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, 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 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 4
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 11
Item 8. Financial Statements and Supplementary Data 11
Item 9. Changes in and Disagreements With Accountants on Accounting and
Financial Disclosure 11
PART III
Item 10. Directors and Executive Officers of Registrant 12
Item 11. Executive Compensation 14
Item 12. Security Ownership of Certain Beneficial Owners and Management 14
Item 13. Certain Relationships and Related Transactions 14
PART IV
Item 14. Exhibits, Financial Statement Schedules and Reports on Form 8-K 15
SIGNATURES 30
<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
Registrant's Agreement of Limited Partnership (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.
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, 1999, appears in Item 7 hereof.
The Partnership has also invested amounts held in its reserve account in
certain GNMA securities backed by pools of single-family mortgages ("Reserve
Investments").
While principal of and interest on the GNMA Certificates and the FHA Loans
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.
<PAGE> - 1 -
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.
The Registrant has no employees. Certain services are provided to the
Registrant by employees of America First Companies L.L.C. ("America First")
which is an affiliate of the general partners of the Registrant, and the
Registrant reimburses America First 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.
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 five multifamily apartment projects and 99.99%
interest in one multifamily apartment project. 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 $ 2,746,324
Fox Hollow Apartments High Point, NC 184 877 4,223,060
Highland Park Apartments Columbus, OH 252 891 5,306,306
Misty Springs Apartments Daytona Beach, FL 128 786 3,033,575
The Ponds at Georgetown Ann Arbor, MI 134 1,002 5,246,659
Waterman's Crossing Newport News, VA 260 944 7,360,073
Water's Edge Apartments Lake Villa, IL 108 814 3,998,901
-------- ---------------
1,174 $ 31,914,898
======== ===============
</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>
1999 1998 1997 1996 1995
---------- ---------- ---------- ---------- ----------
<S> <C> <C> <C> <C> <C>
BLUFF RIDGE APARTMENTS
Average Occupancy Rate 99% 99% 96% 94% 94%
Average Effective Annual Rental Per Unit $6,734 $6,644 $6,258 $5,792 $5,755
FOX HOLLOW APARTMENTS
Average Occupancy Rate 96% 95% 96% 95% 97%
Average Effective Annual Rental Per Unit $6,781 $6,480 $6,482 $6,360 $6,176
HIGHLAND PARK APARTMENTS
Average Occupancy Rate 94% 95% 93% 95% 97%
Average Effective Annual Rental Per Unit $6,852 $6,392 $6,333 $6,171 $6,071
MISTY SPRINGS APARTMENTS
Average Occupancy Rate 99% 100% 98% 94% 97%
Average Effective Annual Rental Per Unit $6,752 $6,509 $6,101 $5,574 $5,809
THE PONDS AT GEORGETOWN
Average Occupancy Rate 99% 99% 97% 95% 95%
Average Effective Annual Rental Per Unit $10,732 $10,362 $9,883 $9,515 $9,174
WATERMAN'S CROSSING
Average Occupancy Rate 99% 100% 98% 96% 95%
Average Effective Annual Rental Per Unit $7,822 $7,535 $7,207 $6,841 $6,737
WATER'S EDGE APARTMENTS
Average Occupancy Rate 95% 96% 96% 91% 97%
Average Effective Annual Rental Per Unit $9,587 $9,274 $8,723 $8,169 $8,559
</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 Item 7, "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 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. In this complaint, the plaintiffs sought to enjoin the proposed
merger transaction and seek 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.
The General Partners determined not to pursue the merger transaction which was
the subject of the initial lawsuit and proposed an alternative transaction to
BAC holders. A prospectus/consent solicitation statement outlining this
alternative transaction was sent to BAC holders on or about November 16,
1999. The plaintiffs amended their complaint on December 8, 1999, and again
on February 22, 2000. The second amended complaint challenges this current
prospectus/consent solicitation statement on grounds similar to those alleged
in the original complaint, as well as on other procedural grounds. The second
amended complaint does not seek to enjoin the proposed merger transaction.
<PAGE> - 3 -
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.
The General Partners have moved to dismiss these complaints, and they 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.
There are no other material pending legal proceedings to which the Partnership
is a party or to which any of its property is subject.
Item 4. Submission of Matters to a Vote of Security Holders.
On or about November 16, 1999, the general partners submitted a proposal for a
merger of the Registrant with Capital Source II L.P.-A and America First Real
Estate Investment Partners, L.P. for consent to the BAC holders without a
meeting. As of December 31, 1999, the solicitation was still pending and
therefore, a final vote of the BAC holders has not been tabulated.
PART II
Item 5. Market for Registrant's Common Equity and Related Stockholder
Matters.
(a) Market Information. The BACs are subject to
various transfer restrictions imposed to prevent the Registrant from being
treated as a publicly traded partnership for federal income tax purposes
and, accordingly, there is no public trading market for the BACs.
(b) Investors. The approximate number of BAC Holders on December
31, 1999, was 5,397.
