FORM 10-Q
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
X Quarterly report pursuant to Section 13 or 15(d) of the Securities Exchange
Act of 1934
For the quarterly period ended June 30, 1996 or
Transition report pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934
For the transition period from to
Commission File Number: 0-16497
CAPITAL SOURCE L.P.
(Exact name of registrant as specified in its charter)
Delaware 52-1417770
(State or other jurisdiction (IRS Employer
of 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)
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
<PAGE> i
Part I. Financial Information
Item 1. Financial Statements
CAPITAL SOURCE L.P.
BALANCE SHEETS
(UNAUDITED)
<TABLE>
<CAPTION>
June 30, 1996 Dec. 31, 1995
--------------- ---------------
<S> <C> <C>
Assets
Investment in real estate:
Land $ 3,093,671 $ 3,093,671
Buildings 35,505,314 35,505,314
Personal property 2,000,103 1,998,765
--------------- ---------------
40,599,088 40,597,750
Less accumulated depreciation (9,525,359) (9,039,307)
--------------- ---------------
Net investment in real estate 31,073,729 31,558,443
--------------- ---------------
Cash and temporary cash investments, at cost
which approximates market value (Note 5) 10,022,870 8,962,735
Escrow deposits and property reserves 914,464 1,019,329
Investment in U.S. government securities - 1,005,000
Investment in mortgage-backed securities (Note 5) 1,473,860 1,677,803
Interest and other receivables 177,607 72,993
Deferred mortgage issuance costs, net of accumulated amortization of
$1,293,678 in 1996 and $1,224,775 in 1995 2,309,129 2,378,032
Other assets 580,750 519,649
--------------- ---------------
$ 46,552,409 $ 47,193,984
=============== ===============
Liabilities and Partners' Capital (Deficit)
Liabilities
Accounts payable and accrued expenses $ 1,250,573 $ 1,205,598
Distribution payable (Note 3) 860,587 860,587
Mortgage loan payable (Note 7) 6,392,007 6,392,007
Interest payable 82,217 311,962
Due to general partners and their affiliates (Note 4) 4,114,944 4,112,583
--------------- ---------------
12,700,328 12,882,737
--------------- ---------------
Minority interest 224,094 224,794
--------------- ---------------
Partners' Capital (Deficit)
General Partners (279,377) (274,793)
Limited Partners ($10.05 per BAC in 1996 and $10.18 in 1995) 33,907,364 34,361,246
--------------- ---------------
33,627,987 34,086,453
--------------- ---------------
$ 46,552,409 $ 47,193,984
=============== ===============
The accompanying notes are an integral part of the consolidated financial statements.
</TABLE>
<PAGE> - 1 -
CAPITAL SOURCE L.P.
STATEMENTS OF INCOME
(UNAUDITED)
<TABLE>
<CAPTION>
For the For the For the Six For the Six
Quarter Ended Quarter Ended Months Ended Months Ended
June 30, 1996 June 30, 1995 June 30, 1996 June 30, 1995
--------------- --------------- --------------- ---------------
<S> <C> <C> <C> <C>
Income
Rental income $ 1,758,744 $ 1,776,909 $ 3,525,263 $ 3,553,587
Mortgage-backed securities income 29,371 34,065 59,716 68,582
Interest on GNMA securities - 156,022 - 312,217
Interest on temporary cash investments
and U.S. government securities 137,734 43,928 266,310 83,022
Other income 85,085 63,575 149,711 105,126
--------------- --------------- --------------- ---------------
2,010,934 2,074,499 4,001,000 4,122,534
--------------- --------------- --------------- ---------------
Expenses
Real estate operating expenses 933,326 805,933 1,643,423 1,545,247
Depreciation 271,455 148,079 486,052 373,230
Interest expense 149,842 135,001 299,683 276,650
General and administrative expenses (Note 4)
Investor servicing 74,324 50,776 149,439 101,285
Professional fees 18,993 19,225 37,418 39,350
Other expenses 4,001 791 6,125 2,007
Amortization 34,451 28,617 68,903 63,907
--------------- --------------- --------------- ---------------
1,486,392 1,188,422 2,691,043 2,401,676
--------------- --------------- --------------- ---------------
Minority interest in losses of Operating
Partnerships 668 916 700 1,688
--------------- --------------- --------------- ---------------
Net income $ 525,210 $ 886,993 $ 1,310,657 $ 1,722,546
=============== =============== =============== ===============
Net income allocated to:
General Partners $ 5,253 $ 8,869 $ 13,107 $ 17,225
Limited Partners 519,957 878,124 1,297,550 1,705,321
--------------- --------------- --------------- ---------------
$ 525,210 $ 886,993 $ 1,310,657 $ 1,722,546
=============== =============== =============== ===============
Net income per BAC $ .15 $ .26 $ .38 $ .50
=============== =============== =============== ===============
</TABLE>
CAPITAL SOURCE L.P.
