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, 1996 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: 0-16862
CAPITAL SOURCE II L.P.-A
(Exact name of registrant as specified in its charter)
Delaware 38-2684691
(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 II L.P.-A
CONSOLIDATED BALANCE SHEETS
(UNAUDITED)
<TABLE>
<CAPTION>
Sept. 30, 1996 Dec. 31, 1995
-------------- --------------
<S> <C> <C>
Assets
Investment in real estate:
Land $ 2,800,750 $ 2,800,750
Buildings 23,053,009 22,994,698
Personal property 1,530,559 1,495,374
-------------- -------------
27,384,318 27,290,822
Less accumulated depreciation (5,500,237) (4,989,699)
-------------- -------------
Net investment in real estate 21,884,081 22,301,123
Cash and temporary cash investments, at cost
which approximates market value (Note 5) 2,600,952 757,381
Escrow deposits and property reserves 1,288,170 828,470
Investment in U.S. government securities - 2,512,500
Investment in mortgage-backed securities (Note 5) 1,192,930 1,326,114
Interest and other receivables 30,028 59,367
Deferred mortgage issuance costs net of accumulated
amortization of $655,233 in 1996 and $570,002 in 1995 1,726,618 1,811,849
Other assets 154,621 198,366
-------------- --------------
$ 28,877,400 $ 29,795,170
============== ==============
Liabilities and Partners' Capital (Deficit)
Liabilities
Accounts payable and accrued expenses $ 1,014,679 $ 852,710
Distribution payable (Note 3) 546,968 546,968
Due to general partners and their affiliates (Note 4) 1,091,702 1,084,619
-------------- --------------
2,653,349 2,484,297
-------------- --------------
Minority interest 206,343 207,068
-------------- --------------
Partners' Capital (Deficit)
General Partners (306,281) (295,420)
Limited Partners ($6.56 per BAC in 1996 and $6.83 in 1995) 26,323,989 27,399,225
-------------- --------------
26,017,708 27,103,805
-------------- --------------
$ 28,877,400 $ 29,795,170
============== ==============
The accompanying notes are an integral part of the consolidated financial statements.
</TABLE>
<PAGE> -1-
CAPITAL SOURCE II L.P.-A
CONSOLIDATED STATEMENTS OF INCOME
(UNAUDITED)
<TABLE>
<CAPTION>
For the For the For the Nine For the Nine
Quarter Ended Quarter Ended Months Ended Months Ended
Sept. 30, 1996 Sept. 30, 1995 Sept. 30, 1996 Sept. 30, 1995
-------------- -------------- -------------- --------------
<S> <C> <C> <C> <C>
Income
Rental income $ 1,216,912 $ 1,164,241 $ 3,623,577 $ 3,375,607
Interest income on temporary cash investments
and U.S. government securities 27,870 54,385 121,933 155,851
Mortgage-backed securities income 22,665 26,694 69,949 98,079
Other income 38,653 39,749 107,000 100,619
Gain on sale of mortgage-backed securities - 15,670 - 15,670
-------------- -------------- -------------- --------------
1,306,100 1,300,739 3,922,459 3,745,826
-------------- -------------- -------------- --------------
Expenses
Real estate operating expenses 577,857 509,571 1,524,424 1,453,399
Depreciation 170,694 188,455 510,538 564,847
Property development and management fees (Note 4) - 8,387 - 25,952
General and administrative expenses (Note 4)
Investor servicing 66,697 63,621 198,540 158,354
Professional fees 11,371 11,058 36,839 34,908
Other expenses 5,446 3,317 16,356 7,617
Asset management and partnership
administration fees (Note 4) 41,500 41,500 124,500 124,500
Amortization 29,844 32,998 85,231 95,572
-------------- -------------- -------------- --------------
903,409 858,907 2,496,428 2,465,149
-------------- -------------- -------------- --------------
Minority interest in losses of
Operating Partnerships 228 908 725 2,500
-------------- -------------- -------------- --------------
Net income $ 402,919 $ 442,740 $ 1,426,756 $ 1,283,177
============== ============== ============== ==============
Net income allocated to:
General Partners $ 4,030 $ 4,428 $ 14,268 $ 12,832
