983 to 1987, was a senior officer of The Daseke Group, Inc., a privately held
company specializing in the syndication of private real estate limited
partnerships. From 1974 to 1983, Mr. Abbott was an officer of two life
insurance companies and a director of an insurance agency subsidiary.
Donald E. Petrow, 39, is a First Vice President of Lehman. Since March
1989, he has been responsible for the investment management and restructuring
of various investment portfolios, including but not limited to, federally
insured mortgages, tax exempt bonds, residential real estate, cable and
energy. From November 1981 to February 1989, Mr. Petrow, as Vice President of
Lehman, was involved in investment banking activities relating to partnership
finance and acquisition. Prior to joining Lehman, Mr. Petrow was employed in
accounting and equipment leasing firms. Mr. Petrow holds a B.S. Degree in
accounting from Saint Peters College and an M.B.A. in Finance from Pace
University.
Elizabeth I. Rubin is a Vice President of Lehman in the Diversified Asset
Group. Ms. Rubin joined Lehman in April 1992. Prior to joining Lehman, she
was employed from September 1988 to April 1992 by the accounting firm of
Kenneth Leventhal and Co.. Ms. Rubin is a Certified Public Accountant and
received a B.S. degree from the State University of New York at Binghamton in
1988.
Certain officers and directors of the IME General Partner are now
serving (or in the past have served) as officers or directors of entities
which act as general partners of a number of real estate limited partnerships
which have sought protection under the provisions of the Federal Bankruptcy
Code. The partnerships which have filed bankruptcy petitions own real estate
which has been adversely affected by the economic conditions in the market in
which the real estate is located and, consequently, the partnerships sought
the protection of the bankruptcy laws to protect the partnerships' assets from
loss through foreclosure.
Item 11. Executive Compensation. The Registrant does not have any
directors or officers. None of the directors or officers of the General
Partners receive compensation from the Registrant and neither General Partner
receives reimbursement from the Registrant for any portion of their salaries.
Remuneration paid by the Registrant to the General Partners pursuant to the
terms of its agreement of limited partnership during the period ending
December 31, 1995, is described in Note 4 to the Notes to the Financial
Statements filed in response to Item 8 hereof.
Item 12. Security Ownership of Certain Beneficial Owners and Management.
(a) No person is known by Registrant to own beneficially more than 5% of
the BACs.
<PAGE> 13
(b) No director or officer of the General Partners owns any BACs.
(c) The IME General Partner shall assume all authority and responsibility
for the management of the Registrant in the event Mr. Yanney ceases to be a
member or the chief executive officer of the America First General Partner.
There exists no other arrangement known to the Registrant the operation of
which may at any subsequent date result in a change in control of the
Registrant.
Item 13. Certain Relationships and Related Transactions. The members of
the America First General Partner are America First Companies L.L.C. and
Michael B. Yanney. The IME General Partner is an affiliate of Lehman.
Except as described herein, the Registrant is not a party to any transaction
or proposed transaction with either General Partner or with any person who
is: (i) a member, director, or officer of the General Partners; (ii) a
nominee for election as a director or manager of a General Partner; (iii) an
owner of more than 5% of the BACs; or, (iv) a member of the immediate family
of any of the foregoing persons.
The Operating Partnership's general partners provide various on-site
property development and management services. There were no property
development and management fees paid during 1995.
The 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 investors has been paid on a cumulative basis and
the investors have received the return of their capital contributions. During
1995, distributions to investors represented less than an 8% return;
accordingly, no fees were paid or accrued during 1995.
During 1995, the Registrant paid or reimbursed the General Partners
$309,826 for certain costs and expenses incurred in connection with the
operation of the Registrant, including legal and accounting fees and investor
communication costs, such as printing and mailing charges. See Note 4 to
Notes to Consolidated Financial Statements filed in response to Item 8 hereof
for a description of these costs and expenses.
An affiliate of the America First General Partner who is also controlled
by America First Companies L.L.C. has been retained to provide property
management services for Waterman's Crossing, Misty Springs and Fox Hollow
Apartments. The fees for such services totaled $136,529 during 1995 which
represent the lower of costs incurred in providing such management services or
the customary fees for such services determined on a competitive basis.
PART IV
Item 14. Exhibits, Financial Statement Schedules and Reports on Form
8-K. (a) The following documents are filed as part of this report:
1. Financial Statements. The following financial statements are
included in response to Item 8 of this report:
Independent Accountants' Report dated March 28, 1996.
Consolidated Balance Sheets of Registrant as of December 31, 1995,
and December 31, 1994.
Consolidated Statements of Income of Registrant for the years
ended December 31, 1995, December 31, 1994, and December 31, 1993.
Consolidated Statements of Partners' Capital of Registrant for the
years ended December 31, 1995, December 31, 1994, and December 31,
1993.
Consolidated Statements of Cash Flows of Registrant for the years
ended December 31, 1995, December 31, 1994, and December 31, 1993.
Notes to Consolidated Financial Statements of Registrant.
Schedule III--Real Estate and Accumulated Depreciation for the
years ended December 31, 1995, and December 31, 1994.
<PAGE> 14
2. Financial Statement Schedules. The information required to be
set forth in the financial statement schedules is included in the
Financial Statements filed in response to Item 14(a)(1) hereof.
3. Exhibits. The following exhibits were filed as required by
Item 14(c) of this report. Exhibit numbers refer to the paragraph
numbers under Rule 601 of Regulation S-K:
4(a). Agreement of Limited Partnership of Capital Source L.P.
(incorporated herein by reference from Exhibit A of the Prospectus
contained in the Registrant's Post Effective Amendment No. 3 dated
May 15, 1986, to the Registration Statement on Form S-11
(Commission File No. 0-16497)).
