FORM 10-Q
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
X Quarterly report pursuant to Section 13 or 15(d) of the Securities Exchange
Act of 1934
For the quarterly period ended March 31, 1998 or
Transition report pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934
For the transition period from to
Commission File Number: 0-16497
CAPITAL SOURCE L.P.
(Exact name of registrant as specified in its charter)
Delaware 52-1417770
(State or other jurisdiction (IRS Employer
of incorporation or organization) Identification No.)
Suite 400, 1004 Farnam Street, Omaha, Nebraska 68102
(Address of principal executive offices) (Zip Code)
(402) 444-1630
(Registrant's telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to
such filing requirements for the past 90 days.
YES X NO
<PAGE> - i -
Part I. Financial Information
Item 1. Financial Statements
CAPITAL SOURCE L.P.
CONSOLIDATED BALANCE SHEETS
(UNAUDITED)
<TABLE>
<CAPTION>
Mar. 31, 1998 Dec. 31, 1997
--------------- ---------------
<S> <C> <C>
Assets
Investment in real estate:
Land $ 3,093,671 $ 3,093,671
Buildings 35,536,966 35,536,966
Personal property 2,004,746 2,001,950
--------------- ---------------
40,635,383 40,632,587
Less accumulated depreciation (11,055,886) (10,831,199)
--------------- ---------------
Net investment in real estate 29,579,497 29,801,388
--------------- ---------------
Cash and temporary cash investments, at cost
which approximates market value (Note 5) 10,218,941 10,410,564
Escrow deposits and property reserves 826,231 894,986
Investment in mortgage-backed securities (Note 5) 1,047,854 1,088,526
Interest and other receivables 190,094 70,542
Deferred mortgage issuance costs, net of accumulated amortization of
$1,538,408 in 1998 and $1,503,039 in 1997 2,064,398 2,099,768
Other assets 882,212 767,156
--------------- ---------------
$ 44,809,227 $ 45,132,930
=============== ===============
Liabilities and Partners' Capital (Deficit)
Liabilities
Accounts payable and accrued expenses $ 1,497,745 $ 1,532,202
Distribution payable (Note 3) 860,587 860,587
Mortgage loan payable (Note 7) 6,320,076 6,320,076
Due to general partners and their affiliates (Note 4) 4,013,726 4,013,626
--------------- ---------------
12,692,134 12,726,491
--------------- ---------------
Minority interest 192,208 192,296
--------------- ---------------
Partners' Capital (Deficit)
General Partners (296,410) (293,517)
Limited Partners ($9.55 per BAC in 1998 and $9.63 in 1997) 32,221,295 32,507,660
--------------- ---------------
31,924,885 32,214,143
--------------- ---------------
$ 44,809,227 $ 45,132,930
=============== ===============
The accompanying notes are an integral part of the consolidated financial statements.
</TABLE>
<PAGE> - 1 -
CAPITAL SOURCE L.P.
CONSOLIDATED STATEMENTS OF INCOME
(UNAUDITED)
<TABLE>
<CAPTION>
For the For the
Quarter Ended Quarter Ended
Mar. 31, 1998 Mar. 31, 1997
--------------- ---------------
<S> <C> <C>
Income
Rental income $ 1,894,782 $ 1,827,184
Mortgage-backed securities income 19,895 24,245
Interest on temporary cash investments 141,288 143,363
Other income 77,879 90,024
--------------- ---------------
2,133,844 2,084,816
--------------- ---------------
Expenses
Real estate operating expenses 950,856 819,400
Depreciation 224,686 224,392
Interest expense 149,841 149,841
General and administrative expenses (Note 4)
Investor servicing 126,562 86,137
Professional fees 12,775 15,850
Other expenses 66,596 1,565
Amortization 35,369 34,199
--------------- ---------------
1,566,685 1,331,384
--------------- ---------------
Minority interest in losses of Operating Partnerships 142 4,849
--------------- ---------------
Net income $ 567,301 $ 758,281
=============== ===============
Net income allocated to:
General Partners $ 5,673 $ 7,583
Limited Partners 561,628 750,698
--------------- ---------------
$ 567,301 $ 758,281
=============== ===============
Net income, basic and diluted, per BAC $ .17 $ .22
=============== ===============
</TABLE>
CAPITAL SOURCE L.P.
