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
For the fiscal year ended December 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 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 4
Item 6. Selected Financial Data 5
Item 7. Management's Discussion and Analysis of Financial Condition and
Results of Operations 5
Item 7A. Quantitative and Qualitative Disclosures About Market Risk 12
Item 8. Financial Statements and Supplementary Data 12
Item 9. Changes in and Disagreements With Accountants on Accounting and
Financial Disclosure 12
PART III
Item 10. Directors and Executive Officers of Registrant 13
Item 11. Executive Compensation 15
Item 12. Security Ownership of Certain Beneficial Owners and Management 15
Item 13. Certain Relationships and Related Transactions 15
PART IV
Item 14. Exhibits, Financial Statement Schedules and Reports on Form 8-K 16
SIGNATURES 31
<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. The Partnership originally intended to
qualify the BACs for quotation on NASDAQ within 24 to 36 months after it
commenced operations in order to make the BACs freely transferable. However,
at a Special Meeting of BAC Holders on May 17, 1990, an amendment to the
Partnership Agreement was approved to only allow limited transferability of
BACs to preserve the tax status of the Partnership and avoid being designated
as a "publicly traded partnership".
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.
On May 7, 1998, a registration statement on Form S-4 was filed with the
Securities and Exchange Commission by America First Real Estate Investment
Company, Inc. (AFRIC) relating to a proposed merger of the Registrant and
Capital Source, L.P. II-A into AFRIC which was formed for the purpose of
making opportunistic, growth-oriented real estate investments. Due to
significant changes in the United States equity and real estate markets in the
Fall of 1998, the general partners of the Registrant have reevaluated the
terms of the proposed merger and have decided to restructure it so that the
resulting entity is a publicly-traded limited partnership that will primarily
invest in residential apartment complexes and other commercial real estate.
Therefore, the investment objectives of the new limited partnership will be
substantially similar to those of the Registrant. The proposed merger will be
subject to the consent of the BAC holders of the Registrant and Capital
Source, L.P. II-A.
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, 1998, 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").
<PAGE> - 1 -
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
area 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 property location, condition and property amenities.
The Registrant believes that each of its properties is in compliance in
all material respects with federal, state and local regulations regarding
hazardous waste and other environmental matters and the Registrant is not
aware of any environmental contamination at any of such properties that would
require any material capital expenditure by the Registrant for the remediation
thereof.
The Registrant is engaged solely in the business of owning mortgages and
holding equity interests in real estate limited partnerships. 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.
At December 31, 1998, the Registrant had one employee. In addition,
certain services are provided to the Registrant by employees of America First
Companies L.L.C. which is an affiliate of the general partners of the
Registrant, and the Registrant reimburses America First Companies L.L.C. for
such services at cost. The Registrant is not charged and does not reimburse
for the services performed by managers and officers of America First Companies
L.L.C..
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 up to a 99% interest in six multifamily apartment projects. In addition,
the Registrant owns a 30.29% interest in another multifamily apartment project
known as The Ponds at Georgetown. The multifamily apartment projects are
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 $ 2,835,474
Fox Hollow Apartments High Point, NC 184 877 4,373,091
Highland Park Apartments Columbus, OH 252 891 5,630,473
Misty Springs Apartments Daytona Beach, FL 128 786 3,114,439
The Ponds at Georgetown Ann Arbor, MI 134 1,002 5,406,133
Waterman's Crossing Newport News, VA 260 944 7,587,504
Water's Edge Apartments Lake Villa, IL 108 814 4,125,093
-------- ---------------
1,174 $ 33,072,207
======== ===============
</TABLE>
Depreciation is taken by the Operating Partnerships 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.
<PAGE> - 2 -
The average annual occupancy rate and average effective rental rate per
unit for each of the properties for each of the last five years are listed in
the following table:
<TABLE>
<CAPTION>
1998 1997 1996 1995 1994
---------- ---------- ---------- ---------- ----------
<S> <C> <C> <C> <C> <C>
BLUFF RIDGE APARTMENTS
Average Occupancy Rate 99% 96% 94% 94% 92%
Average Effective Annual Rental Per Unit $6,644 $6,258 $5,792 $5,755 $5,622
FOX HOLLOW APARTMENTS
Average Occupancy Rate 95% 96% 95% 97% 97%
Average Effective Annual Rental Per Unit $6,480 $6,482 $6,360 $6,176 $6,102
HIGHLAND PARK APARTMENTS
Average Occupancy Rate 95% 93% 95% 97% 97%
Average Effective Annual Rental Per Unit $6,392 $6,333 $6,171 $6,071 $5,974
MISTY SPRINGS APARTMENTS
Average Occupancy Rate 100% 98% 94% 97% 97%
Average Effective Annual Rental Per Unit $6,509 $6,101 $5,574 $5,809 $5,589
THE PONDS AT GEORGETOWN
Average Occupancy Rate 99% 97% 95% 95% 95%
Average Effective Annual Rental Per Unit $10,362 $9,883 $9,515 $9,174 $8,955
WATERMAN'S CROSSING
Average Occupancy Rate 100% 98% 96% 95% 96%
Average Effective Annual Rental Per Unit $7,535 $7,207 $6,841 $6,737 $6,580
WATER'S EDGE APARTMENTS
Average Occupancy Rate 96% 96% 91% 97% 98%
Average Effective Annual Rental Per Unit $9,274 $8,723 $8,169 $8,559 $8,123
</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". A discussion of general competitive conditions to
which these properties are subject is included in Item 1 hereof.
Item 3. Legal Proceedings.
The Registrant has been named as a defendant in a purported class action
lawsuit filed in the Delaware Court of Chancery on February 3, 1999 by two BAC
holders, Alvin M. Panzer and Sandra G. Panzer, against the Registrant, its
general partners, America First and various of their affiliates (including
Capital Source, L.P. II-A, a similar partnership with general partners that
are affiliates of America First) and Lehman Brothers, Inc. The plaintiffs seek
to have the lawsuit certified as a class action on behalf of all BAC holders
of the Registrant and Capital Source, L.P. II-A. The lawsuit alleges, among
other things, that a proposed merger transaction involving the Registrant and
Capital Source, L.P. II-A is deficient and coercive, that the defendants have
breached the terms of the Registrant's partnership agreement and that the
defendants have acted in manners which violate their fiduciary duties to the
BAC holders. The plaintiffs seek to enjoin the proposed merger transaction
and to appoint an independent BAC holder representative to investigate
alternative transactions. The lawsuit also requests a judicial dissolution of
the Registrant, an accounting, and unspecified damages and costs.
There are no other 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 1998 to a vote of the Registrant's
security holders.
<PAGE> - 3 -
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.
In the event the General Partners have reason to believe that a
requested sale, transfer or assignment of BACs would cause the
Partnership to be characterized as a publicly traded partnership for
federal income tax purposes, the General Partners will, pursuant to their
powers under Section 5.09 of the Partnership Agreement, refuse to process
such requested sale, transfer or assignment unless the General Partners
receive an unqualified opinion of Counsel to the effect that such sale,
transfer or assignment of BACs, would not cause the Partnership to be
characterized as a publicly traded partnership for federal income tax
purposes. Neither the General Partners nor the Partnership may be held
liable for any losses resulting to a holder of BACs or a purchaser of
Units as a result of a requested sale, transfer or assignment of BACs not
being processed due to these limitations.
The foregoing restrictions are intended to prevent the trading
volume of BACs from reaching a level that would cause the Partnership to
be characterized as a publicly traded partnership under Section 7704 of
the Code. In the event the Partnership were characterized as a publicly
traded partnership, the Partnership could be subject to entity level
taxation. In such event, amounts otherwise distributable to holders of
BACs would be used to satisfy federal income tax liabilities of the
Partnership and, thus, amounts received by holders of BACs would be less
than anticipated.
(b) Investors. The approximate number of BAC Holders on December
31, 1998, was 5,571.