(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, 1999, and December 31, 1998, equaled $3,407,964
and $3,407,963 respectively. The cash distributions paid or accrued per
BAC during the fiscal years ended December 31, 1999, and December 31, 1998
were as follows:
<TABLE>
<CAPTION>
Per BAC
Year Ended Year Ended
December 31, 1999 December 31, 1998
----------------- -----------------
<S> <C> <C>
Income .7905 $ .5582
Return of Capital .2195 .4518
----------------- -----------------
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 2000 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, 1999 Dec. 31, 1998 Dec. 31, 1997 Dec. 31, 1996 Dec. 31, 1995
------------- ------------- ------------- ------------- -------------
<S> <C> <C> <C> <C> <C>
Mortgage-backed securities income $ 3,215,472 $ 3,262,922 $ 3,302,727 $ 3,340,747 $ 3,895,475
Interest income on temporary cash investments
and U.S. government securities 431,111 530,396 554,604 523,636 193,257
Equity in losses of Operating Partnerships (325,245) (186,942) (178,550) (257,512) (255,500)
Other income 2,000 6,300 5,334 9,749 3,950
Operating and administrative expenses (629,037) (1,710,173) (632,894) (429,313) (365,125)
------------- ------------- ------------- ------------- -------------
Net income $ 2,694,301 $ 1,902,503 $ 3,051,221 $ 3,187,307 $ 3,472,057
============= ============= ============= ============= =============
Net income, basic and diluted, per
Beneficial Assignment Certificate (BAC) $ .79 $ .56 $ .90 $ .94 $ 1.02
============= ============= ============= ============= =============
Cash distributions paid or accrued per BAC $ 1.0100 $ 1.0100 $ 1.0100 $ 1.0100 $ 1.0100
============= ============= ============= ============= =============
Investment in FHA Loans $ 12,340,447 $ 12,429,485 $ 12,511,046 $ 12,585,755 $ 12,654,188
============= ============= ============= ============= =============
Investment in GNMA Certificates $ 23,105,420 $ 23,454,411 $ 23,588,139 $ 23,937,795 $ 24,388,920
============= ============= ============= ============= =============
Total assets $ 44,867,473 $ 45,707,177 $ 46,965,808 $ 47,248,776 $ 47,541,721
============= ============= ============= ============= =============
</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, 1999 Dec. 31, 1998 Dec. 31, 1997
--------------- --------------- ---------------
<S> <C> <C> <C>
Regular monthly distributions
Income $ .7905 $ .5582 $ .8952
Return of capital .2195 .4518 .1148
--------------- --------------- ---------------
$ 1.0100 $ 1.0100 $ 1.0100
=============== =============== ===============
Distributions
Paid out of cash flow $ 1.0085 $ 1.0100 $ 1.0100
Paid out of reserves .0015 - -
--------------- --------------- ---------------
$ 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, 1999, a net amount of $4,989 was withdrawn from reserves. The
total amount held in reserves at December 31, 1999, was $9,053,549 of which
$670,268 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, 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 108 108 100%
Fox Hollow Apartments High Point, NC 184 168 91%
Highland Park Apartments Columbus, OH 252 229 91%
Misty Springs Apartments Daytona Beach, FL 128 127 99%
The Ponds at Georgetown Ann Arbor, MI 134 134 100%
Waterman's Crossing Newport News, VA 260 259 100%
Water's Edge Apartments Lake Villa, IL 108 95 88%
------------- ------------ ------------
1,174 1,120 95%
============= ============ ============
</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 1999 and 1998. Operations at Bluff
Ridge are heavily dependent on demand from the local military personnel. The
Jacksonville rental market has remained relatively stable throughout 1999.
Operating revenue increased 1.8% primarily as a result of rental rate
increases while real estate operating costs decreased 1.5% 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 5% from 1998 to 1999. The property was
current on its debt service payments during 1999.
Fox Hollow Apartments
Fox Hollow Apartments is a 184-unit apartment community located in High Point,
North Carolina. Average occupancy was 96% in 1999, compared to 95% in 1998.
Excluding interest, depreciation and amortization, net operating income
increased approximately 7% from 1998 to 1999. This increase was primarily due
to a 2.6% increase in revenue and a 2.1% decrease in real estate operating
expenses resulting from lower repairs and maintenance expenses and property
improvements. The property remained in compliance with the terms of the Loan
Modification Agreement (LMA) entered into with the mortgage holder in 1996.
During December 1999, the Partnership acquired the sole remaining limited
partner's 1% limited partnership interest in the Operating Partnership which
owns Fox Hollow Apartments. As a result of this acquisition, the Partnership
now owns a 99.99% limited partnership interest in the Fox Hollow Operating
Partnership. The Partnership also acquired the right to receive any and all
payments of principal and interest on certain advances made to the Operating
Partnership by such limited partner. The Partnership paid an aggregate amount
of $325,000 for these acquisitions. The Partnership recorded these
acquisitions as an additional investment in the Operating Partnership which
owns Fox Hollow Apartments.
Highland Park Apartments
Highland Park Apartments contains 252 luxury garden apartments and is located
in Columbus, Ohio. Average occupancy was 94% in 1999, compared to 95% in
1998. Excluding interest, depreciation and amortization, net operating income
increased approximately 11% from 1998 to 1999. This increase is due to a 7.8%
increase in revenue attributable primarily to rental rate increases. The
increase in revenue was partially offset by a 2.8% increase in real estate
operating expenses resulting from higher repairs and maintenance expenses,
property improvements and labor costs. The property remained current on its
mortgage obligations throughout 1999.
<PAGE> - 7 -
Misty Springs Apartments
Misty Springs Apartments is a 128-unit apartment community located in Daytona
Beach, Florida. Average occupancy was 99% in 1999 and 1998. Net operating
income, excluding interest, depreciation and amortization, was approximately
4% higher in 1999, compared to 1998. This increase resulted from a 4.1%
increase in revenue attributable to higher rental rates which was partially
offset by a 4% increase in operating expenses, primarily repairs and
maintenance expenses and property improvements.
At December 31, 1999, 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 1999; however, shortfalls of $35,000 were funded by the Partnership's
reserves.
The Ponds at Georgetown
The Ponds at Georgetown consists of 134 apartments located in Ann Arbor,
Michigan. Average occupancy was 99% in 1999 and 1998. Excluding interest,
depreciation and amortization, operating income generated by the property in
1999 approximated that of 1998. 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%. Since the restructuring, cash flow
generated from operations has generally been sufficient to cover all the
Operating Partnership's cash needs. The property was current on its mortgage
obligations as of December 31, 1999.
Waterman's Crossing
Waterman's Crossing is a 260-unit apartment community located in Newport News,
Virginia. Average occupancy was 99% in 1999, compared to 100% in 1998.