CONSOLIDATED STATEMENTS OF PARTNERS' CAPITAL (DEFICIT)
FOR THE QUARTER ENDED MARCH 31, 1998
(UNAUDITED)
<TABLE>
<CAPTION>
General Limited
Partners Partners Total
--------------- --------------- ---------------
<S> <C> <C> <C>
Partners' Capital (Deficit) (excluding net unrealized holding gains)
Balance at December 31, 1997 (293,953) 32,464,480 32,170,527
Net income 5,673 561,628 567,301
Cash distributions paid or accrued (Note 3) (8,606) (851,991) (860,597)
--------------- --------------- ---------------
(296,886) 32,174,117 31,877,231
--------------- --------------- ---------------
Net unrealized holding gains
Balance at December 31, 1997 436 43,180 43,616
Net change 40 3,998 4,038
--------------- --------------- ---------------
476 47,178 47,654
--------------- --------------- ---------------
Balance at March 31, 1998 $ (296,410) $ 32,221,295 $ 31,924,885
=============== =============== ===============
The accompanying notes are an integral part of the consolidated financial statements.
</TABLE>
<PAGE> - 2 -
CAPITAL SOURCE L.P.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
<TABLE>
<CAPTION>
For the For the
Quarter Ended Quarter Ended
Mar. 31, 1998 Mar. 31, 1997
--------------- ---------------
<S> <C> <C>
Cash flows from operating activities
Net income $ 567,301 $ 758,281
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation and amortization 260,055 258,591
Amortization of discount on mortgage-backed securities (495) (707)
Minority interest in losses of Operating Partnerships (142) (4,849)
Increase in interest and other receivables (119,552) (169,485)
Decrease in escrow deposits and property reserves 68,755 133,716
Increase in other assets (115,000) (16,777)
Decrease in accounts payable and accrued expenses (34,457) (29,047)
Increase (decrease) in due to general partners and their affiliates 100 (63,770)
--------------- ---------------
Net cash provided by operating activities 626,565 865,953
--------------- ---------------
Cash flows from investing activities
Principal payments received on mortgage-backed securities 45,205 64,640
Acquisition of personal property (2,796) (2,308)
--------------- ---------------
Net cash provided by investing activities 42,409 62,332
--------------- ---------------
Cash flow used in financing activities
Distributions (860,597) (860,597)
--------------- ---------------
Net increase (decrease) in cash and temporary cash investments (191,623) 67,688
Cash and temporary cash investments at beginning of period 10,410,564 10,272,497
--------------- ---------------
Cash and temporary cash investments at end of period $ 10,218,941 $ 10,340,185
=============== ===============
Supplemental disclosure of cash flow information:
Cash paid during the period for interest $ 149,841 $ 149,841
=============== ===============
The accompanying notes are an integral part of the consolidated financial statements.
</TABLE>
<PAGE> - 3 -
CAPITAL SOURCE L.P.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 1998
(UNAUDITED)
1. Organization
Capital Source L.P. (the Partnership) was formed on August 22, 1985, under the
Delaware Revised Uniform Limited Partnership Act. The General Partners of
the Partnership are Insured Mortgage Equities, Inc. and America First Capital
Source I L.L.C. (the General Partners).