4(b). Beneficial Assignment Certificate (incorporated by
reference to page 47 of Form 10-K for the fiscal year ended
December 31, 1989, filed with the Securities and Exchange
Commission by the Registrant (Commission File No. 0-16497)).
24. Power of Attorney.
(b) The Registrant did not file any reports on Form 8-K during the last
quarter of the period covered by this report.
<PAGE> 15
INDEPENDENT ACCOUNTANTS' REPORT
To the Partners
Capital Source L.P.:
We have audited the accompanying consolidated balance sheets of Capital Source
L.P. and subsidiaries as of December 31, 1995 and 1994, and the related
consolidated statements of income, partners' capital, and cash flows for each
of three years in the period ended December 31, 1995. These consolidated
financial statements are the responsibility of the Partnership's management.
Our responsibility is to express an opinion on these consolidated 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 consolidated financial statements referred to above
present fairly, in all material respects, the consolidated financial position
of Capital Source L.P. and subsidiaries as of December 31, 1995 and 1994, and
the consolidated results of their operations and their cash flows for each of
the three years in the period ended December 31, 1995, in conformity with
generally accepted accounting principles.
Omaha, Nebraska
March 28, 1996 Coopers & Lybrand L.L.P.
To the Partners
Capital Source L.P.
Our report on the financial statements of Capital Source L.P. and subsidiaries
is included in this Form 10-K. In connection with our audit of such
consolidated financial statements, we have also audited the related
consolidated financial statement schedules listed in Item 14.
In our opinion, the consolidated financial statement schedules referred to
above, when considered in relation to the basic financial statements taken as
a whole, present fairly, in all material aspects, the information required to
be included therein.
Omaha, Nebraska
March 28, 1996 Coopers & Lybrand L.L.P.
<PAGE> 16
CAPITAL SOURCE L.P.
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
Dec. 31, 1995 Dec. 31, 1994
--------------- ---------------
<S> <C> <C>
Assets
Investment in real estate:
Land $ 3,093,671 $ 3,093,671
Buildings 35,505,314 35,505,314
Personal property 1,998,765 1,991,554
--------------- ---------------
40,597,750 40,590,539
Less accumulated depreciation (9,039,307) (8,142,887)
--------------- ---------------
Net investment in real estate 31,558,443 32,447,652
--------------- ---------------
Cash and temporary cash investments, at cost
which approximates market value (Note 5) 8,962,735 2,351,857
Escrow deposits and property reserves 1,019,329 1,371,560
Investment in U.S. government securities (Note 5) 1,005,000 -
Investment in GNMA security (Note 8) - 7,145,554
Investment in mortgage-backed securities (Note 5) 1,677,803 1,822,428
Interest and other receivables 72,993 28,455
Deferred mortgage issuance costs, net of accumulated amortization of
$1,224,775 in 1995 and $1,083,261 in 1994 2,378,032 2,519,546
Other assets 519,649 416,647
--------------- ---------------
$ 47,193,984 $ 48,103,699
=============== ===============
Liabilities and Partners' Capital (Deficit)
Liabilities
Accounts payable and accrued expenses $ 1,205,598 $ 1,143,750
Distribution payable (Note 3) 860,587 860,587
Mortgage loan payable (Note 7) 6,392,007 6,395,004
Interest payable 311,962 349,158
Due to operating partnerships' general partners and their affiliates (Note 4) 4,112,583 4,512,113
--------------- ---------------
12,882,737 13,260,612
--------------- ---------------
Minority interest 224,794 227,365
--------------- ---------------
Partners' Capital (Deficit)
General Partners (274,793) (269,500)
Limited Partners ($10.18 per BAC in 1995 and $10.34 in 1994) 34,361,246 34,885,222
--------------- ---------------
34,086,453 34,615,722
--------------- ---------------
$ 47,193,984 $ 48,103,699
=============== ===============
The accompanying notes are an integral part of the consolidated financial statements.
</TABLE>
<PAGE> 17
CAPITAL SOURCE L.P.
CONSOLIDATED STATEMENTS OF INCOME
<TABLE>
<CAPTION>
For the For the For the
Year Ended Year Ended Year Ended
Dec. 31, 1995 Dec. 31, 1994 Dec. 31, 1993
--------------- --------------- ---------------
<S> <C> <C> <C>
Income
Rental income $ 7,210,114 $ 7,748,867 $ 7,530,940
Mortgage-backed securities income 132,211 77,012 -
Interest on GNMA securities 519,970 446,103 -
Interest on temporary cash investments
and U.S. government securities 225,135 159,005 184,042
Other income 219,376 306,903 202,831
Unusual item - gain on disposition of
Falcon Point assets and related liabilities (Note 8) - 2,746,326 -
--------------- --------------- ---------------
8,306,806 11,484,216 7,917,813
--------------- --------------- ---------------
Expenses
Real estate operating expenses 3,569,892 4,105,677 3,344,398
Depreciation 896,420 990,377 1,066,623
Interest expense 571,801 613,814 570,542
Property development and management fees (Note 4) - 7,649 4,031
General and administrative expenses (Note 4)
Investor servicing 238,667 213,212 192,330
Professional fees 53,121 70,175 106,542
Other expenses 5,849 8,714 17,115
Amortization 141,514 157,898 135,897
--------------- --------------- ---------------
5,477,264 6,167,516 5,437,478
--------------- --------------- ---------------
Minority interest in (income) losses of operating
partnerships 2,571 (19,772) 6,889
--------------- --------------- ---------------
Net income $ 2,832,113 $ 5,296,928 $ 2,487,224
=============== =============== ===============
Net income allocated to:
General Partners $ 28,321 $ 52,969 $ 24,872
Limited Partners 2,803,792 5,243,959 2,462,352
--------------- --------------- ---------------
$ 2,832,113 $ 5,296,928 $ 2,487,224
=============== =============== ===============
Net income per BAC $ .83 $ 1.55 $ .73
=============== =============== ===============
The accompanying notes are an integral part of the consolidated financial statements.
