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, 1996
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 5
Item 7. Management's Discussion and Analysis of Financial Condition and
Results of Operations 6
Item 8. Financial Statements and Supplementary Data 13
Item 9. Changes in and Disagreements With Accountants on Accounting and
Financial Disclosure 13
PART III
Item 10. Directors and Executive Officers of Registrant 13
Item 11. Executive Compensation 15
Item 12. Security Ownership of Certain Beneficial Owners and Management 16
Item 13. Certain Relationships and Related Transactions 16
PART IV
Item 14. Exhibits, Financial Statement Schedules and Reports on Form 8-K 17
SIGNATURES 35
<PAGE> - ii -
PART I
Item 1. Business. Capital Source L.P. (the "Registrant" or the
"Partnership") was formed in August 1985 under the Delaware Revised 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, 1996, appears in Item 7 hereof.
The Partnership has also invested amounts held in its reserve account in
certain GNMA securities backed by pools of single-family mortgages ("Reserve
Investments").
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.
<PAGE> - 1 -
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.
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 $ 2,987,919
Fox Hollow Apartments High Point, NC 184 877 4,673,884
Highland Park Apartments Columbus, OH 252 891 6,280,499
Misty Springs Apartments Daytona Beach, FL 128 786 3,276,167
The Ponds at Georgetown Ann Arbor, MI 134 1,002 5,725,082
Waterman's Crossing Newport News, VA 260 944 8,042,366
Water's Edge Apartments Lake Villa, IL 108 814 4,348,380
-------- ---------------
1,174 $ 35,334,297
======== ===============
</TABLE>
Depreciation is taken on each property on a straight-line basis over the
estimated useful lives of the various components 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:
<PAGE> - 2 -
<TABLE>
<CAPTION>
1996 1995 1994 1993 1992
---------- ---------- ---------- ---------- ----------
<S> <C> <C> <C> <C> <C>
BLUFF RIDGE APARTMENTS
Average Occupancy Rate 94% 94% 92% 94% 95%
Average Effective Annual Rental Per Unit $5,792 $5,755 $5,622 $5,623 $5,423
FOX HOLLOW APARTMENTS
Average Occupancy Rate 95% 97% 97% 96% 93%
Average Effective Annual Rental Per Unit $6,360 $6,176 $6,102 $5,687 $5,376
HIGHLAND PARK APARTMENTS
Average Occupancy Rate 95% 97% 97% 96% 96%
Average Effective Annual Rental Per Unit $6,171 $6,071 $5,974 $5,701 $5,486
MISTY SPRINGS APARTMENTS
Average Occupancy Rate 94% 97% 97% 93% 84%
Average Effective Annual Rental Per Unit $5,574 $5,809 $5,589 $5,129 $4,588
THE PONDS AT GEORGETOWN
Average Occupancy Rate 95% 95% 95% 90% 88%
Average Effective Annual Rental Per Unit $9,515 $9,174 $8,955 $8,398 $7,970
WATERMAN'S CROSSING
Average Occupancy Rate 96% 95% 96% 95% 96%
Average Effective Annual Rental Per Unit $6,841 $6,737 $6,580 $6,436 $6,415
WATER'S EDGE APARTMENTS
Average Occupancy Rate 91% 97% 98% 94% 91%
Average Effective Annual Rental Per Unit $8,169 $8,559 $8,123 $7,786 $7,381
</TABLE>
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 6 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 1996 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, 1996, was 6,026.
(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, 1996, and December 31, 1995, equaled $3,407,965
and $3,407,964, respectively. The cash distributions paid per BAC during
the fiscal years ended December 31, 1996, and December 31, 1995 were as
follows:
<PAGE> - 3 -
<TABLE>
<CAPTION>
Per BAC
Year Ended Year Ended
December 31, 1996 December 31, 1995
----------------- -----------------
<S> <C> <C>
Income $ .7767 $ .8309
Return of Capital .2333 .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 1997 and thereafter.
<PAGE> - 4 -
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, 1996 Dec. 31, 1995 Dec. 31, 1994 Dec. 31, 1993 Dec. 31, 1992
------------- ------------- ------------- ------------- -------------
<S> <C> <C> <C> <C> <C>
Rental income $ 7,203,323 $ 7,210,114 $ 7,748,867 $ 7,530,940 $ 7,418,665
Mortgage-backed securities income 112,182 132,211 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 550,599 225,135 159,005 184,042 121,149
Other income 270,132 219,376 306,903 202,831 106,113
Unusual item - gain on disposition of
Falcon Point assets and related liabilities - - 2,746,326 - -
Expenses (including depreciation) (5,573,880) (5,477,264) (6,167,516) (5,437,478) (5,387,016)
Minority interest in (income) losses of
operating partnerships 2,746 2,571 (19,772) 6,889 8,665
------------- ------------- ------------- ------------- -------------
Income before extraordinary item 2,565,102 2,832,113 5,296,928 2,487,224 2,431,494
Extraordinary item - gain from forgiveness of
accrued interest 82,216 - - - -
------------- ------------- ------------- ------------- -------------
Net income $ 2,647,318 $ 2,832,113 $ 5,296,928 $ 2,487,224 $ 2,431,494
============= ============= ============= ============= =============
Net income per BAC
Income before extraordinary item $ .76 $ .83 $ 1.55 $ .73 $ .71
Extraordinary item .02 - - - -
------------- ------------- ------------- ------------- -------------
Net income per BAC $ .78 $ .83 $ 1.55 $ .73 $ .71
============= ============= ============= ============= =============
Cash distributions per BAC $ 1.0100 $ 1.0100 $ 1.0100 $ 2.6825 $ 1.1000
============= ============= ============= ============= =============
Total assets $ 46,223,005 $ 47,193,984 $ 48,103,699 $ 48,098,722 $ 54,742,900
============= ============= ============= ============= =============
Mortgage loan payable $ 6,354,657 $ 6,392,007 $ 6,395,004 $ 6,395,004 $ 6,395,004
============= ============= ============= ============= =============
</TABLE>
<PAGE>
<PAGE> - 5 -
Item 7. 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, 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
December 31, 1996.