Excluding interest, depreciation and amortization, operating income increased
2% from 1998 to 1999. This increase was due to an increase in revenue of 2.9%
resulting primarily from rental rate increases which was partially offset by
higher operating expenses, primarily repairs and maintenance expenses,
property improvements and labor costs. The Operating Partnership was current
on its mortgage obligations in 1999; however, shortfalls of $25,000 were
funded by the Partnerships reserves.
Water's Edge Apartments
Water's Edge Apartments is a 108-unit apartment complex located in Lake Villa,
Illinois. Average occupancy was 95% in 1999 compared to 96% in 1998.
Although 1999 operating revenue approximated that of 1998, net operating
income, excluding interest, depreciation and amortization, increased
approximately 11% in 1999 compared to 1998. This increase is attributable to
decreases in property taxes, utilities, administrative expenses, repairs and
maintenance expenses and property improvements. The Operating Partnership
remained current on its mortgage obligations in 1999. The Partnership
received a $59,755 distribution of excess cash flow from this property during
1999.
<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, 1999 Dec. 31, 1998 Dec. 31, 1997
--------------- --------------- ---------------
<S> <C> <C> <C>
Mortgage-backed securities income $ 3,215,472 $ 3,262,922 $ 3,302,727
Interest income on temporary cash investments 431,111 530,396 554,604
Equity in losses of Operating Partnerships (325,245) (186,942) (178,550)
Other income 2,000 6,300 5,334
-------------- --------------- ---------------
3,323,338 3,612,676 3,684,115
Operating and administrative expenses 629,037 1,710,173 632,894
-------------- --------------- ---------------
Net income $ 2,694,301 $ 1,902,503 $ 3,051,221
============== =============== ===============
</TABLE>
<TABLE>
<CAPTION>
Increase Increase
(Decrease) (Decrease)
From 1998 From 1997
--------------- ---------------
<S> <C> <C>
Mortgage-backed securities income $ (47,450) $ (39,805)
Interest income on temporary cash investments (99,285) (24,208)
Equity in losses of Operating Partnerships (138,303) (8,392)
Other income (4,300) 966
-------------- ---------------
(289,338) (71,439)
Operating and administrative expenses (1,081,136) 1,077,279
-------------- ---------------
Net income $ 791,798 $ (1,148,718)
============== ===============
</TABLE>
Mortgage-backed securities income decreased by $47,450 from 1998 to 1999.
Such decrease was attributable to the fourth quarter 1998 payoff of the GNMA
Certificate of the Ponds at Georgetown at 9.25% and the issuance of a new GNMA
Certificate at 7.25%, as well as the continued amortization of the principal
balances of the Partnership's mortgage-backed securities.
Mortgage-backed securities income decreased by $39,805 from 1997 to 1998, due
to the continued amortization of the principal balances of the Partnership's
mortgage-backed securities.
Interest income on temporary cash investments decreased by $99,285 from 1998
to 1999 and $24,208 from 1997 to 1998 due to a decrease in the average cash
balance held by the Partnership. This decrease resulted primarily from the
use of cash to make additional equity contributions to the Ponds at
Georgetown in September 1998 and to increase the investment in the Ponds at
Georgetown GNMA Certificate in October 1998.
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 contributions to certain Operating
Partnerships of $385,000, $186,942, and $178,550 during 1999, 1998 and 1997,
respectively. During 1999, the Partnership received a distribution of $59,755
from one of the Operating Partnerships. No such distributions were received
in 1998 or 1997. The Partnership recorded equity in losses of Operating
Partnerships in 1999, 1998, and 1997 to the extent of the additional
contributions to Operating Partnerships, net of distributions received.
Accordingly, equity in losses of Operating Partnerships decreased $138,303
from 1998 to 1999 and decreased $8,392 from 1997 to 1998.
<PAGE> - 9 -
Operating and administrative expenses decreased $1,081,136 from 1998 to 1999.
This decrease was due to: (i) the 1998 write-off of approximately $767,000 in
transaction costs incurred in conjunction with a proposed merger which was no
longer under consideration; (ii) decreases of $218,000 in salaries and
related expenses and $57,000 in consulting expenses due to a reduction of
personnel time and consulting fees incurred in connection with developing and
evaluating alternatives for restructuring the Partnership; (iii) a decrease of
approximately $52,000 in amortization expenses as certain deferred costs
became fully amortized in 1998; and (iv) a decrease of $77,000 in other
general and administrative expenses. These expense decreases were partially
offset by an increase of approximately $90,000 in legal fees resulting from
the defense of a class action lawsuit filed against the Partnership as more
fully described in Note 9 to the financial statements.
Operating and administrative expenses increased $1,077,279 from 1997 to 1998.
This increase was due to: (i) the write-off in 1998 of approximately
$767,000 in transaction costs incurred in conjunction with a proposed merger
which was no longer under consideration; (ii) an increase of approximately
$273,000 in salaries and related expenses primarily due to additional
personnel 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.
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. 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. To date, the
Partnership has not experienced any significant problems with such systems and
equipment arising from the inability of computer programs and embedded
circuitry to correctly recognize dates occurring after December 31, 1999.
Although the Partnership does not anticipate that so-called "Year 2000
problems" will surface, there can be no assurance that such problems will not
arise. The Partnership has not incurred any significant costs in rectifying
Year 2000 problems.
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.
<PAGE> - 10 -
Item 7A. Quantitative and Qualitative Disclosures About Market Risk.
The Partnership's primary market risk exposure is interest rate risk. The
Partnership's exposure to market risk for changes in interest rates relates
primarily to its investment securities which are 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>
2000 251,152 8.85%
2001 275,138 8.85%
2002 301,431 8.84%
2003 330,255 8.84%
2004 361,849 8.83%
Thereafter 33,935,875 9.02%
</TABLE>
The aggregate fair value of the Partnership's investment securities at
December 31, 1999 was $35,464,997.