</TABLE>
<PAGE> 18
CAPITAL SOURCE L.P.
CONSOLIDATED STATEMENTS OF PARTNERS' CAPITAL
FROM DECEMBER 31, 1992, TO DECEMBER 31, 1995
<TABLE>
<CAPTION>
General Limited
Partners Partners Total
--------------- --------------- ---------------
<S> <C> <C> <C>
Partners' Capital (excluding net unrealized holding gain)
Balance at December 31, 1992 $ (221,489) $ 39,638,224 $ 39,416,735
Net income 24,872 2,462,352 2,487,224
Cash distributions paid or accrued (Note 3) (91,428) (9,051,350) (9,142,778)
--------------- --------------- ---------------
Balance at December 31, 1993 (288,045) 33,049,226 32,761,181
Net income 52,969 5,243,959 5,296,928
Cash distributions paid or accrued (Note 3) (34,424) (3,407,963) (3,442,387)
--------------- --------------- ---------------
Balance at December 31, 1994 (269,500) 34,885,222 34,615,722
Net income 28,321 2,803,792 2,832,113
Cash distributions paid or accrued (Note 3) (34,424) (3,407,964) (3,442,388)
--------------- --------------- ---------------
(275,603) 34,281,050 34,005,447
--------------- --------------- ---------------
Net unrealized holding gain
Balance at December 31, 1994 - - -
Net Change 810 80,196 81,006
--------------- --------------- ---------------
810 80,196 81,006
--------------- --------------- ---------------
Balance at December 31, 1995 $ (274,793) $ 34,361,246 $ 34,086,453
=============== =============== ===============
The accompanying notes are an integral part of the consolidated financial statements.
</TABLE>
<PAGE> 19
CAPITAL SOURCE L.P.
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
For the For the For the
Year Ended Year Ended Year Ended
Dec. 31, 1995 Dec. 31, 1994 Dec. 31, 1993
--------------- --------------- ---------------
<S> <C> <C> <C>
Cash flows from operating activities
Net income $ 2,832,113 $ 5,296,928 $ 2,487,224
Adjustments to reconcile net income to net cash
provided by operating activities:
Unusual item - gain on disposition of
Falcon Point assets and related liabilities - (2,746,326) -
Depreciation and amortization 1,037,934 1,148,275 1,202,520
Amortization of discount on mortgage-backed
and U.S. government securities (11,656) (1,341) -
Property development and management fees - 7,649 4,031
Minority interest in (income) losses of operating partnerships (2,571) 19,772 (6,889)
Decrease (increase) in interest and other receivables (44,538) (5,419) 372,908
Decrease (increase) in escrow deposits and property reserves 352,231 (139,743) (34,245)
Decrease (increase) in other assets (105,999) 36,304 (310,212)
Increase (decrease) in accounts payable and accrued expenses 61,848 375,861 (737,725)
Increase (decrease) in due to operating partnerships'
general partners and their affiliates (399,530) (235,455) 684,587
Increase (decrease) in interest payable (37,196) (49,372) 144,063
--------------- --------------- ---------------
Net cash provided by operating activities 3,682,636 3,707,133 3,806,262
--------------- --------------- ---------------
Cash flows from investing activities
Principal payments received on GNMA securities 7,145,554 - -
Principal payments received on mortgage-backed
and U.S. government securities 219,865 122,654 -
Acquisition of mortgage-backed securities - (1,943,741) -
Acquisition of U.S. government securities (987,578) - -
Acquisition of personal property (7,211) (18,784) (11,473)
Disposition of FHA Debentures - - 6,331,067
--------------- --------------- ---------------
Net cash provided by (used in) investing activities 6,370,630 (1,839,871) 6,319,594
--------------- --------------- ---------------
Cash flow used in financing activity
Distributions (3,442,388) (3,442,391) (9,219,469)
--------------- --------------- ---------------
Net increase (decrease) in cash and temporary cash investments 6,610,878 (1,575,129) 906,387
Cash and temporary cash investments at beginning of year 2,351,857 3,926,986 3,020,599
--------------- --------------- ---------------
Cash and temporary cash investments at end of year $ 8,962,735 $ 2,351,857 $ 3,926,986
=============== =============== ===============
Supplemental disclosure of cash flow information:
Cash paid during the period for interest $ 608,997 $ 663,186 $ 426,479
=============== =============== ===============
Supplemental disclosure of non-cash investing activities:
Disposition of Falcon Point assets and related liabilities:
Land $ - $ (783,975) $ -
Buildings - (6,004,565) -
Personal property - (49,722) -
Accumulated depreciation - 997,252 -
Cash and temporary cash investments - (68,044) -
Escrow deposit and property reserves - (93,908) -
Interest and other receivables - (29,440) -
Deferred costs, net of accumulated amortization - (436,657) -
Other assets - (3,888) -
Accounts payable and accrued expenses - 225,301 -
Intercompany mortgage payable - 7,251,258 -
Intercompany interest payable - 808,485 -
Due to operating partnerships' general partners'
and their affiliates - 777,808 -
Minority interest - 156,421 -
--------------- --------------- ---------------
Net liabilities $ - $ 2,746,326 $ -
=============== =============== ===============
The accompanying notes are an integral part of the consolidated financial statements.