(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, 1998, and December 31, 1997, equaled $3,407,963
and 3,407,965 respectively. The cash distributions paid per BAC during
the fiscal years ended December 31, 1998, and December 31, 1997
were as follows:
<TABLE>
<CAPTION>
Per BAC
Year Ended Year Ended
December 31, 1998 December 31, 1997
----------------- -----------------
<S> <C> <C>
Income .5582 $ .8952
Return of Capital .4518 .1148
----------------- -----------------
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 1999 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, 1998 Dec. 31, 1997 Dec. 31, 1996 Dec. 31, 1995 Dec. 31, 1994
------------- ------------- ------------- ------------- -------------
<S> <C> <C> <C> <C> <C>
Mortgage-backed securities income $ 3,262,922 $ 3,302,727 $ 3,340,747 $ 3,895,475 $ 3,924,176
Interest income on temporary cash investments
and U.S. government securities 530,396 554,604 523,636 193,257 130,252
Equity in losses of Operating Partnerships (186,942) (178,550) (257,512) (255,500) (232,361)
Other income 6,300 5,334 9,749 3,950 2,400
Operating and administrative expenses (1,710,173) (632,894) (429,313) (365,125) (359,592)
------------- ------------- ------------- ------------- -------------
Net income $ 1,902,503 $ 3,051,221 $ 3,187,307 $ 3,472,057 $ 3,464,875
============= ============= ============= ============= =============
Net income, basic and diluted, per
Beneficial Assignment Certificate (BAC) $ .56 $ .90 $ .94 $ 1.02 $ 1.02
============= ============= ============= ============= =============
Cash distributions paid or accrued per BAC $ 1.0100 $ 1.0100 $ 1.0100 $ 1.0100 $ 1.0100
============= ============= ============= ============= =============
Investment in FHA Loans $ 12,429,485 $ 12,511,046 $ 12,585,755 $ 12,654,188 $ 12,716,874
============= ============= ============= ============= =============
Investment in GNMA Certificates $ 23,454,411 $ 23,588,139 $ 23,937,795 $ 24,388,920 $ 31,770,666
============= ============= ============= ============= =============
Total assets $ 45,707,177 $ 46,965,808 $ 47,248,776 $ 47,541,721 $ 47,448,997
============= ============= ============= ============= =============
</TABLE>
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 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.
<PAGE> - 5 -
Distributions
Cash distributions paid or accrued per BAC were as follows:
<TABLE>
<CAPTION>
For the For the For the
Year Ended Year Ended Year Ended
Dec. 31, 1998 Dec. 31, 1997 Dec. 31, 1996
--------------- --------------- ---------------
<S> <C> <C> <C>
Regular monthly distributions
Income $ .5582 $ .8952 $ .9352
Return of capital .4518 .1148 .0748
--------------- --------------- ---------------
$ 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 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 year ended
December 31, 1998, a net amount of $1,334,522 of undistributed cash flow was
added to reserves. The total amount held in reserves at December 31, 1998,
was $9,229,246 of which $879,182 was invested in GNMA Certificates.
The Partnership believes that cash provided by operating and investing
activities and, if necessary, withdrawals from the Partnership's reserves will
be adequate to meet its short-term and long-term liquidity requirements,
including the payments of distributions to BAC Holders. Under the terms of
the Partnership Agreement, the Partnership has the authority to enter into
short-term and long-term debt financing arrangements; however, the Partnership
currently does not anticipate entering into such arrangements. The
Partnership is not authorized to issue additional BACs to meet short-term and
long-term liquidity requirements.
Asset Quality
The FHA Loans and GNMA Certificates owned by the Partnership are guaranteed as
to principal and interest by FHA and GNMA, respectively. The obligations of
FHA and GNMA are backed by the full faith and credit of the United States
government. The Partnership Equity Investments, however, are not insured or
guaranteed. The value of these investments is a function of the value of the
real estate owned by the Operating Partnerships.
The fair value of the properties underlying the Operating Partnerships is
based on management's best estimate of the fair value of such properties,
however; the ultimate realized values may vary from these estimates. The fair
value of the properties is determined based on the discounted estimated future
cash flows from the properties, including estimated sales proceeds. The
calculation of discounted estimated future cash flows includes certain
variables such as the assumed inflation rates for rents and expenses,
capitalization rates and discount rates. These variables are supplied to
management by an independent real estate firm and are based on local market
conditions for each property. In certain cases, additional factors such as
the replacement value of the property or comparable sales of similar
properties are also taken into consideration.
<PAGE> - 6 -
The following table shows the occupancy levels of the properties financed by
the Partnership at December 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 108 107 99%
Fox Hollow Apartments High Point, NC 184 177 96%
Highland Park Apartments Columbus, OH 252 236 94%
Misty Springs Apartments Daytona Beach, FL 128 126 98%
The Ponds at Georgetown Ann Arbor, MI 134 133 99%
Waterman's Crossing Newport News, VA 260 260 100%
Water's Edge Apartments Lake Villa, IL 108 105 97%
------------- ------------ ------------
1,174 1,144 97%
============= ============ ============
</TABLE>
The following sets forth certain information regarding the properties financed
by the Partnership:
Bluff Ridge Apartments
Bluff Ridge Apartments is a 108-unit complex located in Jacksonville, North
Carolina. Average occupancy was 99% in 1998, compared to 96% in 1997.
Operations at Bluff Ridge are heavily dependent on demand from the local
military personnel. The Jacksonville rental market has remained relatively
stable throughout 1998. Operating revenue increased as a result of rental
rate increases and an increase in average occupancy. In addition, real estate
operating costs decreased primarily due to a decrease in repairs and
maintenance expenses and property improvements. As a result, net operating
income, excluding interest, depreciation and amortization, increased
approximately 3% from 1997 to 1998. The property was current on its debt
service payments during 1998.
Fox Hollow Apartments
Fox Hollow Apartments is a 184-unit apartment community located in High Point,
North Carolina. Average occupancy was 95% in 1998, compared to 96% in 1997.
Excluding interest, depreciation and amortization, net operating income
increased approximately 19% from 1997 to 1998. This increase was primarily
due to a decrease in repairs and maintenance expenses and a slight increase in
rental revenues due to rental rate increases. The property remained in
compliance with the terms of the Loan Modification Agreement (LMA) entered
into with the mortgage holder in 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.
Highland Park Apartments
Highland Park Apartments contains 252 luxury garden apartments and is located
in Columbus, Ohio. Average occupancy was 95% in 1998, compared to 93% in
1997. Excluding interest, depreciation and amortization, net operating income
decreased approximately 5% from 1997 to 1998. This decrease is primarily due
to an increase in real estate operating expenses of approximately 9% which was
partially offset by a 1% increase in rental revenue resulting primarily from
the increase in average occupancy. The increases in real estate operating
expenses resulted from higher repairs and maintenance expenses and advertising
costs which were partially offset by a decrease in other administrative
expenses. The property remained current on its mortgage obligations
throughout 1998.
<PAGE> - 7 -
Misty Springs Apartments
Misty Springs Apartments is a 128-unit apartment community located in Daytona
Beach, Florida. Average occupancy was 100% in 1998, compared to 98% in 1997.
Net operating income, excluding interest, depreciation and amortization, was
approximately 5% lower in 1998, compared to 1997. This decrease resulted from
a 14% increase in real estate operating expenses which was partially offset by
an increase of approximately 5% in operating revenue. Real estate operating
expenses were higher primarily due to increases in salaries and related
expenses and repairs and maintenance expenses which were partially offset by a
9% decrease in administrative expenses. The increase in operating revenue was
due primarily to the increase in average occupancy. Shortfalls of $10,000
were funded by the Partnership reserves in 1998.
At December 31, 1998, the operating partnership was in compliance with the
terms of a Reinstatement Agreement entered into in 1993. The Operating
Partnership was current on its debt service payments on its mortgage loan
during 1998.
The Ponds at Georgetown
The Ponds at Georgetown consists of 134 apartments located in Ann Arbor,
Michigan. Average occupancy was 99% in 1998, compared to 97% in 1997. Rental
revenue increased approximately 3.5% in 1998, compared to 1997, primarily due
to the increase in average occupancy while real estate operating expenses
increased approximately 8%. The increase in real estate operating expenses
was primarily due to an 8% increase in repairs and maintenance expenses which
was partially offset by a 17% decrease in real estate taxes. As previously
disclosed, the mortgage loan for the Ponds at Georgetown was restructured in
September 1998 which lowered the interest rate from 9.25% to 7.85%. In
connection with the restructuring, shortfalls of $176,942 were funded by the
Partnership's reserves. As a result of restructuring the mortgage loan, cash
flow from the property is now anticipated to be sufficient to cover all the
operating partnership's cash needs, including mortgage payments and taxes.
The property was current on its mortgage obligations as of December 31, 1998.
Waterman's Crossing
Waterman's Crossing is a 260-unit apartment community located in Newport News,
Virginia. Average occupancy was 100% in 1998, compared to 98% in 1997. The
operating partnership was current on its mortgage obligations in 1998.