As the above table incorporates only those positions or exposures that existed
as of December 31, 1999, it does not consider those exposures or posititons
that could arise after that date. Moreover, because future commitments are
not presented in the table above, the information presented has limited
predictive value. As a result, the Partnership's ultimate economic impact
with respect to interest rate fluctuations will depend on the exposures that
arise during the period, the Partnership's risk mitigating strategies at that
time and interest rates.
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, 1999 and 1998.
The information required by this Item 9 relating to a change in accountants
has been previously reported (as that term is defined by Rule 12b-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.
<PAGE> - 11 -
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. 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
Chairman of the Board, President, 1997
Chief Executive Officer and
Director of the IME General Partner
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
Lisa Yanney Roskens Manager of America First 1999
</TABLE>
Michael B. Yanney, 66, 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, Inc., America First Mortgage Investments, Inc., RCN
Corporation, Rio Grande Medical Technologies, Inc. and Telecom Technologies,
Inc. Mr. Yanney is the husband of Gail Walling Yanney and the father of Lisa
Yanney Roskens.
<PAGE> - 12 -
Michael Thesing, 45, 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. and America First
Investment Advisors, 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., 73, 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, 66, 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 1991 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, 77, 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, 63, 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 and mother of Lisa Yanney Roskens.
Mariann Byerwalter, 39, 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.,
SRI International, Stanford Management Company and Stanford Hospitals and
Clinics.
Lisa Yanney Roskens, 33 is a Managing Director of Twin Compass, LLC, a
small business consulting firm. From 1997 to 1999, Ms. Roskens was employed
by Inacom Corporation, where she held the position of Director of Business
Development and Director of Field Services Development. From 1995 to 1997,
Ms. Roskens served as Finance Director for the U.S. Senate campaign of Senator
Charles Hagel of Nebraska. From 1992 to 1995, Ms. Roskens was an attorney
with the Kutak Rock law firm in Omaha, Nebraska, specializing in commercial
litigation. Ms. Roskens is the daughter of Michael Yanney and Gail Walling
Yanney.
<PAGE> - 13 -
Section 16(a) Beneficial Ownership Reporting Compliance
Section 16(a) of the Securities Exchange Act of 1934 requires the
managers and executive officers of the parent company of the Registrant's
General Partners and persons who beneficially own more than 10% of the
Registrant's BACs to file reports of their ownership of BACs with the
Securities and Exchange Commission (the "SEC"). Such executive officers,
managers and BAC holders are required by SEC regulation to furnish the
Registrant with copies of all Section 16(a) reports they file. Based solely
upon review of the copies of such reports received by the Registrant and
written representations from each such person who did not file an annual
report with the SEC (Form 5) that no other reports were required, the
Registrant believes that there was compliance for the fiscal year ended
December 31, 1999 with all Section 16(a) filing requirements applicable to
such executive officers, managers and beneficial owners of BACs.
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, 1999, 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 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
1999, distributions to investors represented less than an 8% return;
accordingly, no fees were paid or accrued during 1999.
During 1999, the Registrant paid or reimbursed one of the General
Partners or an affiliate of the General Partners $657,861 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.
<PAGE> - 14 -
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, 1999, the Manager was paid property management fees of
$210,137.
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, 1999, and
December 31, 1998.
Statements of Income and Comprehensive Income of the Registrant
for the years ended December 31, 1999, December 31, 1998, and
December 31, 1997.
Statements of Partners' Capital (Deficit) of the Registrant for
the years ended December 31, 1999, December 31, 1998, and December
31, 1997.
Statements of Cash Flows of the Registrant for the years ended
December 31, 1999, December 31, 1998, and December 31, 1997.
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 are 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). 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)).
24. Power of Attorney
27. Financial Data Schedule
(b) The Registrant did not file a Form 8-K during the last quarter of the
period covered by this report.
<PAGE> - 15 -
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, 1999 and 1998, 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, 1999. 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, 1999 and 1998, and the results of its operations and its cash
flows for each of the three years in the period ended December 31, 1999, in
conformity with generally accepted accounting principles.
Omaha, Nebraska
March 17, 2000 /s/KPMG LLP
<PAGE> - 16 -
CAPITAL SOURCE L.P.
BALANCE SHEETS
<TABLE>
<CAPTION>
Dec. 31, 1999 Dec. 31, 1998
--------------- ---------------
<S> <C> <C>
Assets
Cash and temporary cash investments, at cost which
approximates market value $ 8,658,997 $ 9,304,694
Investment in FHA Loans (Note 5) 12,340,447 12,429,485
Investment in GNMA Certificates (Note 5) 23,105,420 23,454,411
Investment in Operating Partnerships (Note 6) - -
Interest receivable 304,743 306,659
Other assets 457,866 211,928
--------------- ---------------
$ 44,867,473 $ 45,707,177
=============== ===============
Liabilities and Partners' Capital (Deficit)
Liabilities
Accounts payable (Note 7) $ 420,860 $ 490,085
Distribution payable (Note 4) 860,597 860,597
--------------- ---------------
1,281,457 1,350,682
--------------- ---------------
Partners' Capital (Deficit)
General Partner (179,799) (172,094)
Beneficial Assignment Certificate Holders
($12.97 per BAC in 1999 and $13.20 in 1998) 43,765,815 44,528,589
--------------- ---------------
43,586,016 44,356,495
--------------- ---------------
$ 44,867,473 $ 45,707,177
=============== ===============
</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, 1999 Dec. 31, 1998 Dec. 31, 1997
--------------- --------------- ---------------
<S> <C> <C> <C>
Income
Mortgage-backed securities income (Note 5) $ 3,215,472 $ 3,262,922 $ 3,302,727
Interest income on temporary cash investments 431,111 530,396 554,604
Equity in losses of Operating Partnerships (Note 6) (325,245) (186,942) (178,550)
Other income 2,000 6,300 5,334
--------------- --------------- ---------------
3,323,338 3,612,676 3,684,115
Expenses
Operating and administrative expenses (Note 7) 629,037 1,710,173 632,894
--------------- --------------- ---------------
Net income 2,694,301 1,902,503 3,051,221
Other comprehensive income:
Unrealized gains on securities
Unrealized holding gains (losses) arising during the year (22,392) (4,699) 2,114
--------------- --------------- ---------------
Net comprehensive income $ 2,671,909 $ 1,897,804 $ 3,053,335
=============== =============== ===============
Net income allocated to:
General Partner $ 26,943 $ 19,025 $ 30,512
BAC Holders 2,667,358 1,883,478 3,020,709
--------------- --------------- ---------------
$ 2,694,301 $ 1,902,503 $ 3,051,221
=============== =============== ===============
Net income, basic and diluted, per BAC $ .79 $ .56 $ .90
=============== =============== ===============
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> - 17 -
CAPITAL SOURCE L.P.
