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 September 30, 1997 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.
CONSOLIDATED BALANCE SHEETS
(UNAUDITED)
<TABLE>
<CAPTION>
Sept. 30, 1997 Dec. 31, 1996
--------------- ---------------
<S> <C> <C>
Assets
Investment in real estate:
Land $ 3,093,671 $ 3,093,671
Buildings 35,517,314 35,517,314
Personal property 1,998,298 1,992,979
--------------- ---------------
40,609,283 40,603,964
Less accumulated depreciation (10,598,813) (9,925,636)
--------------- ---------------
Net investment in real estate 30,010,470 30,678,328
--------------- ---------------
Cash and temporary cash investments, at cost
which approximates market value (Note 5) 10,412,534 10,272,497
Escrow deposits and property reserves 816,353 917,796
Investment in mortgage-backed securities (Note 5) 1,145,376 1,327,396
Interest and other receivables 186,938 62,114
Deferred mortgage issuance costs, net of accumulated amortization of
$1,429,970 in 1997 and $1,361,572 in 1996 2,138,638 2,241,235
Other assets 537,389 723,639
--------------- ---------------
$ 45,247,698 $ 46,223,005
=============== ===============
Liabilities and Partners' Capital (Deficit)
Liabilities
Accounts payable and accrued expenses $ 1,224,085 $ 1,416,730
Distribution payable (Note 3) 860,587 860,587
Mortgage loan payable (Note 7) 6,354,657 6,354,657
Due to general partners and their affiliates (Note 4) 4,012,596 4,117,105
--------------- ---------------
12,451,925 12,749,079
--------------- ---------------
Minority interest 196,962 222,048
--------------- ---------------
Partners' Capital (Deficit)
General Partners (289,670) (283,139)
Limited Partners ($9.75 per BAC in 1997 and $9.94 in 1996) 32,888,481 33,535,017
--------------- ---------------
32,598,811 33,251,878
--------------- ---------------
$ 45,247,698 $ 46,223,005
=============== ===============
The accompanying notes are an integral part of the consolidated financial statements.
</TABLE>
<PAGE> - 1 -
CAPITAL SOURCE L.P.
CONSOLIDATED STATEMENTS OF INCOME
(UNAUDITED)
<TABLE>
<CAPTION>
For the For the For the Nine For the Nine
Quarter Ended Quarter Ended Months Ended Months Ended
Sept. 30, 1997 Sept. 30, 1996 Sept. 30, 1997 Sept. 30, 1996
--------------- --------------- --------------- ---------------
<S> <C> <C> <C> <C>
Income
Rental income $ 1,893,387 $ 1,799,583 $ 5,594,872 $ 5,324,846
Mortgage-backed securities income 22,336 27,048 69,691 86,764
Interest on temporary cash investments
and U.S. government securities 146,980 136,214 431,727 402,524
Other income 120,892 107,018 273,998 256,729
--------------- --------------- --------------- ---------------
2,183,595 2,069,863 6,370,288 6,070,863
--------------- --------------- --------------- ---------------
Expenses
Real estate operating expenses 1,027,738 977,206 2,913,109 2,620,629
Depreciation 224,392 157,737 673,177 643,789
Interest expense 142,445 149,841 442,127 449,524
General and administrative expenses (Note 4)
Investor servicing 96,904 75,622 270,033 225,061
Professional fees 14,750 17,346 45,350 54,764
Other expenses 10,435 2,950 12,707 9,075
Amortization 34,199 35,399 102,597 104,302
--------------- --------------- --------------- ---------------
1,550,863 1,416,101 4,459,100 4,107,144
--------------- --------------- --------------- ---------------
Minority interest in losses of Operating
Partnerships 4,796 806 14,298 1,506
--------------- --------------- --------------- ---------------
Net income $ 637,528 $ 654,568 $ 1,925,486 $ 1,965,225
=============== =============== =============== ===============
Net income allocated to:
General Partners $ 6,375 $ 6,545 $ 19,255 $ 19,652
Limited Partners 631,153 648,023 1,906,231 1,945,573
--------------- --------------- --------------- ---------------
$ 637,528 $ 654,568 $ 1,925,486 $ 1,965,225
=============== =============== =============== ===============
Net income per BAC $ .18 $ .20 $ .56 $ .58
=============== =============== =============== ===============
</TABLE>
CAPITAL SOURCE L.P.