Excluding interest, depreciation and amortization, operating income increased
6% from 1997 to 1998. This increase was primarily due to reductions of
approximately 5% in repairs and maintenance expenses and 11%
in advertising expenses. These decreases were partially offset by an
increase in administrative expenses of approximately 6% and an increase in
operating revenue of approximately 4%. The increase in operating revenue
resulted primarily from the increase in average occupancy.
Water's Edge Apartments
Water's Edge Apartments is a 108-unit apartment complex located in Lake Villa,
Illinois. Average occupancy was 96% in 1998 and 1997. Net operating income,
excluding interest, depreciation and amortization, increased approximately 2%
in 1998 compared to 1997. This increase is primarily attributable to higher
operating revenue due primarily to the increase in average occupancy. The
operating partnership remained current on its mortgage obligations in 1998.
<PAGE> - 8 -
Results of Operations
The tables below compare the results of operations for each year shown.
<TABLE>
<CAPTION>
For the For the For the
Year Ended Year Ended Year Ended
Dec. 31, 1998 Dec. 31, 1997 Dec. 31, 1996
--------------- --------------- ---------------
<S> <C> <C> <C>
Mortgage-backed securities income $ 3,262,922 $ 3,302,727 $ 3,340,747
Interest income on temporary cash investments
and U.S. government securities 530,396 554,604 523,636
Equity in losses of Operating Partnerships (186,942) (178,550) (257,512)
Other income 6,300 5,334 9,749
-------------- --------------- ---------------
3,612,676 3,684,115 3,616,620
Operating and administrative expenses 1,710,173 632,894 429,313
-------------- --------------- ---------------
Net income $ 1,902,503 $ 3,051,221 $ 3,187,307
============== =============== ===============
</TABLE>
<TABLE>
<CAPTION>
Increase Increase
(Decrease) (Decrease)
From 1997 From 1996
--------------- ---------------
<S> <C> <C>
Mortgage-backed securities income $ (39,805) $ (38,020)
Interest income on temporary cash investments
and U.S. government securities (24,208) 30,968
Equity in losses of Operating Partnerships (8,392) 78,962
Other income 966 (4,415)
-------------- ---------------
(71,439) 67,495
Operating and administrative expenses 1,077,279 203,581
-------------- ---------------
Net income $ (1,148,718) $ (136,086)
============== ===============
</TABLE>
Mortgage-backed securities income decreased $39,805 from 1997 to 1998 and
$38,020 from 1996 to 1997, due to the continued amortization of the principal
balances of the Partnership's mortgage-backed securities.
Interest income on temporary cash investments and U.S. government securities
decreased $24,208 from 1997 to 1998 due to a decrease in the average cash
balance primarily due to additional equity contributions made to The Ponds at
Georgetown and an increased investment in The Ponds at Georgetown GNMA
Certificate.
Interest income on temporary cash investments and U.S. government securities
increased $30,968 from 1996 to 1997 due to an increase in the Partnership's
cash reserve as additional cash was placed in reserves during 1996 and 1997.
The Partnership suspended recognizing losses in the Operating Partnerships
when its entire initial investment had been consumed by such losses.
Subsequently, losses have been recognized only to the extent of additional
contributions, net of distributions received, to the Operating Partnerships
by the Partnership.
The Partnership made additional investments in certain Operating Partnerships
of $186,942, $178,550, and $334,745 during 1998, 1997 and 1996, respectively.
During 1996, the Partnership received a distribution of $77,233 from one of
the Operating Partnerships. The Partnership recorded equity in losses of
Operating Partnerships for 1998, 1997, and 1996 to the extent of the
additional investments in Operating Partnerships, net of distributions
received.
<PAGE> - 9 -
Operating and administrative expenses increased $1,077,279 from 1997 to 1998.
This increase was due to: (i) the write-off of approximately $767,000 in
transaction costs incurred in conjunction with the proposed merger described
in Note 9 to the financial statements; (ii) an increase of approximately
$273,000 in salaries and related expenses primarily due to additional
management time incurred in conjunction with the aforementioned proposed
merger; (iii) an increase of approximately $30,000 in fees and expenses
incurred in connection with a review of various options for restructuring the
Partnership to improve total investment returns and provide liquidity to the
Partnership's investors and (iv) an increase of approximately $7,000 in other
operating and administrative expenses. Operating and administrative expenses
increased $203,581 from 1996 to 1997 primarily due to: (i) and increase of
approximately $137,000 in salaries and related expenses, and (ii) an increase
of approximately $44,000 in professional fees incurred in connection with a
review of various options available to the Partnership to improve total
investment returns and provide liquidity to the Partnership's investors and
(iii) an increase of approximately $23,000 in other operating and
administrative expenses.
Year 2000
The Partnership does not own or operate its own computer system and owns no
business or other equipment. However, the operation of the Partnership's
business relies on the computer system and other equipment maintained by
America First Companies L.L.C., the parent company of its general partners
("America First"). In addition, the Partnership has business relationships
with a number of third parties whose ability to perform their obligations to
the Partnership depend on such systems and equipment. Some or all of these
systems and equipment may be affected by the inability of certain computer
programs and embedded circuitry to correctly recognize dates occurring after
December 31, 1999. America First has adopted a plan to deal with this
so-called "Year 2000 problem" with respect to its information technology
("IT") systems, non-IT systems and third party business relationships.
State of Readiness
The IT system maintained by America First consists primarily of personal
computers, most of which are connected by a local area network. All
accounting and other record keeping functions relating to the Partnership that
are conducted in house by America First are performed on this PC-LAN system.
America First does not own or operate any "mainframe" computer systems. The
PC-LAN system runs software programs that America First believes are
compatible with dates after December 31, 1999. America First has engaged a
third party computer consulting firm to review and test its PC-LAN system to
ensure that it will function correctly after that date and expects that this
process, along with any necessary remediation, will be completed by
mid-1999. America First believes any Year 2000 problems relating to its IT
systems will be resolved without significant operational difficulties.
However, there can be no assurance that testing will discover all potential
Year 2000 problems or that it will not reveal unanticipated material problems
with the America First IT systems that will need to be resolved.
Non-IT systems include embedded circuitry such as microcontrollers found in
telephone equipment, security and alarm systems, copiers, fax machines, mail
room equipment, heating and air conditioning systems and other infrastructure
systems that are used by America First in connection with the operation of the
Partnership's business. America First is reviewing its non-IT systems along
with the providers that service and maintain these systems, with initial
emphasis being placed on those, such as telephone systems, which have been
identified as necessary to America First's ability to conduct the operation of
the Partnership's business activities. America First expects that any
necessary modification or replacement of such "mission critical" systems will
be accomplished by mid-1999.
<PAGE> - 10 -
The Partnership has no control over the remediation efforts of third parties
with which it has material business relationships and the failure of certain
of these third parties to successfully remediate their Year 2000 issues could
have a material adverse effect on the Partnership. Accordingly, America First
has undertaken the process of contacting each such third party to determine
the state of their readiness for Year 2000. Such parties include, but are not
limited to, the obligors on the Partnership's GNMA Certificates and FHA Loans,
the Partnership's transfer and paying agent and the financial institutions
with which the Partnership maintains accounts. America First has received
initial assurances from certain of these third parties that their ability to
perform their obligations to the Partnership are not expected to be materially
adversely affected by the Year 2000 problem. America First will continue to
request updated information from these material third parties in order to
access their Year 2000 readiness. If a material third party vendor is unable
to provide assurance to America First that it is, or will be, ready for Year
2000, America First intends to seek an alternative vendor to the extent
practical.
Costs
All of the IT systems and non-IT systems used to conduct the Partnership's
business operations are owned or leased by America First. Under the terms of
its partnership agreement, neither America First nor the Partnership's general
partners may be reimbursed by the Partnership for expenses associated with
their computer systems or other business equipment. Therefore, the costs
associated with the identification, remediation and testing of America First's
IT and non-IT systems will be paid by America First rather than the
Partnership. The Partnership will bear its proportionate share of the costs
associated with surveying the Year 2000 readiness of third parties. However,
the Partnership's share of the costs associated with these activities are
expected to be insignificant. Accordingly, the costs associated with
addressing the Partnership's Year 2000 issues are not expected to have a
material effect on the Partnership's results of operations, financial position
or cash flow.
