FORM 10-Q
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
X Quarterly report pursuant to Section 13 or 15(d) of the Securities Exchange
Act of 1934
For the quarterly period ended June 30, 1999 or
Transition report pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934
For the transition period from to
Commission File Number: 0-16497
CAPITAL SOURCE L.P.
(Exact name of registrant as specified in its charter)
Delaware 52-1417770
(State or other jurisdiction (IRS Employer
of incorporation or organization) Identification No.)
Suite 400, 1004 Farnam Street, Omaha, Nebraska 68102
(Address of principal executive offices) (Zip Code)
(402) 444-1630
(Registrant's telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to
such filing requirements for the past 90 days.
YES X NO
<PAGE> - i -
Part I. Financial Information
Item 1. Financial Statements
CAPITAL SOURCE L.P.
BALANCE SHEETS
<TABLE>
<CAPTION>
June 30, 1999 Dec. 31, 1998
(unaudited)
--------------- ---------------
<S> <C> <C>
Assets
Cash and temporary cash investments, at cost which
approximates market value $ 8,972,106 $ 9,304,694
Investment in FHA Loans (Note 5) 12,385,942 12,429,485
Investment in GNMA Certificates (Note 5) 23,261,408 23,454,411
Investment in Operating Partnerships (Note 6) - -
Interest receivable 300,904 306,659
Other assets 251,955 211,928
--------------- ---------------
$ 45,172,315 $ 45,707,177
=============== ===============
Liabilities and Partners' Capital (Deficit)
Liabilities
Accounts payable (Note 7) $ 238,200 $ 490,085
Distribution payable (Note 4) 860,597 860,597
--------------- ---------------
1,098,797 1,350,682
--------------- ---------------
Partners' Capital (Deficit)
General Partner (174,923) (172,094)
Beneficial Assignment Certificate Holders
($13.11 per BAC in 1999 and $13.20 in 1998) 44,248,441 44,528,589
--------------- ---------------
44,073,518 44,356,495
--------------- ---------------
$ 45,172,315 $ 45,707,177
=============== ===============
The accompanying notes are an integral part of the financial statements.
</TABLE>
<PAGE> - 1 -
CAPITAL SOURCE L.P.
STATEMENTS OF INCOME AND COMPREHENSIVE INCOME
(UNAUDITED)
<TABLE>
<CAPTION>
For the For the For the Six For the Six
Quarter Ended Quarter Ended Months Ended Months Ended
June 30, 1999 June 30, 1998 June 30, 1999 June 30, 1998
--------------- --------------- --------------- ---------------
<S> <C> <C> <C> <C>
Income
Mortgage-backed securities income $ 805,006 $ 817,818 $ 1,612,472 $ 1,638,110
Interest income on temporary cash investments 102,894 136,428 206,920 274,605
Equity in losses of Operating Partnerships - - (50,000) (10,000)
Other income - 2,300 2,000 3,450
--------------- --------------- --------------- ---------------
907,900 956,546 1,771,392 1,906,165
Expenses
Operating and administrative expenses (Note 7) 179,413 196,565 323,534 419,369
--------------- --------------- --------------- ---------------
Net income 728,487 759,981 1,447,858 1,486,796
Other comprehensive income:
Unrealized holding losses on securities
arising during the period (12,636) (6,745) (9,641) (2,707)
--------------- --------------- --------------- ---------------
Net comprehensive income $ 715,851 $ 753,236 $ 1,438,217 $ 1,484,089
=============== =============== =============== ===============
Net income allocated to:
General Partner $ 7,285 7,600 $ 14,479 $ 14,868
Limited Partner 721,202 752,381 1,433,379 1,471,928
--------------- --------------- --------------- ---------------
$ 728,487 759,981 $ 1,447,858 $ 1,486,796
=============== =============== =============== ===============
Net income, basic and diluted, per BAC $ .21 $ .22 $ .42 $ .44
=============== =============== =============== ===============
The accompanying notes are an integral part of the financial statements.
</TABLE>
<PAGE> - 2 -
CAPITAL SOURCE L.P.
