FORM 10-Q
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
X Quarterly report pursuant to Section 13 or 15(d) of the Securities Exchange
Act of 1934
For the quarterly period ended September 30, 2000 or
Transition report pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934
For the transition period from to
Commission File Number: 0-16497
CAPITAL SOURCE L.P.
(Exact name of registrant as specified in its charter)
Delaware 52-1417770
(State or other jurisdiction (IRS Employer
of incorporation or organization) Identification No.)
Suite 400, 1004 Farnam Street, Omaha, Nebraska 68102
(Address of principal executive offices) (Zip Code)
(402) 444-1630
(Registrant's telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to
such filing requirements for the past 90 days.
YES X NO
<PAGE> - i -
Part I. Financial Information
Item 1. Financial Statements
CAPITAL SOURCE L.P.
BALANCE SHEETS
<TABLE>
<CAPTION>
Sept. 30, 2000 Dec. 31, 1999
(unaudited)
--------------- ---------------
<S> <C> <C>
Assets
Cash and temporary cash investments, at cost which
approximates market value $ 8,117,102 $ 8,658,997
Investment in FHA Loans (Note 2) 12,268,350 12,340,447
Investment in GNMA Certificates (Note 2) 22,901,766 23,105,420
Investment in Operating Partnerships (Note 3) - -
Interest receivable 306,170 304,743
Other assets 817,077 457,866
--------------- ---------------
$ 44,410,465 $ 44,867,473
=============== ===============
Liabilities and Partners' Capital (Deficit)
Liabilities
Accounts payable (Note 4) $ 231,646 $ 420,860
Distribution payable 860,597 860,597
--------------- ---------------
1,092,243 1,281,457
--------------- ---------------
Partners' Capital (Deficit)
General Partner (182,477) (179,799)
Beneficial Assignment Certificate Holders
($12.89 per BAC in 2000 and $12.97 in 1999) 43,500,699 43,765,815
--------------- ---------------
43,318,222 43,586,016
--------------- ---------------
$ 44,410,465 $ 44,867,473
=============== ===============
The accompanying notes are an integral part of the financial statements.
</TABLE>
<PAGE> - 1 -
CAPITAL SOURCE L.P.
STATEMENTS OF INCOME AND COMPREHENSIVE INCOME
(UNAUDITED)
<TABLE>
<CAPTION>
For the For the For the Nine For the Nine
Quarter Ended Quarter Ended Months Ended Months Ended
Sept. 30, 2000 Sept. 30, 1999 Sept. 30, 2000 Sept. 30, 1999
--------------- --------------- --------------- ---------------
<S> <C> <C> <C> <C>
Income
Mortgage-backed securities income $ 794,597 $ 802,554 $ 2,389,928 $ 2,415,026
Interest income on temporary cash investments 130,465 109,429 368,475 316,349
Equity in earnings of Operating Partnerships 105,158 59,755 170,146 9,755
Other income - - - 2,000
--------------- --------------- --------------- ---------------
1,030,220 971,738 2,928,549 2,743,130
Expenses
Operating and administrative expenses (Note 4) 204,497 117,480 614,357 441,014
--------------- --------------- --------------- ---------------
Net income 825,723 854,258 2,314,192 2,302,116
Other comprehensive income:
Unrealized holding gains (losses) on securities
arising during the period 4,457 (3,590) (195) (13,231)
--------------- --------------- --------------- ---------------
Net comprehensive income $ 830,180 $ 850,668 $ 2,313,997 $ 2,288,885
=============== =============== =============== ===============
Net income allocated to:
General Partner $ 8,257 $ 8,543 $ 23,142 $ 23,022
Limited Partner 817,466 845,715 2,291,050 2,279,094
--------------- --------------- --------------- ---------------
$ 825,723 $ 854,258 $ 2,314,192 $ 2,302,116
=============== =============== =============== ===============
Net income, basic and diluted, per BAC $ .24 $ .26 $ .68 $ .68
=============== =============== =============== ===============
Weighted average number of BACs outstanding 3,374,222 3,374,222 3,374,222 3,374,222
=============== =============== =============== ===============
The accompanying notes are an integral part of the financial statements.
</TABLE>
<PAGE> - 2 -
CAPITAL SOURCE L.P.