<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 $ 3,530,929
Highland Park Apartments FHA 8.75% 11-01-2028 9,054,826
Misty Springs Apartments GNMA 8.75% 06-15-2029 4,295,077
The Ponds at Georgetown GNMA 9.00% 12-15-2029 2,244,805
Waterman's Crossing GNMA 10.00% 09-15-2028 10,975,228
Water's Edge Apartments GNMA 8.75% 12-15-2028 5,095,289
Pools of single-family mortgages GNMA 7.58%(1) 2008 to 2009 666,746
Pools of single-family mortgages GNMA 7.58%(1) 2007 to 2008 660,650
---------------
$ 36,523,550
===============
</TABLE>
(1) Represents yield to the Partnership.
<PAGE> - 6 -
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, 1996 Dec. 31, 1995 Dec. 31, 1994
--------------- --------------- ---------------
<S> <C> <C> <C>
Regular monthly distributions
Income $ .7767 $ .8309 $ 1.0100
Return of capital .2333 .1791 -
--------------- --------------- ---------------
$ 1.0100 $ 1.0100 $ 1.0100
=============== =============== ===============
Distributions
Paid out of cash flow $ 1.0100 $ 1.0100 $ 1.0100
=============== =============== ===============
</TABLE>
Regular quarterly distributions to BAC Holders consist primarily of interest
received on FHA Loans, 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 year ended
December 31, 1996, a net amount of $558,905 of undistributed cash flow was
added to reserves. The total amount held in reserves at December 31, 1996,
was $10,859,286 of which $1,327,396 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 its Partnership
Agreement, the Partnership has the authority to enter into short-term and
long-term debt financing arrangements; however, the Partnership currently does
not anticipate entering into such arrangements. The Partnership is not
authorized to issue additional BACs to meet short-term and long-term liquidity
requirements.
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, 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 108 100 93%
Fox Hollow Apartments High Point, NC 184 166 90%
Highland Park Apartments Columbus, OH 252 240 95%
Misty Springs Apartments Daytona Beach, FL 128 123 96%
The Ponds at Georgetown Ann Arbor, MI 134 130 97%
Waterman's Crossing Newport News, VA 260 249 96%
Water's Edge Apartments Lake Villa, IL 108 97 90%
------------- ------------ ------------
1,174 1,105 94%
============= ============ ============
</TABLE>
<PAGE> - 7 -
Bluff Ridge Apartments
Bluff Ridge Apartments is a 108-unit complex located in Jacksonville, North
Carolina. Average occupancy was 94% in 1996 and 1995. Operations at Bluff
Ridge are heavily dependent on demand from the local military personnel. The
Jacksonville rental market has remained relatively stable throughout 1996.
Excluding interest, net cash flow generated by the property increased
approximately 4% from 1995 to 1996, due primarily to an increase in rental
income resulting from rental rate increases. The property was current on its
debt service payments during 1996 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 95% in 1996, compared to 97% in 1995.
The property was in compliance with the terms of the Loan Modification
Agreement (LMA) entered into with the new mortgage holder on January 8, 1996.
While there can be no assurance that the modified terms of the Fox Hollow
mortgage will enable the property to remain current on its mortgage
obligations, the restructuring allows the Partnership to retain its
Partnership Equity Investment in the Fox Hollow Apartments and improves the
property's ability to make its required mortgage payments from operating cash
flow.
Excluding interest, net cash flow generated by Fox Hollow Apartments decreased
approximately 2.8% from 1995 to 1996. This decrease is primarily due to an
increase in repairs and maintenance expenses and property improvements which
was partially offset by an increase in operating revenue. Operating revenue
increased due to rental rate increases and additional income earned from
corporate unit rentals.
Highland Park Apartments
Highland Park Apartments contains 252 luxury garden apartments and is located
in Columbus, Ohio. Average occupancy was 95% in 1996, compared to 97% in
1995. Moderate rental rate increases were implemented. However, net cash
flow generated by the property, excluding interest, was approximately 1% less
in 1996, compared to 1995, due primarily to an increase in real estate
operating expenses of approximately 7.7%, primarily utility expenses. The
increase in real estate operating expenses was partially offset by an increase
in operating revenue resulting from rental rate increases and income earned
from sources such as garage and washer-dryer rentals. Despite the decrease in
net cash flow, the property remained current on its mortgage obligations
throughout 1996 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 94% in 1996, compared to 97% in 1995.
The net cash flow generated by the property, excluding interest, was
approximately 12.9% lower in 1996, compared to 1995, due to a decrease of
approximately 2.9% in operating revenue accompanied by a 7.7% increase in real
estate operating expenses. The decrease in operating revenue was due
primarily to the decrease in average occupancy. Real estate operating
expenses were higher primarily due to an increase in property taxes.
At December 31, 1996, the Operating Partnership was in compliance with the
terms of a Reinstatement Agreement entered into in July 1993. The Operating
Partnership was current on its debt service payments on its mortgage loan
during 1996, with a shortfall of $93,000 being funded by Partnership reserves.
<PAGE> - 8 -
The Ponds at Georgetown
The Ponds at Georgetown consists of 134 apartments located in Ann Arbor,
Michigan. Average occupancy was 95% in 1996 and 1995. 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. However, 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 (a private mortgage lender'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. In addition to the mortgage being in default, the property is
approximately $566,000 delinquent on its property taxes. A tax sale of the
property is scheduled for May, 1997; however, the Partnership is exploring a
number of alternatives with the mortgage holder to determine the best course
of action to take. Excluding interest, net cash flow generated by the
property in 1996 approximated that of 1995.
Waterman's Crossing
Waterman's Crossing is a 260-unit apartment community located in Newport News,
Virginia. Average occupancy was 96% in 1996, compared to 95% in 1995. The
Operating Partnership remains current on its mortgage obligations; however
shortfalls of $80,000 were funded by Partnership reserves in 1996. The
operating performance of the property has gradually been improving as net cash
flow generated by the property in 1996, excluding interest, increased
approximately 4.5% from 1995. This increase is primarily due to higher rental
revenues resulting from a slight increase in average occupancy and rental rate
increases accompanied by a decrease in property taxes and administrative
expenses.
Water's Edge Apartments
Water's Edge Apartments is a 108-unit apartment complex located in Lake Villa,
Illinois. Average occupancy was 91% in 1996, compared to 97% in 1995. The
property has continued to meet its mortgage obligations on a timely basis from
cash flow; however, the property's net cash flow, excluding interest,
decreased approximately 12.5% in 1996 compared to 1995. This decrease
resulted from a 4.6% decrease in rental revenue due to the decrease in average
occupancy accompanied by a 6.3% increase in real estate operating expenses,
primarily repairs and maintenance expenses and property improvements.