</TABLE>
<PAGE> 20
CAPITAL SOURCE L.P.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1995
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 provided virtually 100% of the debt and equity financing for
eight multifamily rental housing properties. The Partnership's investment in
the properties consisted of: (i) approximately 85% in the form of permanent
mortgages and/or loans to fund construction; and, (ii) the balance to purchase
up to a 99% limited partnership interest in the Operating Partnerships which
developed, own and operate the properties. Each loan is insured or
guaranteed, in an amount substantially equal to the face amount of the
mortgage, by the Federal Housing Administration (FHA) or the Government
National Mortgage Association (GNMA). The Partnership has been repaid by FHA
on one of its first mortgage loans. The Partnership has also been repaid by
GNMA on one of its GNMA Certificates. The Partnership no longer holds a
Partnership Equity Investment in the Operating Partnership which owned the
property collateralizing the repaid GNMA Certificate. The seven remaining
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 affiliates of 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. The General Partners have
negotiated agreements with each Operating Partnership's general partner
whereby the Operating Partnership's general partner guarantees to fund certain
operating deficits of that Operating Partnership.
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 consolidated financial statements include the accounts of the
Partnership and seven subsidiary Operating Partnerships. The Partnership
is a limited partner with an ownership interest of up to 99% in six of
the subsidiary Operating Partnerships. The Partnership's ownership
interest in The Ponds at Georgetown L.P. is 30.29%. The remaining limited
partner interest of 68.70% is owned by Capital Source II L.P.-A, an
affiliate of the General Partners. All significant intercompany accounts
and transactions have been eliminated in consolidation.
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.
<PAGE> 21
CAPITAL SOURCE L.P.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1995
B) Investment in Real Estate
The Partnership's investment in real estate is carried at cost less
accumulated depreciation. The carrying value of each property does not
exceed net realizable value.
C) Investments in U.S. Government Securities and Mortgage-Backed Securities
On January 1, 1994, the Partnership adopted Statement of Financial
Accounting Standard No. 115 "Accounting for Certain Investments in Debt and
Equity Securities" (FAS 115). FAS 115 requires that investment securities
be classified as held-to-maturity, available-for-sale or trading. Under
FAS 115, investments classified as held-to-maturity are carried at
amortized cost. Investments classified as available-for-sale are reported
at fair value with any unrealized gains or losses excluded from earnings
and reflected as a separate component of partners' capital. 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 adjustments to the component of
partners' capital. The Partnership does not have investment securities
classified as trading. The adoption of FAS 115 had no impact to partners'
capital or earnings prior to June 30, 1995, since all investment
securities were classified as held-to-maturity. As described in Note 5,
on June 30, 1995, the Partnership reclassified certain investment
securities from the held-to-maturity category to the available-for-sale
category.
D) Depreciation and Amortization
Depreciation of real estate is based on the estimated useful life of the
properties using the straight-line method. Deferred mortgage issuance
costs are being amortized using the effective yield method over the 40
year term of the respective loan.
E) Revenue Recognition
The Operating Partnerships lease multifamily rental units under
operating leases with terms of one year or less. Rental revenue is
recognized as earned net of any vacancy losses and rental concessions
offered.
F) Income Taxes
No provision has been made for income taxes since BAC Holders are required
to report their share of the Partnership's income for federal and state
income tax purposes. The tax basis of the Partnerships' assets and
liabilities exceeded the reported amounts by $5,319,958 and $6,141,437 at
December 31, 1995, and December 31, 1994, respectively.
G) Temporary Cash Investments
Temporary cash investments are invested in short-term debt securities
purchased with original maturities of three months or less.
H) New Accounting Pronouncement
The Financial Accounting Standards Board has issued Financial Accounting
Standard No. 121, "Accounting for the Impairment of Long-Lived Assets and
for Long-Lived Assets to be Disposed of". Among other things, this
Statement requires that long-lived assets and certain identifiable
intangibles to be held and used by an entity be reviewed for impairment
whenever events or circumstances indicate that the carrying value of an
asset may not be recoverable. The Partnership plans to adopt this
Statement in 1996. The Partnership anticipates that the adoption of this
Statement will not have a material impact on the consolidated financial
statements.
I) 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.
J) Reclassifications
Certain amounts in the 1994 consolidated financial statements have been
reclassified to conform with the 1995 presentation.
<PAGE> 22
CAPITAL SOURCE L.P.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1995
3. Partnership Income, Expenses and Cash Distributions
Profits and losses from normal 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 consolidated financial statements represent the actual cash
distributions made during each year and the cash distributions accrued at the
end of each year.
The General Partners will also receive 1% of the net proceeds from any sale
of Partnership assets. The General Partners will receive a termination fee
equal to 3% of all sales proceeds less actual costs incurred in connection
with all sales transactions, payable only after the investors have received a
return of their capital contributions and a 13% annual return on a cumulative
basis. The General Partners will also receive a fee equal to 9.1% of all
cash available for distribution and sales proceeds (after deducting from cash
available or sales proceeds any termination fee paid therefrom) after
investors have received a return of their capital contributions and a 13%
annual return on a cumulative basis.
4. 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 Operating Partnerships' general partners provide various on-site property
development and management services. There were no property development and
management fees paid for the year ended December 31, 1995. Property
development and management fees for the years ended December 31, 1994 and 1993
amounted to $7,649 and $4,031, respectively. Unpaid fees, which are
non-interest bearing, are included in amounts due to Operating Partnerships'
general partners and their affiliates on the accompanying consolidated balance
sheets and will be paid as the operating partnerships reach specified
performance standards or upon sale of the related property.
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, 1995, 1994 and 1993, 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 are
paid by a General Partner or an affiliate and reimbursed by the Partnership.
The amount of such expenses reimbursed to the General Partner was $309,826,
$291,744 and $329,904 for the years ended December 31, 1995, 1994 and 1993,
respectively. Reimbursed expenses are presented on a cash basis and do not
reflect accruals made at each year end.