STATEMENT OF PARTNERS CAPITAL (DEFICIT)
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2000
(UNAUDITED)
<TABLE>
<CAPTION>
General BAC
Partner Holders Total
-------------- ---------------- ---------------
<S> <C> <C> <C>
Partners' Capital (Deficit)
(excluding accumulated other comprehensive income)
Balance at December 31, 1999 $ (179,964) $ 43,749,455 $ 43,569,491
Net income 23,142 2,291,050 2,314,192
Cash distributions paid or accrued (25,818) (2,555,973) (2,581,791)
-------------- ---------------- ---------------
(182,640) 43,484,532 43,301,892
-------------- ---------------- ---------------
Accumulated other comprehensive income
Balance at December 31, 1999 165 16,360 16,525
Other comprehensive income (loss) (2) (193) (195)
-------------- ---------------- ---------------
163 16,167 16,330
-------------- ---------------- ---------------
Balance at September 30, 2000 $ (182,477) $ 43,500,699 $ 43,318,222
============== ================ ===============
</TABLE>
CAPITAL SOURCE L.P.
STATEMENTS OF CASH FLOWS
(UNAUDITED)
<TABLE>
<CAPTION>
For the Nine For the Nine
Months Ended Months Ended
Sept. 30, 2000 Sept. 30, 1999
--------------- ---------------
<S> <C> <C>
Cash flows from operating activities
Net income $ 2,314,192 $ 2,302,116
Adjustments to reconcile net income to net cash
from operating activities
Equity in earnings of Operating Partnerships (170,146) (9,755)
Amortization of discount on mortgage-backed securities (1,112) (1,917)
Decrease in interest receivable 1,427 3,337
(Increase) decrease in other assets (10,795) 26,038
Decrease in accounts payable (189,214) (323,398)
--------------- ---------------
Net cash provided by operating activities 1,944,352 1,996,421
--------------- ---------------
Cash flows from investing activities
FHA Loan and GNMA principal payments received 276,668 334,872
Distributions received from Operating Partnerships 170,146 59,755
Investment in Operating Partnerships - (50,000)
Deferred transaction costs paid (351,270) -
--------------- ---------------
Net cash provided by investing activities 95,544 344,627
--------------- ---------------
Cash flow used in financing activity
Distributions paid (2,581,791) (2,581,791)
--------------- ---------------
Net decrease in cash and temporary cash investments (541,895) (240,743)
Cash and temporary cash investments at beginning of period 8,658,997 9,304,694
--------------- ---------------
Cash and temporary cash investments at end of period $ 8,117,102 $ 9,063,951
=============== ===============
The accompanying notes are an integral part of the financial statements.
</TABLE>
<PAGE> - 3 -
CAPITAL SOURCE L.P.
NOTES TO FINANCIAL STATEMENTS
SEPTEMBER 30, 2000
(UNAUDITED)
1. Basis of Presentation
The accompanying interim unaudited financial statements have been prepared
according to the rules and regulations of the Securities and Exchange
Commission. Certain information and footnote disclosures normally included in
financial statements prepared in accordance with generally accepted accounting
principles have been condensed or omitted according to such rules and
regulations, although management believes that the disclosures are adequate to
make the information presented not misleading. The financial statements
should be read in conjunction with the financial statements and notes thereto
included in the Partnership's Annual Report on Form 10-K for the year ended
December 31, 1999. In the opinion of management, all normal and recurring
adjustments necessary to present fairly the financial position at September
30, 2000 and results of operations for all periods presented have been made.
The results of operations for the three and nine-month periods ended September
30, 2000 are not necessarily indicative of the results to be expected for the
full year.
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.
2. Investment in Mortgage-Backed Securities
At September 30, 2000, the total amortized cost, gross unrealized holding
gains and aggregate fair value of available-for-sale securities were $564,264,
$16,330 and $580,594, respectively. At September 30, 2000, the total
amortized cost, gross unrealized holding gains and aggregate fair value of
held-to-maturity securities were $34,589,521, $19,008 and $34,608,529,
respectively.
<PAGE> - 4 -
CAPITAL SOURCE L.P.
