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, 1997 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, 1997 Dec. 31, 1996
-------------- --------------
<S> <C> <C>
Assets
Investment in real estate:
Land $ 2,800,750 $ 2,800,750
Buildings 23,055,561 23,055,361
Personal property 1,632,344 1,597,666
-------------- -------------
27,488,655 27,453,777
Less accumulated depreciation (6,160,775) (5,664,440)
-------------- -------------
Net investment in real estate 21,327,880 21,789,337
Cash and temporary cash investments, at cost
which approximates market value (Note 5) 1,513,962 2,430,937
Escrow deposits and property reserves 1,188,678 771,061
Investment in mortgage-backed securities (Note 5) 1,085,151 1,171,079
Interest and other receivables 24,737 23,125
Deferred mortgage issuance costs net of accumulated
amortization of $764,597 in 1997 and $681,197 in 1996 1,617,254 1,700,654
Other assets 189,151 220,229
-------------- --------------
$ 26,946,813 $ 28,106,422
============== ==============
Liabilities and Partners' Capital (Deficit)
Liabilities
Accounts payable and accrued expenses $ 971,870 $ 874,562
Distribution payable (Note 3) 546,968 546,968
Due to general partners and their affiliates (Note 4) 1,063,619 1,099,709
-------------- --------------
2,582,457 2,521,239
-------------- --------------
Minority interest 205,763 206,460
-------------- --------------
Partners' Capital (Deficit)
General Partners (324,873) (312,671)
Limited Partners ($6.10 per BAC in 1997 and $6.41 in 1996) 24,483,466 25,691,394
-------------- --------------
24,158,593 25,378,723
-------------- --------------
$ 26,946,813 $ 28,106,422
============== ==============
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, 1997 Sept. 30, 1996 Sept. 30, 1997 Sept. 30, 1996
-------------- -------------- -------------- --------------
<S> <C> <C> <C> <C>
Income
Rental income $ 1,247,763 $ 1,216,912 $ 3,754,987 $ 3,623,577
Interest income on temporary cash investments
and U.S. government securities 23,905 27,870 80,634 121,933
Mortgage-backed securities income 20,241 22,665 62,510 69,949
Other income 59,735 38,653 155,274 107,000
-------------- -------------- -------------- --------------
1,351,644 1,306,100 4,053,405 3,922,459
-------------- -------------- -------------- --------------
Expenses
Real estate operating expenses 661,831 577,857 1,818,989 1,524,424
Depreciation 166,306 170,694 498,271 510,538
General and administrative expenses (Note 4)
Investor servicing 91,018 66,697 246,412 198,540
Professional fees 10,550 11,371 32,750 36,839
Other expenses 6,210 5,446 14,641 16,356
Asset management and partnership
administration fees (Note 4) 41,500 41,500 124,500 124,500
Amortization 27,800 29,844 83,400 85,231
-------------- -------------- -------------- --------------
1,005,215 903,409 2,818,963 2,496,428
-------------- -------------- -------------- --------------
Minority interest in losses of
Operating Partnerships 369 228 697 725
-------------- -------------- -------------- --------------
Net income $ 346,798 $ 402,919 $ 1,235,139 $ 1,426,756
============== ============== ============== ==============
Net income allocated to:
General Partners $ 3,468 $ 4,030 $ 12,351 $ 14,268
Limited Partners 343,330 398,889 1,222,788 1,412,488
-------------- -------------- -------------- --------------
$ 346,798 $ 402,919 $ 1,235,139 $ 1,426,756
============== ============== ============== ==============
Net income per BAC $ .08 $ .10 $ .30 $ .35
============== ============== ============== ==============
</TABLE>
CONSOLIDATED STATEMENT OF PARTNERS' CAPITAL (DEFICIT)
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1997
(UNAUDITED)
<TABLE>
<CAPTION>
General Limited
Partners Partners Total
-------------- -------------- --------------
<S> <C> <C> <C>
Partners' Capital (Deficit) (excluding net unrealized holding gain)
Balance at December 31, 1996 $ (313,033) $ 25,655,514 $ 25,342,481
Net income 12,351 1,222,788 1,235,139
Cash distributions paid or accrued (Note 3) (24,614) (2,436,743) (2,461,357)
-------------- -------------- --------------
(325,296) 24,441,559 24,116,263
-------------- -------------- --------------
Net unrealized holding gain
Balance at December 31, 1996 362 35,880 36,242
Net change 61 6,027 6,088
-------------- -------------- --------------
423 41,907 42,330
-------------- -------------- --------------
Balance at September 30, 1997 $ (324,873) $ 24,483,466 $ 24,158,593
============== ============== ==============