STATEMENTS OF PARTNERS' CAPITAL (DEFICIT)
FROM DECEMBER 31, 1996 TO DECEMBER 31, 1999
<TABLE>
<CAPTION>
General BAC
Partners Holders Total
--------------- --------------- ---------------
<S> <C> <C> <C>
Partners' Capital (Deficit) (excluding accumulated
other comprehensive income)
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)
--------------- --------------- ---------------
Balance at December 31, 1998 (172,483) 44,490,061 44,317,578
Net income 26,943 2,667,358 2,694,301
Cash distributions paid or accrued (Note 4) (34,424) (3,407,964) (3,442,388)
--------------- --------------- ---------------
(179,964) 43,749,455 43,569,491
--------------- --------------- ---------------
Accumulated Other Comprehensive Income
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)
--------------- --------------- ---------------
Balance at December 31, 1998 389 38,528 38,917
Other comprehensive income (224) (22,168) (22,392)
--------------- --------------- ---------------
165 16,360 16,525
--------------- --------------- ---------------
Balance at December 31, 1999 $ (179,799) $ 43,765,815 $ 43,586,016
=============== =============== ===============
The accompanying notes are an integral part of the financial statements.
</TABLE>
<PAGE> - 18 -
CAPITAL SOURCE L.P.
STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
For the For the For the
Year Ended Year Ended Year Ended
Dec. 31, 1999 Dec. 31, 1998 Dec. 31, 1997
--------------- --------------- ---------------
<S> <C> <C> <C>
Cash flows from operating activities
Net income $ 2,694,301 $ 1,902,503 $ 3,051,221
Adjustments to reconcile net income to
net cash provided by operating activities
Equity in losses of Operating Partnerships 325,245 186,942 178,550
Amortization of discount on mortgage-backed securities (2,216) (2,287) (2,665)
Decrease in interest receivable 1,916 14,826 275
Decrease (increase) in other assets 207,037 (77,354) (3,605)
(Decrease) increase in accounts payable (69,225) 285,943 106,086
--------------- --------------- ---------------
Net cash provided by operating activities 3,157,058 2,310,573 3,329,862
--------------- --------------- ---------------
Cash flows from investing activities
FHA Loan and GNMA principal payments received 417,853 2,635,396 429,144
Distributions received from Operating Partnerships 59,755 - -
Acquisition of GNMA Certificate - (2,422,519) -
Investments in Operating Partnerships (385,000) (186,942) (178,550)
Deferred transaction costs paid (452,975) - -
--------------- --------------- ---------------
Net cash (used in) provided by investing activities (360,367) 25,935 250,594
--------------- --------------- ---------------
Cash flow from financing activity
Distributions paid (3,442,388) (3,442,378) (3,442,389)
--------------- --------------- ---------------
Net (decrease) increase in cash and temporary cash investments (645,697) (1,105,870) 138,067
Cash and temporary cash investments at beginning of year 9,304,694 10,410,564 10,272,497
--------------- --------------- ---------------
Cash and temporary cash investments at end of year $ 8,658,997 $ 9,304,694 $ 10,410,564
=============== =============== ===============
The accompanying notes are an integral part of the financial statements.
</TABLE>
<PAGE> - 19 -
CAPITAL SOURCE L.P.
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1999
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> - 20 -
CAPITAL SOURCE L.P.
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1999
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 $10,629,471 and $10,331,740 at
December 31, 1999, and December 31, 1998, 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) New Accounting Pronouncement
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 use of derivative instruments.
Adoption of this statement, as amended, is required by the Partnership
effective January 1, 2001. Management believes that the impact of such
adoption will not be material to the financial statements.
3. Partnership Reserve Account
The Partnership maintains a reserve account which consisted of the following
at December 31, 1999:
<TABLE>
<S> <C>
Cash and temporary cash investments $ 8,383,281
GNMA Certificates 670,268
---------------
$ 9,053,549
===============
</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 GNMA Certificates.
<PAGE> - 21 -
CAPITAL SOURCE L.P.
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1999
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, 1999, the total amortized cost, gross unrealized holding
gains, and aggregate fair value of available-for-sale securities were
$653,743, $16,525 and $670,268, respectively. The total amortized cost,
gross unrealized holding gains and aggregate fair value of held-to-maturity
securities were $34,775,599, $19,130 and $34,794,729, respectively.
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.
<PAGE> - 22 -
CAPITAL SOURCE L.P.