The Partnership provided virtually 100% of the debt and equity financing for
eight multifamily rental housing properties. The Partnership's investment in
the properties consisted of: (i) approximately 85% in the form of permanent
mortgages and/or loans to fund construction; and, (ii) the balance to purchase
up to a 99% limited partnership interest in the Operating Partnerships which
developed, own and operate the properties. Each loan is insured or
guaranteed, in an amount substantially equal to the face amount of the
mortgage, by the Federal Housing Administration (FHA) or the Government
National Mortgage Association (GNMA). The Partnership has been repaid by FHA
on one of its first mortgage loans. The Partnership has also been repaid by
GNMA on one of its GNMA Certificates. The Partnership no longer holds a
Partnership Equity Investment in the Operating Partnership which owned the
property collateralizing the repaid GNMA Certificate. The seven remaining
Operating Partnerships are geographically located as follows: (i) two in
North Carolina; and, (ii) one each in Ohio, Florida, Michigan, Virginia and
Illinois.
CS Properties I, Inc., which is owned by affiliates of the General Partners,
serves as the Special Limited Partner for the Operating Partnerships. The
Special Limited Partner has the power, among other things, to remove the
general partners of the Operating Partnerships under certain circumstances and
to consent to the sale of the Operating Partnerships' assets. CS Properties
I, Inc. also serves as the general partner of Misty Springs Apartments,
Waterman's Crossing and Fox Hollow Apartments.
The Partnership will terminate subsequent to the sale of all properties but in
no event will the Partnership continue beyond December 31, 2030.
2.Summary of Significant Accounting Policies
A) Financial Statement Presentation
The consolidated financial statements include the accounts of the
Partnership and seven subsidiary Operating Partnerships. The Partnership
is a limited partner with an ownership interest of up to 99% in six of
the subsidiary Operating Partnerships. The Partnership's ownership
interest in The Ponds at Georgetown L.P. is 30.29%. The remaining limited
partner interest of 68.70% is owned by Capital Source II L.P.-A, an
affiliate of the General Partners. All significant intercompany accounts
and transactions have been eliminated in consolidation.
The consolidated financial statements are prepared without audit on the
accrual basis of accounting in accordance with generally accepted
accounting principles. The consolidated financial statements should be
read in conjunction with the consolidated financial statements and notes
thereto included in the Partnership's Annual Report on Form 10-K for the
year ended December 31, 1997. In the opinion of management, all normal
and recurring adjustments necessary to present fairly the financial
position at March 31, 1998 and results of operations for all periods
presented have been made.
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the
financial statements and the reported amounts of revenues and expenses
during the reporting period. Actual results could differ from those
estimates.
<PAGE> - 4 -
CAPITAL SOURCE L.P.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 1998
(UNAUDITED)
B) Investment in Real Estate
The Partnership's investment in real estate is carried at cost less
accumulated depreciation. The carrying value of each property is reviewed
for impairment whenever events or circumstances indicate that the carrying
value may not be recoverable. If the sum of the expected undiscounted
future cash flows is less than the carrying amount, an impairment is
recorded based on fair value.
C) Investment in Mortgage-Backed Securities
Investment securities are classified as held-to-maturity,
available-for-sale or trading. Investments classified as
available-for-sale are reported at fair value with any unrealized gains or
losses excluded from earnings and reflected as a separate component of
partners' capital. Subsequent increases and decreases in the net
unrealized gain/loss on the available-for-sale securities are reflected as
adjustments to the carrying value of the portfolio and adjustments to the
component of partners' capital. The Partnership does not have investment
securities classified as held-to-maturity or trading.
D) Depreciation and Amortization
Depreciation of real estate is based on the estimated useful life of the
properties using the straight-line method. Deferred mortgage issuance
costs are amortized using the effective yield method over the 40 year term
of the respective loan.
E) Revenue Recognition
The Operating Partnerships lease multifamily rental units under
operating leases with terms of one year or less. Rental revenue is
recognized as earned, net of any vacancy losses and rental concessions
offered.
F) Income Taxes
No provision has been made for income taxes since BAC Holders are required
to report their share of the Partnership's income for federal and state
income tax purposes.