Amounts due to the operating partnerships' general partners and their
affiliates on December 31, 1995, and December 31, 1994, are comprised of the
following:
<TABLE>
<CAPTION>
1995 1994
--------------- ---------------
<S> <C> <C>
Unpaid property development and management fees $ 438,030 $ 433,178
Operating deficit loans 3,674,553 4,078,935
--------------- ---------------
$ 4,112,583 $ 4,512,113
=============== ===============
</TABLE>
<PAGE> 23
CAPITAL SOURCE L.P.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1995
An affiliate of America First Capital Source I, L.L.C. has been retained to
provide property management services for Waterman's Crossing, Misty Springs
Apartments (both beginning in August 1993) and Fox Hollow Apartments
(beginning in June 1995). The fees for services provided were $136,529,
$124,896 and $41,477 for 1995, 1994 and 1993, respectively, which represent
the lower of costs incurred in providing management of the property or
customary fees for such services determined on a competitive basis.
5. Partnership Reserve Account
The Partnership maintains a reserve account which consisted of the following
at December 31, 1995:
<TABLE>
<S> <C>
Cash and temporary cash investments $ 8,112,316
GNMA Certificates 1,677,803
U.S. government securities 1,005,000
---------------
Balance at December 31, 1995 $ 10,795,119
===============
</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 Permanent Investments and the operation of the
Partnership. The GNMA Certificates mature between 2007 and 2009 and the U.S.
government securities mature in 1996. During the quarter ending June 30,
1995, the Partnership reassessed the appropriateness of the classification of
securities held in the reserve account. The Partnership concluded, given the
nature of the reserve account, it would be more appropriate to classify
securities held in the reserve account as available-for-sale rather than as
held-to-maturity. Accordingly, on June 30, 1995, the Partnership transferred
all securities held in the reserve account from the held-to-maturity
classification to the available-for-sale classification. The total amortized
cost, gross unrealized holding gains and aggregate fair value of the
securities transferred were $2,740,792, $57,052 and $2,797,844, respectively.
At December 31, 1995, the total amortized cost, gross unrealized holding gains
and aggregate fair value of available-for-sale securities were $2,601,797,
$81,006 and $2,682,803, respectively. At December 31, 1994, the total
amortized cost, gross unrealized holding losses and aggregate fair value of
held-to-maturity securities were $1,822,428, $46,634 and $1,775,794,
respectively.
6. Parent Company Only Financial Information
Generally accepted accounting principles require that the Partnership's
financial statements consolidate the operating partnerships since the
Partnership holds a majority ownership interest and, through CS Properties I,
Inc., it can influence the decisions of the general partners in certain
circumstances. In the consolidated financial statements, the Partnership's
investment in FHA Loans and GNMA Certificates is eliminated against the
related mortgage payable recorded by the operating partnership. If a mortgage
loan goes into default and is foreclosed upon by FHA or GNMA, the respective
agency may, at their discretion, repay the FHA Loan or the GNMA Certificate.
If this occurs, the Partnership's investment in the operating partnership
would be eliminated, resulting in the recognition of a gain on the
Partnership's consolidated financial statements. This arises because
consolidation accounting does not allow the Partnership to stop recording
losses from the operating partnerships when the net investment is reduced to
zero.
<PAGE> 24
CAPITAL SOURCE L.P.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1995
The parent company only financial information below represents the condensed
financial information of the Partnership using the equity method of accounting
for the investment in operating partnerships, rather than the consolidation of
those partnerships. Under the equity method of accounting, the Partnership's
capital contributions are adjusted to reflect its share of operating
partnership profits or losses and distributions. The investment in operating
partnerships represents the Partnership's limited partnership interest in the
accumulated deficits of those operating partnerships. The parent company only
information is provided to more clearly present the Partnership's investment
in the operating partnerships. Since the Partnership is not a general
partner, it is not obligated to fund the negative balances. If the
investments in all operating partnerships were eliminated at December 31,
1995, Partnership capital would increase by $12,498,266 ($3.67 per BAC).
The FHA Loans and the GNMA Certificates are collateralized by first mortgage
loans on the properties owned by the operating partnerships and are guaranteed
or insured as to principal and interest by FHA or GNMA. The FHA insured
mortgage loans are subject to a 1% assignment fee. The obligations of FHA and
GNMA are backed by the full faith and credit of the United States government.