<PAGE> - 9 -
Results of Operations
The table 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, 1996 Dec. 31, 1995 Dec. 31, 1994
--------------- --------------- ---------------
<S> <C> <C> <C>
Rental income $ 7,203,323 $ 7,210,114 $ 7,748,867
Mortgage-backed securities income 112,182 132,211 77,012
Interest on GNMA securities - 519,970 446,103
Interest income on temporary cash investments
and U.S. government securities 550,599 225,135 159,005
Other income 270,132 219,376 306,903
Unusual item - gain on disposition of
Falcon Point assets and related liabilities - - 2,746,326
--------------- --------------- ---------------
8,136,236 8,306,806 11,484,216
--------------- --------------- ---------------
Real estate operating expenses 3,615,907 3,569,892 4,105,677
Depreciation 897,337 896,420 990,377
Interest expense 562,015 571,801 613,814
Property development and management fees - - 7,649
Investor servicing 301,694 238,667 213,212
Professional fees 50,164 53,121 70,175
Other expenses 9,966 5,849 8,714
Amortization 136,797 141,514 157,898
--------------- --------------- ---------------
5,573,880 5,477,264 6,167,516
--------------- --------------- ---------------
Minority interest in (income) losses of operating partnerships 2,746 2,571 (19,772)
--------------- --------------- ---------------
Income before extraordinary item 2,565,102 2,832,113 5,296,928
Extraordinary item - gain from forgiveness of
accrued interest 82,216 - -
--------------- --------------- ---------------
Net income $ 2,647,318 $ 2,832,113 $ 5,296,928
=============== =============== ===============
</TABLE>
<PAGE> - 10 -
<TABLE>
<CAPTION>
Increase Increase
(Decrease) (Decrease)
From 1995 From 1994
--------------- ---------------
<S> <C> <C>
Rental income $ (6,791) $ (538,753)
Mortgage-backed securities income (20,029) 55,199
Interest on GNMA securities (519,970) 73,867
Interest income on temporary cash investments
and U.S. government securities 325,464 66,130
Other income 50,756 (87,527)
Unusual item - gain on disposition of
Falcon Point assets and liabilities - (2,746,326)
--------------- ---------------
(170,570) (3,177,410)
--------------- ---------------
Real estate operating expenses 46,015 (535,785)
Depreciation 917 (93,957)
Interest expense (9,786) (42,013)
Property development and management fees - (7,649)
Investor servicing 63,027 25,455
Professional fees (2,957) (17,054)
Other expenses 4,117 (2,865)
Amortization (4,717) (16,384)
--------------- ---------------
96,616 (690,252)
--------------- ---------------
Minority interest in (income) losses of operating partnerships 175 22,343
--------------- ---------------
Income before extraordinary item (267,011) (2,464,815)
Extraordinary item - gain from forgiveness of
accrued interest 82,216 -
--------------- ---------------
Net income $ (184,795) $ (2,464,815)
=============== ===============
</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 $49,006 from 1995 to 1996. The decrease is due to
a slight decrease in rental income accompanied by increases in real estate
operating expenses, primarily repairs and maintenance expenses and property
improvements. The decrease in rental income consisted of a decrease of
approximately $115,000 due to decreases in average occupancy at four of the
properties which was partially offset by an increase in revenue of
approximately $108,000 resulting from rental rate increases.
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.
Mortgage-backed securities income decreased $20,029 from 1996 to 1995 due to
the continued amortization of the principal balance of the mortgage-backed
securities. Mortgage-backed securities income increased $55,199 from 1994 to
1995 as a result of interest earned on mortgage-backed securities acquired in
June and July 1994.
<PAGE> - 11 -
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. 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 $325,464 from 1995 to 1996. This increase is the result of
investing proceeds received from the payoff of the GNMA Certificate related to
Falcon Point Apartments in November 1995 and to additions made to the
Partnership's reserves during 1996. 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)
an 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.
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 $50,756 from 1995 to 1996, due primarily to
an increase in corporate unit rentals at Fox Hollow Apartments. Other income
decreased $11,367 from 1994 to 1995, due to a decrease in the rentals and/or
usage of such items.
Due to an 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.
Investor servicing costs increased $63,027 from 1995 to 1996 and $25,455 from
1994 to 1995. The increase from 1995 to 1996 was due to: (i) an increase of
approximately $49,000 in salaries and related expenses, (ii) an increase of
approximately $5,000 in printing and servicing expenses, (iii) an increase of
approximately $3,000 in insurance expenses and (iv) an increase of
approximately $7,000 in other investor servicing expenses. 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.
Professional fees decreased $2,957 from 1995 to 1996 and $17,054 from 1994 to
1995, 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. Other expenses increased from 1995
to 1996, due to an increase in travel expenses
The Partnership recorded an extraordinary gain of $82,216 in 1996 due to the
forgiveness of accrued interest on the Fox Hollow Apartments mortgage. The
interest was forgiven in conjunction with a Loan Modification Agreement entered
into in January 1996.
<PAGE> - 12 -
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, 1996 and 1995.
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. (the "America First General Partner"),
which is controlled by America First Companies L.L.C. ("America First") and
Insured Mortgage Equities Inc. (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 the officers and managers of America First, and each serves for a
term of one year.
<TABLE>
<CAPTION>
Name Position Held Position Held Since
- ----------------------- ---------------------------------- -----------------------
<S> <C> <C>
Michael B. Yanney Chairman of the Board, President, 1984
Chief Executive Officer and
Manager of America First
Chairman and Chief Executive 1991
Officer of the America First
General Partner
Stewart Zimmerman President of the America First 1991
General Partner
Michael Thesing Vice President, Secretary and 1984
Treasurer of America First
Vice President, Secretary and 1991
Treasurer of the America First
General Partner
William S. Carter, M.D. Manager of America First 1994
George Kubat Manager of America First 1994
Martin A. Massengale Manager of America First 1994
Alan Baer Manager of America First 1994
Gail Walling Yanney Manager of America First 1996
Mariann Byerwalter Manager of America First 1997
</TABLE>
Michael B. Yanney, 63, is the Chairman and President of America First
Companies L.L.C. 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., C-Tec Corporation, Mid-America Apartment
Communities, Inc. and PKS Information Services, Inc..