Year 2000 Risks
The Partnership's general partners believe that the most reasonably likely
worst-case scenario will be that one or more of the third parties with which
it has a material business relationship will not have successfully dealt with
its Year 2000 issues and, as a result, is unable to provide services or
otherwise perform its obligations to the Partnership. For example, if an
obligor on the Partnership's GNMA Certificates or FHA Loan encounters a
serious and unexpected Year 2000 issue, it may be unable to make a timely
payment of principal and interest to the Partnership. This, in turn, could
cause a delay or temporary reduction in cash distributions to BAC holders. In
addition, if the Partnership's transfer and paying agent experiences Year
2000-related difficulties, it may cause delays in making distributions to BAC
holders or in the processing of transfers of BACs. It is also possible that
one or more of the IT and non-IT systems of America First will not function
correctly, and that such problems may make it difficult to conduct necessary
accounting and other record keeping functions for the Partnership. However,
based on currently available information, the general partners do not believe
that there will be any protracted systemic failures of the IT or non-IT
systems utilized by America First in connection with the operation of the
Partnership's business.
Contingency Plans
Because of the progress which America First has made toward achieving Year
2000 readiness, the Partnership has not made any specific contingency plans
with respect to the IT and non-IT systems of America First. In the event of a
Year 2000 problem with its IT system, America First may be required to
manually perform certain accounting and other record-keeping functions.
America First plans to terminate the Partnership's relationships with material
third party service providers that are not able to represent to America First
that they will be able to successfully resolve their material Year 2000 issues
in a timely manner. However, the Partnership will not be able to terminate
its relationships with certain third parties, such as the obligors on its GNMA
Certificates and FHA Loans, who may experience Year 2000 problems. The
Partnership has no specific contingency plans for dealing with Year 2000
problems experienced with these third parties.
<PAGE> - 11 -
All forecasts, estimates or other statements in this report relating to the
Year 2000 readiness of the Partnership and its affiliates are based on
information and assumptions about future events. Such "forward-looking
statements" are subject to various known and unknown risks and uncertainties
that may cause actual events to differ from such statements. Important
factors upon which the Partnership's Year 2000 forward-looking statements are
based include, but are not limited to, (a) the belief of America First that
the software used in IT systems is already able to correctly read and
interpret dates after December 31, 1999 and will require little or any
remediation; (b) the ability to identify, repair or replace mission critical
non-IT equipment in a timely manner, (c) third parties' remediation of their
internal systems to be Year 2000 ready and their willingness to test their
systems interfaces with those of America First, (d) no third party system
failures causing material disruption of telecommunications, data transmission,
payment networks, government services, utilities or other infrastructure, (e)
no unexpected failures by third parties with which the Partnership has a
material business relationship and (f) no material undiscovered flaws in
America First's Year 2000 testing process.
Forward Looking Statements
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 7A. Quantitative and Qualitative Disclosures About Market Risk.
The Partnership's primary market risk exposure is interest rate risk. The
Partnerhsip's exposure to market risk for changes in interest rates relates
primarily to its investment securities which is comprised of investments in
debt securities with fixed interest rates. The Partnership does not use
derivative financial instruments to hedge its investment portfolio.
The table below presents principal amounts and weighted average interest rates
by year of maturity for the Partnership's investment portfolio:
<TABLE>
<CAPTION>
Principal Weighted Average
Maturity Amount Interest Rate
------------ ----------------- -----------------
<C> <C> <C>
1999 $ 216,559 8.82%
2000 238,486 8.81%
2001 260,774 8.81%
2002 285,159 8.81%
2003 311,840 8.80%
Thereafter 34,532,160 9.01%
</TABLE>
The aggregate fair value of the Partnership's investment securities at
December 31, 1998 was $36,129,123.
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, 1998 and 1997.
<PAGE> - 12 -
The information required by this Item 9 relating to a change in accountants
has been previously reported (as that term is defined by Rule 12a-2 of the
Exchange Act) with the Commission by the Partnership on its Current Report on
Form 8-K dated October 2, 1998, as amended, and is hereby incorporated by
reference.
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")
and Insured Mortgage Equities Inc. (the "IME General Partner"), each of which
is controlled by America First Companies L.L.C. ("America First").
Collectively, the America First General Partner and the IME General Partner
are referred to as the "General Partners".
The following individuals are the officers and directors of the General
Partners 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
Director of the IME General Partner 1997
Michael Thesing Vice President, Secretary, 1984
Treasurer and Manager of America First
Vice President, Secretary and 1991
Treasurer of the America First
General Partner
Vice President, Secretary and Treasurer 1997
of the IME General Partner
William S. Carter, M.D. 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>
<PAGE> - 13 -
Michael B. Yanney, 65, has served as the Chairman, President and Chief
Executive Officer of America First Companies L.L.C. and its predecessors since
1984. From 1977 until the organization of the first such fund in 1984, Mr.
Yanney was principally engaged in the ownership and management of commercial
banks. Mr. Yanney also has investments in private corporations engaged in a
variety of businesses. From 1961 to 1977, Mr. Yanney was employed by Omaha
National Bank and Omaha National Corporation (now part of U.S. Bank), 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, Level 3 Communications, Inc., Freedom Communications, Inc., Magnum
Resources, RCN Corporation, Rio Grande Medical Technologies, Inc. and PKS
Information Services, Inc..
Michael Thesing, 44, has been Vice President and Chief Financial Officer
of affiliates of America First Companies L.L.C. since July 1984. He serves as
President of America First Investment Advisors L.L.C. and is a member of the
Board of Managers of America First Companies L.L.C.. 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., 72, is a retired physician. Dr. Carter
practiced medicine for 30 years in Omaha, Nebraska, specializing in
otolaryngology (disorders of the ears, nose and throat).
Martin A. Massengale, 65, 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. and is a member of the Board
of Trustees of the Great Plains Funds, Inc.
Alan Baer, 76, 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, 62, 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, 38, is Vice President of Business Affairs and Chief
Financial Officer of Stanford University. Ms. Byerwalter was Executive Vice
President of America First Eureka Holdings, Inc. ("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. Ms.
Byerwalter currently serves on the board of directors of Redwood Trust, Inc.
<PAGE> - 14 -
Item 11. Executive Compensation. The Registrant does not have any
directors or officers. Certain services are provided to the Registrant by
managers and officers of America First. 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, 1998, is described in Note 7 to the Notes to the Financial
Statements filed in response to Item 8 hereof.
Item 12. Security Ownership of Certain Beneficial Owners and Management.
(a) No person is known by Registrant to own beneficially more than 5% of
the BACs.
(b) No director or officers of the General Partners or managers or
officers of America First own any BACs.
(c) There are no arrangements known to the Registrant, the operation of
which may at any subsequent date result in a change of 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 owned by America First. 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 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
1998, distributions to investors represented less than an 8% return;
accordingly, no fees were paid or accrued during 1998.
During 1998, the Registrant paid or reimbursed the General Partners
$1,305,744 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 7 to
Notes to Financial Statements filed in response to Item 8 hereof
for a description of these costs and expenses.
America First Properties Management Company, L.L.C. (the "Manager") has
been retained to provide property management services with respect to the
day-to-day operation of Waterman's Crossing, Misty Springs, Fox Hollow
Apartments and The Ponds at Georgetown. The 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 4% to 4.4% of
gross revenues. Because the Manager is an affiliate of the General Partners,
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, 1998, the Manager was paid property management fees of
$196,606.
<PAGE> - 15 -
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 Auditors' Report.
Balance Sheets of the Registrant as of December 31, 1998, and
December 31, 1997.
Statements of Income and Comprehensive Income of the Registrant
for the years ended December 31, 1998, December 31, 1997, and
December 31, 1996.
Statements of Partners' Capital (Deficit) of the Registrant for
the years ended December 31, 1998, December 31, 1997, and December
31, 1996.
Statements of Cash Flows of the Registrant for the years ended
December 31, 1998, December 31, 1997, and December 31, 1996.
Notes to Financial Statements of the Registrant.
2. Financial Statement Schedules. The information required to be
set forth in the financial statement schedules is shown in the Notes to
Financial Statements filed in response to Item 8 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
27. Financial Data Schedule
(b) The Registrant filed the following Form 8-K during the last
quarter of the period covered by this report:
<TABLE>
<S> <C> <C>
Financial Statements
Date of Report Item Reported Filed
- - -------------------- ------------- ---------------------
October 2, 1998 Item 4. Change in Registrant's No
Certifying Accountant
Item 5. Other Events
Item 7. Financial Statements & Exhibits
</TABLE>
<PAGE> - 16 -
INDEPENDENT AUDITORS' REPORT
To the Partners
Capital Source L.P.:
We have audited the accompanying balance sheets of Capital Source L.P. as of
December 31, 1998 and 1997, and the related statements of income and
comprehensive income, partners' capital (deficit) and cash flows for the three
years in the period ended December 31, 1998. These financial statements are
the responsibility of the Partnership's management. Our responsibility is to
express an opinion on these 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 financial statements referred to above present fairly, in
all material respects, the financial position of Capital Source L.P. as of
December 31, 1998 and 1997, and the results of its operations and its cash
flows for each of the three years in the period ended December 31, 1998, in
conformity with generally accepted accounting principles.