G) Temporary Cash Investments
Temporary cash investments are invested in short-term debt securities
purchased with original maturities of three months or less.
H) Net Income per Beneficial Assignment Certificate (BAC)
Net income per BAC is based on the number of BACs outstanding (3,374,222)
during each period presented.
I) Comprehensive Income
In the first quarter of 1998, the Partnership adopted Statement of
Financial Accounting Standards No. 130, "Reporting Comprehensive Income"
(SFAS 130). SFAS 130 requires the display and reporting of comprehensive
income, which includes all changes in partners' capital with the exception
of additional investments by partners or distributions to partners.
Comprehensive income for the Partnership includes net income and the
change in net unrealized holding gains (losses) on investments charged or
credited to Partners' Capital. Comprehensive income for the quarters
ended March 31, 1998 and 1997 was as follows:
<TABLE>
<CAPTION>
For the For the
Quarter Ended Quarter Ended
Mar. 31, 1998 Mar. 31, 1997
--------------- ---------------
<S> <C> <C>
Net income $ 567,301 $ 758,281
Change in net unrealized holding gains (losses) 4,038 (15,847)
--------------- ---------------
Comprehensive income $ 571,339 $ 742,434
=============== ===============
</TABLE>
<PAGE> - 5 -
CAPITAL SOURCE L.P.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 1998
(UNAUDITED)
3. Partnership Income, Expenses and Cash Distributions
Profits and losses from normal operations and cash available for distribution
will be allocated 99% to the investors and 1% to the General Partners.
Certain fees payable to the General Partners will not become due until
investors have received certain priority returns. Cash distributions included
in the consolidated financial statements represent the actual cash
distributions made during each period and the cash distributions accrued at
the end of each period.
The General Partners will also receive 1% of the net proceeds from any sale
of Partnership assets. The General Partners will receive a termination fee
equal to 3% of all sales proceeds less actual costs incurred in connection
with all sales transactions, payable only after the investors have received a
return of their capital contributions and a 13% annual return on a cumulative
basis. The General Partners will also receive a fee equal to 9.1% of all
cash available for distribution and sales proceeds (after deducting from cash
available or sales proceeds any termination fee paid therefrom) after
investors have received a return of their capital contributions and a 13%
annual return on a cumulative basis.
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 quarter ended March 31, 1998. 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 in accordance with the terms of the respective Operating
Partnership's limited partnership agreement.
The General Partners are entitled to receive an asset management and
partnership administration fee equal to 0.5% of invested assets per annum,
payable only during such years that an 8% return has been paid to investors on
a noncumulative basis. Any unpaid amounts will accrue and be payable only
after a 13% annual return to investors has been paid on a cumulative basis and
the investors have received the return of their capital contributions. For
the quarter ended March 31, 1998, distributions to investors represented less
than an 8% return; accordingly, no fees were paid or accrued during this
period.
Amounts due to general partners and their affiliates at March 31, 1998, is
comprised of the following:
<TABLE>
<S> <C>
Unpaid property development and management fees $ 450,173
Operating deficit loans 3,563,553
---------------
$ 4,013,726
===============
</TABLE>
Substantially all of the Partnership's general and administrative expenses and
certain costs capitalized by the Partnership are paid by a General Partner or
an affiliate and reimbursed by the Partnership. The amount of such expenses
and costs reimbursed to the General Partner for 1998 was $363,427. Reimbursed
expenses are presented on a cash basis and do not reflect accruals made at
quarter end.
<PAGE> - 6 -
CAPITAL SOURCE L.P.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 1998
(UNAUDITED)
An affiliate of the General Partners has been retained to provide property
management services for Waterman's Crossing, Misty Springs Apartments, Fox
Hollow Apartments and The Ponds at Georgetown. The fees for services provided
in 1998, amounted to $48,616 and represented the lower of costs incurred in
providing management of the property or customary fees for such services
determined on a competitive basis.