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1999
Descriptions of the Partnership's mortgage-backed securities held at December
31, 1999 are as follows:
<TABLE>
<CAPTION>
Income
Number Interest Maturity Carrying Earned
Type of Security and Name Location of Units Rate Date Amount in 1999
- --------------------------------- ----------------- -------- ----------- ------------ --------------- -----------
<S> <C> <C> <C> <C> <C> <C>
Held-to-Maturity
GNMA Certificates:
Misty Springs Apartments Daytona Beach, FL 128 8.75% 06-15-2029 $ 4,219,029 $ 370,292
The Ponds at Georgetown Ann Arbor, MI 134 7.50% (1) 12-15-2029 2,400,377 182,287
Waterman's Crossing Newport News, VA 260 10.00% 09-15-2028 10,815,058 1,084,256
Water's Edge Apartments Lake Villa, IL 108 8.75% 12-15-2028 5,000,688 438,962
--------------- ------------
22,435,152 2,075,797
FHA Loans:
Bluff Ridge Apartments Jacksonville, NC 108 8.72% 11-15-2028 3,462,315 302,925
Highland Park Apartments Columbus, OH 252 8.75% 11-01-2028 8,878,132 779,449
--------------- ------------
12,340,447 1,082,374
--------------- ------------
34,775,599 3,158,171
Available-for-Sale
GNMA Certificates:
Pools of single-family mortgages 7.58%(2) 2008 to 2009 348,945(3) 29,245
Pools of single-family mortgages 7.58%(2) 2007 to 2008 321,323(3) 28,056
--------------- ------------
670,268 57,301
--------------- ------------
Balance at December 31,1999 $ 35,445,867 $ 3,215,472
=============== ============
</TABLE>
(1) During the fourth quarter of 1998, the GNMA Certificate backed by a
first mortgage loan on this property 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.
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, 1999 Dec. 31, 1998 Dec. 31, 1997
--------------- --------------- ---------------
<S> <C> <C> <C>
Balance at beginning of year $ 35,883,896 $ 36,099,185 $ 36,523,550
Additions
Acquisition of GNMA Certificate - 2,422,519 -
Amortization of discount on mortgage-backed securities 2,216 2,287 2,665
Deductions
FHA Loan and GNMA principal payments received (417,853) (2,635,396) (429,144)
Change in net unrealized holding gains on
available-for-sale mortgage-backed securities (22,392) (4,699) 2,114
--------------- --------------- ---------------
Balance at end of year $ 35,445,867 $ 35,883,896 $ 36,099,185
=============== =============== ===============
</TABLE>
<PAGE> - 23 -
CAPITAL SOURCE L.P.
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1999
6. Investment in Operating Partnerships
The Partnership's Investment in Operating Partnerships consists 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 provide 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, 1999,
are as follows:
<TABLE>
<CAPTION>
1999
Equity in
(Losses)
Earnings of
Carrying Operating
Name Location Partnership Name Amount Partnerships
- ------------------------ --------------------- ----------------------------------------- ------------ -------------
<S> <C> <C> <C> <C>
Bluff Ridge Apartments Jacksonville, NC Bluff Ridge Associates Limited Partnership $ - $ -
Fox Hollow Apartments High Point, NC Fox Hollow Limited Partnership - (325,000) (1)
Highland Park Apartments Columbus, OH Interstate Limited Partnership - -
Misty Springs Apartments Daytona Beach, FL Cypress Landings II, LTD. - (35,000)
The Ponds at Georgetown Ann Arbor, MI Ponds at Georgetown Limited Partnership - -
Waterman's Crossing Newport News, VA Oyster Cove Limited Partnership - (25,000)
Water's Edge Apartments Lake Villa, IL Water's Edge Limited Partnership - 59,755
------------ ------------
Balance at December 31, 1999 $ - $ (325,245)
============ ============
(1) During December 1999, the Partnership acquired the sole remaining limited
partner's 1% limited partnership interest in the Operating Partnership which
owns Fox Hollow Apartments. As a result of this acquisition, the Partnership
now owns a 99.99% limited partnership interest in the Fox Hollow Operating
Partnership. The Partnership also acquired the right to receive any and all
payments of principal and interest on certain advances made to the Operating
Partnership by such limited partner. The Partnership paid an aggregate amount
of $325,000 for these acquisitions. The Partnership recorded these
acquisitions as an additional investment in the Operating Partnership which
owns Fox Hollow Apartments.
</TABLE>
Reconciliation of the carrying amount of the Investment in Operating
Partnerships is as follows:
<TABLE>
<CAPTION>
For the For the For the
Year Ended Year Ended Year Ended
Dec. 31, 1999 Dec. 31, 1998 Dec. 31, 1997
--------------- --------------- ---------------
<S> <C> <C> <C>
Balance at beginning of year $ - $ - $ -
Addition
Investment in Operating Partnerships 385,000 186,942 178,550
Deductions
Equity in losses of Operating Partnerships (325,245) (186,942) (178,550)
Distributions received from Operating Partnerships (59,755) - -
--------------- --------------- ---------------
Balance at end of year $ - $ - $ -
=============== =============== ===============
</TABLE>
<PAGE> - 24 -
CAPITAL SOURCE L.P.
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1999
Combined financial statements of the Operating Partnerships are as follows:
CAPITAL SOURCE L.P.
OPERATING PARTNERSHIPS BALANCE SHEETS
<TABLE>
<CAPTION>
Dec. 31, 1999 Dec. 31, 1998
--------------- ---------------
<S> <C> <C>
Assets
Investment in real estate:
Land $ 3,098,171 $ 3,098,171
Buildings 38,090,720 38,090,720
Personal property 1,673,094 1,663,961
-------------- ---------------
42,861,985 42,852,852
Less accumulated depreciation (13,173,956) (12,219,492)
-------------- ---------------
Net investment in real estate 29,688,029 30,633,360
Cash and temporary cash investments, at cost
which approximates market value 556,730 358,887
Escrow deposits and property reserves 664,474 567,420
Interest and other receivables 29,929 56,782
Deferred mortgage issuance cost, net of
accumulated amortization 1,986,492 2,061,678
Other assets 518,161 448,844
-------------- ---------------
$ 33,443,815 $ 34,126,971
============== ===============
Liabilities and Partners' Capital (Deficit)
Liabilities
Accounts payable and accrued expenses $ 1,003,466 $ 1,194,470
Mortgage loan payable 40,886,773 41,100,810
Interest payable 252,081 254,370
Due to general partners and their affiliates 3,919,323 3,941,467
-------------- ---------------
46,061,643 46,491,117
-------------- ---------------
Partners' Capital (Deficit)
General Partners (12,617,828) (12,364,146)
Limited Partners - -
-------------- ---------------
(12,617,828) (12,364,146)
-------------- ---------------
$ 33,443,815 $ 34,126,971
============== ===============
</TABLE>
<PAGE> - 25 -
CAPITAL SOURCE L.P.