Omaha, Nebraska
March 19, 1999 /s/KPMG Peat Marwick LLP
<PAGE> - 17 -
CAPITAL SOURCE L.P.
BALANCE SHEETS
<TABLE>
<CAPTION>
Dec. 31, 1998 Dec. 31, 1997
--------------- ---------------
<S> <C> <C>
Assets
Cash and temporary cash investments, at cost which
approximates market value $ 9,304,694 $ 10,410,564
Investment in FHA Loans (Note 5) 12,429,485 12,511,046
Investment in GNMA Certificates (Note 5) 23,454,411 23,588,139
Investment in Operating Partnerships (Note 6) - -
Interest receivable 306,659 321,485
Other assets 211,928 134,574
--------------- ---------------
$ 45,707,177 $ 46,965,808
=============== ===============
Liabilities and Partners' Capital (Deficit)
Liabilities
Accounts payable (Note 7) $ 490,085 $ 204,142
Distribution payable (Note 4) 860,597 860,587
--------------- ---------------
$ 1,350,682 1,064,729
--------------- ---------------
Partners' Capital (Deficit)
General Partner (172,094) (156,647)
Beneficial Assignment Certificate Holders
($13.20 per BAC in 1998 and $13.65 in 1997) 44,528,589 46,057,726
--------------- ---------------
44,356,495 45,901,079
--------------- ---------------
$ 45,707,177 $ 46,965,808
=============== ===============
</TABLE>
CAPITAL SOURCE L.P.
STATEMENTS OF INCOME AND COMPREHENSIVE INCOME
<TABLE>
<CAPTION>
For the For the For the
Year Ended Year Ended Year Ended
Dec. 31, 1998 Dec. 31, 1997 Dec. 31, 1996
--------------- --------------- ---------------
<S> <C> <C> <C>
Income
Mortgage-backed securities income (Note 5) $ 3,262,922 $ 3,302,727 $ 3,340,747
Interest income on temporary cash investments
and U.S. government securities 530,396 554,604 523,636
Equity in losses of Operating Partnerships (Note 6) (186,942) (178,550) (257,512)
Other income 6,300 5,334 9,749
--------------- --------------- ---------------
3,612,676 3,684,115 3,616,620
Expenses
Operating and administrative expenses (Note 7) 1,710,173 632,894 429,313
--------------- --------------- ---------------
Net income 1,902,503 3,051,221 3,187,307
Other comprehensive income:
Unrealized gains (losses) on securities
Unrealized holding gains (losses) arising during the year (4,669) 2,114 (39,504)
--------------- --------------- ---------------
Net comprehensive income $ 1,897,804 $ 3,053,335 $ 3,147,803
=============== =============== ===============
Net income allocated to:
General Partner $ 19,025 $ 30,512 $ 31,873
BAC Holders 1,883,478 3,020,709 3,155,434
--------------- --------------- ---------------
$ 1,902,503 $ 3,051,221 $ 3,187,307
=============== =============== ===============
Net income, basic and diluted, per BAC $ .56 $ .90 $ .94
=============== =============== ===============
Weighted average number of BACs outstanding 3,374,222 3,374,222 3,374,222
=============== =============== ===============
The accompanying notes are an integral part of the financial statements.
</TABLE>
<PAGE> - 18 -
CAPITAL SOURCE L.P.
STATEMENT OF PARTNERS' CAPITAL (DEFICIT)
FROM DECEMBER 31, 1995 TO DECEMBER 31, 1998
<TABLE>
<CAPTION>
General BAC
Partners Holders Total
--------------- --------------- ---------------
<S> <C> <C> <C>
Partners' Capital (Deficit) (excluding accumulated
other comprehensive income)
Balance at December 31, 1995 $ (150,620) $ 46,654,333 $ 46,503,713
Net income 31,873 3,155,434 3,187,307
Cash distributions paid or accrued (Note 4) (34,424) (3,407,965) (3,442,389)
--------------- --------------- ---------------
Balance at December 31, 1996 (153,171) 46,401,802 46,248,631
Net income 30,512 3,020,709 3,051,221
Cash distributions paid or accrued (Note 4) (34,424) (3,407,965) (3,442,389)
--------------- --------------- ---------------
Balance at December 31, 1997 (157,083) 46,014,546 45,857,463
Net income 19,025 1,883,478 1,902,503
Cash distributions paid or accrued (Note 4) (34,425) (3,407,963) (3,442,388)
--------------- --------------- ---------------
(172,483) 44,490,061 44,317,578
--------------- --------------- ---------------
Accumulated Other Comprehensive Income
Balance at December 31, 1995 810 80,196 81,006
Other comprehensive income (395) (39,109) (39,504)
--------------- --------------- ---------------
Balance at December 31, 1996 415 41,087 41,502
Other comprehensive income 21 2,093 2,114
--------------- --------------- ---------------
Balance at December 31, 1997 436 43,180 43,616
Other comprehensive income (47) (4,652) (4,699)
--------------- --------------- ---------------
389 38,528 38,917
--------------- --------------- ---------------
Balance at December 31, 1998 $ (172,094) $ 44,528,589 $ 44,356,495
=============== =============== ===============
The accompanying notes are an integral part of the financial statements.
</TABLE>
<PAGE> - 19 -
CAPITAL SOURCE L.P.
STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
For the For the For the
Year Ended Year Ended Year Ended
Dec. 31, 1998 Dec. 31, 1997 Dec. 31, 1996
--------------- --------------- ---------------
<S> <C> <C> <C>
Cash flows from operating activities
Net income $ 1,902,503 $ 3,051,221 $ 3,187,307
Adjustments to reconcile net income to
net cash provided by operating activities
Equity in losses of Operating Partnerships 186,942 178,550 257,512
Amortization of discount on mortgage-backed securities (2,287) (2,665) (6,700)
(Decrease) increase in interest receivable 14,826 275 10,926
Decrease (increase) in other assets (77,354) (3,605) 67,223
Increase in accounts payable 285,943 106,086 1,641
--------------- --------------- ---------------
Net cash provided by operating activities 2,310,573 3,329,862 3,517,909
--------------- --------------- ---------------
Cash flows from investing activities
FHA Loan and GNMA principal payments received 2,635,396 429,144 491,754
Acquisition of GNMA Certificate (2,422,519) - -
Investments in Operating Partnerships (186,942) (178,550) (334,745)
Distributions received from Operating Partnerships - - 77,233
Maturity of U.S. government securities - - 1,000,000
--------------- --------------- ---------------
Net cash provided by investing activities 25,935 250,594 1,234,242
--------------- --------------- ---------------
Cash flows from financing activities
Distributions paid (3,442,378) (3,442,389) (3,442,389)
--------------- --------------- ---------------
Net increase in cash and temporary cash investments (1,105,870) 138,067 1,309,762
Cash and temporary cash investments at beginning of year 10,410,564 10,272,497 8,962,735
--------------- --------------- ---------------
Cash and temporary cash investments at end of year $ 9,304,694 $ 10,410,564 $ 10,272,497
=============== =============== ===============
The accompanying notes are an integral part of the financial statements.
</TABLE>
<PAGE> - 20 -
CAPITAL SOURCE L.P.
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1998
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 was formed to invest principally in federally-insured
mortgages on multifamily housing properties and limited partnership interests
in the operating partnerships which construct and operate these properties.
Each federally insured loan is guaranteed in amounts equal to the face amount
of the mortgage, by the Federal Housing Administration (FHA) or the Government
National Mortgage Association (GNMA). Hereinafter, the Partnership's
investments in such mortgages are referred to as investments in
mortgage-backed securities. The 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 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 and as a co-general partner of The Ponds at Georgetown.
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 financial statements of the Partnership are prepared on the accrual
basis of accounting in accordance with generally accepted accounting
principles.
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 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, as determined by reference
to published sources. Any unrealized gains or losses are excluded from
earnings and reflected in other comprehensive income. 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 in other comprehensive income. The Partnership does not have
investment securities classified as trading.
<PAGE> - 21 -
CAPITAL SOURCE L.P.