5. Partnership Reserve Account
The Partnership maintains a reserve account which consisted of the following
at March 31, 1998:
<TABLE>
<S> <C>
Cash and temporary cash investments $ 9,675,936
GNMA Certificates 1,047,854
---------------
$ 10,723,790
===============
</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 March
31, 1998, the total amortized cost, gross unrealized holding gains and
aggregate fair value of available-for-sale securities were $1,000,200, $47,654
and $1,047,854, 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 March 31, 1998,
Partnership capital would increase by $13,846,450 ($4.06 per BAC).
The FHA Loans and the GNMA Certificates are collateralized by first mortgage
loans on the properties owned by the Operating Partnerships and are guaranteed
or insured as to principal and interest by FHA or GNMA. The FHA insured
mortgage loans are subject to a 1% assignment fee. The obligations of FHA and
GNMA are backed by the full faith and credit of the United States government.
<PAGE> - 7 -
CAPITAL SOURCE L.P.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 1998
(UNAUDITED)
Parent Company Only
Condensed Balance Sheets
<TABLE>
<CAPTION>
Mar. 31, 1998 Dec. 31, 1997
--------------- ---------------
<S> <C> <C>
Assets
Cash and temporary cash investments $ 10,218,941 $ 10,410,564
Investment in FHA Loans 12,491,321 12,511,046
Investment in GNMA Certificates 23,518,083 23,588,139
Investment in Operating Partnerships (13,846,450) (13,686,936)
Interest receivable 319,311 321,485
Other assets 285,139 134,574
--------------- ---------------
$ 32,986,345 $ 33,278,872
=============== ===============
Liabilities and Partners' Capital
Liabilities
Accounts payable $ 200,873 $ 204,142
Distributions payable 860,587 860,587
--------------- ---------------
1,061,460 1,064,729
Partners' Capital 31,924,885 32,214,143
--------------- ---------------
$ 32,986,345 $ 33,278,872
=============== ===============
</TABLE>
Parent Company Only
Condensed Statements of Income
<TABLE>
<CAPTION>
For the For the
Quarter Ended Quarter Ended
Mar. 31, 1998 Mar. 31, 1997
--------------- ---------------
<S> <C> <C>
Income
Mortgage and mortgage-backed securities income $ 800,397 $ 794,675
Interest on temporary cash investments 138,177 133,476
Interest on mortgage-backed securities 19,895 24,245
Equity in losses of Operating Partnerships (169,514) (74,392)
Other income 1,150 700
--------------- ---------------
790,105 878,704
Expenses
Operating and administrative 222,804 120,423
--------------- ---------------
Net income $ 567,301 $ 758,281
=============== ===============
</TABLE>
<PAGE> - 8 -
CAPITAL SOURCE L.P.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 1998
(UNAUDITED)
Parent Company Only
Condensed Statements of Cash Flows
<TABLE>
<CAPTION>
For the For the
Quarter Ended Quarter Ended
Mar. 31, 1998 Mar. 31, 1997
--------------- ---------------
<S> <C> <C>
Cash flows from operating activities
Net income $ 567,301 $ 758,281
Adjustments to reconcile net income to net cash
provided by operating activities:
Equity in losses of Operating Partnerships 169,514 74,392
Amortization 16,872 16,872
Amortization of discount on mortgage-backed securities (495) (707)
Other non-cash adjustments (168,532) (4,975)
--------------- ---------------
Net cash provided by operating activities 584,660 843,863
--------------- ---------------
Cash flows from investing activities
FHA Loan and GNMA Certificate principal payments 94,314 109,422
Investment in Operating Partnerships (10,000) (25,000)
--------------- ---------------
Net cash provided by investing activities 84,314 84,422
--------------- ---------------
Cash flow used in financing activity
Distributions (860,597) (860,597)
--------------- ---------------
Net increase (decrease) in cash and temporary cash investments (191,623) 67,688
Cash and temporary cash investments at beginning of period 10,410,564 10,272,497
--------------- ---------------
Cash and temporary cash investments at end of period $ 10,218,941 $ 10,340,185
=============== ===============
</TABLE>
7. Mortgage Loan Payable
The mortgage collateralized solely by Fox Hollow Apartments provides for
interest at 8.86%. Installments of principal and interest in the amount of
$49,947 are due on the first day of each month with the balance of principal
and interest due and payable no later than October 1, 2028. The mortgage loan
payable of $6,320,076 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.