STATEMENT OF PARTNERS CAPITAL (DEFICIT)
FOR THE SIX MONTHS ENDED JUNE 30, 1999
(UNAUDITED)
<TABLE>
<CAPTION>
General BAC
Partner Holders Total
-------------- ---------------- ---------------
<S> <C> <C> <C>
Partners' Capital (Deficit)
(excluding accumulated other comprehensive income)
Balance at December 31, 1998 $ (172,483) $ 44,490,061 $ 44,317,578
Net income 14,479 1,433,379 1,447,858
Cash distributions paid or accrued (Note 4) (17,212) (1,703,982) (1,721,194)
-------------- ---------------- ---------------
(175,216) 44,219,458 44,044,242
-------------- ---------------- ---------------
Accumulated other comprehensive income
Balance at December 31, 1998 389 38,528 38,917
Other comprehensive income (96) (9,545) (9,641)
-------------- ---------------- ---------------
293 28,983 29,276
-------------- ---------------- ---------------
Balance at June 30, 1999 $ (174,923) $ 44,248,441 $ 44,073,518
============== ================ ===============
</TABLE>
CAPITAL SOURCE L.P.
STATEMENTS OF CASH FLOWS
(UNAUDITED)
<TABLE>
<CAPTION>
For the Six For the Six
Months Ended Months Ended
June 30, 1999 June 30, 1998
--------------- ---------------
<S> <C> <C>
Cash flows from operating activities
Net income $ 1,447,858 $ 1,486,796
Adjustments to reconcile net income to net cash
from operating activities
Equity in losses of Operating Partnerships 50,000 10,000
Amortization of discount on mortgage-backed securities (1,346) (1,313)
Decrease in interest receivable 5,755 5,022
Increase in other assets (40,027) (345,086)
Decrease in accounts payable (251,885) (478)
--------------- ---------------
Net cash provided by operating activities 1,210,355 1,154,941
--------------- ---------------
Cash flows from investing activities
FHA Loan and GNMA principal payments received 228,251 219,407
Investment in Operating Partnerships (50,000) (10,000)
--------------- ---------------
Net cash provided by investing activities 178,251 209,407
--------------- ---------------
Cash flow used in financing activity
Distributions paid (1,721,194) (1,721,194)
--------------- ---------------
Net decrease in cash and temporary cash investments (332,588) (356,846)
Cash and temporary cash investments at beginning of period 9,304,694 10,410,564
--------------- ---------------
Cash and temporary cash investments at end of period $ 8,972,106 $ 10,053,718
=============== ===============
The accompanying notes are an integral part of the financial statements.
</TABLE>
<PAGE> - 3 -
CAPITAL SOURCE L.P.
NOTES TO FINANCIAL STATEMENTS
JUNE 30, 1999
(UNAUDITED)
1. Organization
Capital Source L.P. (the Partnership) was formed on August 22, 1985, under the
Delaware Revised Uniform Limited Partnership Act. The General Partners of
the Partnership are Insured Mortgage Equities Inc. and America First Capital
Source I, L.L.C. (the General Partners).
The Partnership was formed to invest principally in federally-insured
mortgages on multifamily housing properties and limited partnership interests
in 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 without audit on
the accrual basis of accounting in accordance with generally accepted
accounting principles. The financial statements should be read in
conjunction with the financial statements and notes thereto included in
the Partnership's Annual Report on Form 10-K for the year ended
December 31, 1998. In the opinion of management, all normal and recurring
adjustments necessary to present fairly the financial position at
June 30, 1999 and results of operations for all periods presented
have been made.
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the
financial statements and the reported amounts of revenues and expenses
during the reporting period. Actual results could differ from those
estimates.
B) Investment in 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> - 4 -
CAPITAL SOURCE L.P.
NOTES TO FINANCIAL STATEMENTS
JUNE 30, 1999
(UNAUDITED)
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 Beneficial Assignment
Certificate (BAC) Holders are required to report their share of the
Partnership's income for federal and state income tax purposes.
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 BAC
Net income per BAC has been calculated based on the number of BACs
outstanding (3,374,222) for all periods presented.
G) New Accounting Pronouncement
On January 1, 1999, the Partnership adopted Statement of Position 98-5,
"Reporting on the Costs of Start-Up Activities" (SOP 98-5). SOP 98-5
requires costs of start-up activities and organization costs to be
expensed as incurred. The adoption of SOP 98-5 did not have an impact on
the Partnership's financial statements.
<PAGE> - 5 -
CAPITAL SOURCE L.P.
NOTES TO FINANCIAL STATEMENTS
JUNE 30, 1999
(UNAUDITED)
3. Partnership Reserve Account
The Partnership maintains a reserve account which consisted of the following
at June 30, 1999:
<TABLE>
<S> <C>
Cash and temporary cash investments $ 8,343,430
GNMA Certificates 754,583
---------------
$ 9,098,013
===============
</TABLE>
The reserve account was established to maintain working capital for the
Partnership and is available to supplement distributions to investors and for
any contingencies related to the Partnership's investment in 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 period and the change in cash distributions accrued at the
end of each period.