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1998
C) Investment in Operating Partnerships
The investment in Operating Partnerships consists of interests in limited
partnerships which own properties underlying the mortgage-backed securities
and are accounted for using the equity method. The investments
by the Partnership in the Operating Partnerships were recorded at the cost
to acquire such interests. Subsequently, losses were recorded by the
Partnership as they were realized by the Operating Partnerships. The
Partnership suspended recognizing losses in the Operating Partnerships
when its entire initial investment had been consumed by such losses.
Subsequently, losses have been recognized only to the extent of additional
contributions, net of distributions received, to the Operating Partnerships
by the Partnership. The Operating Partnerships are not insured or
guaranteed. The value of these investments is a function of the value of
the real estate underlying the Operating Partnerships. With regard to the
Operating Partnerships, the Partnership is not the general partner and it
has no legal obligation to provide additional cash support, nor has it
indicated any commitment to provide this support; accordingly it has
not reduced its investment in these Operating Partnerships below zero.
D) 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 book basis of the Partnerships' assets and
liabilities exceeded the tax basis by $10,331,740 and $9,517,551 at
December 31, 1998, and December 31, 1997, respectively.
E) Temporary Cash Investments
Temporary cash investments are invested in short-term debt securities
purchased with an original maturity of three months or less.
F) 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.
G) Comprehensive Income
In 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. The adoption of SFAS 130 had no
impact on total Partners' Capital.
H) Segment Reporting
In 1998, the Partnership adopted Statement of Financial Accounting
Standards No. 131, "Disclosures about Segments of an Enterprise and
Related Information" (SFAS 131). SFAS 131 requires that a public business
enterprise report financial and descriptive information about its
reportable operating segments. The adoption of SFAS 131 did not have an
impact on the financial reporting of the Partnership as it is engaged
solely in the business of owning mortgages and holding equity interests in
real estate limited partnerships.
I) New Accounting Pronouncements
In June, 1998, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 133, "Accounting for Derivative
Instruments and Hedging Activities" (SFAS 133). This statement provides new
accounting and reporting standards for the use of derivative instruments.
Adoption of this statement is required by the Partnership effective
January 1, 2000. Management believes that the impact of such adoption
will not be material to the financial statements.
In April 1998, the Accounting Standards Executive Committee issued
Statement of Position 98-5, "Reporting on the Costs of
Start-Up Activities" (SOP 98-5). This statement requires costs of start-up
activities and organization costs to be expensed as incurred. Adoption of
this statement is required by the Partnership effective January 1, 1999.
Management intends to adopt the statement as required in fiscal 1999.
Management believes that the impact of such adoption will not have an
impact to the financial statements.
<PAGE> - 22 -
CAPITAL SOURCE L.P.
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1998
3. Partnership Reserve Account
The Partnership maintains a reserve account which consisted of the following
at December 31, 1998:
<TABLE>
<S> <C>
Cash and temporary cash investments $ 8,350,064
GNMA Certificates 879,182
---------------
$ 9,229,246
===============
</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 mortgage-backed securities and the operation of the
Partnership. See Note 5 regarding the investment in mortgage backed
securities.
4. Partnership Income, Expenses and Cash Distributions
Profits and losses from continuing 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 financial statements represent the actual cash distributions
made during each year and the change in 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.
5. Investment in Mortgage-Backed Securities
The mortgage-backed securities held by the Partnership represent Government
National Mortgage Association (GNMA) Certificates and Federal Housing
Administration (FHA) Loans. The GNMA Certificates are backed by first mortgage
loans on multifamily housing properties and pools of single-family
properties. The GNMA Certificates are debt securities issued by a private
mortgage lender and are guaranteed by GNMA as to the full and timely payment
of principal and interest on the underlying loans. The FHA Loans are
guaranteed as to the full and timely payment of principal and interest on the
underlying loans.
At December 31, 1998, the total amortized cost, gross unrealized holding
gains, and aggregate fair value of available-for-sale securities were
$840,265, $38,917 and $879,182, respectively. The total amortized cost,
gross unrealized holding gains and aggregate fair value of held-to-maturity
securities were $35,004,714, $245,227 and $35,249,941, respectively.
At December 31, 1997, the total amortized cost, gross unrealized holding
gains, and aggregate fair value of available-for-sale securities were
$1,044,910, $43,616 and $1,088,526, respectively. The total amortized cost,
gross unrealized holding gains and aggregate fair value of held-to-maturity
securities were $35,010,659, $491,651 and $35,502,310, respectively.
<PAGE> - 23 -
CAPITAL SOURCE L.P.
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1998
Descriptions of the Partnership's mortgage-backed securities held at December
31, 1998 are as follows:
<TABLE>
<CAPTION>
Income
Number Interest Maturity Carrying Earned
Type of Security and Name Location of Units Rate Date Amount in 1998
- - --------------------------------- ----------------- -------- ----------- ------------ --------------- -----------
<S> <C> <C> <C> <C> <C> <C>
Held-to-Maturity
GNMA Certificates:
Misty Springs Apartments Daytona Beach, FL 128 8.75% 06-15-2029 $ 4,246,682 $ 372,615
The Ponds at Georgetown Ann Arbor, MI 134 7.50% (1) 12-15-2029 2,419,479 196,242
Waterman's Crossing Newport News, VA 260 10.00% 09-15-2028 10,873,980 1,089,882
Water's Edge Apartments Lake Villa, IL 108 8.75% 12-15-2028 5,035,088 441,852
--------------- ------------
22,575,229 2,100,591
FHA Loans:
Bluff Ridge Apartments Jacksonville, NC 108 8.72% 11-15-2028 3,487,222 305,012
Highland Park Apartments Columbus, OH 252 8.75% 11-01-2028 8,942,263 784,841
--------------- ------------
12,429,485 1,089,853
--------------- ------------
35,004,714 3,190,444
Available-for-Sale
GNMA Certificates:
Pools of single-family mortgages 7.58%(2) 2008 to 2009 437,306(3) 36,001
Pools of single-family mortgages 7.58%(2) 2007 to 2008 441,876(3) 36,477
--------------- ------------
879,182 72,478
--------------- ------------
Balance at December 31,1998 $ 35,883,896 $ 3,262,922
=============== ============
</TABLE>
(1) During the fourth quarter of 1998, this GNMA Certificate was repaid and
a new GNMA Certificate was issued. The interest rate on the reissued
GNMA Certificate is 7.5% compared to 9.0% on the repaid GNMA Certificate.
(2) Represents effective yield to the Partnership.
(3) Reserve account asset - see Note 3.
<PAGE> - 24 -
CAPITAL SOURCE L.P.
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1998
Reconciliation of the carrying amount of the mortgage-backed securities is as
follows:
<TABLE>
<CAPTION>
For the For the For the
Year Ended Year Ended Year Ended
Dec. 31, 1998 Dec. 31, 1997 Dec. 31, 1996
--------------- --------------- ---------------
<S> <C> <C> <C>
Balance at beginning of year $ 36,099,185 $ 36,523,550 $ 37,043,108
Additions
Acquisition of GNMA Certificate 2,422,519 - -
Amortization of discount on mortgage-backed securities 2,287 2,665 6,700
Deductions
FHA Loan and GNMA principal payments received (2,635,396) (429,144) (491,754)
Change in net unrealized holding gains on
available-for-sale mortgage-backed securities (4,699) 2,114 (34,504)
--------------- --------------- ---------------
Balance at end of year $ 35,883,896 $ 36,099,185 $ 36,523,550
=============== =============== ===============
</TABLE>
6. Investment in Operating Partnerships
The Partnership's Operating Partnerships consist of interests in limited
partnerships which own multifamily properties financed by the GNMA
Certificates and FHA Loans held by the Partnership. The limited partnership
agreements originally provided for the payment of a base return on the equity
provided to the limited partnerships and for the payment of additional amounts
out of a portion of the net cash flow or net sale or refinancing proceeds of
the properties, subject to various priority payments.
Descriptions of the Operating Partnerships held at December 31, 1998,
are as follows:
<TABLE>
<CAPTION>
1998
Equity in
Losses of
Carrying Operating
Name Location Partnership Name Amount Partnerships
- - ------------------------ --------------------- ----------------------------------------- ------------ -------------
<S> <C> <C> <C> <C>
Misty Springs Apartments Daytona Beach, FL Cypress Landings II, LTD. $ - $ (10,000)
The Ponds at Georgetown Ann Arbor, MI Ponds at Georgetown Limited Partnership - (176,942)
Waterman's Crossing Newport News, VA Oyster Cove Limited Partnership - -
Water's Edge Apartments Lake Villa, IL Water's Edge Limited Partnership - -
Bluff Ridge Apartments Jacksonville, NC Bluff Ridge Associates Limited Partnership - -
Highland Park Apartments Columbus, OH Interstate Limited Partnership - -
------------ ------------
Balance at December 31, 1998 $ - $ (186,942)
============ ============
</TABLE>
<PAGE> - 25 -
CAPITAL SOURCE L.P.