8. Subsequent Event
On May 7, 1998, a Registration Statement on Form S-4 was filed by America
First Real Estate Investment Company, Inc. (the Company) with the Securities
and Exchange Commission which includes a consent solicitation statement of the
Partnership and Capital Source II L.P.-A, a sister partnership with assets and
investment objectives similar to the Partnership. Upon approval of the
proposed plan by investors in both partnerships, the partnerships will be
combined into the Company which will be engaged in the business of making
real estate and related investments. At their election and subject to certain
limitations, investors in each partnership will receive, in exchange for their
partnership units, shares of common stock in the Company (the Common Stock) or
variable rate notes (the Notes) of the Company. The Company intends to list
shares of Common Stock issued pursuant to the planned merger on a national
securities exchange.
<PAGE> - 9 -
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations
Liquidity and Capital Resources
The Partnership originally acquired: (i) five mortgage-backed securities
guaranteed as to principal and interest by the Government National Mortgage
Association (GNMA) collateralized by first mortgage loans on multifamily
housing properties located in five states; (ii) three first mortgage loans
insured as to principal and interest by the Federal Housing Administration
(FHA) on multifamily housing properties located in two states; and (iii)
Partnership Equity Investments in eight limited partnerships which own the
multifamily properties financed by the GNMA Certificates and FHA Loans. The
Partnership subsequently received FHA Debentures in payment of the FHA Loan on
Fox Hollow Apartments which were paid in full in 1993. In 1994, foreclosure
proceedings were initiated on Falcon Point Apartments and, accordingly, the
Partnership no longer holds a Partnership Equity Investment in this property.
In addition, during 1995, the GNMA Certificate related to Falcon Point
Apartments was paid-in-full to the Partnership. Collectively, the remaining
GNMA Certificates, FHA Loans and Partnership Equity Investments are referred
to as the "Permanent Investments". The Partnership has also invested amounts
held in its reserve account in certain GNMA securities backed by pools of
single-family mortgages (Reserve Investments). The obligations of GNMA and
FHA are backed by the full faith and credit of the United States government.
The FHA Loans, GNMA Certificates and Partnership Equity Investments in
Operating Partnerships represent the Partnership's principal assets as shown
in the Parent Company Only Financial Information in Note 6 to the financial
statements. The parent company information is presented using the equity
method of accounting for the investment in Operating Partnerships. Generally
accepted accounting principles, however, require that the Partnership's
financial statements consolidate the Operating Partnerships, since the
Partnership holds a majority ownership in each Operating Partnership and can
influence decisions of the general partners in certain circumstances.
The following FHA Loans and GNMA Certificates were owned by the Partnership at
March 31, 1998.
<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 $ 3,504,519
Highland Park Apartments FHA 8.75% 11-01-2028 8,986,802
Misty Springs Apartments GNMA 8.75% 06-15-2029 4,265,854
The Ponds at Georgetown GNMA 9.00% 12-15-2029 2,231,048
Waterman's Crossing GNMA 10.00% 09-15-2028 10,914,389
Water's Edge Apartments GNMA 8.75% 12-15-2028 5,058,938
Pools of single-family mortgages GNMA 7.58%(1) 2008 to 2009 524,758
Pools of single-family mortgages GNMA 7.58%(1) 2007 to 2008 523,096
---------------
$ 36,009,404
===============
</TABLE>
(1) Represents yield to the Partnership.