Limited Partners 398,889 438,312 1,412,488 1,270,345
-------------- -------------- -------------- --------------
$ 402,919 $ 442,740 $ 1,426,756 $ 1,283,177
============== ============== ============== ==============
Net income per BAC $ .10 $ .11 $ .35 $ .32
============== ============== ============== ==============
</TABLE>
CONSOLIDATED STATEMENT OF PARTNERS' CAPITAL (DEFICIT)
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1996
(UNAUDITED)
<TABLE>
<CAPTION>
General Limited
Partners Partners Total
-------------- -------------- --------------
<S> <C> <C> <C>
Partners' Capital (Deficit) (excluding net unrealized holding gain)
Balance at December 31, 1995 $ (296,207) $ 27,321,270 $ 27,025,063
Net income 14,268 1,412,488 1,426,756
Cash distributions paid or accrued (Note 3) (24,614) (2,436,743) (2,461,357)
-------------- -------------- --------------
(306,553) 26,297,015 25,990,462
-------------- -------------- --------------
Net unrealized holding gain
Balance at December 31, 1995 787 77,955 78,742
Net change (515) (50,981) (51,496)
-------------- -------------- --------------
272 26,974 27,246
-------------- -------------- --------------
Balance at September 30, 1996 $ (306,281) $ 26,323,989 $ 26,017,708
============== ============== ==============
The accompanying notes are an integral part of the consolidated financial statements.
</TABLE>
<PAGE> -2-
CAPITAL SOURCE II L.P.-A
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
<TABLE>
<CAPTION>
For the Nine For the Nine
Months Ended Months Ended
Sept. 30, 1996 Sept. 30, 1995
-------------- --------------
<S> <C> <C>
Cash flows from operating activities
Net income $ 1,426,756 $ 1,283,177
Adjustments to reconcile net income to net cash
provided by operating activities
Depreciation and amortization 595,769 660,419
Amortization of discount on government securities (9,059) (16,659)
Property development and management fees - 25,952
Minority interest in losses of Operating Partnerships (725) (2,500)
Decrease (increase) in interest and other receivables 29,339 (54,671)
Increase in escrow deposits and property reserves (459,700) (392,712)
Decrease (increase) in other assets 43,745 (103,405)
Increase in accounts payable and accrued expenses 161,969 355,185
Increase (decrease) in due to Operating Partnerships'
general partners and their affiliates 7,083 (103,742)
-------------- --------------
Net cash provided by operating activities 1,795,177 1,651,044
-------------- --------------
Cash flows from investing activities
Maturity of U.S. government securities 2,500,000 -
Principal payments on mortgage-backed securities 103,247 122,391
Acquisition of U.S. government securities - (2,468,945)
Sale of mortgage-backed securities - 454,997
Acquisition of buildings and construction in progress (58,311) -
Acquisition of personal property (35,185) (6,850)
-------------- --------------
Net cash provided by (used in) investing activities 2,509,751 (1,898,407)
-------------- --------------
Cash flow used in financing activity
Distributions (2,461,357) (2,461,357)
-------------- --------------
Net increase (decrease) in cash and temporary cash investments 1,843,571 (2,708,720)
Cash and temporary cash investments at beginning of period 757,381 3,588,037
-------------- --------------
Cash and temporary cash investments at end of period $ 2,600,952 $ 879,317
============== ==============
The accompanying notes are an integral part of the consolidated financial statements.
</TABLE>
<PAGE> -3-
CAPITAL SOURCE II L.P.-A
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 1996
(UNAUDITED)
1. ORGANIZATION
Capital Source II L.P.-A (the Partnership) was formed on August 22, 1986,
under the Delaware Uniform Limited Partnership Act. The General Partners of
the Partnership are Insured Mortgage Equities II L.P. and America First
Capital Source II, L.L.C. (the General Partners).