Parent Company Only
Condensed Balance Sheets
<TABLE>
<CAPTION>
Dec. 31, 1995 Dec. 31, 1994
--------------- ---------------
<S> <C> <C>
Assets
Cash and temporary cash investments $ 8,962,735 $ 2,351,857
Investment in FHA Loans 12,654,188 12,716,874
Investment in mortgage-backed securities 24,388,920 31,770,666
Investment in U.S. government securities 1,005,000 -
Investment in operating partnerships (12,498,266) (11,858,322)
Interest receivable 332,686 343,597
Other assets 198,192 266,003
--------------- ---------------
$ 35,043,455 $ 35,590,675
=============== ===============
Liabilities and Partners' Capital
Liabilities
Accounts payable $ 96,415 $ 114,366
Distributions payable 860,587 860,587
--------------- ---------------
957,002 974,953
Partners' Capital 34,086,453 34,615,722
--------------- ---------------
$ 35,043,455 $ 35,590,675
=============== ===============
</TABLE>
<PAGE> 25
CAPITAL SOURCE L.P.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1995
Parent Company Only
Condensed Statements of Income
<TABLE>
<CAPTION>
For the For the
Year Ended Year Ended
Dec. 31, 1995 Dec. 31, 1994
--------------- ---------------
<S> <C> <C>
Income
Mortgage and mortgage-backed securities income $ 3,548,264 $ 3,739,315
Interest on temporary cash investments and U.S. government securities 193,257 130,252
Interest on mortgage-backed securities 132,211 -
Equity in losses of operating partnerships (680,444) (961,773)
Other income 3,950 2,400
Unusual item - gain on disposition of Falcon Point assets and related liabilities - 2,746,326
-------------- ---------------
3,197,238 5,656,520
Expenses
Operating and administrative 365,125 359,592
-------------- ---------------
Net income $ 2,832,113 $ 5,296,928
============== ===============
</TABLE>
Parent Company Only
Condensed Statements of Cash Flows
<TABLE>
<CAPTION>
For the For the
Year Ended Year Ended
Dec. 31, 1995 Dec. 31, 1994
--------------- ---------------
<S> <C> <C>
Cash flows from operating activities
Net income $ 2,832,113 $ 5,296,928
Adjustments to reconcile net income to net cash
provided by operating activities:
Unusual item - gain on disposition of
Falcon Point assets and related liabilities - (2,746,326)
Equity in losses of operating partnerships 680,444 961,773
Amortization 67,488 67,488
Amortization of discount on investment securities (11,656) (1,341)
Other non-cash adjustments (6,717) (12,915)
--------------- ---------------
Net cash provided by operating activities 3,561,672 3,565,607
--------------- ---------------
Cash flow from investing activities
FHA Loan and GNMA Certificates principal payments 7,519,672 292,896
Acquisition of U.S. government securities and mortgage-backed securities (987,578) (1,943,741)
Investment in operating partnerships (40,500) (47,500)
--------------- ---------------
Net cash provided by (used in) investing activities 6,491,594 (1,698,345)
--------------- ---------------
Cash flow used in financing activity
Distributions (3,442,388) (3,442,391)
--------------- ---------------
Net increase (decrease) in cash and temporary cash investments 6,610,878 (1,575,129)
Cash and temporary cash investments at beginning of year 2,351,857 3,926,986
--------------- ---------------
Cash and temporary cash investments at end of year $ 8,962,735 $ 2,351,857
=============== ===============
</TABLE>
<PAGE> 26
CAPITAL SOURCE L.P.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1995
7. Mortgage Loan Payable
The mortgage collateralized solely by Fox Hollow Apartments provides for
interest at 8.86% and is payable monthly in payments of $42,495 plus service
charges of $2,364 and tax escrow payments of $4,312. The mortgage loan
payable of $6,392,007 is recorded on the consolidated balance sheet, since it
is no longer eliminated in consolidation. The mortgage is an obligation of
the operating partnership which owns the property. A Provisional Workout
Agreement (PWA) was in effect with HUD that extended to April 30, 1996;
however, HUD sold the mortgage in May 1995. The new mortgage holder did not
accept the terms of the PWA and notified the property partnership that
foreclosure proceedings may be initiated should the property be unable to pay
any accrued interest on the mortgage to bring it current. Despite this
situation, the Partnership continued to operate under the terms of the PWA
until January 1, 1996. The General Partners negotiated a Loan Modification
Agreement (LMA) with the new mortgage holder on January 8, 1996. See Note
11 - Subsequent Event.
8. Investment in GNMA Security and Unusual Item
Due to the earth slide at Falcon Point Apartments in April 1994, the property
was not able to generate sufficient cash flow to service its mortgage loan.
Foreclosure proceedings were initiated against the property on October 28,
1994, thereby eliminating the Partnership's equity in the property. On that
date, the liabilities of the property exceeded the related assets by
$2,746,326, resulting in an unusual gain to the Partnership of $2,746,326.
The Partnership continued to hold the GNMA Certificate related to Falcon Point
which generated interest income at 8.75% for the Partnership. The GNMA
Certificate was shown on the 1994 consolidated balance sheet since it was no
longer eliminated in consolidation. In November 1995, the GNMA Certificate
was paid-in-full to the Partnership.
9. 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: Fair value approximates the carrying
value of such assets.
Investment in U.S. government securities and mortgage-backed securities:
Fair values are amounts based on obtained from an independent pricing source.
Mortgage loan payable: Fair value is not readily determinable as certain
terms of the mortgage loan have recently been revised under a loan
modification agreement.
<TABLE>
<CAPTION>
At December 31, 1995
-----------------------------------
Carrying Estimated
Amount Fair Value
--------------- ---------------
<S> <C> <C>
Cash and temporary cash investments $ 8,962,735 $ 8,962,735
Investment in U.S. government securities 1,005,000 1,005,000
Investment in mortgage-backed securities 1,667,803 1,667,803
</TABLE>
<PAGE> 27
CAPITAL SOURCE L.P.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1995
10. Summary of Unaudited Quarterly Results of Operations
<TABLE>
<CAPTION>
First Second Third Fourth
From January 1, 1995, to December 31, 1995 Quarter Quarter Quarter Quarter
--------------- --------------- --------------- ---------------
<S> <C> <C> <C> <C>
Total income $ 2,048,035 $ 2,074,499 $ 2,092,030 $ 2,092,242
Total expenses (1,213,254) (1,188,422) (1,457,400) (1,618,188)
Minority interest in losses of operating
partnerships 772 916 661 222
--------------- --------------- --------------- ---------------
Net income $ 835,553 $ 886,993 $ 635,291 $ 474,276
=============== =============== =============== ===============
Net income per BAC $ .24 $ .26 $ .19 $ .14
=============== =============== =============== ===============
</TABLE>
<TABLE>
<CAPTION>
First Second Third Fourth
From January 1, 1994, to December 31, 1994 Quarter Quarter Quarter Quarter
--------------- --------------- --------------- ---------------
<S> <C> <C> <C> <C>
Total income $ 2,061,902 $ 2,058,297 $ 2,073,633 $ 5,290,384 (1)
Total expenses (1,333,643) (1,378,552) (1,225,404) (2,229,917)
Minority interest in (income) losses of
operating partnerships 989 1,581 1,181 (23,523)
---------------- --------------- --------------- ---------------
Net income $ 729,248 $ 681,326 $ 849,410 $ 3,036,944
================ =============== =============== ===============
Net income per BAC $ .21 $ .20 $ .25 $ .89
================ =============== =============== ===============
</TABLE>
(1) During the fourth quarter of 1994, the Partnership recorded a gain of
$2,746,326 on the disposition of Falcon Point assets and related liabilities.