NOTES TO FINANCIAL STATEMENTS
SEPTEMBER 30, 2000
(UNAUDITED)
Descriptions of the Partnership's mortgage-backed securities at September 30,
2000 are as follows:
<TABLE>
<CAPTION>
Number Interest Maturity Carrying
Type of Security and Name Location of Units Rate Date Amount
---------------------------------- -------------------- -------- -------- ------------- ---------------
<S> <C> <C> <C> <C> <C>
Held-to-Maturity
GNMA Certificates:
Misty Springs Apartments Daytona Beach, FL 128 8.75% 06-15-2029 $ 4,196,600
The Ponds at Georgetown Ann Arbor, MI 134 7.50% 12-15-2029 2,385,037
Waterman's Crossing Newport News, VA 260 10.00% 09-15-2028 10,766,747
Water's Edge Apartments Lake Villa, IL 108 8.75% 12-15-2028 4,972,788
---------------
22,321,172
FHA Loans:
Bluff Ridge Apartments Jacksonville, NC 108 8.72% 11-15-2028 3,442,143
Highland Park Apartments Columbus, OH 252 8.75% 11-01-2028 8,826,207
---------------
12,268,350
---------------
34,589,522
---------------
Available-for-Sale
GNMA Certificates:
Pools of single-family mortgages 7.58%(1) 2008 to 2009 304,101
Pools of single-family mortgages 7.58%(1) 2007 to 2008 276,493
---------------
580,594
---------------
Balance at September 30, 2000 $ 35,170,116
===============
</TABLE>
(1) Represents effective yield to the Partnership.
Reconciliation of the carrying amount of the mortgage-backed securities is as
follows:
<TABLE>
<S> <C>
Balance at December 31, 1999 $ 35,445,867
Addition
Amortization of discount on mortgage-backed securities 1,112
Deductions
FHA Loan and GNMA principal payments received (276,668)
Change in net unrealized holding gains (losses) on available-for-sale
mortgage-backed securities (195)
---------------
Balance at September 30, 2000 $ 35,170,116
===============
</TABLE>
3. 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 and is accounted for using
the equity method. Currently, losses are recognized only to the extent of
additional contributions, net of distributions received, to the Operating
Partnerships by the Partnership. Any distributions received by the
Partnership from the Operating Partnerships are recorded as income.
<PAGE> - 5 -
CAPITAL SOURCE L.P.
NOTES TO FINANCIAL STATEMENTS
SEPTEMBER 30, 2000
(UNAUDITED)
Descriptions of the Operating Partnerships held at September 30, 2000, are as
follows:
<TABLE>
<CAPTION>
Carrying
Name Location Partnership Name Amount
------------------------ --------------------- ----------------------------------------- ------------
<S> <C> <C> <C>
Misty Springs Apartments Daytona Beach, FL Cypress Landings II, Ltd. $ -
Fox Hollow Apartments High Point, NC Fox Hollow Limited Partnership -
The Ponds at Georgetown Ann Arbor, MI Ponds at Georgetown Limited Partnership -
Waterman's Crossing Newport News, VA Oyster Cove Limited Partnership -
Water's Edge Apartments Lake Villa, IL Water's Edge Limited Partnership -
Bluff Ridge Apartments Jacksonville, NC Bluff Ridge Associates Limited Partnership -
Highland Park Apartments Columbus, OH Interstate Limited Partnership -
------------
Balance at September 30, 2000 $ -
============
</TABLE>
Reconciliation of the carrying amount of the Operating Partnerships is as
follows:
<TABLE>
<CAPTION>
<S> <C>
Balance at December 31, 1999 $ -
Addition
Equity in earnings of Operating Partnerships 170,146
Deduction
Distributions received from Operating Partnerships (170,146)
---------------
Balance at September 30, 2000 $ -
===============
4. Transactions with Related Parties
The General Partners, certain of their affiliates and the Operating
Partnerships' general partners have received or may receive fees,
compensation, income, distributions and payments from the Partnership in
connection with the offering and the investment, management and sale of the
Partnership's assets (other than disclosed elsewhere) as follows.
The General Partners are entitled to receive an asset management and
partnership administration fee equal to 0.5% of invested assets per annum,
payable only during such years that an 8% return has been paid to investors on
a noncumulative basis. Any unpaid amounts will accrue and be payable only
after a 13% annual return to investors has been paid on a cumulative basis and
the investors have received the return of their capital contributions. For
the quarter and nine months ended September 30, 2000, distributions to investors
represented less than an 8% return; accordingly, no fees were paid or accrued
during these periods.
Substantially all of the Partnership's general and administrative expenses and
certain costs capitalized by the Partnership are paid by a General Partner or
an affiliate and reimbursed by the Partnership. The amount of such expenses
and costs reimbursed to the General Partner for the nine months ended
September 30, 2000, was $1,149,859 ($332,310 for the quarter ended September
30, 2000). Such reimbursed expenses included in this footnote are presented
on a cash basis and do not reflect accruals made at quarter end which are
reflected in the accompanying financial statements.