STATEMENT OF PARTNERS' CAPITAL
FOR THE SIX MONTHS ENDED JUNE 30, 1996
(UNAUDITED)
<TABLE>
<CAPTION>
General Limited
Partners Partners Total
--------------- --------------- ---------------
<S> <C> <C> <C>
Partners' Capital (excluding net unrealized holding gain)
Balance at December 31, 1995 $ (275,603) $ 34,281,050 $ 34,005,447
Net income 13,107 1,297,550 1,310,657
Cash distributions paid or accrued (Note 3) (17,212) (1,703,982) (1,721,194)
--------------- --------------- ---------------
(279,708) 33,874,618 33,594,910
--------------- --------------- ---------------
Net unrealized holding gain
Balance at December 31, 1995 810 80,196 81,006
Net change (479) (47,450) (47,929)
--------------- --------------- ---------------
331 32,746 33,077
--------------- --------------- ---------------
Balance at June 30, 1996 $ (279,377) $ 33,907,364 $ 33,627,987
=============== =============== ===============
The accompanying notes are an integral part of the consolidated financial statements.
</TABLE>
<PAGE> - 2 -
CAPITAL SOURCE L.P.
STATEMENTS OF CASH FLOWS
(UNAUDITED)
<TABLE>
<CAPTION>
For the Six For the Six
Months Ended Months Ended
June 30, 1996 June 30, 1995
--------------- ---------------
<S> <C> <C>
Cash flows from operating activities
Net income $ 1,310,657 $ 1,722,546
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation and amortization 554,955 437,137
Amortization of discount on mortgage-backed and U.S. government securities (4,988) (3,856)
Minority interest in losses of Operating Partnerships (700) (1,688)
Increase in interest and other receivables (104,614) (140,089)
(Increase) decrease in escrow deposits and property reserves 104,865 (215,366)
Increase in other assets (61,101) (171,148)
Increase in accounts payable and accrued expenses 44,975 193,825
Increase (decrease) in due to Operating Partnerships'
general partners and their affiliates 2,361 (8,829)
Decrease in interest payable (229,745) (13,683)
--------------- ---------------
Net cash provided by operating activities 1,616,665 1,798,849
--------------- ---------------
Cash flows from investing activities
Maturity of U.S. government securities 1,000,000 -
Principal payments received on mortgage-backed and U.S. government securities 166,002 73,070
Acquisition of personal property (1,338) (3,975)
Acquisition of U.S. government securities - (987,578)
Principal payments received on GNMA securities - 15,809
--------------- ---------------
Net cash provided by (used in) investing activities 1,164,664 (902,674)
--------------- ---------------
Cash flow used in financing activity
Distributions (1,721,194) (1,721,194)
--------------- ---------------
Net increase (decrease) in cash and temporary cash investments 1,060,135 (825,019)
Cash and temporary cash investments at beginning of period 8,962,735 2,351,857
--------------- ---------------
Cash and temporary cash investments at end of period $ 10,022,870 $ 1,526,838
=============== ===============
Supplemental disclosure of cash flow information:
Cash paid during the period for interest $ 529,428 $ 290,333
=============== ===============
The accompanying notes are an integral part of the consolidated financial statements.
</TABLE>
<PAGE> - 3 -
CAPITAL SOURCE L.P.
NOTES TO FINANCIAL STATEMENTS
JUNE 30, 1996
(UNAUDITED)
1. Organization
Capital Source L.P. (the Partnership) was formed on August 22, 1985, under the
Delaware Revised Uniform Limited Partnership Act. The General Partners of
the Partnership are Insured Mortgage Equities Inc. and America First Capital
Source I, L.L.C. (the General Partners).