CONSOLIDATED STATEMENT OF PARTNERS' CAPITAL (DEFICIT)
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1997
(UNAUDITED)
<TABLE>
<CAPTION>
General Limited
Partners Partners Total
--------------- --------------- ---------------
<S> <C> <C> <C>
Partners' Capital (Deficit) (excluding net unrealized holding gain)
Balance at December 31, 1996 $ (283,554) $ 33,493,930 $ 33,210,376
Net income 19,255 1,906,231 1,925,486
Cash distributions paid or accrued (Note 3) (25,818) (2,555,973) (2,581,791)
--------------- --------------- ---------------
(290,117) 32,844,188 32,554,071
--------------- --------------- ---------------
Net unrealized holding gain
Balance at December 31, 1996 415 41,087 41,502
Net change 32 3,206 3,238
--------------- --------------- ---------------
447 44,293 44,740
--------------- --------------- ---------------
Balance at September 30, 1997 $ (289,670) $ 32,888,481 $ 32,598,811
=============== =============== ===============
The accompanying notes are an integral part of the consolidated financial statements.
</TABLE>
<PAGE> - 2 -
CAPITAL SOURCE L.P.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
<TABLE>
<CAPTION>
For the Nine For the Nine
Months Ended Months Ended
Sept. 30, 1997 Sept. 30, 1996
--------------- ---------------
<S> <C> <C>
Cash flows from operating activities
Net income $ 1,925,486 $ 1,965,225
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation and amortization 775,774 748,091
Amortization of discount on mortgage-backed and U.S. government securities (2,049) (5,995)
Minority interest in losses of Operating Partnerships (14,298) (1,506)
Increase in interest and other receivables (124,824) (108,757)
Decrease in escrow deposits and property reserves 101,443 112,709
Decrease (increase) in other assets 175,462 (42,185)
Increase (decrease) in accounts payable and accrued expenses (192,645) 76,268
Increase (decrease) in due to general partners and their affiliates (104,509) 3,491
Decrease in interest payable - (229,745)
--------------- ---------------
Net cash provided by operating activities 2,539,840 2,517,596
--------------- ---------------
Cash flows from investing activities
Principal payments received on mortgage-backed and U.S. government securities 187,307 258,067
Acquisition of personal property (5,319) (2,936)
Maturity of U.S. government securities - 1,000,000
--------------- ---------------
Net cash provided by investing activities 181,988 1,255,131
--------------- ---------------
Cash flow used in financing activity
Distributions (2,581,791) (2,581,792)
--------------- ---------------
Net increase in cash and temporary cash investments 140,037 1,190,935
Cash and temporary cash investments at beginning of period 10,272,497 8,962,735
--------------- ---------------
Cash and temporary cash investments at end of period $ 10,412,534 $ 10,153,670
=============== ===============
Supplemental disclosure of cash flow information:
Cash paid during the period for interest $ 442,127 $ 679,269
=============== ===============
The accompanying notes are an integral part of the consolidated financial statements.
</TABLE>
<PAGE> - 3 -
CAPITAL SOURCE L.P.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 1997
(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 consolidated financial statements should be
read in conjunction with the consolidated financial statements and notes
thereto included in the Partnership's Annual Report on Form 10-K for the
year ended December 31, 1996. In the opinion of management, all normal
and recurring adjustments necessary to present fairly the financial
position at September 30, 1997 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.
<PAGE> - 4 -
CAPITAL SOURCE L.P.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 1997
(UNAUDITED)
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 Mortgage-Backed Securities
Investment securities are classified as held-to-maturity,
available-for-sale or trading. 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 held-to-maturity or 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) 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 CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 1997
(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 nine months ended September 30, 1997. 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.
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 nine months ended September 30, 1997, distributions to
investors represented less than an 8% return; accordingly, no fees were paid
or accrued during these periods.