The General Partners will 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 June 30, 1999, the total amortized cost, gross unrealized holding gains and
aggregate fair value of available-for-sale securities were $725,307, $29,276
and $754,583, respectively. At June 30, 1999, the total amortized cost, gross
unrealized holding gains and aggregate fair value of held-to-maturity
securities were $ 34,892,767, $244,469 and $35,137,236, respectively.
<PAGE> - 6 -
CAPITAL SOURCE L.P.
NOTES TO FINANCIAL STATEMENTS
JUNE 30, 1999
(UNAUDITED)
Descriptions of the Partnership's mortgage-backed securities at June 30,
1999, are as follows:
<TABLE>
<CAPTION>
Number Interest Maturity Carrying
Type of Security and Name Location of Units Rate Date Amount
---------------------------------- -------------------- -------- -------- ------------- ---------------
<S> <C> <C> <C> <C> <C>
Held-to-Maturity
GNMA Certificates:
Misty Springs Apartments Daytona Beach, FL 128 8.75% 06-15-2029 $ 4,233,166
The Ponds at Georgetown Ann Arbor, MI 134 7.50% 12-15-2029 2,410,115
Waterman's Crossing Newport News, VA 260 10.00% 09-15-2028 10,845,270
Water's Edge Apartments Lake Villa, IL 108 8.75% 12-15-2028 5,018,274
---------------
22,506,825
FHA Loans:
Bluff Ridge Apartments Jacksonville, NC 108 8.72% 11-15-2028 3,475,042
Highland Park Apartments Columbus, OH 252 8.75% 11-01-2028 8,910,900
---------------
12,385,942
---------------
34,892,767
---------------
Available-for-Sale
GNMA Certificates:
Pools of single-family mortgages 7.58%(1) 2008 to 2009 390,750(2)
Pools of single-family mortgages 7.58%(1) 2007 to 2008 363,833(2)
---------------
754,583
---------------
Balance at June 30, 1999 $ 35,647,350
===============
</TABLE>
(1) Represents effective yield to the Partnership.
(2) Reserve account asset - see Note 3.
Reconciliation of the carrying amount of the mortgage-backed securities is as
follows:
<TABLE>
<S> <C>
Balance at December 31, 1998 $ 35,883,896
Addition
Amortization of discount on mortgage-backed securities 1,346
Deductions
FHA Loan and GNMA principal payments received (228,251)
Change in net unrealized holding losses on available-for-sale
mortgage-backed securities (9,641)
---------------
Balance at June 30, 1999 $ 35,647,350
===============
</TABLE>
6. Investment in Operating Partnerships
The Partnership's Investment in 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.
<PAGE> - 7 -
CAPITAL SOURCE L.P.
NOTES TO FINANCIAL STATEMENTS
JUNE 30, 1999
(UNAUDITED)
Descriptions of the Operating Partnerships held at June 30, 1999, are as
follows:
<TABLE>
<CAPTION>
Carrying
Name Location Partnership Name Amount
- ------------------------ --------------------- ----------------------------------------- ------------
<S> <C> <C> <C>
Misty Springs Apartments Daytona Beach, FL Cypress Landings II, Ltd. $ -
Fox Hollow Apartments High Point, NC Fox Hollow Limited Partnership -
The Ponds at Georgetown Ann Arbor, MI Ponds at Georgetown Limited Partnership -
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 June 30, 1999 $ -
============
</TABLE>
Reconciliation of the carrying amount of the Operating Partnerships is as
follows:
<TABLE>
<CAPTION>
For the Six
Months Ended
June 30, 1999
---------------
<S> <C>
Balance at beginning of year $ -
Addition
Investment in Operating Partnerships 50,000
Deduction
Equity in losses of Operating Partnerships (50,000)
---------------
Balance at end of period $ -
===============
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 quarter and six months ended June 30, 1999, distributions to investors represented
less than an 8% return; accordingly, no fees were paid or accrued during this
period.
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 for the six months ended June 30, 1999, was
$403,710 ($241,736 for the quarter ended June 30, 1999). These reimbursed
expenses are presented on a cash basis and do not reflect accruals made at
quarter end.
<PAGE> - 8 -
CAPITAL SOURCE L.P.