The Partnership provided virtually 100% of the debt and equity financing for
five multifamily rental housing properties. The Partnership's investment in
the properties consisted of: (i) approximately 85% in the form of permanent
mortgages and/or loans to fund construction, and (ii) the balance to purchase
up to a 99% limited partnership interest in the Operating Partnerships which
developed, own and operate the properties. Each loan is insured or
guaranteed, in an amount substantially equal to the face amount of the
mortgage, by the Federal Housing Administration (FHA) or the Government
National Mortgage Association (GNMA). The Partnership has been repaid by GNMA
on one of its GNMA Certificates and the related property has been deeded to
GNMA in lieu of foreclosure thus eliminating the Partnership's Equity
Investment. The four remaining Operating Partnerships are geographically
located as follows: (i) two in Michigan; and, (ii) one each in Florida and
North Carolina.
CS Properties II, Inc. which is owned by affiliates of the General Partners,
serves as the Special Limited Partner for the Operating Partnerships. The
Special Limited Partner has the power, among other things, to remove the
general partners of the Operating Partnerships under certain circumstances and
to consent to the sale of the Operating Partnerships' assets.
The Partnership will terminate subsequent to the sale of all properties but in
no event will the Partnership continue beyond December 31, 2035.
2. Summary of Significant Accounting Policies
A)Financial Statement Presentation
The consolidated financial statements include the accounts of the
Partnership and four subsidiary Operating Partnerships. The Partnership is
a limited partner with an ownership interest in three of the subsidiary
Operating Partnerships of up to 99%. The Partnership's ownership interest
in The Ponds at Georgetown L.P. is 68.70%. The remaining limited partner
interest of 30.29% is owned by Capital Source L.P., an affiliate of the
General Partners. All significant intercompany accounts and transactions
have been eliminated in consolidation.
The consolidated financial statements are prepared without audit on the
accrual basis of accounting in accordance with generally accepted
accounting principles. The 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, 1995. In the opinion of management, all normal and recurring
adjustments necessary to present fairly the financial position at
September 30, 1996, and results of operations for all periods presented
have been made.
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the
financial statements and the reported amounts of revenues and expenses
during the reporting period. Actual results could differ from those
estimates.
B)Investment in Real Estate
The Partnership's investment in real estate is carried at cost less
accumulated depreciation. The carrying value of each property does not
exceed net realizable value.
<PAGE> -4-
CAPITAL SOURCE II L.P.-A
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 1996
(UNAUDITED)
C)Investments in U.S. Government Securities and 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 with any unrealized gains or losses excluded from earnings
and reflected as a separate component of partners' capital. Subsequent
increases and decreases in the net unrealized gain/loss on the available-
for-sale securities are reflected as adjustments to the carrying value of
the portfolio and adjustments to the component of partners' capital. The
Partnership does not have investment securities classified as trading.
D)Depreciation and Amortization
Depreciation of real estate is based on the estimated useful life of the
properties using the straight-line method. Deferred mortgage issuance
costs are being amortized using the effective yield method over the
40 year term of the respective loan.
E)Revenue Recognition
The Operating Partnerships lease multifamily rental units under operating
leases with terms of one year or less. Rental revenue is recognized net
of any vacancy losses and rental concessions offered.
F)Income Taxes
No provision has been made for income taxes since BAC Holders are required
to report their share of the Partnership's income for federal and state
income tax purposes.
G)Temporary Cash Investments
Temporary cash investments are invested in short-term debt securities
purchased with original maturities of three months or less.
H)New Accounting Pronouncement
On January 1, 1996, the Partnership adopted Statement of Financial
Accounting Standards No. 121 (FAS 121), "Accounting for the Impairment of
Long-Lived Assets and for Long-Lived Assets to be Disposed of." Among
other things, FAS 121 requires that long-lived assets and certain
identifiable intangibles to be held and used by an entity be reviewed for
impairment whenever events or circumstances indicate that the carrying
value of an asset may not be recoverable. The adoption of FAS 121 did not
have a material impact on the financial statements.
I)Net Income per Beneficial Assignment Certificate (BAC)
Net income per BAC was calculated based on the number of BACs outstanding
(4,011,101) during each period presented.
3. Partnership Income, Expenses and Cash Distributions
Profits and losses from normal operations and cash available for distribution
will be allocated 99% to the investors and 1% to the General Partners.