<PAGE> - 6 -
CAPITAL SOURCE L.P.
NOTES TO FINANCIAL STATEMENTS
SEPTEMBER 30, 2000
(UNAUDITED)
An affiliate of the General Partners has been retained to provide property
management services for Waterman's Crossing, Misty Springs Apartments, Fox
Hollow Apartments and The Ponds at Georgetown. The fees for services provided
were $51,406 and $152,571 for the quarter and nine months ended September 30,
2000, 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.
5. 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.
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
Books and Records Action). 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.
To resolve these lawsuits, the Partnership and affiliates, on April 24, 2000,
entered into a settlement agreement (the Settlement) with the plaintiffs. The
Settlement remains subject to approval by the Court. The complete terms of
the Settlement, along with the updated consent solicitation material
describing the revised merger transaction, was filed with the Securities and
Exchange Commission (the SEC) on or about June 15, 2000. In connection with
the Settlement, which, if approved, will also result in the dismissal of the
Books and Records Action, the Partnership submitted a revised transaction to
BAC holders for approval on or about June 30, 2000. On October 2, 2000, the
BAC holders of both the Partnership and Capital Source II L.P.-A approved the
revised transaction. In accordance with the Settlement, the parties to this
litigation sent a court-approved settlement notice to the class members on or
about November 10, 2000. This notice described the terms of the Settlement
and also notified the class that the Court will hold a hearing on December 19,
2000 to consider whether to approve the Settlement.
<PAGE> - 7 -
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations
The following discussion should be read in conjunction with all of the
financial statements and notes included in Item 1 of this report as well as
the Partnership's Annual Report on Form 10-K for the year ended December 31,
1999.
Liquidity and Capital Resources
At September 30, 2000, the Partnership owned: (i) four 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 four states; and (ii) two 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 seven limited partnerships which own
multifamily properties. Six of these properties are financed by GNMA
Certificates or FHA Loans. The remaining property was financed by an FHA Loan
which was repaid to the Partnership in 1993. The GNMA Certificates, FHA Loans
and Partnership Equity Investments are referred to as the "Permanent
Investments". The Partnership has also invested amounts in certain GNMA
securities backed by pools of single-family mortgages (Reserve Investments).
The obligations of GNMA and FHA are backed by the full faith and credit of the
United States government. The overall status of the Partnership's investments
has remained relatively constant since December 31, 1999.
The following table shows the occupancy levels of the properties financed by
the Partnership at September 30, 2000:
</TABLE>
<TABLE>
<CAPTION>
Number Percentage
Number of Units of Units
Property Name Location of Units Occupied Occupied
------------------------------- -------------------- ------------ ------------ ------------
<S> <C> <C> <C> <C>
Bluff Ridge Apartments Jacksonville, NC 108 107 99%
Fox Hollow Apartments High Point, NC 184 184 100%
Highland Park Apartments Columbus, OH 252 244 97%
Misty Springs Apartments Daytona Beach, FL 128 128 100%
The Ponds at Georgetown Ann Arbor, MI 134 133 99%
Waterman's Crossing Newport News, VA 260 255 98%
Water's Edge Apartments Lake Villa, IL 108 98 91%
------------- ------------ ------------
1,174 1,149 98%
============= ============ ============
Distributions
Cash distributions paid or accrued per BAC for the periods shown were as
follows:
</TABLE>
<TABLE>
<CAPTION>
For the Nine For the Nine
Months Ended Months Ended
Sept. 30, 2000 Sept. 30, 1999
--------------- ---------------
<S> <C> <C>
Regular quarterly distributions
Income $ .6790 $ .6754
Return of capital .0785 .0821
--------------- ---------------
$ .7575 $ .7575
=============== ===============
Distributions
Paid out of cash flow $ .7102 $ .7575
Paid out of reserves .0473 -
--------------- ---------------
$ .7575 $ .7575
=============== ===============
</TABLE>
<PAGE> - 8 -
Regular quarterly distributions to BAC Holders consist primarily of interest
received on FHA Loans and GNMA Certificates. Additional cash for
distributions is received from other investments. The Partnership may draw on
reserves to pay operating expenses or to supplement cash distributions to BAC
Holders. The Partnership is permitted to replenish reserves with cash flows
in excess of distributions paid. For the nine months ended September 30, 2000,
$161,077 was withdrawn from reserves to supplement distributions to BAC
Holders ($48,142 was withdrawn for the quarter ended September 30, 2000). The
total amount held in reserves at September 30, 2000 was $8,818,286 of which
$580,594 was invested in GNMA Certificates.