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1999
<TABLE>
CAPITAL SOURCE L.P.
OPERATING PARTNERSHIPS INCOME STATEMENTS
Dec. 31, 1999 Dec. 31, 1998 Dec. 31, 1997
--------------- --------------- ---------------
<S> <C> <C> <C>
Income
Rental income $ 8,075,019 $ 7,739,350 $ 7,555,700
Interest income on temporary cash investments 26,338 23,807 29,277
Other income 255,456 374,279 246,723
--------------- --------------- ---------------
8,356,813 8,137,436 7,831,700
--------------- --------------- ---------------
Expenses
Real estate operating expenses 3,618,813 3,674,740 3,601,141
Depreciation expense 954,464 952,305 960,062
Interest expense 3,976,989 4,067,738 4,073,157
Amortization 75,186 75,201 73,980
--------------- --------------- ---------------
8,625,452 8,769,984 8,708,340
--------------- --------------- ---------------
Net loss $ (268,639) $ (632,548) $ (876,640)
=============== =============== ===============
Net loss allocated to:
General Partners $ 56,606 $ (445,606) $ (698,090)
Limited Partners (325,245) (186,942) (178,550)
--------------- --------------- ---------------
$ (268,639) $ (632,548) $ (876,640)
=============== =============== ===============
</TABLE>
<PAGE> - 26 -
CAPITAL SOURCE L.P.
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1999
<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, 1999 Dec. 31, 1998 Dec. 31, 1997
--------------- --------------- ---------------
<S> <C> <C> <C>
Cash flows from operating activities
Net loss $ (268,639) $ (632,548) $ (876,640)
Adjustments to reconcile net loss to net cash
provided by operating activities:
Depreciation and amortization 1,029,650 1,027,506 1,034,042
Decrease (increase) in interest and other receivables 26,853 (40,679) (7,298)
Decrease (increase) in escrow deposits and property reserves 97,054 (33,333) (358)
Decrease (increase) in other assets (69,317) 69,817 21,962
Increase (decrease) in accounts payable and accrued expenses (191,004) (109,402) 9,152
Decrease in interest payable (2,289) (36,860) (1,173)
Decrease in due to general partners and their affiliates (22,144) (72,159) (103,479)
--------------- --------------- ---------------
Net cash provided by operating activities 600,164 172,342 76,208
--------------- --------------- ---------------
Cash flows from investing activities:
Acquisition of real estate - (378,315) (19,652)
Acquisition of personal property (9,133) 337,990 (8,971)
--------------- --------------- ---------------
Net cash used in investing activities (9,133) (40,325) (28,623)
--------------- --------------- ---------------
Cash flows from financing activities:
Principal payments on mortgage loan payable (214,037) (230,869) (219,993)
Contributions received 60,000 186,942 178,550
Distributions paid (60,359) - -
Other, net (178,792) (23,436) (29,310)
--------------- --------------- ---------------
Net cash used in financing activities (393,188) (67,363) (70,753)
--------------- --------------- ---------------
Net increase (decrease) in cash and temporary cash investments 197,843 64,654 (23,168)
Cash and temporary cash investments at beginning of year 358,887 294,233 317,401
--------------- --------------- ---------------
Cash and temporary cash investments at end of year $ 556,730 $ 358,887 $ 294,233
============== ============== ==============
</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, 1999, 1998 and 1997, distributions to investors
represented less than an 8% return; accordingly, no fees were paid or accrued
during these years.
<PAGE> - 27 -
CAPITAL SOURCE L.P.
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1999
Substantially all of the Partnership's general and administrative expenses and
certain costs capitalized by the Partnership are paid by a General Partner or
an affiliate and reimbursed by the Partnership. The amount of such expenses
and costs reimbursed to the General Partner was $657,861, $1,305,744, and
$533,419 for the years ended December 31, 1999, 1998 and 1997, respectively.
The reimbursements 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. The fees for services provided
were $210,137, $196,606, and $183,069 for 1999, 1998 and 1997, 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 and liabilities.
Investment in FHA Loans and GNMA Certificates: Fair values are based on
prices obtained from an independent pricing source, adjusted for estimated
prepayments. Refer to the table below for carrying amounts and estimated
fair values of such investments.
<TABLE>
<CAPTION>
At December 31, 1999 At December 31, 1998
----------------------------------- -----------------------------------
Carrying Estimated Carrying Estimated
Amount Fair Value Amount Fair Value
--------------- --------------- --------------- ---------------
<S> <C> <C> <C> <C>
Investment in FHA Loans $ 12,340,447 $ 12,340,447 $ 12,429,485 $ 12,500,047
Investment in GNMA Certificates $ 23,105,420 $ 23,124,550 $ 23,454,411 $ 23,629,076
</TABLE>
9. 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. In this complaint, the plaintiffs sought to enjoin the proposed
merger transaction and seek 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.
The General Partners determined not to pursue the merger transaction which was
the subject of the initial lawsuit and proposed an alternative transaction to
BAC holders. A prospectus/consent solicitation statement outlining this
alternative transaction was sent to BAC holders on or about November 16,
1999. The plaintiffs amended their complaint on December 8, 1999, and again
on February 22, 2000. The second amended complaint challenges this current
prospectus/consent solicitation statement on grounds similar to those alleged
in the original complaint, as well as on other procedural grounds. The second
amended complaint does not seek to enjoin the proposed merger transaction.