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, 1997 Sept. 30, 1996
-------------- --------------
<S> <C> <C>
Cash flows from operating activities
Net income $ 1,235,139 $ 1,426,756
Adjustments to reconcile net income to net cash
provided by operating activities
Depreciation and amortization 581,671 595,769
Amortization of discount on government securities (1,018) (9,059)
Minority interest in losses of Operating Partnerships (697) (725)
Decrease (increase) in interest and other receivables (1,612) 29,339
Increase in escrow deposits and property reserves (417,617) (459,700)
Decrease in other assets 31,078 43,745
Increase in accounts payable and accrued expenses 97,308 161,969
Increase (decrease) in due to general partners and their affiliates (36,090) 7,083
-------------- --------------
Net cash provided by operating activities 1,488,162 1,795,177
-------------- --------------
Cash flows from investing activities
Principal payments on mortgage-backed securities 93,034 103,247
Acquisition of personal property (36,614) (35,185)
Acquisition of buildings and construction in progress (200) (58,311)
Maturity of U.S. government securities - 2,500,000
-------------- --------------
Net cash provided by investing activities 56,220 2,509,751
-------------- --------------
Cash flow used in financing activity
Distributions (2,461,357) (2,461,357)
-------------- --------------
Net increase (decrease) in cash and temporary cash investments (916,975) 1,843,571
Cash and temporary cash investments at beginning of period 2,430,937 757,381
-------------- --------------
Cash and temporary cash investments at end of period $ 1,513,962 $ 2,600,952
============== ==============
Supplemental disclosure of non-cash investing activity:
Write-off of fully depreciated assets $ 1,936 $ -
============== ==============
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, 1997
(UNAUDITED)
1. Organization
Capital Source II L.P.-A (the Partnership) was formed on August 22, 1986,
under the Delaware Revised 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 consolidated financial statements should be
read in conjunction with the consolidated financial statements and notes
thereto included in the Partnership's Annual Report on Form 10-K for the
year ended December 31, 1996. In the opinion of management, all normal and
recurring adjustments necessary to present fairly the financial position at
September 30, 1997, 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, 1997
(UNAUDITED)
C)Investment in Mortgage-Backed Securities
Investment securities are classified as held-to-maturity,
available-for-sale or trading. 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 held-to-maturity or 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 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 as
earned, 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)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, 1997
(UNAUDITED)
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 1997. 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
of $124,500 were incurred during 1997 ($41,500 for the quarter ended
September 30, 1997).
Amounts due to general partners and their affiliates consisted of the
following at September 30, 1997:
Unpaid property development and management fees $ 108,097
Operating deficit and construction loans 849,772
Unpaid asset management and partnership administrative fees 105,750
--------------
$ 1,063,619
==============
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 for 1997 was
$343,313 ($87,570 for the quarter ended September 30, 1997). The reimbursed
expenses are presented on a cash basis and do not reflect accruals made at
quarter end.
An affiliate of America First Capital Source II, L.L.C. has been retained to
provide property management services for The Ponds at Georgetown beginning in
November 1996. The fees for services provided were $22,214 for 1997 ($7,562
for the quarter ended September 30, 1997) 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. Partnership Reserve Account
The Partnership maintains a reserve account which consisted of the following
at September 30, 1997.
Cash and temporary cash investments $ 948,763
GNMA Certificates 1,085,151
--------------
$ 2,033,914
==============
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, 1997, the total amortized cost, gross unrealized holding gains
and aggregate fair value of available-for-sale securities were $1,042,821,
$42,330 and $1,085,151, respectively.