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1998
Reconciliation of the carrying amount of the Operating Partnerships is
as follows:
<TABLE>
<CAPTION>
For the For the For the
Year Ended Year Ended Year Ended
Dec. 31, 1998 Dec. 31, 1997 Dec. 31, 1996
--------------- --------------- ---------------
<S> <C> <C> <C>
Balance at beginning of year $ - $ - $ -
Addition
Investment in Operating Partnerships 186,942 178,550 334,745
Deductions
Equity in losses of Operating Partnerships (186,942) (178,550) (257,512)
Distributions received from Operating Partnerships - - (77,233)
--------------- --------------- ---------------
Balance at end of year $ - $ - $ -
=============== =============== ===============
</TABLE>
Combined Financial Statements of the Operating Partnerships are as follows:
CAPITAL SOURCE L.P.
OPERATING PARTNERSHIPS BALANCE SHEETS
<TABLE>
<CAPTION>
Dec. 31, 1998 Dec. 31, 1997
--------------- ---------------
<S> <C> <C>
Assets
Investment in real estate:
Land $ 3,098,171 $ 3,093,671
Buildings 38,090,720 37,716,906
Personal property 1,663,961 2,001,950
-------------- ---------------
42,852,852 42,812,527
Less accumulated depreciation (12,219,492) (11,267,188)
-------------- ---------------
Net investment in real estate 30,633,361 31,545,339
Cash and temporary cash investments, at cost
which approximates market value 358,887 294,233
Escrow deposits and property reserves 567,420 600,753
Interest and other receivables 56,782 16,103
Deferred mortgage issuance cost, net of
accumulated amortization 2,061,678 2,047,698
Other assets 448,844 518,661
-------------- ---------------
$ 34,126,971 $ 35,022,787
============== ===============
Liabilities and Partners' Capital (Deficit)
Liabilities
Accounts payable and accrued expenses $ 1,194,471 $ 1,303,872
Mortgage loan payable 41,100,810 41,331,679
Intercompany interest payable 254,370 291,230
Due to general partners and their affiliates 3,941,467 4,013,626
--------------- ---------------
46,491,118 46,940,407
--------------- ---------------
Partners' Capital (Deficit)
General Partners (12,364,146) (11,917,620)
Limited Partners - -
--------------- ---------------
(12,364,146) (11,917,620)
--------------- ---------------
$ 34,126,971 $ 35,022,787
=============== ===============
</TABLE>
<PAGE> - 26 -
CAPITAL SOURCE L.P.
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1998
<TABLE>
CAPITAL SOURCE L.P.
OPERATING PARTNERSHIPS INCOME STATEMENTS
Dec. 31, 1998 Dec. 31, 1997 Dec. 31, 1996
--------------- --------------- ---------------
<S> <C> <C> <C>
Income
Rental income $ 7,739,350 $ 7,555,700 $ 7,203,323
Interest income on temporary cash investments 23,807 29,277 26,964
Other income 374,279 246,723 260,383
--------------- --------------- ---------------
8,137,436 7,831,700 7,490,670
--------------- --------------- ---------------
Expenses
Real estate operating expenses 3,674,740 3,601,141 3,712,500
Depreciation expense 952,305 960,062 951,835
Interest expense 4,067,738 4,073,157 3,855,732
Amortization 75,201 73,980 69,309
--------------- --------------- ---------------
8,769,984 8,708,340 8,589,376
--------------- --------------- ---------------
Loss before extraordinary item (632,548) (876,640) (1,098,706)
Extraordinary item - gain from forgiveness of
accrued interest - - 82,216
--------------- --------------- ---------------
Net Loss $ (632,548) $ (876,640) $ (1,016,490)
=============== =============== ===============
Net Loss allocated to:
General Partners $ (445,606) $ (698,090) $ (758,978)
Limited partners (186,942) (178,550) (257,512)
--------------- --------------- ---------------
$ (632,548) $ (876,640) $ (1,016,490)
=============== =============== ===============
</TABLE>
<PAGE> - 27 -
CAPITAL SOURCE L.P.
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1998
<TABLE>
CAPITAL SOURCE L.P.
OPERATING PARTNERSHIPS STATEMENTS OF CASH FLOWS
For the For the For the
Year Ended Year Ended Year Ended
Dec. 31, 1998 Dec. 31, 1997 Dec. 31, 1996
--------------- --------------- ---------------
<S> <C> <C> <C>
Cash flows from operating activities
Net loss $ (632,546) $ (876,640) $ (1,016,490)
Adjustments to reconcile net loss to net cash
provided by operating activities:
Extraordinary item - gain from forgiveness of
accrued interest - - 82,216
Depreciation and amortization 1,027,506 1,034,042 1,021,144
Decrease (increase) in interest and other receivables (40,679) (7,298) 1,233
Decrease (increase) in escrow deposits and property reserves (33,333) (358) 55,329
Decrease (increase) in other assets 69,817 21,962 (31,269)
Increase in accounts payable and accrued expenses (109,401) 9,152 209,282
Decrease in intercompany interest payable (36,860) (1,173) (313,032)
Increase (decrease) in due to general partners and their affiliates (72,159) (103,479) 4,522
--------------- --------------- ---------------
Net cash provided by operating activities 172,345 76,208 12,935
--------------- --------------- ---------------
Cash flows from investing activities:
Acquisition of real estate (378,315) (19,652) (12,000)
Acquisition of personal property 337,989 (8,971) (5,222)
--------------- --------------- ---------------
Net cash used in investing activities (40,326) (28,623) (17,222)
--------------- --------------- ---------------
Cash flows from financing activities:
Principal payments on mortgage loan payable (230,869) (219,993) (206,424)
Contributions 186,942 178,550 334,745
Distributions - - (77,233)
Other net (23,438) (29,310) (93,005)
--------------- --------------- ---------------
Net cash used in financing activities (67,365) (70,753) (41,917)
--------------- --------------- ---------------
Net increase (decrease) in cash and temporary cash investments 64,654 (23,168) (46,204)
Cash and temporary cash investments at beginning of year 294,233 317,401 363,605
--------------- --------------- ---------------
Cash and temporary cash investments at end of year 358,887 294,233 317,401
=============== =============== ===============
</TABLE>
7. 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 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, 1998, 1997 and 1996, distributions to investors
represented less than an 8% return; accordingly, no fees were paid or accrued
during these years.
<PAGE> - 28 -
CAPITAL SOURCE L.P.
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1998
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
reimbursed to the General Partner was $1,305,744, $533,419, and $347,522 for
the years ended December 31, 1998, 1997 and 1996, respectively. These
reimbursed expenses are presented on a cash basis and do not reflect accruals
made at each year end.
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 (beginning in November 1996).
The fees for services provided were $196,606, $183,069, and $165,721 for 1998,
1997 and 1996, 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.
8. 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, interest receivable, other assets,
accounts payable, distributions payable: Fair value approximates the
carrying value of such assets.
Investment in FHA Loans and GNMA Certificates: Fair values are based on
prices obtained from an independent pricing source, adjusted for estimated
prepayments.
<TABLE>
<CAPTION>
At December 31, 1998 At December 31, 1997
----------------------------------- -----------------------------------
Carrying Estimated Carrying Estimated
Amount Fair Value Amount Fair Value
--------------- --------------- --------------- ---------------
<S> <C> <C> <C> <C>
Cash and temporary cash investments $ 9,304,694 $ 9,304,694 $ 10,410,564 $ 10,410,564
Investment in FHA Loans $ 12,429,485 $ 12,500,047 $ 12,511,046 $ 12,679,944
Investment in GNMA Certificates $ 23,454,411 $ 23,629,076 $ 23,588,139 $ 23,910,892
</TABLE>
9. Proposed Merger
Due to significant changes in the United States equity and real estate markets
in the Fall of 1998, the general partners of the Partnership have reevaluated
the terms of the proposed merger of the Partnership and Capital Source, L.P.