The Partnership 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 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 consolidated financial statements are prepared without audit on the
accrual basis of accounting in accordance with generally accepted
accounting principles. The financial statements should be read in
conjunction with the financial statements and notes thereto included in
the Partnership's Annual Report on Form 10-K for the year ended December
31, 1995. In the opinion of management, all normal and recurring
adjustments necessary to present fairly the financial position at June
30, 1996, and results of operations for all periods presented have been
made.
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the
financial statements and the reported amounts of revenues and expenses
during the reporting period. Actual results could differ from those
estimates.
B) Investment in 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.
<PAGE> - 4 -
CAPITAL SOURCE L.P.
NOTES TO FINANCIAL STATEMENTS
JUNE 30, 1996
(UNAUDITED)
C) Investments in U.S. Government Securities and Mortgage-Backed Securities
Investment securities are classified as held-to-maturity,
available-for-sale or trading. Investments classified as held-to-maturity
are carried at amortized cost. Investments classified as
available-for-sale are reported at fair value 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.
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.
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
On January 1, 1996, the Partnership adopted Statement of Financial
Accounting Standards No. 121 (FAS 121), "Accounting for the Impairment of
Long-Lived Assets and for Long-Lived Assets to be Disposed of". Among
other things, FAS 121 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 adoption of FAS 121 did 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 period presented.
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 period and the cash distributions accrued at
the end of each period.
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.
<PAGE> - 5 -
CAPITAL SOURCE L.P.
NOTES TO FINANCIAL STATEMENTS
JUNE 30, 1996
(UNAUDITED)
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 incurred for the six months ended June 30, 1996. Unpaid fees,
which are non-interest bearing, are included in amounts due to 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.
Amounts due to general partners and their affiliates at June 30, 1996, is
comprised of the following:
<TABLE>
<S> <C>
Unpaid property development and management fees $ 440,391
Operating deficit loans 3,674,553
---------------
$ 4,114,944
===============
</TABLE>
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 quarter and six months ended June 30, 1996, 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 for 1996 was
$204,883 ($79,323 for the quarter ended June 30, 1996). Reimbursed expenses
are presented on a cash basis and do not reflect accruals made at quarter end.
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, and Fox Hollow Apartments (beginning in June, 1995). The fees for
services provided in 1996, amounted to $80,336 ($40,107 for the quarter ended
June 30, 1996), and represented 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 June 30, 1996:
<TABLE>
<S> <C>
Cash and temporary cash investments $ 9,299,117
GNMA Certificates 1,473,860
---------------
$ 10,772,977
===============
</TABLE>
<PAGE> - 6 -
CAPITAL SOURCE L.P.
NOTES TO FINANCIAL STATEMENTS
JUNE 30, 1996
(UNAUDITED)
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. At June
30, 1996, the total amortized cost, gross unrealized holding gains and
aggregate fair value of available-for-sale securities were $1,440,783, $33,077
and $1,473,860 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. 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 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.
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 June 30, 1996,
Partnership capital would increase by $12,697,820 ($3.73 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.
<PAGE> - 7 -
CAPITAL SOURCE L.P.
NOTES TO FINANCIAL STATEMENTS
JUNE 30, 1996
(UNAUDITED)
Parent Company Only
Condensed Balance Sheets
<TABLE>
<CAPTION>
June 30, 1996 Dec. 31, 1995
--------------- ---------------
<S> <C> <C>
Assets
Cash and temporary cash investments $ 10,022,870 $ 8,962,735
Investment in FHA Loans 12,620,723 12,654,188
Investment in mortgage-backed securities 24,135,818 24,388,920
Investment in U.S. government securities - 1,005,000
Investment in Operating Partnerships (12,697,820) (12,498,266)
Interest receivable 316,628 332,686
Other assets 170,560 198,192
--------------- ---------------
$ 34,568,779 $ 35,043,455
=============== ===============
Liabilities and Partners' Capital
Liabilities
Accounts payable $ 80,205 $ 96,415
Distributions payable 860,587 860,587
--------------- ---------------
940,792 957,002
Partners' Capital 33,627,987 34,086,453
--------------- ---------------
$ 34,568,779 $ 35,043,455
=============== ===============
</TABLE>
Parent Company Only
Condensed Statements of Income
<TABLE>
<CAPTION>
For the Six For the Six
Months Ended Months Ended
June 30, 1996 June 30, 1995
--------------- ---------------
<S> <C> <C>
Income
Mortgage and mortgage-backed securities income $ 1,556,210 $ 1,780,621
Interest on temporary cash investments and U.S. government securities 256,973 68,177
Interest on mortgage-backed securities 59,716 68,582
Equity in losses of Operating Partnerships (339,066) (20,149)
Other income 3,550 1,700
-------------- ---------------
1,537,383 1,898,931
Expenses
Operating and administrative 226,726 176,385
-------------- ---------------
Net income $ 1,310,657 $ 1,722,546
============== ===============
</TABLE>
<PAGE> - 8 -
CAPITAL SOURCE L.P.