<PAGE> -6-
CAPITAL SOURCE II L.P.-A
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 1997
(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., 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, 1997, Partnership capital would increase by $5,329,898
($1.32 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, 1997 Dec. 31, 1996
-------------- --------------
<S> <C> <C>
Assets
Cash and temporary cash investments $ 1,513,962 $ 2,430,937
Investment in FHA Loan 6,546,109 6,568,139
Investment in GNMA Certificates 21,735,323 21,895,675
Investment in Operating Partnerships (5,329,898) (5,198,166)
Interest receivable 214,413 219,661
Other assets 179,740 225,743
-------------- --------------
$ 24,859,649 $ 26,141,989
============== ==============
Liabilities and Partners' Capital
Liabilities
Accounts payable $ 154,088 $ 216,298
Distribution payable 546,968 546,968
-------------- --------------
701,056 763,266
-------------- --------------
Partners' Capital 24,158,593 25,378,723
-------------- --------------
$ 24,859,649 $ 26,141,989
============== ==============
</TABLE>
<PAGE> -7-
CAPITAL SOURCE II L.P.-A
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 1997
(UNAUDITED)
Parent Company Only
Condensed Statements of Income
<TABLE>
<CAPTION>
For the Nine For the Nine
Months Ended Months Ended
Sept. 30, 1997 Sept. 30, 1996
-------------- --------------
<S> <C> <C>
Income
Mortgage and mortgage-backed securities income $ 1,876,851 $ 1,892,507
Interest income on temporary cash investments
and U.S. government securities 73,605 115,526
Equity in losses of Operating Partnerships (253,182) (163,460)
Other income 2,950 5,200
Gain on sale of mortgage-backed securities - -
-------------- ---------------
1,700,224 1,849,773
Expenses
Operating and administrative 465,085 423,017
-------------- --------------
Net income $ 1,235,139 $ 1,426,756
============== ==============
</TABLE>
Parent Company Only
Condensed Statements of Cash Flows
<TABLE>
<CAPTION>
For the Nine For the Nine
Months Ended Months Ended
Sept. 30, 1997 Sept. 30, 1996
-------------- --------------
<S> <C> <C>
Cash flows from operating activities
Net income $ 1,235,139 $ 1,426,756
Adjustments to reconcile net income to net cash
provided by operating activities
Equity in losses of Operating Partnerships 253,182 163,460
Amortization 46,782 46,782
Other non-cash adjustments (58,759) (23,419)
-------------- --------------
Net cash provided by operating activities 1,476,344 1,613,579
-------------- --------------
Cash flows from investing activities
FHA Loan and GNMA Certificate principal payments 189,488 191,349
Investment in operating partnerships (121,450) -
Maturity of U.S. government securities - 2,500,000
-------------- --------------
Net cash provided by investing activities 68,038 2,691,349
-------------- --------------
Cash flow used in financing activity
Distributions (2,461,357) (2,461,357)
-------------- --------------
Net increase (decrease) in cash and temporary cash investments (916,975) 1,843,571
Cash and temporary cash investments at beginning of period 2,430,937 757,381
-------------- --------------
Cash and temporary cash investments at end of period $ 1,513,962 $ 2,600,952
============== ==============
</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 (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, 1997.
<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 $ 10,241,710
Delta Crossing FHA 9.10% 10-01-2030 6,546,109
Monticello Apartments GNMA 8.75% 11-15-2029 5,335,592
The Ponds at Georgetown GNMA 9.00% 12-15-2029 5,072,870
Pools of single-family mortgages GNMA 7.58% (1) 2008 to 2009 1,085,151
--------------
$ 28,281,432
==============
(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, 1997 Sept. 30, 1996
-------------- --------------
<S> <C> <C>
Regular monthly distributions
Income $ .3049 $ .3521
Return of capital .3026 .2554
-------------- --------------
$ .6075 $ .6075
============== ==============
Distributions
Paid out of cash flow $ .4257 $ .4513
Paid out of reserves .1818 .1562
-------------- --------------
$ .6075 $ .6075
============== ==============
</TABLE>
Regular monthly distributions to BAC Holders consist primarily of interest
received on the FHA Loan and GNMA Certificates. Additional cash for
distributions is received from other investments. The Partnership may draw on
reserves to pay operating expenses or to supplement cash distributions to
investors. The Partnership is permitted to replenish reserves with cash flows
in excess of distributions paid. For the nine months ended September 30, 1997,
$736,766 was withdrawn from reserves to supplement regular monthly cash
distributions ($262,057 for the quarter ended September 30, 1997). The total
amount held in reserves at September 30, 1997, was $2,033,914 of which
$1,085,151 was invested in U.S. government securities.
The Partnership has been supplementing cash flow from operations with
withdrawals from reserves in order to maintain distributions at the current
level. The Partnership is currently considering reducing distributions to a
level that more closely reflects cash flow generated from operations.
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 its 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 constant
since June 30, 1997.