Amounts due to general partners and their affiliates at September 30, 1997, is
comprised of the following:
<TABLE>
<S> <C>
Unpaid property development and management fees $ 449,043
Operating deficit loans 3,563,553
---------------
$ 4,012,596
===============
</TABLE>
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 1997 was
$373,919 ($92,206 for the quarter ended September 30, 1997). 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, Fox Hollow Apartments and The Ponds at Georgetown (beginning in
November 1996). The fees for services provided in 1997, amounted to $136,635
($45,998 for the quarter ended September 30, 1997), 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 September 30, 1997:
<TABLE>
<S> <C>
Cash and temporary cash investments $ 9,768,972
GNMA Certificates 1,145,376
---------------
$ 10,914,348
===============
</TABLE>
<PAGE> - 6 -
CAPITAL SOURCE L.P.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 1997
(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
September 30, 1997, the total amortized cost, gross unrealized holding gains
and aggregate fair value of available-for-sale securities were $1,100,636,
$44,740 and $1,145,376 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 September 30,
1997, Partnership capital would increase by $13,495,037 ($3.96 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 CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 1997
(UNAUDITED)
Parent Company Only
Condensed Balance Sheets
<TABLE>
<CAPTION>
Sept. 30, 1997 Dec. 31, 1996
--------------- ---------------
<S> <C> <C>
Assets
Cash and temporary cash investments $ 10,412,534 $ 10,272,497
Investment in FHA Loans 12,530,341 12,585,755
Investment in mortgage-backed securities 23,673,684 23,937,795
Investment in Operating Partnerships (13,495,037) (13,038,255)
Interest receivable 319,690 321,760
Other assets 76,704 130,969
--------------- ---------------
$ 33,517,916 $ 34,210,521
=============== ===============
Liabilities and Partners' Capital
Liabilities
Accounts payable $ 58,518 $ 98,056
Distributions payable 860,587 860,587
--------------- ---------------
919,105 958,643
Partners' Capital 32,598,811 33,251,878
--------------- ---------------
$ 33,517,916 $ 34,210,521
=============== ===============
</TABLE>
Parent Company Only
Condensed Statements of Income
<TABLE>
<CAPTION>
For the Nine For the Nine
Months Ended Months Ended
Sept. 30, 1997 Sept. 30, 1996
--------------- ---------------
<S> <C> <C>
Income
Mortgage and mortgage-backed securities income $ 2,355,904 $ 2,362,880
Interest income on temporary cash investments and U.S. government securities 411,494 389,440
Interest income on mortgage-backed securities 69,691 86,764
Equity in losses of Operating Partnerships (535,332) (541,943)
Other income 2,434 7,600
-------------- ---------------
2,304,191 2,304,741
Expenses
Operating and administrative 378,705 339,516
-------------- ---------------
Net income $ 1,925,486 $ 1,965,225
============== ===============
</TABLE>
<PAGE> - 8 -
CAPITAL SOURCE L.P.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 1997
(UNAUDITED)
Parent Company Only
Condensed Statements of Cash Flows
<TABLE>
<CAPTION>
For the Nine For the Nine
Months Ended Months Ended
Sept. 30, 1997 Sept. 30, 1996
--------------- ---------------
<S> <C> <C>
Cash flows from operating activities
Net income $ 1,925,486 $ 1,965,225
Adjustments to reconcile net income to net cash
provided by operating activities:
Equity in losses of Operating Partnerships 535,332 541,943
Amortization 50,616 50,616
Amortization of discount on mortgage-backed and U.S. government securities (2,049) (5,995)
Other non-cash adjustments (33,819) 6,996
--------------- ---------------
Net cash provided by operating activities 2,475,566 2,558,785
--------------- ---------------
Cash flows from investing activities
FHA Loan and GNMA Certificate principal payments 324,812 383,454
Investment in Operating Partnerships (78,550) (246,745)
Maturity of U.S. government securities - 1,000,000
Distributions received from Operating Partnerships - 77,233
--------------- ---------------
Net cash provided by investing activities 246,262 1,213,942
--------------- ---------------
Cash flow used in financing activity
Distributions (2,581,791) (2,581,792)
--------------- ---------------
Net increase in cash and temporary cash investments 140,037 1,190,935
Cash and temporary cash investments at beginning of period 10,272,497 8,962,735
--------------- ---------------
Cash and temporary cash investments at end of period $ 10,412,534 $ 10,153,670
=============== ===============
</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 $6,354,657 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
(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 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
September 30, 1997.