NOTES TO FINANCIAL STATEMENTS
JUNE 30, 1999
(UNAUDITED)
An affiliate of the General Partners has been retained to provide property
management services for Waterman's Crossing, Misty Springs Apartments, Fox
Hollow Apartments and The Ponds at Georgetown. The fees for services provided
were $50,597 and $100,456 for the quarter and six months ended June 30,
1999, 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. 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 II L.P.-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 II L.P.-A. The lawsuit alleges, among
other things, that a proposed merger transaction involving the Partnership and
Capital Source II L.P.-A is deficient and coercive, that the defendants have
breached the terms of the Partnership'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 Partnership, an accounting, and unspecified damages and costs.
On July 12, 1999, Sandra G. Panzer, one of the named plaintiffs in the action
described above, filed an additional complaint against the Partnership, its
general partners and America First in the Delaware Court of Chancery. The
complaint seeks to compel the general partners to supply the plaintiff with a
list of all BAC holders of the Partnership and copies of the limited
partnership agreements of the Operating Partnerships.
At this time, the general partners are unable to estimate the effect of either
of these lawsuits, if any, on the financial statements of the Partnership.
<PAGE> - 9 -
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations
Liquidity and Capital Resources
The Partnership originally acquired: (i) five mortgage-backed securities
guaranteed as to principal and interest by the Government National Mortgage
Association (GNMA) collateralized by first mortgage loans on multifamily
housing properties located in five states; (ii) three first mortgage loans
insured as to principal and interest by the Federal Housing Administration
(FHA) on multifamily housing properties located in two states; and (iii)
Partnership Equity Investments in eight limited partnerships which own the
multifamily properties financed by the GNMA Certificates and FHA Loans. The
Partnership subsequently received FHA Debentures (which were paid in full in
1993) in payment of the FHA Loan on Fox Hollow Apartments. 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.
Distributions
Cash distributions paid or accrued per BAC were as follows:
</TABLE>
<TABLE>
<CAPTION>
For the Six For the Six
Months Ended Months Ended
June 30, 1999 June 30, 1998
--------------- ---------------
<S> <C> <C>
Regular quarterly distributions
Income $ .4248 $ .4362
Return of capital .0802 .0688
--------------- ---------------
.5050 .5050
=============== ===============
Distributions
Paid out of cash flow $ .5050 $ .5050
=============== ===============
</TABLE>
Regular quarterly distributions to BAC Holders consist primarily of interest
received on FHA Loans and GNMA Certificates. Additional cash for
distributions is received from other investments. The Partnership may draw on
reserves to pay operating expenses or to supplement cash distributions to
investors. The Partnership is permitted to replenish reserves with cash flows
in excess of distributions paid. For the six months ended June 30, 1999,
$4,915 of undistributed cash flow was placed in reserves ($13,305 was
withdrawn for the quarter ended June 30, 1999). The total amount held in
reserves at June 30, 1999 was $9,098,013 of which $754,583 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
its Partnership Agreement, the Partnership has the authority to enter into
short-term and long-term debt financing arrangements; however, the Partnership
currently does not anticipate entering into such arrangements. The
Partnership is not authorized to issue additional BACs to meet short-term and
long-term liquidity requirements.
<PAGE> - 10 -
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 underlying the Operating Partnerships. The fair value of the
properties underlying the Operating Partnerships is based on management's best
estimate of the net realizable value of such properties; however, the ultimate
realized values may vary from these estimates.
The overall status of the Partnership's investments has remained
relatively constant since March 31, 1999.
The following table shows the occupancy levels of the properties financed by
the Partnership at June 30, 1999:
<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 108 105 97%
Fox Hollow Apartments High Point, NC 184 179 97%
Highland Park Apartments Columbus, OH 252 237 94%
Misty Springs Apartments Daytona Beach, FL 128 128 100%
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 108 104 96%
------------- ------------ ------------
1,174 1,146 98%
============= ============ ============
Results of Operations
The tables below compare the results of operations for each period shown.