<PAGE> - 13 -
Stewart Zimmerman, 52, 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, 42, has been Vice President and Chief Financial Officer
of affiliates of America First Companies L.L.C. 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.
William S. Carter, M.D., 70, is a retired physician. Dr. Carter
practiced medicine for 30 years in Omaha, Nebraska, specializing in
otolaryngology (disorders of the ears, nose and throat).
George Kubat, 51, is the President and Chief Executive Officer of
Phillips Manufacturing Co., an Omaha, Nebraska, based manufacturer of drywall
and construction materials. Prior to assuming that position in November 1992,
Mr. Kubat was a certified public accountant with Coopers & Lybrand in Omaha,
Nebraska, from 1969. He was the tax partner in charge of the Omaha office
from 1981 to 1992. Mr. Kubat currently serves on the board of directors of
Sitel Corporation, American Business Information, Inc., and G.B. Foods
Corporation.
Martin A. Massengale, 63, is President Emeritus of the University of
Nebraska, Director of the Center for Grassland Studies and Foundation
Distinguished Professor. Prior to becoming President in 1991, he served as
Interim President from 1989, as Chancellor of the University of Nebraska
Lincoln from 1981 until 1990 and as Vice Chancellor for Agriculture and
Natural Resources from 1976 to 1981. Prior to that time, he was a professor
and associate dean of the College of Agriculture at the University of
Arizona. Dr. Massengale currently serves on the board of directors of Woodmen
Accident & Life Insurance Company and IBP, Inc..
Alan Baer, 74, is presently Chairman of Alan Baer & Associates, Inc., a
management company located in Omaha, Nebraska. He is also Chairman of Lancer
Hockey, Inc., Baer Travel Services, Wessan Telemarketing, Total Security
Systems, Inc. and several other businesses. Mr. Baer is the former Chairman
and Chief Executive Officer of the Brandeis Department Store chain which,
before its acquisition, was one of the larger retailers in the Midwest. Mr.
Baer has also owned and served on the board of directors of several banks in
Nebraska and Illinois.
Gail Walling Yanney, 61, is a retired physician. Dr. Walling practiced
anesthesia and was most recently the Executive Director of the Clarkson
Foundation until October of 1995. In addition, she was a director of FirsTier
Bank, N.A., Omaha prior to its merger with First Bank, N.A.. Ms. Yanney is
the wife of Michael B. Yanney.
Mariann Byerwalter, 36, is Vice President of Business Affairs and Chief
Financial Officer of Stanford University. Ms. Byerwalter was Executive Vice
President of AFEH and EurekaBank from 1988 to January 1996. Ms. Byerwalter
was Chief Financial Officer and Chief Operating Officer of AFEH, and Chief
Financial Officer of EurekaBank from 1993 to January 1996. She was an officer
of BankAmerica Corporation and its venture capital subsidiary from 1984 to
1987. She served as Vice President and Executive Assistant to the President
of Bank of America and was a Vice President in the bank's Corporate Planning
and Development Department, managing several acquisitions and divestitures.
During 1986, Ms. Byerwalter managed five divestitures, representing a total
purchase price of over $100 million with assets aggregating more than $5.0
billion.
<PAGE> - 14 -
The following individuals are the director and officers of the IME
General Partner, and each serves for a term of one year.
<TABLE>
<CAPTION>
Director
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, 51, 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, 40, 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 or the managers or officers of America First 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, 1996, is described
in Note 4 to the Notes to the Financial Statements filed in response to Item 8
hereof.
<PAGE> - 15 -
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.
(b) No director or officers of the General Partners or managers or
officers of America First own 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 Mr.
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 or manager or officer of
America First; (ii) a nominee for election as a director or manager of a
General Partner or a manager of America First; (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 incurred during 1996.
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
1996, distributions to investors represented less than an 8% return;
accordingly, no fees were paid or accrued during 1996.
During 1996, the Registrant paid or reimbursed the General Partners
$347,522 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.
The Registrant has entered into property management agreements with
America First Properties Management Company, L.L.C. (the "Manager") with
respect to the day-to-day operation of Waterman's Crossing, Misty Springs, Fox
Hollow Apartments and The Ponds at Georgetown (beginning in November 1996).
Such property management agreements provide that the Manager is entitled to
receive a management fee equal to a stated percentage of the gross revenues
generated by the property under management. Management fees payable to the
Manager range from 3% to 5% of gross revenues. Because the Manager is an
affiliate of AFCA, the management fees payable by the Registrant to the
Manager may not exceed the lesser of (i) the rates that the Registrant would
pay an unaffiliated manager for similar services in the same geographic
location or (ii) the Manager's actual cost for providing such services.
During the year ended December 31, 1996, the Registrant paid the Manager
property management fees of $165,721.
<PAGE> - 16 -
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.
Consolidated Balance Sheets of the Registrant as of December 31,
1996, and December 31, 1995.
Consolidated Statements of Income of the Registrant for the years
ended December 31, 1996, December 31, 1995, and December 31, 1994.
Consolidated Statements of Partners' Capital of the Registrant for
the years ended December 31, 1996, December 31, 1995, and December
31, 1994.
Consolidated Statements of Cash Flows of the Registrant for the
years ended December 31, 1996, December 31, 1995, and December 31,
1994.
Notes to Consolidated Financial Statements of the Registrant.
Schedule III--Real Estate and Accumulated Depreciation for the
years ended December 31, 1996, and December 31, 1995.
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 Item 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> - 17 -
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, 1996 and 1995, and the related
consolidated statements of income, partners' capital, and cash flows for each
of three years in the period ended December 31, 1996. 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, 1996 and 1995, and
the consolidated results of their operations and their cash flows for each of
the three years in the period ended December 31, 1996, in conformity with
generally accepted accounting principles.
Omaha, Nebraska
March 26, 1997 /s/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 schedule 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 26, 1997 /s/Coopers & Lybrand L.L.P.
<PAGE> - 18 -
Part I. Financial Information
Item 1. Financial Statements
CAPITAL SOURCE L.P.