<PAGE> - 28 -
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.
The General Partners have moved to dismiss these complaints, and they 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.
10. Summary of Unaudited Quarterly Results of Operations
<TABLE>
<CAPTION> First Second Third Fourth
From January 1, 1999, to December 31, 1999 Quarter Quarter Quarter Quarter
--------------- --------------- --------------- ---------------
<S> <C> <C> <C> <C>
Total income $ 863,492 (1) $ 907,900 $ 971,738 (2) $ 580,208 (1)
Total expenses (144,121) (179,413) (117,480) (188,023)
--------------- --------------- --------------- ---------------
Net income $ 719,371 $ 728,487 $ 854,258 $ 392,185
=============== =============== =============== ===============
Net income, basic and diluted, per BAC $ .21 $ .21 $ .26 $ .11
=============== =============== =============== ===============
(1) The Partnership recorded equity in losses of Operating Partnerships of
$50,000 and $335,000 during the first and fourth quarters, respectively.
(2) The Partnership recorded equity in earnings of Operating Partnerships of
$59,755.
</TABLE>
<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 (1) $ 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 recorded equity in losses of Operating Partnerships of $156,040.
(2) The Partnership wrote off approximately $767,000 in transaction costs
incurred in conjunction with a proposed merger which was no longer under
consideration.
<PAGE> - 29 -
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 28, 2000
<PAGE> - 30 -
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 28, 2000 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 28, 2000 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 28, 2000 By /s/ William S. Carter, M.D.*
William S. Carter, M.D.
Manager of America First Companies L.L.C.
Date: March 28, 2000 By /s/ Martin A. Massengale*
Martin A. Massengale
Manager of America First Companies L.L.C.
Date: March 28, 2000 By /s/ Alan Baer*
Alan Baer
Manager of America First Companies L.L.C.
Date: March 28, 2000 By /s/ Gail Walling Yanney*
Gail Walling Yanney
Manager of America First Companies L.L.C.
Date: March 28, 2000 By /s/ Mariann Byerwalter*
Mariann Byerwalter
Manager of America First Companies L.L.C.
Date: March 28, 2000 By /s/ Lisa Yanney Roskens*
Lisa Yanney Roskens
Manager of America First Companies L.L.C.
*By Michael Thesing,
Attorney in Fact
/s/ Michael Thesing
Michael Thesing
<PAGE> - 31 -
EXHIBIT 24
POWER OF ATTORNEY
<PAGE> - 32 -
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, 1999, 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 Apartment Investors, L.P.
Capital Source L.P.
Capital Source II L.P.-A
America First Real Estate Investment Partners, L.P.
IN WITNESS WHEREOF, the undersigned has executed
this Power of Attorney as of the 1st day of February 2000.
/s/ Michael B. Yanney
Michael B. Yanney
<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, 1999, 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 Apartment Investors, L.P.
Capital Source L.P.
Capital Source II L.P.-A
America First Real Estate Investment Partners, L.P.
IN WITNESS WHEREOF, the undersigned has executed
this Power of Attorney as of the 1st day of February 2000.
/s/ William S. Carter, M.D.
William S. Carter, M.D.
<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, 1999, 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 Apartment Investors, L.P.
Capital Source L.P.
Capital Source II L.P.-A
America First Real Estate Investment Partners, L.P.
IN WITNESS WHEREOF, the undersigned has executed
this Power of Attorney as of the 1st day of February 2000.
/s/ Martin A. Massengale
Martin A. Massengale
<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, 1999, 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 Apartment Investors, L.P.
Capital Source L.P.
Capital Source II L.P.-A
America First Real Estate Investment Partners, L.P.
IN WITNESS WHEREOF, the undersigned has executed
this Power of Attorney as of the 1st day of February 2000.
/s/ Alan Baer
Alan Baer
<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, 1999, 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 Apartment Investors, L.P.
Capital Source L.P.
Capital Source II L.P.-A
America First Real Estate Investment Partners, L.P.
IN WITNESS WHEREOF, the undersigned has executed
this Power of Attorney as of the 1st day of February 2000.
/s/ Gail Walling Yanney
Gail Walling Yanney
<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, 1999, 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 Apartment Investors, L.P.
Capital Source L.P.
Capital Source II L.P.-A
America First Real Estate Investment Partners, L.P.
IN WITNESS WHEREOF, the undersigned has executed
this Power of Attorney as of the 1st day of February 2000.
/s/ Mariann Byerwalter
Mariann Byerwalter
<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, 1999, 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 Apartment Investors, L.P.
Capital Source L.P.
Capital Source II L.P.-A
America First Real Estate Investment Partners, L.P.
IN WITNESS WHEREOF, the undersigned has executed
this Power of Attorney as of the 1st day of February 2000.
/s/ Lisa Yanney Roskens
Lisa Yanney Roskens
<PAGE> - 39 -
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-END> DEC-31-1999
<CASH> 8,658,997
<SECURITIES> 35,445,867
<RECEIVABLES> 304,743
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 44,867,473
<PP&E> 0
<DEPRECIATION> 0
<TOTAL-ASSETS> 44,867,473
<CURRENT-LIABILITIES> 1,281,457
<BONDS> 0
<COMMON> 0
0
0
<OTHER-SE> 43,586,016
<TOTAL-LIABILITY-AND-EQUITY> 44,867,473
<SALES> 0
<TOTAL-REVENUES> 3,323,338
<CGS> 0
<TOTAL-COSTS> 0
<OTHER-EXPENSES> 629,037
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> 2,694,301
<INCOME-TAX> 0
<INCOME-CONTINUING> 2,694,301
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 2,694,301
<EPS-BASIC> .79
<EPS-DILUTED> .79
</TABLE>