Certain fees payable to the General Partners will not become due until
investors have received certain priority returns. Cash distributions included
in the consolidated financial statements represent the actual cash
distributions made during each period and the cash distributions accrued at
the end of each period.
The General Partners will 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 an 11.5% 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 an 11.5%
annual return on a cumulative basis.
<PAGE> -5-
CAPITAL SOURCE II L.P.-A
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 1996
(UNAUDITED)
4. Transactions with Related Parties
The General Partners, certain of their affiliates and the operating
partnerships' general partners have received or may receive fees,
compensation, income, distributions and payments from the Partnership in
connection with the offering and the investment, management and sale of the
Partnership's assets (other than disclosed elsewhere) as follows.
The Operating Partnerships' general partners provide various on-site property
development and management services. There were no property development and
management fees incurred in 1996. Unpaid fees, which are non-interest
bearing, are included in amounts due to general partners and their affiliates
on the accompanying consolidated balance sheets and will be paid as the
Operating Partnerships reach specified performance standards, or upon sale of
the related property.
The General Partners are entitled to receive an asset management and
partnership administrative fee equal to 0.5% of invested assets per annum, the
first $50,000 of which will be paid each year with the balance payable only
during such years that a 6.5% annual return has been paid to investors on a
noncumulative basis. An additional fee equal to 0.5% of invested assets per
annum will be payable only during those years that an 11.5% annual return has
been paid to investors on a noncumulative basis. Any unpaid amounts will
accrue and be payable only after an 11.5% annual return to investors has been
paid on a cumulative basis and the investors have received the return of their
capital contributions. Asset management and partnership administration fees
totalled $124,500 during 1996 ($41,500 for the quarter ended
September 30, 1996).
Amounts due to general partners and their affiliates consisted of the
following at September 30, 1996:
Unpaid property development and management fees $ 93,007
Operating deficit and construction loans 874,195
Unpaid asset management and partnership administrative fees 124,500
--------------
$ 1,091,702
==============
Substantially all of the Partnership's general and administrative expenses are
paid by a General Partner or an affiliate and reimbursed by the Partnership.
The amount of such expenses reimbursed to the General Partner during 1996 was
$249,998 ($70,693 for the quarter ended September 30, 1996). The reimbursed
expenses are presented on a cash basis and do not reflect accruals made at
quarter end.
5. PARTNERSHIP RESERVE ACCOUNT
The Partnership maintains a reserve account which consisted of the following
at September 30, 1996.
Cash and temporary cash investments $ 1,895,658
GNMA Certificates 1,192,930
--------------
$ 3,088,588
==============
The reserve account was established to maintain working capital for the
Partnership and is available to supplement distributions to investors or for
other contingencies related to the ownership of investments and the operation
of the Partnership. The GNMA Certificates mature between 2008 and 2009. At
September 30, 1996, the total amortized cost, gross unrealized holding gains
and aggregate fair value of available-for-sale securities were $1,165,684,
$27,246 and $1,192,930, respectively.
<PAGE> -6-
CAPITAL SOURCE II L.P.-A
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 1996
(UNAUDITED)
6. Parent Company Only Financial Information
Generally accepted accounting principles require that the Partnership`s
financial statements consolidate the Operating Partnerships since the
Partnership holds a majority ownership interest and, through CS Properties II,
Inc., it can influence decisions of the general partners in certain
circumstances. In the consolidated financial statements, the Partnership`s
investment in FHA Loans and GNMA Certificates is eliminated against the
related mortgage payable recorded by the operating partnership. If a mortgage
loan goes into default and is foreclosed upon by FHA or GNMA, the respective
agency may, at their discretion, repay the FHA Loan or the GNMA Certificate.
If this occurs, the Partnership`s investment in the operating partnership
would be eliminated, resulting in the recognition of a gain on the
Partnership`s financial statements. This arises because consolidation
accounting does not allow the Partnership to stop recording losses from the
Operating Partnerships when the net investment is reduced to zero.