The Partnership believes that cash provided by operating and investing
activities and, if necessary, withdrawals from the Partnership's reserves will
be adequate to meet its short-term and long-term liquidity requirements,
including the payments of distributions to BAC Holders. Under the terms of its
Partnership Agreement, the Partnership has the authority to enter into
short-term and long-term debt financing arrangements; however, the Partnership
currently does not anticipate entering into such arrangements. The
Partnership is not authorized to issue additional BACs to meet short-term and
long-term liquidity requirements.
Results of Operations
Comparison of the Quarters Ended September 30, 2000 and September 30, 1999
Mortgage-backed securities income decreased slightly for the quarter
ended September 30, 2000, compared to the same period in 1999 due to the
continued amortization of the principal balances of the Partnership's
mortgage-backed securities.
Interest income on temporary cash investments increased approximately $21,000
for the quarter ended September 30, 2000, compared to the same period in 1999
due to an increase in the average interest rate earned on reserve investments.
Equity in earnings of Operating Partnerships increased $45,403 for the quarter
ended September 30, 2000 compared to the same period in 1999. This increase
is the result of an increase in excess cash flow received from Water's Edge
Apartments to $105,158 for the quarter ended September 30, 2000, up from
$59,755 for the comparable period of 1999. The Partnership recorded equity in
earnings of Operating Partnerships for the respective periods to the extent of
distributions received from the Operating Partnerships, net of additional
investments.
Operating and administrative expenses increased approximately $87,000 for the
quarter ended September 30, 2000, compared to the same period in 1999
primarily due to an increase in legal fees resulting from the defense of a
purported class action lawsuit filed against the Partnership as more fully
described in Note 5 to the financial statements. Also contributing to the
increase in operating and administrative expenses was an increase in salaries
and related expenses.
Comparison of the Nine Months Ended September 30, 2000 and September 30, 1999
Mortgage-backed securities income decreased slightly for the nine months
ended September 30, 2000, compared to the same period in 1999 due to the
continued amortization of the principal balances of the Partnership's
mortgage-backed securities.
Interest income on temporary cash investments increased approximately $52,000
for the nine months ended September 30, 2000, compared to the same period in
1999 due to an increase in the average interest rate earned on reserve
investments.
During the nine months ended September 30, 2000, the Partnership received
distributions totaling $170,146 from The Ponds at Georgetown, Highland Park
Apartments and Water's Edge Apartments compared to $59,755 received from
Water's Edge Apartments during the comparable period of 1999. In addition,
the Partnership did not make additional contributions to any Operating
Partnerships during the nine months ending September 30, 2000, while
additional contributions totaling $50,000 were made to Waterman's Crossing and
Misty Springs Apartments during the same period in 1999. The Partnership
recorded equity in earnings of Operating Partnerships for the respective
periods to the extent of distributions received from the Operating
Partnerships, net of additional investments. Accordingly, equity in earnings
of Operating Partnerships increased $160,391 for the nine months ended
September 30, 2000 compared to the same period in 1999.
<PAGE> - 9 -
Operating and administrative expenses increased approximately $173,000 for the
nine months ended September 30, 2000, compared to the same period in 1999
primarily due to an increase in legal fees resulting from the defense of a
purported class action lawsuit filed against the Partnership as more fully
described in Note 5 to the financial statements. Also contributing to the
increase in operating and administrative expenses was an increase in salaries
and related expenses.
New Accounting Pronouncement
The Partnership plans to adopt Statement of Financial Accounting Standards No.
133, "Accounting for Derivative Instruments and Hedging Activities" (SFAS 133)
effective January 1, 2001. Management is currently evaluating the effects of
adopting this statement and does not anticipate that such adoption will have a
material impact on the financial statements of the Partnership.
Forward Looking Statements
This report contains forward looking statements that reflect management's
current beliefs and estimates of future economic circumstances, industry
conditions, the Partnership's performance and financial results. All
statements, trend analysis and other information concerning possible or
assumed future results of operations of the Partnership and the real estate
investments it has made (including, but not limited to, the information
contained in "Management's Discussion and Analysis of Financial Condition and
Results of Operations"), constitute forward-looking statements. BAC Holders
and others should understand that these forward looking statements are subject
to numerous risks and uncertainties and a number of factors could affect the
future results of the Partnership and could cause those results to differ
materially from those expressed in the forward looking statements contained
herein.