NOTES TO FINANCIAL STATEMENTS
JUNE 30, 1996
(UNAUDITED)
Parent Company Only
Condensed Statements of Cash Flows
<TABLE>
<CAPTION>
For the Six For the Six
Months Ended Months Ended
June 30, 1996 June 30, 1995
--------------- ---------------
<S> <C> <C>
Cash flows from operating activities
Net income $ 1,310,657 $ 1,722,546
Adjustments to reconcile net income to net cash
provided by operating activities:
Equity in losses of Operating Partnerships 339,066 20,149
Amortization 33,744 33,712
Amortization of discount on mortgage-backed and U.S. government securities (4,988) (3,856)
Other non-cash adjustments (6,264) (22,527)
--------------- ---------------
Net cash provided by operating activities 1,672,215 1,750,024
--------------- ---------------
Cash flows from investing activities
Maturity of U.S. government securities 1,000,000 -
FHA Loan and GNMA Certificates principal payments 248,626 164,229
Acquisition of U.S. government securities and mortgage-backed securities - (987,578)
Investment in Operating Partnerships (216,745) (30,500)
Distributions received from Operating Partnerships 77,233 -
--------------- ---------------
Net cash provided by (used in) investing activities 1,109,114 (853,849)
--------------- ---------------
Cash flow used in financing activity
Distributions (1,721,194) (1,721,194)
--------------- ---------------
Net increase (decrease) in cash and temporary cash investments 1,060,135 (825,019)
Cash and temporary cash investments at beginning of period 8,962,735 2,351,857
--------------- ---------------
Cash and temporary cash investments at end of period $ 10,022,870 $ 1,526,838
=============== ===============
</TABLE>
7. Mortgage Loan Payable
The mortgage collateralized solely by Fox Hollow Apartments provides for
interest at 8.86%. Under the terms of a Loan Modification Agreement entered
into on January 8, 1996, installments of principal and interest in the amount
of $49,947 are due on the first day of each month with the balance of
principal and interest due and payable no later than October 1, 2028. 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.
<PAGE> - 9 -
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations
Liquidity and Capital Resources
The Partnership originally acquired: (i) five mortgage-backed securities
guaranteed as to principal and interest by the Government National Mortgage
Association (GNMA) collateralized by first mortgage loans on multifamily
housing properties located in five states; (ii) three first mortgage loans
insured as to principal and interest by the Federal Housing Administration
(FHA) on multifamily housing properties located in two states; and (iii)
Partnership Equity Investments in eight limited partnerships which own the
multifamily properties financed by the GNMA Certificates and FHA Loans. The
Partnership subsequently received FHA Debentures in payment of the FHA Loan on
Fox Hollow Apartments which were paid in full 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 GNMA
Certificate related to Falcon Point Apartments was paid-in-full to the
Partnership. Collectively, the remaining GNMA Certificates, FHA Loans and
Partnership Equity Investments are referred to as the "Permanent
Investments". The Partnership has also invested amounts held in its reserve
account in certain GNMA securities backed by pools of single-family mortgages
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 and GNMA Certificates were owned by the Partnership at
June 30, 1996. 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% 11-15-2028 $ 3,540,707
Highland Park Apartments FHA 8.75% 11-01-2028 9,080,016
Misty Springs Apartments GNMA 8.75% 06-15-2029 4,305,880
The Ponds at Georgetown GNMA 9.00% 12-15-2029 2,249,877
Waterman's Crossing GNMA 10.00% 09-15-2028 10,997,472
Water's Edge Apartments GNMA 8.75% 12-15-2028 5,108,729
Pools of single-family properties GNMA 7.58%(1) 2008 to 2009 738,643
Pools of single-family properties GNMA 7.58%(1) 2007 to 2008 735,217
---------------
$ 36,756,541
===============
</TABLE>
(1) Represents yield to the Partnership.