<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 $ 3,515,432
Highland Park Apartments FHA 8.75% 11-01-2028 9,014,909
Misty Springs Apartments GNMA 8.75% 06-15-2029 4,277,939
The Ponds at Georgetown GNMA 9.00% 12-15-2029 2,236,741
Waterman's Crossing GNMA 10.00% 09-15-2028 10,939,659
Water's Edge Apartments GNMA 8.75% 12-15-2028 5,073,969
Pools of single-family mortgages GNMA 7.58%(1) 2008 to 2009 562,722
Pools of single-family mortgages GNMA 7.58%(1) 2007 to 2008 582,654
---------------
$ 36,204,025
===============
</TABLE>
(1) Represents yield to the Partnership.
<PAGE> - 10 -
Distributions
Cash distributions paid or accrued per BAC were as follows:
<TABLE>
<CAPTION>
For the Nine For the Nine
Months Ended Months Ended
Sept. 30, 1997 Sept. 30, 1996
--------------- ---------------
<S> <C> <C>
Regular quarterly distributions
Income $ .5649 $ .5766
Return of capital .1926 .1809
--------------- ---------------
.7575 .7575
=============== ===============
Distributions
Paid out of cash flow $ .7575 $ .7575
=============== ===============
</TABLE>
Regular quarterly distributions to BAC Holders consist primarily of interest
received on FHA Loans and GNMA Certificates. Additional cash for
distributions is received from other investments. The Partnership may draw on
reserves to pay operating expenses or to supplement cash distributions to
investors. The Partnership is permitted to replenish reserves with cash flows
in excess of distributions paid. For the nine months ended September 30,
1997, $254,455 ($94,980 for the quarter ended September 30, 1997) of
undistributed cash flow was added to reserves. The total amount held in
reserves at September 30, 1997, was $10,914,348 of which $1,145,376 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 June 30, 1997.
<PAGE> - 11 -
The following table shows the occupancy levels of the properties financed by
the Partnership at September 30, 1997:
<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 108 106 98%
Fox Hollow Apartments High Point, NC 184 180 98%
Highland Park Apartments Columbus, OH 252 241 96%
Misty Springs Apartments Daytona Beach, FL 128 126 98%
The Ponds at Georgetown Ann Arbor, MI 134 132 99%
Waterman's Crossing Newport News, VA 260 251 97%
Water's Edge Apartments Lake Villa, IL 108 103 95%
------------- ------------ ------------
1,174 1,139 97%
============= ============ ============
</TABLE>
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)
Sept. 30, 1997 Sept. 30, 1996 From 1996
--------------- --------------- ---------------
<S> <C> <C> <C>
Rental income $ 1,893,387 $ 1,799,583 $ 93,804
Mortgage-backed securities income 22,336 27,048 (4,712)
Interest income on temporary cash investments
and U.S. government securities 146,980 136,214 10,766
Other income 120,892 107,018 13,874
--------------- --------------- ---------------
2,183,595 2,069,863 113,732
--------------- --------------- ---------------
Real estate operating expenses 1,027,738 977,206 50,532
Depreciation 224,392 157,737 66,655
Interest expense 142,445 149,841 (7,396)
Investor servicing 96,904 75,622 21,282
Professional fees 14,750 17,346 (2,596)
Other expenses 10,435 2,950 7,485
Amortization 34,199 35,399 (1,200)
--------------- --------------- ---------------
1,550,863 1,416,101 134,762
--------------- --------------- ---------------
Minority interest in losses of Operating Partnerships 4,796 806 3,990
--------------- --------------- ---------------
Net income $ 637,528 $ 654,568 $ (17,040)
=============== =============== ===============
</TABLE>
<PAGE> - 12 -
<TABLE>
<CAPTION>
For the Nine For the Nine Increase
Months Ended Months Ended (Decrease)
Sept. 30, 1997 Sept. 30, 1996 From 1996
--------------- --------------- ---------------
<S> <C> <C> <C>
Rental income $ 5,594,872 $ 5,324,846 $ 270,026
Mortgage-backed securities income 69,691 86,764 (17,073)