<PAGE> - 10 -
Distributions
Cash distributions paid or accrued per BAC were as follows:
<TABLE>
<CAPTION>
For the For the
Quarter Ended Quarter Ended
Mar. 31, 1998 Mar. 31, 1997
--------------- ---------------
<S> <C> <C>
Regular monthly distributions
Income $ .1664 $ .2225
Return of capital .0861 .0300
--------------- ---------------
$ .2525 $ .2525
=============== ===============
Distributions
Paid out of cash flow $ .2525 $ .2525
=============== ===============
</TABLE>
Regular quarterly distributions to BAC Holders consist primarily of interest
received on FHA Loans and GNMA Certificates. Additional cash for
distributions is received from other temporary investments. The Partnership
may draw on reserves to pay operating expenses or to supplement cash
distributions to BAC Holders. The Partnership is permitted to replenish
reserves with cash flows in excess of distributions paid. For the quarter
ended March 31, 1998, a net amount of $12,596 of undistributed cash flow was
withdrawn from reserves. The total amount held in reserves at March 31, 1998,
was $10,723,790 of which $1,047,854 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 overall status of the Partnership's investments has remained relatively
constant since December 31, 1997.
<PAGE> - 11 -
The following table shows the occupancy levels of the properties financed by
the Partnership at March 31, 1998:
<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 108 104 96%
Fox Hollow Apartments High Point, NC 184 173 94%
Highland Park Apartments Columbus, OH 252 234 93%
Misty Springs Apartments Daytona Beach, FL 128 127 99%
The Ponds at Georgetown Ann Arbor, MI 134 131 98%
Waterman's Crossing Newport News, VA 260 252 97%
Water's Edge Apartments Lake Villa, IL 108 107 99%
------------- ------------ ------------
1,174 1,128 96%
============= ============ ============
</TABLE>
Results of Operations
The table below compares the results of operations for each period shown.
<TABLE>
<CAPTION>
For the For the Increase
Quarter Ended Quarter Ended (Decrease)
Mar. 31, 1998 Mar. 31, 1997 From 1997
--------------- --------------- ---------------
<S> <C> <C> <C>
Rental income $ 1,894,782 $ 1,827,184 $ 67,598
Mortgage-backed securities income 19,895 24,245 (4,350)
Interest on temporary cash investments 141,288 143,363 (2,075)
Other income 77,879 90,024 (12,145)
--------------- --------------- ---------------
2,133,844 2,084,816 49,028
--------------- --------------- ---------------
Real estate operating expenses 950,856 819,400 131,456
Depreciation 224,686 224,392 294
Interest expense 149,841 149,841 -
Investor servicing 126,562 86,137 40,425
Professional fees 12,775 15,850 (3,075)
Other expenses 66,596 1,565 65,031
Amortization 35,369 34,199 1,170
--------------- --------------- ---------------
1,566,685 1,331,384 235,301
--------------- --------------- ---------------
Minority interest in losses of Operating Partnerships 142 4,849 (4,707)
--------------- --------------- ---------------
Net income $ 567,301 $ 758,281 $ (190,980)
=============== =============== ===============
</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 $65,322 for the quarter ended March 31, 1998,
compared to the same period in 1997. Although rental income increased 3.7%
during the quarter, this increase was more than offset by an increase in real
estate operating expenses and a slight increase in depreciation and
amortization. The increase in rental income was primarily due to an increase
in occupancy at certain properties. The increase in real estate operating
expenses was primarily attributable to an increase in salaries expense, real
estate taxes and property improvements at certain properties.
Mortgage-backed securities income decreased $4,350 for the quarter ended March
31, 1998, compared to the same period in 1997 due to the continued
amortization of the principal balance of the mortgage-backed securities.
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 decreased $12,145 for the quarter ended March 31,
1998, compared to the same period in 1997, due primarily to
decreases in corporate unit rentals.