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
Dec. 31, 1996 Dec. 31, 1995
--------------- ---------------
<S> <C> <C>
Assets
Investment in real estate:
Land $ 3,093,671 $ 3,093,671
Buildings 35,517,314 35,505,314
Personal property 1,992,979 1,998,765
--------------- ---------------
40,603,964 40,597,750
Less accumulated depreciation (9,925,636) (9,039,307)
--------------- ---------------
Net investment in real estate 30,678,328 31,558,443
--------------- ---------------
Cash and temporary cash investments, at cost
which approximates market value (Note 5) 10,272,497 8,962,735
Escrow deposits and property reserves 917,796 1,019,329
Investment in U.S. government securities - 1,005,000
Investment in mortgage-backed securities (Note 5) 1,327,396 1,677,803
Interest and other receivables 62,114 72,993
Deferred mortgage issuance costs, net of accumulated amortization of
$1,361,572 in 1996 and $1,224,775 in 1995 2,241,235 2,378,032
Other assets 723,639 519,649
--------------- ---------------
$ 46,223,005 $ 47,193,984
=============== ===============
Liabilities and Partners' Capital (Deficit)
Liabilities
Accounts payable and accrued expenses $ 1,416,730 $ 1,205,598
Distribution payable (Note 3) 860,587 860,587
Mortgage loan payable (Note 7) 6,354,657 6,392,007
Interest payable - 311,962
Due to general partners and their affiliates (Note 4) 4,117,105 4,112,583
--------------- ---------------
12,749,079 12,882,737
--------------- ---------------
Minority interest 222,048 224,794
--------------- ---------------
Partners' Capital (Deficit)
General Partners (283,139) (274,793)
Limited Partners ($9.94 per BAC in 1996 and $10.18 in 1995) 33,535,017 34,361,246
--------------- ---------------
33,251,878 34,086,453
--------------- ---------------
$ 46,223,005 $ 47,193,984
=============== ===============
The accompanying notes are an integral part of the consolidated financial statements.
</TABLE>
<PAGE> - 19 -
CAPITAL SOURCE L.P.
CONSOLIDATED STATEMENTS OF INCOME
<TABLE>
<CAPTION>
For the For the For the
Year Ended Year Ended Year Ended
Dec. 31, 1996 Dec. 31, 1995 Dec. 31, 1994
--------------- --------------- ---------------
<S> <C> <C> <C>
Income
Rental income $ 7,203,323 $ 7,210,114 $ 7,748,867
Mortgage-backed securities income 112,182 132,211 77,012
Interest on GNMA securities - 519,970 446,103
Interest on temporary cash investments
and U.S. government securities 550,599 225,135 159,005
Other income 270,132 219,376 306,903
Unusual item - gain on disposition of
Falcon Point assets and related liabilities (Note 8) - - 2,746,326
--------------- --------------- ---------------
8,136,236 8,306,806 11,484,216
--------------- --------------- ---------------
Expenses
Real estate operating expenses 3,615,907 3,569,892 4,105,677
Depreciation 897,337 896,420 990,377
Interest expense 562,015 571,801 613,814
Property development and management fees (Note 4) - - 7,649
General and administrative expenses (Note 4)
Investor servicing 301,694 238,667 213,212
Professional fees 50,164 53,121 70,175
Other expenses 9,966 5,849 8,714
Amortization 136,797 141,514 157,898
--------------- --------------- ---------------
5,573,880 5,477,264 6,167,516
--------------- --------------- ---------------
Minority interest in (income) losses of operating
partnerships 2,746 2,571 (19,772)
--------------- --------------- ---------------
Income before extraordinary item 2,565,102 2,832,113 2,296,928
Extraordinary item - gain from forgiveness of
accrued interest (Note 7) 82,216 - -
--------------- --------------- ---------------
Net income $ 2,647,318 $ 2,832,113 $ 5,296,928
=============== =============== ===============
Net income allocated to:
General Partners $ 26,473 $ 28,321 $ 52,969
Limited Partners 2,620,845 2,803,792 5,243,959
--------------- --------------- ---------------
$ 2,647,318 $ 2,832,113 $ 5,296,928
=============== =============== ===============
Net income per BAC
Income before extraordinary item $ .76 $ .83 $ 1.55
Extraordinary item .02 - -
--------------- --------------- ---------------
Net income per BAC $ .78 $ .83 $ 1.55
=============== =============== ===============
The accompanying notes are an integral part of the consolidated financial statements.
</TABLE>
<PAGE> - 20 -
CAPITAL SOURCE L.P.
CONSOLIDATED STATEMENTS OF PARTNERS' CAPITAL (DEFICIT)
FROM DECEMBER 31, 1993, TO DECEMBER 31, 1996
<TABLE>
<CAPTION>
General Limited
Partners Partners Total
--------------- --------------- ---------------
<S> <C> <C> <C>
Partners' Capital (Deficit) (excluding net unrealized holding gain)
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)
--------------- --------------- ---------------
Balance at December 31, 1995 (275,603) 34,281,050 34,005,447
Net income 26,473 2,620,845 2,647,318
Cash distributions paid or accrued (Note 3) (34,424) (3,407,965) (3,442,389)
--------------- --------------- ---------------
(283,554) 33,493,930 33,210,376
--------------- --------------- ---------------
Net unrealized holding gain
Balance at December 31, 1994 - - -
Net change 810 80,196 81,006
--------------- --------------- ---------------
Balance at December 31, 1995 810 80,196 81,006
Net change (395) (39,109) (39,504)
--------------- --------------- ---------------
415 41,087 41,502
--------------- --------------- ---------------
Balance at December 31, 1996 $ (283,139) $ 33,535,017 $ 33,251,878
=============== =============== ===============
The accompanying notes are an integral part of the consolidated financial statements.