Item 3. Quantitative and Qualitative Disclosures About Market Risk.
There have been no material changes in the Partnership's
market risk since December 31, 1999.
<PAGE> - 10 -
PART II. OTHER INFORMATION
Item 1. 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.
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 Books and Records
Action). 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.
To resolve these lawsuits, the Partnership and affiliates, on
April 24, 2000, entered into a settlement agreement (the
Settlement) with the plaintiffs. The Settlement remains subject
to approval by the Court. The complete terms of the Settlement,
along with the updated consent solicitation material describing
the revised merger transaction, was filed with the Securities
and Exchange Commission (the SEC) on or about June 15, 2000. In
connection with the Settlement, which, if approved, will also
result in the dismissal of the Books and Records Action, the
Partnership submitted a revised transaction to BAC holders for
approval on or about June 30, 2000. On October 2, 2000, the
BAC holders of both the Partnership and Capital Source II L.P.-A
approved the revised transaction. In accordance with the
Settlement, the parties to this litigation sent a court-approved
settlement notice to the class members on or about November 10,
2000. This notice described the terms of the Settlement
and also notified the class that the Court will hold a hearing
on December 19, 2000 to consider whether to approve the
Settlement.
There are no other material pending legal proceedings to which
the Partnership is a party or to which any of its property is
subject.
<PAGE> - 11 -
Item 4. Submission of Matters to a Vote of Security Holders.
A Prospectus/Consent Solicitation Statement dated June 30,
2000, was sent to the BAC holders during the third quarter
asking for their consent to a proposed merger of the
Partnership. No meeting was held in connection with the consent
solicitation. The following table sets forth the item that
the BAC holders were asked to vote upon and the results of the
vote as of October 2, 2000, the date on which the consent
solicitation was terminated:
Proposal Results
A proposal to approve of the For: 1,702,640
Partnership's participation in
the proposed consolidation by Against: 435,925
merger with Capital Source II
L.P. and America First Real Abstain: 69,132
Estate Investment Partners,
L.P.
Accordingly, the merger has been approved by the BAC holders of
the Partnership. The merger was also approved by the BAC
holders of Capital Source II L.P.-A. The merger remains subject
to a number of conditions, including the approval by the
Delaware Court of Chancery of a settlement agreement relating to
the legal proceeding described in Item 1.
<PAGE> - 12 -
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
4(a) Agreement of Limited Partnership of Capital Source
L.P. (incorporated herein by reference from Exhibit A of
the Prospectus contained in the Registrant's
Post-Effective Amendment No. 3 dated May 15, 1986 to the
Registration Statement on Form S-11 (Commission File No.
0-16497)).
4(b) Amendment to the Capital Source L.P. Limited Partnership
Agreement (incorporated by reference to Exhibit 3.08 to
Post-Effective Amendment No. 1 to Registration Statement
on Form S-4 dated June 15, 2000 filed by America First
Real Estate Investments Partners, L.P. (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)).
10(a) Stipulation of Settlement
IN THE CASE OF
ALVIN M. PANZER and
SANDRA G. PANZER
Plaintiffs,
v.
INSURED MORTGAGE EQUITIES, INC.,
INSURED MORTGAGE EQUITIES II
LP., AMERICA FIRST CAPITAL
SOURCE I, LLC., AMERICA FIRST
CAPITAL SOURCE II, LLC, AMERICA
FIRST COMPANIES, LLC, AMERICA
FIRST REAL ESTATE INVESTMENT
PARTNERS, L.P., LEHMAN
BROTHERS, INC., CAPITAL SOURCE
L.P., PAUL L. ABBOTT, and CAPITAL
SOURCE II, L.P.,
Defendants.
(incorporated herein by reference to Form 10-Q dated March
31, 2000 filed pursuant to Section 13 or 15(d) of the
Securities Exchange Act of 1934 by Capital Source L.P.
(Commission File No. 0-16497)).
27. Financial Data Schedule
(b) Reports on Form 8-K
The Registrant did not file a report on Form 8-K during the
quarter for which this report is filed.
<PAGE> - 13 -
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Registrant has duly caused this report to be signed
on its behalf by the undersigned, thereunto duly authorized.
CAPITAL SOURCE L.P.
By America First Capital
Source I L.L.C., General
Partner of the Registrant
By /s/ Michael Thesing
Michael Thesing,
Vice President and
Principal Financial Officer
Dated: November 10, 2000
<PAGE> - 14 -