<PAGE> - 12 -
Investor servicing costs increased $40,425 for the quarter ended March 31,
1998, compared to the same period in 1997. This increase is due to an
increase of approximately $46,000 in salaries and related expenses, which were
partially offset by a decrease of approximately $6,000 in other investor
servicing expenses.
Professional fees decreased $3,075 for the quarter ended March 31, 1998,
compared to the same period in 1997, primarily due to a decrease in legal
expenses. Other expenses increased $65,031 for the quarter ending March 31,
1998, compared to the same period in 1997, primarily due to an increase in
consulting fees and travel expenses.
This report contains forward looking statements that reflect management's
current beliefs and estimates of future economic circumstances, industry
conditions, the Partnership's performance and financial results. All
statements, trend analysis and other information concerning possible or
assumed future results of operations of the Partnership and the real estate
investments it has made (including, but not limited to, the information
contained in "Management's Discussion and Analysis of Financial Condition and
Results of Operations"), constitute forward-looking statements. BAC Holders
and others should understand that these forward looking statements are subject
to numerous risks and uncertainties and a number of factors could affect the
future results of the Partnership and could cause those results to differ
materially from those expressed in the forward looking statements contained
herein.
Item 3. Quantitative and Qualitative Disclosures About Market Risk.
The requirements of Item 3 of Form 10-Q are not applicable to the Partnership
prior to its Annual Report on Form 10-K for the year ending December 31, 1998.
<PAGE> - 13 -
PART II. OTHER INFORMATION
Item 5. Other Information
On May 7, 1998, a Registration Statement on Form S-4 was filed
by America First Real Estate Investment Company, Inc. (the
Company) with the Securities and Exchange Commission which
includes a consent solicitation statement of the Partnership
and Capital Source II L.P.-A, a sister partnership with assets
and investment objectives similar to the Partnership. Upon
approval of the proposed plan by investors in both
partnerships, the partnerships will be combined into the
Company which will be engaged in the business of making real
estate and related investments. At their election and subject
to certain limitations, investors in each partnership will
receive, in exchange for their partnership units, shares of
common stock in the Company (the Common Stock) or variable rate
notes (the Notes) of the Company. The Company intends to list
shares of Common Stock issued pursuant to the planned merger on
a national securities exchange.
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
4(a) Agreement of Limited Partnership of Capital Source
L.P. (incorporated herein by reference from Exhibit A of
the Prospectus contained in the Registrant's
Post-Effective Amendment No. 3 dated May 15, 1986 to the
Registration Statement on Form S-11 (Commission File No.
0-16497)).
4(b) Beneficial Assignment Certificate (incorporated by
reference to page 47 of Form 10-K for the fiscal year
ended December 31, 1989 filed with the Securities and
Exchange Commission by the Registrant (Commission File No.
0-16497)).
(b) Form 8-K
The registrant did not file a report on Form 8-K during the
quarter for which this report is filed.
<PAGE> - 14 -
SIGNATURES
Pursuant to the requirements of 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 and
Principal Financial Officer
Dated: May 13, 1998
<PAGE> - 15 -
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-END> MAR-31-1998
<CASH> 10,218,941
<SECURITIES> 1,047,854
<RECEIVABLES> 190,094
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 10,409,035
<PP&E> 40,635,383
<DEPRECIATION> (11,055,886)
<TOTAL-ASSETS> 44,809,227
<CURRENT-LIABILITIES> 2,358,332
<BONDS> 0
<COMMON> 0
0
0
<OTHER-SE> 31,924,885
<TOTAL-LIABILITY-AND-EQUITY> 44,809,227
<SALES> 0
<TOTAL-REVENUES> 2,133,844
<CGS> 0
<TOTAL-COSTS> 0
<OTHER-EXPENSES> 1,416,844
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 149,841
<INCOME-PRETAX> 567,301
<INCOME-TAX> 0
<INCOME-CONTINUING> 567,301
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 567,301
<EPS-PRIMARY> 0
<EPS-DILUTED> 0
</TABLE>