</TABLE>
<PAGE> - 21 -
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, 1996 Dec. 31, 1995 Dec. 31, 1994
--------------- --------------- ---------------
<S> <C> <C> <C>
Cash flows from operating activities
Net income $ 2,647,318 $ 2,832,113 $ 5,296,928
Adjustments to reconcile net income to net cash
provided by operating activities:
Extraordinary item - gain from forgiveness of
accrued interest (82,216)
Unusual item - gain on disposition of
Falcon Point assets and related liabilities - - (2,746,326)
Depreciation and amortization 1,034,134 1,037,934 1,148,275
Amortization of discount on mortgage-backed
and U.S. government securities (6,700) (11,656) (1,341)
Property development and management fees - - 7,649
Minority interest in (income) losses of operating partnerships (2,746) (2,571) 19,772
Decrease (increase) in interest and other receivables 10,879 (44,538) (5,419)
Decrease (increase) in escrow deposits and property reserves 101,533 352,231 (139,743)
Decrease (increase) in other assets (203,990) (105,999) 36,304
Increase in accounts payable and accrued expenses 211,132 61,848 375,861
Increase (decrease) in due to Operating Partnerships'
general partners and their affiliates 4,522 (399,530) (235,455)
Decrease in interest payable (229,746) (37,196) (49,372)
--------------- --------------- ---------------
Net cash provided by operating activities 3,484,120 3,682,636 3,707,133
--------------- --------------- ---------------
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 322,603 219,865 122,654
Acquisition of real estate (12,000) - -
Acquisition of personal property (5,222) (7,211) (18,784)
Principal payments received on GNMA securities 7,145,554 -
Acquisition of U.S. government securities - (987,578) -
Acquisition of mortgage-backed securities - - (1,943,741)
--------------- --------------- ---------------
Net cash provided by (used in) investing activities 1,305,381 6,370,630 (1,839,871)
--------------- --------------- ---------------
Cash flow used in financing activities
Principal payments on mortgage loan payable (37,350) - -
Distributions (3,442,389) (3,442,388) (3,442,391)
--------------- --------------- ---------------
Net cash used in financing activities (3,479,739) (3,442,388) (3,442,391)
--------------- --------------- ---------------
Net increase (decrease) in cash and temporary cash investments 1,309,762 6,610,878 (1,575,129)
Cash and temporary cash investments at beginning of year 8,962,735 2,351,857 3,926,986
--------------- --------------- ---------------
Cash and temporary cash investments at end of year $ 10,272,497 $ 8,962,735 $ 2,351,857
=============== =============== ===============
Supplemental disclosure of cash flow information:
Cash paid during the period for interest $ 791,761 $ 608,997 $ 663,186
=============== =============== ===============
<PAGE> - 22 -
Supplemental disclosure of non-cash investing activities:
Abandonment of fully depreciated property $ 11,008 $ - $ -
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 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> - 23 -
CAPITAL SOURCE L.P.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1996
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 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
Prior to January 1, 1996, the Partnership's investment in real estate was
carried at cost less accumulated depreciation. 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 as the carrying value of each
property does not exceed net realizable value.
<PAGE> - 24 -
CAPITAL SOURCE L.P.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1996
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. The tax basis of the Partnerships' assets and
liabilities exceeded the reported amounts by $4,701,874 and $5,319,958 at
December 31, 1996, and December 31, 1995, 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) 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.
I) New Accounting Pronouncement
The Financial Accounting Standards Board has issued Financial Accounting
Standards No. 128 "Earnings Per Share" (FAS 128). FAS 128, which is
effective for periods ending after December 15, 1997, is not expected to
have an impact on the Partnership's computation, presentation or
disclosure of earnings per BAC.
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.
<PAGE> - 25 -
CAPITAL SOURCE L.P.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1996
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 year ended December 31, 1996 and 1995.
Property development and management fees for the year ended December 31, 1994
amounted to $7,649. 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 years ended December 31, 1996, 1995 and 1994, distributions to investors
represented less than an 8% return; accordingly, no fees were paid or accrued
during these years.
Amounts due to general partners and their affiliates on December 31, 1996 and
1995 are comprised of the following:
<TABLE>
<CAPTION>
1996 1995
--------------- ---------------
<S> <C> <C>
Unpaid property development and management fees $ 445,652 $ 438,030
Operating deficit loans 3,671,453 3,674,553
--------------- ---------------
$ 4,117,105 $ 4,112,583
=============== ===============
</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 was $347,522,
$309,826 and $291,744 for the years ended December 31, 1996, 1995 and 1994,
respectively. Reimbursed expenses are presented on a cash basis and do not
reflect accruals made at each year 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 (beginning in June, 1995) and The Ponds at
Georgetown (beginning in November 1996). The fees for services provided were
$165,721, $136,529 and $124,896 for 1996, 1995 and 1994, respectively, and
represented the lower of costs incurred in providing management of the
property or customary fees for such services determined on a competitive
basis.
<PAGE> - 26 -
CAPITAL SOURCE L.P.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1996
5. Partnership Reserve Account
The Partnership maintains a reserve account which consisted of the following
at December 31, 1996:
<TABLE>
<S> <C>
Cash and temporary cash investments $ 9,531,890
GNMA Certificates 1,327,396
---------------
$ 10,859,286
===============
</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.
At December 31, 1996, the total amortized cost, gross unrealized holding gains
and aggregate fair value of available-for-sale securities were $1,285,894,
$41,502 and $1,327,396 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.
Prior to June 30, 1995, the Partnership classified all investment securities
as held-to-maturity. However, 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.
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 December 31,
1996, Partnership capital would increase by $13,038,255 ($3.83 per BAC).