</TABLE>
<TABLE>
<CAPTION>
For the For the Increase
Quarter Ended Quarter Ended (Decrease)
June 30, 1999 June 30, 1998 From 1998
--------------- --------------- ---------------
<S> <C> <C> <C>
Mortgage-backed securities income $ 805,006 $ 817,818 $ (12,812)
Interest income on temporary cash investments 102,894 136,428 (33,534)
Equity in losses of Operating Partnerships - - -
Other income - 2,300 (2,300)
--------------- --------------- ---------------
907,900 956,546 (48,646)
Operating and administrative expenses 179,413 196,565 (17,152)
--------------- --------------- ---------------
Net income $ 728,487 $ 759,981 $ (31,494)
=============== =============== ===============
</TABLE>
<TABLE>
<CAPTION>
For the Six For the Six Increase
Months Ended Months Ended (Decrease)
June 30, 1999 June 30, 1998 From 1998
--------------- --------------- ---------------
<S> <C> <C> <C>
Mortgage-backed securities income $ 1,612,472 $ 1,638,110 $ (25,638)
Interest income on temporary cash investments 206,920 274,605 (67,685)
Equity in losses of Operating Partnerships (50,000) (10,000) (40,000)
Other income 2,000 3,450 (1,450)
--------------- --------------- ---------------
1,771,392 1,906,165 (134,773)
Operating and administrative expenses 323,534 419,369 (95,835)
--------------- --------------- ---------------
Net income $ 1,447,858 $ 1,486,796 $ (38,938)
=============== =============== ===============
</TABLE>
<PAGE> - 11 -
Mortgage-backed securities income decreased for the quarter and six months
ended June 30, 1999, compared to the same periods in 1998 due to the continued
amortization of the principal balances of the Partnership's mortgage-backed
securities.
Interest income on temporary cash investments decreased for the quarter and
six months ended June 30, 1999, compared to the same periods in 1998 due to
withdrawals made from the Partnership's reserves during 1998 to supplement
distributions to investors and provide additional equity to certain of 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. During the quarters ended June 30, 1999 and June 30, 1998,
the Partnership did not make any additional investments in any Operating
Partnerships. During the six months ended June 30, 1999 and June 30,
1998, the Partnership made additional investments in certain Operating
Partnerships of $50,000 and $10,000, respectively. The Partnership recorded
equity in losses of Operating Partnerships for the respective periods to the
extent of the additional investments.
Operating and administrative expenses decreased for the quarter and six months
ended June 30, 1999, compared to the same periods in 1998 primarily due to
decreases in consulting and amortization expense.
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 early in
the final quarter of 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 early in the final quarter of 1999.
<PAGE> - 12 -
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
assess 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 is
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 Loans 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> - 13 -
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 3. Quantitative and Qualitative Disclosures About Market Risk.
There have been no material changes in the Partnership's
market risk since December 31, 1998.
PART II. OTHER INFORMATION
Item 1. 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 II L.P.-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 II L.P.-A. The lawsuit alleges, among other
things, that a proposed merger transaction involving the
Registrant and Capital Source II L.P.-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.
On July 12, 1999, Sandra G. Panzer, one of the named plaintiffs
in the action described above, filed an additional complaint
against the Partnership, its general partners and America First
in the Delaware Court of Chancery. The complaint seeks to compel
the general partners to supply the plaintiff with a list of all
BAC holders of the Partnership and copies of the limited
partnership agreements of the Operating Partnerships.
<PAGE> - 14 -
The general partners intend to defend these lawsuits vigorously,
but are unable to estimate the effect of either of these
lawsuits, if any, on the financial statements of the Partnership
or on the ability of the Partnership to consummate the proposed
merger with Capital Source II L.P.-A.
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
4(a) Agreement of Limited Partnership of Capital Source
L.P. (incorporated herein by reference from Exhibit A of
the Prospectus contained in the Registrant's
Post-Effective Amendment No. 3 dated May 15, 1986 to the
Registration Statement on Form S-11 (Commission File No.
0-16497)).
4(b) Amendment to the Capital Source L.P. Limited Partnership
Agreement (incorporated by reference to Exhibit 3.08 to
Pre-Effective Amendment No. 3 to Registration Statement on
Form S-4 filed by America First Real Estate Investment
Partners, L.P. on July 21, 1999 (Commission File No.
333-52117).
4(c) 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)).
27. Financial Data Schedule
(b) Reports on Form 8-K
The Registrant did not file a report on Form 8-K during the
quarter for which this report is filed.
<PAGE> - 15 -
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Registrant has duly caused this report to be signed
on its behalf by the undersigned, thereunto duly authorized.
CAPITAL SOURCE L.P.
By America First Capital
Source I L.L.C., General
Partner of the Registrant
By /s/ Michael Thesing
Michael Thesing,
Vice President and
Principal Financial Officer
Dated: August 13, 1999
<PAGE> - 16 -
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