<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, 1997:
<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 178 168 94%
Monticello Apartments Southfield, MI 106 102 96%
The Ponds at Georgetown Ann Arbor, MI 134 132 99%
--------- ---------- ----------
670 646 96%
========= ========== ==========
</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, 1997 Sept. 30, 1996 From 1996
-------------- -------------- --------------
<S> <C> <C> <C>
Rental income $ 1,247,763 $ 1,216,912 $ 30,851
Interest income on temporary cash investments
and U.S. government securities 23,905 27,870 (3,965)
Mortgage-backed securities income 20,241 22,665 (2,424)
Other income 59,735 38,653 21,082
-------------- --------------- --------------
1,351,644 1,306,100 45,544
-------------- --------------- --------------
Real estate operating expenses 661,831 577,857 83,974
Depreciation 166,306 170,694 (4,388)
Investor servicing 91,018 66,697 24,321
Professional fees 10,550 11,371 (821)
Other expenses 6,210 5,446 764
Asset management and partnership administration fees 41,500 41,500 -
Amortization 27,800 29,844 (2,044)
-------------- --------------- --------------
1,005,215 903,409 101,806
-------------- --------------- --------------
Minority interest in losses of Operating Partnerships 369 228 141
-------------- --------------- --------------
Net income $ 346,798 $ 402,919 $ (56,121)
============== =============== ==============
</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, 1997 Sept. 30, 1996 From 1996
-------------- -------------- --------------
<S> <C> <C> <C>
Rental income $ 3,754,987 $ 3,623,577 $ 131,410
Interest income on temporary cash investments
and U.S. government securities 80,634 121,933 (41,299)
Mortgage-backed securities income 62,510 69,949 (7,439)
Other income 155,274 107,000 48,274
-------------- -------------- --------------
4,053,405 3,922,459 130,946
-------------- -------------- --------------
Real estate operating expenses 1,818,989 1,524,424 294,565
Depreciation 498,271 510,538 (12,267)
Investor servicing 246,412 198,540 47,872
Professional fees 32,750 36,839 (4,089)
Other expenses 14,641 16,356 (1,715)
Asset management and partnership administration fees 124,500 124,500 -
Amortization 83,400 85,231 (1,831)
-------------- -------------- --------------
2,818,963 2,496,428 322,535
-------------- -------------- --------------
Minority interest in losses of Operating Partnerships 697 725 (28)
-------------- -------------- --------------
Net income $ 1,235,139 $ 1,426,756 $ (191,617)
============== ============== ==============
</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, decreased $46,691 and $149,057 for the quarter and nine
months ended September 30, 1997, respectively, compared to the same periods in
1996. Rental income increased for the quarter and nine months ended
September 30, 1997, compared to the same periods in 1996, primarily due to
increases in rental revenue of approximately 6% and 8% at Crane's Landing and
4% for each period at The Ponds at Georgetown, for the quarter and nine months
ended September 30, 1997, respectively. These increases resulted primarily
from increases in average occupancy. The increases in rental income,
however, were more than offset by increases in real estate operating expenses,
primarily due to increases in taxes, labor costs, repairs and maintenance
expenses, and property improvements at several of the Partnership's properties.
Interest income on temporary cash investments and U.S. government securities
decreased for the quarter and nine months ended September 30, 1997, compared
to the same periods in 1996, 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, 1997, compared to the same periods in 1996, due to the
continued amortization of the principal balances of the Partnership's
mortgage-backed securities.
Other income consists primarily of income such as corporate unit rentals,
garage rentals, washer/dryer and vending income generated by the Partnership's
properties. Other income increased for the quarter and nine months ended
September 30, 1997, respectively, compared to the same periods in 1996, due
primarily to an increase in corporate unit rentals at the Ponds at Georgetown.
Investor servicing costs increased for the quarter and nine months ended
September 30, 1997, compared to the same periods in 1996, due to increases in
expenses associated with maintaining and providing investors with Partnership
information, primarily salaries and related expenses. Professional fees
decreased for the quarter and nine months ended September 30, 1997, compared
to the same periods in 1996, primarily due to a decrease in legal fees. Other
expenses for the quarter ended September 30, 1997, were comparable with the
same period in 1996. However, other expenses decreased for the nine months
ended September 30, 1997, compared to the same period in 1996, due primarily
to a decrease in travel expenses.
<PAGE> -12-
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> -13-
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, 1997 CAPITAL SOURCE II L.P.-A
By America First Capital
Source II, L.L.C., General
Partner of the Registrant
By /s/ Michael Thesing
Michael Thesing,
Vice President and
Principal Financial Officer
<PAGE> -14-
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
CONSOLIDATED STATEMENTS
</LEGEND>
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-END> SEP-30-1997
<CASH> 1,513,962
<SECURITIES> 1,085,151
<RECEIVABLES> 24,737
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 2,727,377
<PP&E> 27,488,655
<DEPRECIATION> (6,160,775)
<TOTAL-ASSETS> 26,946,813
<CURRENT-LIABILITIES> 1,518,838
<BONDS> 0
<COMMON> 0
0
0
<OTHER-SE> 24,158,593
<TOTAL-LIABILITY-AND-EQUITY> 26,946,813
<SALES> 0
<TOTAL-REVENUES> 4,053,405
<CGS> 0
<TOTAL-COSTS> 2,818,963
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> 1,235,139
<INCOME-TAX> 0
<INCOME-CONTINUING> 0
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 1,235,139
<EPS-PRIMARY> 0
<EPS-DILUTED> 0
</TABLE>