The Partnership also earned interest on GNMA securities of $446,103 during the
fourth quarter of 1994 as a result of the recognition of the Falcon Point GNMA
certificate for financial statement purposes effective November 1, 1994.
11. Subsequent Event
On January 8, 1996, the General Partners negotiated an LMA with the new
mortgage holder of the Fox Hollow Apartments mortgage. Under the terms of the
LMA, the PWA was dissolved and certain terms and conditions of the mortgage
payable were modified so that it operates as a conventional mortgage. The new
mortgage holder agreed to accept $229,745 ($161,745 of which was paid by the
Partnership) as payment of accrued unpaid interest. Further, effective
January 1, 1996, installments of interest and principal in the amount of
$49,947 are due on the first day of each month, with the balance of principal
and accrued interest due and payable by the earlier of the call date or
October 1, 2028.
<PAGE> 28
Schedule III
CAPITAL SOURCE L.P.
REAL ESTATE AND ACCUMULATED DEPRECIATION
DECEMBER 31, 1994
<TABLE>
<CAPTION>
Costs Capitalized
Initial Cost Subsequent
Description to Partnership to Acquisition
- ----------------------------------------------------------------------- ------------------------- -------------------------
Carrying
Costs
Property Location # of Units Encumbrances Land Property Improvements (c)
- ----------------------- --------------- ------------ ------------ ----------- ------------ ------------ ---------
<S> <C> <C> <C> <C> <C> <C> <C>
Waterman's Crossing Newport News, VA 260 (a) $ 700,000 $ 893,682 $ 8,894,510 $ 65,190
Fox Hollow High Point, NC 184 (b) 272,215 499,365 5,518,162 98,580
Highland Park Columbus, OH 252 (a) 65,799 37,792 8,591,903 69,176
Bluff Ridge Jacksonville, NC 108 (a) 196,050 33,281 3,283,500 77,738
Misty Springs Daytona Beach, FL 128 (a) 710,400 351,972 2,840,884 68,679
Water's Edge Lake Villa, IL 108 (a) 246,160 24,550 4,780,840 139,440
Ponds at Georgetown Ann Arbor, MI 134 (a) 174,879 118,649 1,812,662 24,481
----------- ------------ ------------ ---------
$ 2,365,503 $ 1,959,291 $ 35,722,461 $ 543,284
=========== ============ ============ =========
</TABLE>
<TABLE>
<CAPTION>
Gross Amount at December 31, 1994
-----------------------------------------
Buildings,
Improvements Life on
and Personal Accumulated Which
Land Property Total Depreciation Date of Date Depreciation
Property (d) (e) (d) and (e) (f) Construction Acquired is Computed
- ------------------------ ----------- ------------ ------------ ------------ ------------ -------- ------------
<S> <C> <C> <C> <C> <C> <C> <C>
Waterman's Crossing $ 1,122,322 $ 9,431,060 $ 10,553,382 $ 2,546,033 1987 N/A 5-40 years
Fox Hollow 272,215 6,116,107 6,388,322 1,483,649 1988 N/A 5-40 years
Highland Park 208,403 8,556,267 8,764,670 1,504,224 1988 N/A 5-40 years
Bluff Ridge 203,050 3,387,519 3,590,569 588,913 1988 N/A 5-40 years
Misty Springs 741,587 3,230,348 3,971,935 845,700 1988 N/A 5-40 years
Water's Edge 371,215 4,819,775 5,190,990 792,698 1988 N/A 5-40 years
Ponds at Georgetown 174,879 1,955,792 2,130,671 381,670 1989 N/A 5-40 years
----------- ------------ ------------ ------------
$ 3,093,671 $ 37,496,868 $ 40,590,539 $ 8,142,887
=========== ============ ============ ============
</TABLE>
<PAGE> 29
Schedule III
CAPITAL SOURCE L.P.
REAL ESTATE AND ACCUMULATED DEPRECIATION
DECEMBER 31, 1995
<TABLE>
<CAPTION>
Costs Capitalized
Initial Cost Subsequent
Description to Partnership to Acquisition
- ----------------------------------------------------------------------- ------------------------- -------------------------
Carrying
Costs
Property Location # of Units Encumbrances Land Property Improvements (c)
- ----------------------- --------------- ------------ ------------ ----------- ------------ ------------ ---------
<S> <C> <C> <C> <C> <C> <C> <C>
Waterman's Crossing Newport News, VA 260 (a) $ 700,000 $ 893,682 $ 8,894,510 $ 65,190
Fox Hollow High Point, NC 184 (b) 272,215 499,365 5,518,162 98,580
Highland Park Columbus, OH 252 (a) 65,799 37,792 8,591,903 69,176
Bluff Ridge Jacksonville, NC 108 (a) 196,050 33,281 3,283,500 77,738
Misty Springs Daytona Beach, FL 128 (a) 710,400 351,972 2,840,884 68,679
Water's Edge Lake Villa, IL 108 (a) 246,160 24,550 4,788,051 139,440
Ponds at Georgetown Ann Arbor, MI 134 (a) 174,879 118,649 1,812,662 24,481
----------- ------------ ------------ ---------
$ 2,365,503 $ 1,959,291 $ 35,729,672 $ 543,284
=========== ============ ============ =========
</TABLE>
<TABLE>
<CAPTION>
Gross Amount at December 31, 1995
-----------------------------------------
Buildings,
Improvements Life on
and Personal Accumulated Which
Land Property Total Depreciation Date of Date Depreciation
Property (d) (e) (d) and (e) (f) Construction Acquired is Computed
- ------------------------ ----------- ------------ ------------ ------------ ------------ -------- ------------
<S> <C> <C> <C> <C> <C> <C> <C>
Waterman's Crossing $ 1,122,322 $ 9,431,060 $ 10,553,382 $ 2,759,468 1987 N/A 5-40 years
Fox Hollow 272,215 6,116,107 6,388,322 1,626,177 1988 N/A 5-40 years
Highland Park 208,403 8,556,267 8,764,670 1,717,186 1988 N/A 5-40 years
Bluff Ridge 203,050 3,387,519 3,590,569 672,769 1988 N/A 5-40 years
Misty Springs 741,587 3,230,348 3,971,935 917,659 1988 N/A 5-40 years
Water's Edge 371,215 4,826,986 5,198,201 918,451 1988 N/A 5-40 years
Ponds at Georgetown 174,879 1,955,792 2,130,671 427,597 1989 N/A 5-40 years
----------- ------------ ------------ ------------
$ 3,093,671 $ 37,504,079 $ 40,597,750 $ 9,039,307
=========== ============ ============ ============
</TABLE>
<PAGE> 30
Schedule III
CAPITAL SOURCE L.P.