The parent company only financial information below represents the condensed
financial information of the Partnership using the equity method of accounting
for the investment in Operating Partnerships, rather than the consolidation of
those partnerships. Under the equity method of accounting, the Partnership`s
capital contributions are adjusted to reflect its share of operating
partnership profits or losses and distributions. The investment in operating
partnerships represents the Partnership`s limited partnership interest in the
accumulated deficits of those Operating Partnerships. The parent company only
information is provided to more clearly present the Partnership`s investment
in the Operating Partnerships. Since the Partnership is not a general
partner, it is not obligated to fund the negative balances. If the
investments in all Operating Partnerships were eliminated at
September 30, 1996, Partnership capital would increase by $4,837,817
($1.19 per BAC).
The FHA Loans and the GNMA Certificates are collateralized by first mortgage
loans on the properties owned by the Operating Partnerships and are guaranteed
or insured as to principal and interest by FHA or GNMA. The FHA insured
mortgage loans are subject to a 1% assignment fee. The obligations of FHA and
GNMA are backed by the full faith and credit of the United States government.
Parent Company Only
Condensed Balance Sheets
<TABLE>
<CAPTION>
Sept. 30, 1996 Dec. 31, 1995
-------------- --------------
<S> <C> <C>
Assets
Cash and temporary cash investments $ 2,600,952 $ 757,381
Investment in U.S. government securities - 2,512,500
Investment in FHA Loan 6,575,151 6,595,251
Investment in GNMA Certificates 21,941,235 22,142,421
Investment in Operating Partnerships (4,837,817) (4,674,357)
Interest receivable 220,516 246,315
Other assets 244,015 287,899
-------------- --------------
$ 26,744,052 $ 27,867,410
============== ==============
Liabilities and Partners' Capital
Liabilities
Accounts payable $ 179,376 $ 216,637
Distribution payable 546,968 546,968
-------------- --------------
726,344 763,605
-------------- --------------
Partners' Capital 26,017,708 27,103,805
-------------- --------------
$ 26,744,052 $ 27,867,410
============== ==============
</TABLE>
<PAGE> -7-
CAPITAL SOURCE II L.P.-A
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 1996
(UNAUDITED)
Parent Company Only
Condensed Statements of Income
<TABLE>
<CAPTION>
For the Nine For the Nine
Months Ended Months Ended
Sept. 30, 1996 Sept. 30, 1995
-------------- --------------
<S> <C> <C>
Income
Mortgage and mortgage-backed securities income $ 1,892,507 $ 1,928,143
Interest income on temporary cash investments
and U.S. government securities 115,526 149,805
Equity in losses of Operating Partnerships (163,460) (441,930)
Other income 5,200 3,650
Gain on sale of mortgage-backed securities - 15,670
-------------- ---------------
1,849,773 1,655,338
Expenses
Operating and administrative 423,017 372,161
-------------- --------------
Net income $ 1,426,756 $ 1,283,177
============== ==============
</TABLE>
Parent Company Only
Condensed Statements of Cash Flows
<TABLE>
<CAPTION>
For the Nine For the Nine
Months Ended Months Ended
Sept. 30, 1996 Sept. 30, 1995
-------------- --------------
<S> <C> <C>
Cash flows from operating activities
Net income $ 1,426,756 $ 1,283,177
Adjustments to reconcile net income to net cash
provided by operating activities
Equity in losses of Operating Partnerships 163,460 441,930
Amortization 46,782 46,782
Other non-cash adjustments (23,419) (98,266)
-------------- --------------
Net cash provided by operating activities 1,613,579 1,673,623
-------------- --------------
Cash flows from investing activities
FHA Loan and GNMA Certificate principal payments 191,349 202,862
Maturity of U.S. government securities 2,500,000 -
Acquisition of U.S. government securities - (2,468,945)
Sale of mortgage-backed securities - 454,997
Investment in operating partnerships - (109,900)
-------------- --------------
Net cash provided by (used in) investing activities 2,691,349 (1,920,986)
-------------- --------------
Cash flow used in financing activity
Distributions (2,461,357) (2,461,357)
-------------- --------------
Net increase (decrease) in cash and temporary cash investments 1,843,571 (2,708,720)
Cash and temporary cash investments at beginning of period 757,381 3,588,037
-------------- --------------
Cash and temporary cash investments at end of period $ 2,600,952 $ 879,317
============== ==============
</TABLE>
<PAGE> -8-
Item 2.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
Liquidity and Capital Resources
The Partnership originally acquired: (i) four GNMA Certificates which are
guaranteed as to principal and interest by the Government National Mortgage
Association (GNMA) collateralized by first mortgage loans on multifamily
housing properties located in three states; (ii) an FHA Loan which is insured
as to principal and interest by the Federal Housing Administration (FHA) on a
multifamily housing property; and (iii) Partnership Equity Investments in five
Operating Partnerships which own the multifamily properties financed by the
GNMA Certificates and the FHA Loan. During 1992, one of the properties was
deeded to GNMA in lieu of foreclosure, thus eliminating the Partnership Equity
Investment in this Property. In March 1993, the GNMA Certificate related to
this property was paid in full. Collectively, the remaining GNMA
Certificates, the FHA Loan, and the 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 and in U.S. government securities ("Reserve
Investments"). The obligations of GNMA and FHA are backed by the full faith
and credit of the United States government.