<PAGE> - 10 -
Distributions
Cash distributions paid or accrued per BAC were as follows:
<TABLE>
<CAPTION>
For the Six For the Six
Months Ended Months Ended
June 30, 1996 June 30, 1995
--------------- ---------------
<S> <C> <C>
Regular monthly distributions
Income $ .3845 $ .5050
Return of capital .1205 -
--------------- ---------------
.5050 .5050
=============== ===============
Distributions
Paid out of cash flow $ .5050 $ .5050
=============== ===============
</TABLE>
Regular quarterly distributions to BAC Holders consist primarily of interest
received on FHA Loans, GNMA Certificates, and U.S. government securities.
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 six months
ended June 30, 1996, a net amount of $288,132 ($205,554 for the quarter ended
June 30, 1996) of undistributed cash flow was added to reserves. The total
amount held in reserves at June 30, 1996, was $10,772,977 of which
$1,473,860 was invested in GNMA Certificates.
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. Under the terms of the Partnership
Agreement, the Partnership has the authority to enter into short-term and
long-term debt financing arrangements; however, the Partnership currently does
not anticipate entering into such arrangements. The Partnership is not
authorized to issue additional BACs to meet short-term and long-term liquidity
requirements.
Asset Quality
The FHA Loans and GNMA Certificates owned by the Partnership are guaranteed as
to principal and interest by FHA and GNMA, respectively. The obligations of
FHA and GNMA are backed by the full faith and credit of the United States
government. The Partnership Equity Investments, however, are not insured or
guaranteed. The value of these investments is a function of the value of the
real estate owned by the Operating Partnerships.
The overall status of the Partnership's investments has remained
relatively constant since March 31, 1996.
The following table shows the occupancy levels of the properties financed by
the Partnership at June 30, 1996:
<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 108 102 94%
Fox Hollow Apartments High Point, NC 184 176 96%
Highland Park Apartments Columbus, OH 252 238 94%
Misty Springs Apartments Daytona Beach, FL 128 111 87%
The Ponds at Georgetown Ann Arbor, MI 134 112 84%
Waterman's Crossing Newport News, VA 260 252 97%
Water's Edge Apartments Lake Villa, IL 108 101 94%
------------- ------------ ------------
1,174 1,092 93%
============= ============ ============
</TABLE>
<PAGE> - 11 -
Results of Operations
The tables below compare the results of operations for each period shown.
<TABLE>
<CAPTION>
For the For the Increase
Quarter Ended Quarter Ended (Decrease)
June 30, 1996 June 30, 1995 From 1995
--------------- --------------- ---------------
<S> <C> <C> <C>
Rental income $ 1,758,744 $ 1,776,909 $ (18,165)
Mortgage-backed securities income 29,371 34,065 (4,694)
Interest on GNMA securities - 156,022 (156,022)
Interest income on temporary cash investments
and U.S. government securities 137,734 43,928 93,806
Other income 85,085 63,575 21,510
--------------- --------------- ---------------
2,010,934 2,074,499 (63,565)
--------------- --------------- ---------------
Real estate operating expenses 933,326 805,933 127,393
Depreciation 271,455 148,079 123,376
Interest expense 149,842 135,001 14,841
Investor servicing 74,324 50,776 23,548
Professional fees 18,993 19,225 (232)
Other expenses 4,001 791 3,210
Amortization 34,451 28,617 5,834
--------------- --------------- ---------------
1,486,392 1,188,422 297,970
--------------- --------------- ---------------
Minority interest in losses of Operating Partnerships 668 916 (248)
--------------- --------------- ---------------
Net income $ 525,210 $ 886,993 $ (361,783)
=============== =============== ===============
</TABLE>
<TABLE>
<CAPTION>
For the Six For the Six Increase
Months Ended Months Ended (Decrease)
June 30, 1996 June 30, 1995 From 1995
--------------- --------------- ---------------
<S> <C> <C> <C>
Rental income $ 3,525,263 $ 3,553,587 $ (28,324)
Mortgage-backed securities income 59,716 68,582 (8,866)
Interest on GNMA securities - 312,217 (312,217)
Interest income on temporary cash investments
and U.S. government securities 266,310 83,022 183,288
Other income 149,711 105,126 44,585
--------------- --------------- ---------------
4,001,000 4,122,534 (121,534)
--------------- --------------- ---------------
Real estate operating expenses 1,643,423 1,545,247 98,176
Depreciation 486,052 373,230 112,822
Interest expense 299,683 276,650 23,033
Investor servicing 149,439 101,285 48,154