<PAGE> - 27 -
CAPITAL SOURCE L.P.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1996
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, 1996 Dec. 31, 1995
--------------- ---------------
<S> <C> <C>
Assets
Cash and temporary cash investments $ 10,272,497 $ 8,962,735
Investment in FHA Loans 12,585,755 12,654,188
Investment in mortgage-backed securities 23,937,795 24,388,920
Investment in U.S. government securities - 1,005,000
Investment in Operating Partnerships (13,038,255) (12,498,266)
Interest receivable 321,760 332,686
Other assets 130,969 198,192
--------------- ---------------
$ 34,210,521 $ 35,043,455
=============== ===============
Liabilities and Partners' Capital
Liabilities
Accounts payable $ 98,056 $ 96,415
Distributions payable 860,587 860,587
--------------- ---------------
958,643 957,002
Partners' Capital 33,251,878 34,086,453
--------------- ---------------
$ 34,210,521 $ 35,043,455
=============== ===============
</TABLE>
Parent Company Only
Condensed Statements of Income
<TABLE>
<CAPTION>
For the For the
Year Ended Year Ended
Dec. 31, 1996 Dec. 31, 1995
--------------- ---------------
<S> <C> <C>
Income
Mortgage and mortgage-backed securities income $ 3,148,565 $ 3,548,264
Interest on temporary cash investments and U.S. government securities 523,636 193,257
Interest on mortgage-backed securities 112,182 132,211
Equity in losses of Operating Partnerships (717,501) (680,444)
Other income 9,749 3,950
-------------- ---------------
3,076,631 3,197,238
Expenses
Operating and administrative 429,313 365,125
-------------- ---------------
Net income $ 2,647,318 $ 2,832,113
============== ===============
</TABLE>
<PAGE> - 28 -
CAPITAL SOURCE L.P.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1996
Parent Company Only
Condensed Statements of Cash Flows
<TABLE>
<CAPTION>
For the For the
Year Ended Year Ended
Dec. 31, 1996 Dec. 31, 1995
--------------- ---------------
<S> <C> <C>
Cash flows from operating activities
Net income $ 2,647,318 $ 2,832,113
Adjustments to reconcile net income to net cash
provided by operating activities:
Equity in losses of Operating Partnerships 717,501 680,444
Amortization 67,488 67,488
Amortization of discount on mortgage-backed and U.S. government securities (6,700) (11,656)
Other non-cash adjustments 12,302 (6,717)
--------------- ---------------
Net cash provided by operating activities 3,437,909 3,561,672
--------------- ---------------
Cash flows from investing activities
Maturity of U.S. government securities 1,000,000 -
FHA Loan and GNMA Certificate principal payments 491,754 7,519,672
Acquisition of U.S. government securities - (987,578)
Investment in Operating Partnerships (254,745) (40,500)
Distributions received from Operating Partnerships 77,233 -
--------------- ---------------
Net cash provided by investing activities 1,314,242 6,491,594
--------------- ---------------
Cash flow used in financing activity
Distributions (3,442,389) (3,442,388)
--------------- ---------------
Net increase in cash and temporary cash investments 1,309,762 6,610,878
Cash and temporary cash investments at beginning of year 8,962,735 2,351,857
--------------- ---------------
Cash and temporary cash investments at end of year $ 10,272,497 $ 8,962,735
=============== ===============
</TABLE>
7. Mortgage Loan Payable and Extraordinary Item
The mortgage is an 8.86% loan collateralized by Fox Hollow Apartments. Prior
to May 12, 1995 HUD was the mortgage holder, and the Operating Partnership
operated under a Provisional Workout Agreement (PWA). A Loan Modification
Agreement (LMA) dated January 8, 1996, was signed between the Operating
Partnership and the new mortgage holder, dissolving the PWA and modifying
certain terms and conditions of the mortgage payable. The new mortgage holder
agreed to accept $229,745 (of which $161,745 was paid by the Partnership and
$68,000 was paid by the property) as payment of accrued unpaid interest,
thereby forgiving $82,216 of accrued interest. Further, commencing on 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 no later than October 1, 2028. The mortgage loan
payable 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. Principal maturities on the mortgage
loan are as follows:
Year Amount
---------- -------------
1997 $ 37,584
1998 41,053
1999 44,841
2000 48,980
2001 53,500
Thereafter 6,128,699
-------------
$ 6,354,657
=============
<PAGE> - 29 -
CAPITAL SOURCE L.P.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1996
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 until November
1995, when 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, 1996 At December 31, 1995
----------------------------------- -----------------------------------
Carrying Estimated Carrying Estimated
Amount Fair Value Amount Fair Value
--------------- --------------- --------------- ---------------
<S> <C> <C> <C> <C>
Cash and temporary cash investments $ 10,272,497 $ 10,272,497 $ 8,962,735 $ 8,962,735
Investment in mortgage-backed securities 1,327,396 1,327,396 1,667,803 1,667,803
Investment in U.S. government securities - - 1,005,000 1,005,000
</TABLE>
10. Summary of Unaudited Quarterly Results of Operations
<TABLE>
<CAPTION>
First Second Third Fourth
From January 1, 1996, to December 31, 1996 Quarter Quarter Quarter Quarter
--------------- --------------- --------------- ---------------
<S> <C> <C> <C> <C>
Total income $ 1,990,066 $ 2,010,934 $ 2,069,863 $ 2,065,373
Total expenses (1,204,651) (1,486,392) (1,416,101) (1,466,736)
Minority interest in losses of operating
partnerships 32 668 806 1,240
--------------- --------------- --------------- ---------------
Income before extraordinary item 785,447 525,210 654,568 599,877
Extraordinary item - gain from forgiveness of
accrued interest - - - 82,216
--------------- --------------- --------------- ---------------
Net income $ 785,447 $ 525,210 $ 654,568 $ 682,093
=============== =============== =============== ===============
Net income per BAC
Income before extraordinary item $ .23 $ .15 $ .20 $ .18
Extraordinary item - - - .02
--------------- --------------- --------------- ---------------
Net income per BAC $ .23 $ .15 $ .20 $ .20
=============== =============== =============== ===============
</TABLE>
<PAGE> - 30 -
CAPITAL SOURCE L.P.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1996
<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>
<PAGE> - 31 -
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> - 32 -
Schedule III
CAPITAL SOURCE L.P.
REAL ESTATE AND ACCUMULATED DEPRECIATION
DECEMBER 31, 1996
<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 3,272,492 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 4,805,273 139,440
Ponds at Georgetown Ann Arbor, MI 134 (a) 174,879 118,649 1,812,662 24,481
----------- ------------ ------------ ---------
$ 2,365,503 $ 1,959,291 $ 35,735,886 $ 543,284
=========== ============ ============ =========
</TABLE>
<TABLE>
<CAPTION>
Gross Amount at December 31, 1996
-----------------------------------------
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 $ 2,972,902 1987 N/A 5-40 years
Fox Hollow 272,215 6,116,107 6,388,322 1,768,704 1988 N/A 5-40 years
Highland Park 208,403 8,556,267 8,764,670 1,930,147 1988 N/A 5-40 years
Bluff Ridge 203,050 3,376,511 3,579,561 745,618 1988 N/A 5-40 years
Misty Springs 741,587 3,230,348 3,971,935 989,619 1988 N/A 5-40 years
Water's Edge 371,215 4,844,208 5,215,423 1,045,121 1988 N/A 5-40 years
Ponds at Georgetown 174,879 1,955,792 2,130,671 473,525 1989 N/A 5-40 years
----------- ------------ ------------ ------------
$ 3,093,671 $ 37,510,293 $ 40,603,964 $ 9,925,636
=========== ============ ============ ============
</TABLE>
<PAGE> - 33 -
Schedule III
CAPITAL SOURCE L.P.