The FHA Loan, GNMA Certificates and Partnership Equity Investments in
Operating Partnerships represent the Partnership's principal assets as shown
in the Parent Company Only Financial Information in Note 6 to the financial
statements. The parent company information is presented using the equity
method of accounting for the investment in Operating Partnerships. Generally
accepted accounting principles, however, require that the Partnership's
financial statements consolidate the Operating Partnerships, since the
Partnership holds a majority ownership interest in each Operating Partnership,
and can influence decisions of the general partners in certain circumstances.
The following FHA Loan and GNMA Certificates were owned by the Partnership at
September 30, 1996. Interest income from the FHA Loan and GNMA Certificates
is the primary source of cash available for distribution to investors.
<TABLE>
<CAPTION>
Guaranteed Interest Maturity Principal
Property Name or Insured by Rate Date Balance
- ----------------------------------- --------------- ------------ -------------- --------------
<S> <C> <C> <C> <C>
Crane's Landing GNMA 8.75% 12-15-2030 $ 10,288,645
Delta Crossing FHA 9.10% 10-01-2030 6,575,151
Monticello Apartments GNMA 8.75% 11-15-2029 5,362,685
The Ponds at Georgetown GNMA 9.00% 12-15-2029 5,096,975
Pools of single-family properties GNMA 7.58% (1) 2008 to 2009 1,192,930
--------------
$ 28,516,386
==============
(1)Represents yield to the Partnership.
</TABLE>
<PAGE> -9-
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
DISTRIBUTIONS
Cash distributions paid or accrued per BAC were as follows:
<TABLE>
<CAPTION>
For the Nine For the Nine
Months Ended Months Ended
Sept. 30, 1996 Sept. 30, 1995
-------------- --------------
<S> <C> <C>
Regular monthly distributions
Income $ .3521 $ .3167
Return of capital .2554 .2908
-------------- --------------
$ .6075 $ .6075
============== ==============
Distributions
Paid out of cash flow $ .4513 $ .4874
Paid out of reserves .1562 .1201
-------------- --------------
$ .6075 $ .6075
============== ==============
</TABLE>
Regular monthly distributions to BAC Holders consist primarily of interest
received on the FHA Loan, GNMA Certificates and U.S. government securities.
Additional cash for distributions is received from other investments. The
Partnership may draw on reserves to pay operating expenses or to supplement
cash distributions to investors. The Partnership is permitted to replenish
reserves with cash flows in excess of distributions paid. For the nine months
ended September 30, 1996, $633,010 was withdrawn from reserves to supplement
regular monthly cash distributions ($225,018 for the quarter ended
September 30, 1996). The total amount held in reserves at September 30, 1996,
was $3,088,588 of which $1,192,930 was invested in U.S. government securities.