Professional fees 37,418 39,350 (1,932)
Other expenses 6,125 2,007 4,118
Amortization 68,903 63,907 4,996
--------------- --------------- ---------------
2,691,043 2,401,676 289,367
--------------- --------------- ---------------
Minority interest in losses of Operating Partnerships 700 1,688 (988)
--------------- --------------- ---------------
Net income $ 1,310,657 $ 1,722,546 $ (411,889)
=============== =============== ===============
</TABLE>
<PAGE> - 12 -
Rental income is recognized net of any vacancy losses and rental concessions
offered. Rental income, net of real estate operating expenses, depreciation,
and amortization decreased approximately $244,318 for the six months ended
June 30, 1996 ($274,768 for the quarter ended June 30, 1996), compared to the
same periods in 1995. Rental income decreased slightly for the quarter and
six months ended June 30, 1996, compared to the same periods in 1995,
primarily due to an overall decrease in average occupancy. Real estate
operating expenses increased for the quarter and six months ended June 30,
1996, compared to the same periods in 1995, primarily due to increases in
property improvements and repairs and maintenance expenses. Depreciation
expense increased for the quarter and six months ended June 30, 1996, compared
to the same period in 1995, due to an increase in overall depreciation.
Mortgage-backed securities income decreased for the quarter and six months
ended June 30, 1996, compared to the same periods in 1995 due to the continued
amortization of the principal balance of the mortgage-backed securities.
Interest on GNMA securities for the quarter and six months ended June 30,
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. The GNMA Certificate was paid off in
November 1995; therefore, the Partnership no longer receives interest from this
source.
Interest income on temporary cash investments and U.S. government securities
increased for the quarter and six months ended June 30, 1996, compared to the
same periods in 1995. This increase is the result of investing proceeds
received from the payoff of the GNMA Certificate related to Falcon Point
Apartments in November 1995.
Other income consists primarily of garage rentals, washer/dryer, and vending
income generated by the Partnership's properties. Income from such sources
increased for the quarter and six months ended June 30, 1996, compared to the
same periods in 1995, due to an increase in the rentals and/or usuage of such
items.
Interest expense increased for the quarter and six months ended June 30, 1996,
compared to the same periods in 1995, due to the restructuring of the mortgage
loan on Fox Hollow Apartments in January 1996.
Investor servicing costs increased for the quarter and six months ended June
30, 1996, compared to the same periods in 1995 due to increases in expenses
associated with maintaining and providing investors with Partnership
information, primarily salaries and related expenses. Professional fees
decreased for the quarter and six months ended June 30, 1996, compared to the
same periods in 1995 primarily due to a decrease in legal fees. Other
expenses increased for the quarter and six months ended June 30, 1996,
compared to the same periods in 1995, due to an increase in travel expenses.
<PAGE> - 13 -
PART II. OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
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)).
(b) Form 8-K
The registrant did not file a report on Form 8-K during the
quarter for which this report is filed.
<PAGE> - 14 -
SIGNATURES
Pursuant to the requirements 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.
Dated: August 13, 1996 CAPITAL SOURCE L.P.
By America First Capital
Source I, L.L.C., General Partner
By /s/ Michael Thesing
Michael Thesing
Vice President, Secretary and
Treasurer (Vice President and Principal
Financial Officer of Registrant)
<PAGE> - 15 -
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-END> JUN-30-1996
<CASH> 10,022,870
<SECURITIES> 1,473,860
<RECEIVABLES> 177,607
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 10,200,477
<PP&E> 40,599,088
<DEPRECIATION> (9,525,359)
<TOTAL-ASSETS> 46,552,409
<CURRENT-LIABILITIES> 2,193,377
<BONDS> 0
<COMMON> 0
0
0
<OTHER-SE> 33,627,987
<TOTAL-LIABILITY-AND-EQUITY> 46,552,409
<SALES> 0
<TOTAL-REVENUES> 4,001,000
<CGS> 0
<TOTAL-COSTS> 0
<OTHER-EXPENSES> 2,691,043
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> 1,310,657
<INCOME-TAX> 0
<INCOME-CONTINUING> 1,310,657
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 1,310,657
<EPS-PRIMARY> 0
<EPS-DILUTED> 0
</TABLE>