REAL ESTATE AND ACCUMULATED DEPRECIATION
DECEMBER 31, 1995, 1994 and 1993
(a) The Partnership has no encumbrances against this property. Encumbrances
recorded by the operating partnerships are eliminated in the consolidated
financial statements of the Partnership.
(b) The Partnership has a mortgage obligation totaling $6,392,007 which is
collateralized solely by this property. The mortgage provides for the
payment of interest at the rate of 8.86% totaling $42,495 on a monthly
basis. This mortgage loan was in technical default as of December 31,
1995.
(c) Carrying costs include legal fees, appraisal fees, title costs and other
related professional fees.
(d) The aggregate cost for Federal income tax purposes is the same as for
financial reporting purposes.
(e) Reconciliation of Real Estate:
<TABLE>
<CAPTION>
1995 1994 1993
--------------- --------------- ---------------
<S> <C> <C> <C>
Balance - beginning of year $ 40,590,539 $ 47,410,017 $ 47,398,544
Acquisitions 7,211 18,784 11,473
Dispositions - (6,838,262) -
--------------- --------------- ---------------
Balance - end of year $ 40,597,750 $ 40,590,539 $ 47,410,017
=============== =============== ===============
</TABLE>
(f) Reconciliation of Accumulated Depreciation:
<TABLE>
<CAPTION>
1995 1994 1993
--------------- --------------- ---------------
<S> <C> <C> <C>
Balance - beginning of year $ 8,142,887 $ 8,149,762 $ 7,083,139
Depreciation expense 896,420 990,377 1,066,623
Dispositions - (997,252) -
--------------- ---------------- ---------------
Balance - end of year $ 9,039,307 $ 8,142,887 $ 8,149,762
=============== ================ ===============
</TABLE>
<PAGE> 31
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Registrant has duly caused this report to be signed
on its behalf by the undersigned, thereunto duly authorized.
CAPITAL SOURCE L.P.
By America First Capital
Source I, L.L.C., General
Partner
By /s/ Michael Thesing
Michael Thesing,
Vice President
Date: March 28, 1996
<PAGE> 32
Pursuant to the requirements of the Securities and Exchange Act of 1934,
this report has been signed below by the following persons on behalf of the
Registrant and in the capacities and on the dates indicated.
Date: March 29, 1996 By /s/ Michael B. Yanney*
Michael B. Yanney,
Chairman and Chief Executive Officer
(Principal Executive Officer)
Date: March 29, 1996 By /s/ Michael Thesing
Michael Thesing, Vice
President, Secretary and
Treasurer (Principal Financial Officer)
*By Michael Thesing,
Attorney in Fact
/s/ Michael Thesing
Michael Thesing
<PAGE> 33
EXHIBIT 24
POWER OF ATTORNEY
<PAGE> 34
POWER OF ATTORNEY
The undersigned hereby appoints Michael Thesing as his agent and
attorney-in-fact for the purpose of executing and filing all reports on Form
10-K relating to the year ending December 31, 1995, and any amendments
thereto, required to be filed with the Securities and Exchange Commission by
the following persons:
America First Tax-Exempt Mortgage Fund Limited Partnership
America First Tax-Exempt Mortgage Fund 2 Limited Partnership
America First Participating/Preferred Equity Mortgage Fund
America First PREP Fund 2 Limited Partnership
America First PREP Fund 2 Pension Series Limited Partnership
Capital Source L.P.
Capital Source II L.P.
IN WITNESS WHEREOF, the undersigned has executed this Power of Attorney
on the 10th day of March, 1996.
/s/ Michael B. Yanney
Michael B. Yanney
<PAGE> 35
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> DEC-31-1995
<PERIOD-END> DEC-31-1995
<CASH> 8,962,735
<SECURITIES> 2,682,803
<RECEIVABLES> 64,262
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 9,026,997
<PP&E> 40,597,750
<DEPRECIATION> (9,039,307)
<TOTAL-ASSETS> 47,193,984
<CURRENT-LIABILITIES> 2,378,147
<BONDS> 0
<COMMON> 0
0
0
<OTHER-SE> 34,086,453
<TOTAL-LIABILITY-AND-EQUITY> 47,193,984
<SALES> 0
<TOTAL-REVENUES> 8,306,806
<CGS> 0
<TOTAL-COSTS> 0
<OTHER-EXPENSES> 5,477,264
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> 2,832,113
<INCOME-TAX> 0
<INCOME-CONTINUING> 2,832,113
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 2,832,113
<EPS-PRIMARY> 0
<EPS-DILUTED> 0
</TABLE>