The Partnership believes that cash provided by operating activities and, if
necessary, withdrawals from the Partnership's reserves will be adequate to
meet its short-term and long-term liquidity requirements, including the
payments of distributions to BAC Holders. The Partnership has no other
internal or external sources of liquidity. Under the terms of the Partnership
Agreement, the Partnership has the authority to enter into short- 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 Loan and GNMA Certificates owned by the Partnership are guaranteed as
to principal and interest by FHA and GNMA, respectively. The obligations of
FHA and GNMA are backed by the full faith and credit of the United States
government. The Partnership Equity Investments, however, are not insured or
guaranteed. The value of these investments is a function of the value of the
real estate owned by the Operating Partnerships.
The overall status of the Partnership's investments has remained relatively
constant since June 30, 1996.
<PAGE> -10-
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
The following table shows the occupancy levels of the properties financed by
the Partnership as of September 30, 1996:
<TABLE>
<CAPTION>
Number Percentage
Number of Units of Units
Property Name Location of Units Occupied Occupied
- ------------------------------------- ------------------ --------- ---------- ----------
<S> <C> <C> <C> <C>
Crane's Landing Winter Park, FL 252 244 97%
Delta Crossing Charlotte, NC 178 157 88%
Monticello Apartments Southfield, MI 106 100 94%
The Ponds at Georgetown Ann Arbor, MI 134 132 99%
--------- ---------- ----------
670 633 94%
========= ========== ==========
</TABLE>
RESULTS OF OPERATIONS
The tables below compare the results of operations for each period shown.
<TABLE>
<CAPTION>
For the For the Increase
Quarter Ended Quarter Ended (Decrease)
Sept. 30, 1996 Sept. 30, 1995 From 1995
-------------- -------------- --------------
<S> <C> <C> <C>
Rental income $ 1,216,912 $ 1,164,241 $ 52,671
Interest income on temporary cash investments
and U.S. government securities 27,870 54,385 (26,515)
Mortgage-backed securities income 22,665 26,694 (4,029)
Other income 38,653 39,749 (1,096)
Gain on sale of mortgage-backed securities - 15,670 (15,670)
-------------- --------------- --------------
1,306,100 1,300,739 5,361
-------------- --------------- --------------
Real estate operating expenses 577,857 509,571 68,286
Depreciation 170,694 188,455 (17,761)
Property development and management fees - 8,387 (8,387)
Investor servicing 66,697 63,621 3,076
Professional fees 11,371 11,058 313
Other expenses 5,446 3,317 2,129
Asset management and partnership administration fees 41,500 41,500 -
Amortization 29,844 32,998 (3,154)
-------------- --------------- --------------
903,409 858,907 44,502
-------------- --------------- --------------
Minority interest in losses of Operating Partnerships 228 908 (680)
-------------- --------------- --------------
Net income $ 402,919 $ 442,740 $ (39,821)
============== =============== ==============
</TABLE>
<PAGE> -11-
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
<TABLE>
<CAPTION>
For the Nine For the Nine Increase
Months Ended Months Ended (Decrease)
Sept. 30, 1996 Sept. 30, 1995 From 1995
-------------- -------------- --------------
<S> <C> <C> <C>
Rental income $ 3,623,577 $ 3,375,607 $ 247,970
Interest income on temporary cash investments
and U.S. government securities 121,933 155,851 (33,918)
Mortgage-backed securities income 69,949 98,079 (28,130)
Other income 107,000 100,619 6,381
Gain on sale of mortgage-backed securities - 15,670 (15,670)
-------------- -------------- --------------
3,922,459 3,745,826 176,633
-------------- -------------- --------------
Real estate operating expenses 1,524,424 1,453,399 71,025
Depreciation 510,538 564,847 (54,309)
Property development and management fees - 25,952 (25,952)
Investor servicing 198,540 158,354 40,186
Professional fees 36,839 34,908 1,931
Other expenses 16,356 7,617 8,739
Asset management and partnership administration fees 124,500 124,500 -
Amortization 85,231 95,572 (10,341)
-------------- -------------- --------------
2,496,428 2,465,149 31,279
-------------- -------------- --------------
Minority interest in losses of Operating Partnerships 725 2,500 (1,775)
-------------- -------------- --------------
Net income $ 1,426,756 $ 1,283,177 $ 143,579
============== ============== ==============
</TABLE>
Rental income is recognized net of any vacancy losses and rental concessions
offered. Rental income, net of real estate operating expenses, depreciation,
and amortization, increased $5,300 and $241,595 for the quarter and nine
months ended September 30, 1996, respectively, compared to the same periods in
1995. The $5,300 increase for the quarter was primarily due to an increase in
rental income resulting from increased rental rates in certain markets offset
by higher repairs and maintenance expenses and property improvements at
certain properties. The largest element of the $241,595 increase for the nine
month period was an increase of approximately 5% in the average occupancy of
Crane's Landing for the nine month period ended September 30, 1996, compared
to the same period in 1995. The occupancy of Crane's Landing has improved
since construction on the road adjacent to the property was completed during
the third quarter of 1995. Also contributing to this increase was: (i) an
increase in rental income resulting from rental rate increases in certain
markets; and (ii) a decrease in depreciation expense; which were partially
offset by (iii) an increase in real estate operating expenses, primarily
property improvements.