REAL ESTATE AND ACCUMULATED DEPRECIATION
DECEMBER 31, 1996 and 1995
(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 which totaled $6,354,657 at
December 31, 1996, and $6,392,007 at December 31, 1995. The mortgage
obligation is collateralized solely by this property. Pursuant to the
terms of a Loan Modification Agreement (LMA) entered into on January 8,
1996, installments of principal and interest of $49,947 are due monthly
with the balance due and payable no later than October 1, 2028. The
mortgage loan bears interest at 8.86%. The mortgage loan was in
compliance with the terms of the LMA as of December 31, 1996.
(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>
1996 1995
--------------- ---------------
<S> <C> <C>
Balance - beginning of year $ 40,597,750 $ 40,590,539
Acquisitions 12,000 7,211
Improvements 5,222 -
Disposition of personal property (11,008) -
--------------- ---------------
Balance - end of year $ 40,603,964 $ 40,597,750
=============== ===============
</TABLE>
(f) Reconciliation of Accumulated Depreciation:
<TABLE>
<CAPTION>
1996 1995
--------------- ---------------
<S> <C> <C>
Balance - beginning of year $ 9,039,307 $ 8,142,887
Depreciation expense 897,337 896,420
Disposition of personal property (11,008) -
--------------- ----------------
Balance - end of year $ 9,925,636 $ 9,039,307
=============== ================
</TABLE>
<PAGE> - 34 -
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 of the Registrant
By /s/ Michael Thesing
Michael Thesing,
Vice President
Date: March 27, 1997
<PAGE> - 35 -
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 27, 1997 By /s/ Michael B. Yanney*
Michael B. Yanney,
Chairman and Chief Executive Officer of
the America First General Partner
(Principal Executive Officer)
Chairman of the Board, President,
Chief Executive Officer and Manager of
America First Companies L.L.C.
Date: March 27, 1997 By /s/ Michael Thesing
Michael Thesing, Vice
President, Secretary and
Treasurer (Principal Financial Officer)
of the America First General Partner
Vice President, Secretary and Treasurer
of America First Companies L.L.C.
Date: March 27, 1997 By /s/ William S. Carter, M.D.
William S. Carter, M.D.
Manager of America First Companies L.L.C.
Date: March 27, 1997 By /s/ George Kubat
George Kubat
Manager of America First Companies L.L.C.
Date: March 27, 1997 By /s/ Martin A. Massengale
Martin A. Massengale
Manager of America First Companies L.L.C.
Date: March 27, 1997 By /s/ Alan Baer
Alan Baer
Manager of America First Companies L.L.C.
Date: March 27, 1997 By /s/ Gail Walling Yanney
Gail Walling Yanney
Manager of America First Companies L.L.C.
Date: March 27, 1997 By /s/ Mariann Byerwalter
Mariann Byerwalter
Manager of America First Companies L.L.C.
*By Michael Thesing,
Attorney in Fact
/s/ Michael Thesing
Michael Thesing
<PAGE> - 36 -
EXHIBIT 24
POWER OF ATTORNEY
<PAGE> - 37 -
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, 1996, 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 Apartment Investors, L.P.
America First Participating/Preferred Equity Mortgage Fund and America
First Participating/Preferred Equity Mortgage Fund Limited Partnership
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.-A
IN WITNESS WHEREOF, the undersigned has executed this Power of Attorney
on the 25th day of March, 1997.
/s/ Michael B. Yanney
Michael B. Yanney
<PAGE> - 38 -
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, 1996, 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 Apartment Investors, L.P.
America First Participating/Preferred Equity Mortgage Fund and America
First Participating/Preferred Equity Mortgage Fund Limited Partnership
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.-A
IN WITNESS WHEREOF, the undersigned has executed this Power of Attorney
on the 25th day of March, 1997.
/s/ Gail Walling Yanney
Gail Walling Yanney
<PAGE> - 39 -
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, 1996, 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 Apartment Investors, L.P.
America First Participating/Preferred Equity Mortgage Fund and America
First Participating/Preferred Equity Mortgage Fund Limited Partnership
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.-A
IN WITNESS WHEREOF, the undersigned has executed this Power of Attorney
on the 25th day of March, 1997.
/s/ George Kubat
George Kubat
<PAGE> - 40 -
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, 1996, 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 Apartment Investors, L.P.
America First Participating/Preferred Equity Mortgage Fund and America
First Participating/Preferred Equity Mortgage Fund Limited Partnership
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.-A
IN WITNESS WHEREOF, the undersigned has executed this Power of Attorney
on the 25th day of March, 1997.
/s/ Martin A. Massengale
Martin A. Massengale
<PAGE> - 41 -
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, 1996, 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 Apartment Investors, L.P.
America First Participating/Preferred Equity Mortgage Fund and America
First Participating/Preferred Equity Mortgage Fund Limited Partnership
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.-A
IN WITNESS WHEREOF, the undersigned has executed this Power of Attorney
on the 25th day of March, 1997.
/s/ Alan Baer
Alan Baer
<PAGE> - 42 -
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, 1996, 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 Apartment Investors, L.P.
America First Participating/Preferred Equity Mortgage Fund and America
First Participating/Preferred Equity Mortgage Fund Limited Partnership
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.-A
IN WITNESS WHEREOF, the undersigned has executed this Power of Attorney
on the 25th day of March, 1997.
/s/ Mariann Byerwalter
Mariann Byerwalter
<PAGE> - 43 -
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-END> DEC-31-1996
<CASH> 10,272,497
<SECURITIES> 1,327,396
<RECEIVABLES> 62,114
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 10,334,611
<PP&E> 40,603,964
<DEPRECIATION> (9,925,636)
<TOTAL-ASSETS> 46,223,005
<CURRENT-LIABILITIES> 2,277,317
<BONDS> 0
<COMMON> 0
0
0
<OTHER-SE> 33,251,878
<TOTAL-LIABILITY-AND-EQUITY> 46,223,005
<SALES> 0
<TOTAL-REVENUES> 8,136,236
<CGS> 0
<TOTAL-COSTS> 0
<OTHER-EXPENSES> 5,573,880
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> 2,565,102
<INCOME-TAX> 0
<INCOME-CONTINUING> 2,565,102
<DISCONTINUED> 0
<EXTRAORDINARY> 82,216
<CHANGES> 0
<NET-INCOME> 2,647,318
<EPS-PRIMARY> 0
<EPS-DILUTED> 0
</TABLE>