II-A into a newly formed corporation that would have made opportunistic,
growth-oriented real estate investments that had the potential for higher than
average returns with correspondingly greater risks. The general partners have
decided to restructure the proposed transaction so that the resulting entity
is a publicly-traded limited partnership that will primarily invest in
residential apartment complexes and other commercial real estate. Therefore,
the investment objectives of the new limited partnership will be substantially
different than those of the originally proposed merger but similar to those of
the Partnership. As a result of restructuring the proposed transaction,
certain costs totaling approximately $767,000 that related to the previous
transaction that would have been capitalized by the Partnership were expensed
as of December 31, 1998.
<PAGE> - 29 -
10. Legal Proceedings
The Partnership has been named as a defendant in a purported class action
lawsuit filed in the Delaware Court of Chancery on February 3, 1999 by two BAC
holders, Alvin M. Panzer and Sandra G. Panzer, against the Partnership, its
general partners, America First and various of their affiliates (including
Capital Source, L.P. II-A, a similar partnership with general partners that
are affiliates of America First) and Lehman Brothers, Inc. The plaintiffs seek
to have the lawsuit certified as a class action on behalf of all BAC holders
of the Partnership and Capital Source, L.P. II-A. The lawsuit alleges, among
other things, that a proposed merger transaction involving the Partnership and
Capital Source, L.P. II-A is deficient and coercive, that the defendants have
breached the terms of the Partnership agreement and that the defendants have
acted in manners which violate their fiduciary duties to the BAC holders. The
plaintiffs seek to enjoin the proposed merger transaction and to appoint an
independent BAC holder representative to investigate alternative
transactions. The lawsuit also requests a judicial dissolution of the
Partnership, an accounting, and unspecified damages and costs. At this time,
the general partners are unable to estimate the effect of the litigation on
the financial statements of the Partnership.
11. Summary of Unaudited Quarterly Results of Operations
<TABLE>
<CAPTION> First Second Third Fourth
From January 1, 1998, to December 31, 1998 Quarter Quarter Quarter Quarter
--------------- --------------- --------------- ---------------
<S> <C> <C> <C> <C>
Total income $ 949,619 $ 956,546 $ 797,305 $ 909,206
Total expenses (222,804) (196,565) (220,104) (1,070,700) (2)
--------------- --------------- --------------- ---------------
Net income $ 726,815 $ 759,981 $ 577,201 $ (161,494)
=============== =============== =============== ===============
Net income, basic and diluted, per BAC $ .22 $ .22 $ .17 $ (.05)
=============== =============== =============== ===============
(1) The Partnership had equity in losses of Operating Partnerships of $156,040.
(2) The Partnership wrote off approximately $767,000 in transaction costs
incurred in conjunction with the proposed merger described in Note 9.
</TABLE>
<TABLE>
<CAPTION>
First Second Third Fourth
From January 1, 1997, to December 31, 1997 Quarter Quarter Quarter Quarter
--------------- --------------- --------------- ---------------
<S> <C> <C> <C> <C>
Total income $ 928,096 $ 885,712 $ 947,165 $ 923,142
Total expenses (120,423) (119,321) (138,961) (254,189) (1)
--------------- --------------- --------------- ---------------
Net income $ 807,673 $ 766,391 $ 808,204 $ 668,953
=============== =============== =============== ===============
Net income, basic and diluted, per BAC $ .24 $ .22 $ .24 $ .20
=============== =============== =============== ===============
</TABLE>
(1) The Partnership incurred additional management time and expenses in
connection with a review of various options for restructuring to improve
total investment returns and provide liquidity to the Partnership's
investors.
<PAGE> - 30 -
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
Date: March 29, 1999
<PAGE> - 31 -
Pursuant to the requirements of the Securities and Exchange Act of 1934,
this report has been signed below by the following persons on behalf of the
Registrant and in the capacities and on the dates indicated.
Date: March 29, 1999 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 29, 1999 By /s/ Michael Thesing
Michael Thesing, Vice
President, Secretary and
Treasurer (Principal Financial Officer)
of the America First General Partner
Vice President, Secretary, Treasurer
and Manager of America First Companies L.L.C.
Date: March 29, 1999 By /s/ William S. Carter, M.D.*
William S. Carter, M.D.
Manager of America First Companies L.L.C.
Date: March 29, 1999 By /s/ Martin A. Massengale*
Martin A. Massengale
Manager of America First Companies L.L.C.
Date: March 29, 1999 By /s/ Alan Baer*
Alan Baer
Manager of America First Companies L.L.C.
Date: March 29, 1999 By /s/ Gail Walling Yanney*
Gail Walling Yanney
Manager of America First Companies L.L.C.
Date: March 29, 1999 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> - 32 -
EXHIBIT 24
POWER OF ATTORNEY
<PAGE> - 33 -
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, 1998, and any amendments
thereto, required to be filed with the Securities and Exchange Commission by
the following persons:
America First Tax Exempt Investors, L.P.
America First Tax Exempt Mortgage Fund Limited Partnership
America First Apartment Investors, L.P.
Capital Source L.P.
Capital source II L.P.-A
IN WITNESS WHEREOF, the undersigned has executed
this Power of Attorney as of the 1st day of February 1999.
/s/ Michael B. Yanney
Michael B. Yanney
<PAGE> - 34 -
POWER OF ATTORNEY
The undersigned hereby appoints Michael Thesing as his agent and
attorney-in-fact for the purpose of executing and filing all reports on Form
10-K relating to the year ending December 31, 1998, and any amendments
thereto, required to be filed with the Securities and Exchange Commission by
the following persons:
America First Tax Exempt Investors, L.P.
America First Tax Exempt Mortgage Fund Limited Partnership
America First Apartment Investors, L.P.
Capital Source L.P.
Capital source II L.P.-A
IN WITNESS WHEREOF, the undersigned has executed
this Power of Attorney as of the 1st day of February 1999.
/s/ William S. Carter, M.D.
William S. Carter, M.D.
<PAGE> - 35 -
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, 1998, and any amendments
thereto, required to be filed with the Securities and Exchange Commission by
the following persons:
America First Tax Exempt Investors, L.P.
America First Tax Exempt Mortgage Fund Limited Partnership
America First Apartment Investors, L.P.
Capital Source L.P.
Capital source II L.P.-A
IN WITNESS WHEREOF, the undersigned has executed
this Power of Attorney as of the 1st day of February 1999.
/s/ Martin A. Massengale
Martin A. Massengale
<PAGE> - 36 -
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, 1998, and any amendments
thereto, required to be filed with the Securities and Exchange Commission by
the following persons:
America First Tax Exempt Investors, L.P.
America First Tax Exempt Mortgage Fund Limited Partnership
America First Apartment Investors, L.P.
Capital Source L.P.
Capital source II L.P.-A
IN WITNESS WHEREOF, the undersigned has executed
this Power of Attorney as of the 1st day of February 1999.
/s/ Alan Baer
Alan Baer
<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, 1998, and any amendments
thereto, required to be filed with the Securities and Exchange Commission by
the following persons:
America First Tax Exempt Investors, L.P.
America First Tax Exempt Mortgage Fund Limited Partnership
America First Apartment Investors, L.P.
Capital Source L.P.
Capital source II L.P.-A
IN WITNESS WHEREOF, the undersigned has executed
this Power of Attorney as of the 1st day of February 1999.
/s/ Gail Walling Yanney
Gail Walling 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, 1998, and any amendments
thereto, required to be filed with the Securities and Exchange Commission by
the following persons:
America First Tax Exempt Investors, L.P.
America First Tax Exempt Mortgage Fund Limited Partnership
America First Apartment Investors, L.P.
Capital Source L.P.
Capital source II L.P.-A
IN WITNESS WHEREOF, the undersigned has executed
this Power of Attorney as of the 1st day of February 1999.
/s/ Mariann Byerwalter
Mariann Byerwalter
<PAGE> - 39 -
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-END> DEC-31-1998
<CASH> 9,304,694
<SECURITIES> 35,883,896
<RECEIVABLES> 306,659
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 45,707,177
<PP&E> 0
<DEPRECIATION> 0
<TOTAL-ASSETS> 45,707,177
<CURRENT-LIABILITIES> 1,350,682
<BONDS> 0
<COMMON> 0
0
0
<OTHER-SE> 44,356,495
<TOTAL-LIABILITY-AND-EQUITY> 45,707,177
<SALES> 0
<TOTAL-REVENUES> 3,612,676
<CGS> 0
<TOTAL-COSTS> 0
<OTHER-EXPENSES> 1,710,173
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> 1,902,503
<INCOME-TAX> 0
<INCOME-CONTINUING> 1,902,503
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 1,902,503
<EPS-PRIMARY> 0
<EPS-DILUTED> 0
</TABLE>