Interest income on temporary cash investments and U.S. government securities
decreased for the quarter and nine months ended September 30, 1996, compared
to the same periods in 1995, due to withdrawals made from the Partnership's
reserves to supplement distributions to BAC Holders.
Mortgage-backed securities income decreased for the quarter and nine months
ended September 30, 1996, compared to the same periods in 1995, due to the
continued amortization of the principal balances of the Partnership's
mortgage-backed securities.
Other income consists primarily of income such as garage rentals, washer/dryer
and vending income generated by the Partnership's properties. Other income
decreased for the quarter ended and increased for the nine months ended
September 30, 1996, respectively, compared to the same periods in 1995, due to
fluctuations in the rentals and/or usage of such items.
<PAGE> -12-
Property development and management fees decreased for the quarter and nine
months ended September 30, 1996, compared to the same period in 1995, as the
general partners of the Operating Partnerships did not perform services to
earn such fees during 1996. Investor servicing expenses increased for the
quarter and nine months ended September 30, 1996, compared to the same periods
in 1995, due primarily to an increase in salaries and related expenses. Other
expenses increased for the quarter and nine months ended September 30, 1996,
compared to the same periods in 1995, due primarily to an increase in travel
expenses.
<PAGE> -13-
PART II. OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
4(a) Agreement of Limited Partnership of Capital Source II
L.P.-A (incorporated herein by reference from Exhibit A of
the Prospectus contained in the Registrant's Post Effective
Amendment No. 4 dated February 5, 1987, to the Registration
Statement on Form S-11 (Commission File No. 0-16862)).
4(b) Beneficial Assignment Certificate (incorporated by
reference from Exhibit 10(a) to the Registrant's Amendment
No. 2 dated January 27, 1987, to the Registration Statement
on Form S-11 (Commission File No. 0-16862)).
(b) Form 8-K
The registrant did not file a report on Form 8-K during the
quarter for which this report is filed.
<PAGE> -14-
SIGNATURES
Pursuant to the requirements of 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.
Dated: November 12, 1996 CAPITAL SOURCE II L.P.-A
By America First Capital
Source II, L.L.C., General
Partner
By /s/ Michael Thesing
Michael Thesing
Vice President, Secretary and
Treasurer (Principal Financial
Officer)
<PAGE> -15-
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
CONSOLIDATED STATEMENTS
</LEGEND>
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-END> SEP-30-1996
<CASH> 2,600,952
<SECURITIES> 1,192,930
<RECEIVABLES> 30,028
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 3,919,150
<PP&E> 27,384,318
<DEPRECIATION> (5,500,237)
<TOTAL-ASSETS> 28,877,400
<CURRENT-LIABILITIES> 1,686,147
<BONDS> 0
<COMMON> 0
0
0
<OTHER-SE> 26,017,708
<TOTAL-LIABILITY-AND-EQUITY> 28,877,400
<SALES> 0
<TOTAL-REVENUES> 3,922,459
<CGS> 0
<TOTAL-COSTS> 0
<OTHER-EXPENSES> 2,496,428
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> 1,426,756
<INCOME-TAX> 0
<INCOME-CONTINUING> 0
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 1,426,756
<EPS-PRIMARY> 0
<EPS-DILUTED> 0
</TABLE>