Interest income on temporary cash investments
and U.S. government securities 431,727 402,524 29,203
Other income 273,998 256,729 17,269
--------------- --------------- ---------------
6,370,288 6,070,863 299,425
--------------- --------------- ---------------
Real estate operating expenses 2,913,109 2,620,629 292,480
Depreciation 673,177 643,789 29,388
Interest expense 442,127 449,524 (7,397)
Investor servicing 270,033 225,061 44,972
Professional fees 45,350 54,764 (9,414)
Other expenses 12,707 9,075 3,632
Amortization 102,597 104,302 (1,705)
--------------- --------------- ---------------
4,459,100 4,107,144 351,956
--------------- --------------- ---------------
Minority interest in losses of Operating Partnerships 14,298 1,506 12,792
--------------- --------------- ---------------
Net income $ 1,925,486 $ 1,965,225 $ (39,739)
=============== =============== ===============
</TABLE>
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 $22,183 for the quarter ended September 30, 1997,
compared to the same period in 1996, and decreased $50,137 for the nine months
ended September 30, 1997, compared to the same period in 1996. Rental income
increased for the quarter and nine months ended September 30, 1997, compared
to the same periods in 1996, due primarily to increases in average occupancy
and rental rate increases in certain markets. Real estate operating expenses
increased for the quarter and nine months ended June 30, 1997, compared to the
same periods in 1996, and, combined with an increase in depreciation expense,
more than offset the increase in rental income. Real estate operating
expenses increased primarily due to increases in repairs and maintenance
expenses and property improvements.
Mortgage-backed securities income decreased for the quarter and nine months
ended September 30, 1997, compared to the same periods in 1996 due to the
continued amortization of the principal balance of the mortgage-backed
securities.
Interest income on temporary cash investments and U.S. government securities
increased for the quarter and nine months ended September 30, 1997, compared
to the same periods in 1996 due to an increase in the Partnership's cash
reserve as additional cash was placed in reserves during 1996 and 1997.
Other income consists primarily of corporate unit rentals, garage rentals,
washer/dryer, and vending income generated by the Partnership's properties.
Income from such sources increased for the quarter and nine months ended
September 30, 1997, compared to the same period in 1996, primarily due to an
increase in corporate unit rentals.
Investor servicing costs increased for the quarter and nine months ended
September 30, 1997, compared to the same periods in 1996, 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 nine months ended September 30, 1997, compared
to the same periods in 1996, primarily due to a decrease in legal fees.
<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: November 13, 1997 CAPITAL SOURCE L.P.
By America First Capital
Source I L.L.C., General Partner of the
Registrant
By /s/ Michael Thesing
Michael Thesing
Vice President and Principal
Financial Officer
<PAGE> - 15 -
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-END> SEP-30-1997
<CASH> 10,412,534
<SECURITIES> 1,145,376
<RECEIVABLES> 186,938
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 10,599,472
<PP&E> 40,609,283
<DEPRECIATION> (10,598,813)
<TOTAL-ASSETS> 30,010,470
<CURRENT-LIABILITIES> 2,084,672
<BONDS> 0
<COMMON> 0
0
0
<OTHER-SE> 32,598,811
<TOTAL-LIABILITY-AND-EQUITY> 45,247,698
<SALES> 0
<TOTAL-REVENUES> 6,370,288
<CGS> 0
<TOTAL-COSTS> 0
<OTHER-EXPENSES> 4,459,100
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> 1,925,486
<INCOME-TAX> 0
<INCOME-CONTINUING> 1,925,486
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 1,925,486
<EPS-PRIMARY> 0
<EPS-DILUTED> 0
</TABLE>
