FORM 10-K/A
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
(Mark One)
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the fiscal year ended December 31, 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 Agreement of Limited Partnership)
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)
Securities Registered Pursuant to Section 12(b) of the Act:
None
Securities Registered Pursuant to Section 12(g) of the Act:
Beneficial Assignment Certificates ("BACs") representing the beneficial
assignment of limited partnership interests.
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by the Section 13 or 15(d) of the Securities Exchange Act
of 1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports) and (2) has been subject to such
filing requirements for the past 90 days. Yes X No
Indicate by check mark if disclosure of delinquent filers pursuant to
Item 405 of Regulation S-K (229.405 of the chapter) is not contained herein,
and will not be contained, to the best of the registrant's knowledge, in
definitive proxy or information statements incorporated by reference in Part
III of this Form 10-K or any amendment to this Form 10-K. [X]
BACs are not currently traded in any market. Therefore, there is no
market price or average bid and asked price for BACs within the 60 days prior
to the date of this filing.
DOCUMENTS INCORPORATED BY REFERENCE
None
<PAGE> -i-
TABLE OF CONTENTS
Page
PART I
Item 1. Business. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1
Item 2. Properties. . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2
Item 3. Legal Proceedings . . . . . . . . . . . . . . . . . . . . . . . . . 2
Item 4. Submission of Matters to a Vote of Security Holders . . . . . . . . 3
PART II
Item 5. Market for Registrant's Common Equity and
Related Stockholder Matters . . . . . . . . . . . . . . . . . . . . 3
Item 6. Selected Financial Data . . . . . . . . . . . . . . . . . . . . . . 3
Item 7. Management's Discussion and Analysis of Financial Condition and
Results of Operations . . . . . . . . . . . . . . . . . . . . . . . 5
Item 7A. Quantitative and Qualitative Disclosures About Market Risk. . . . . 8
Item 8. Financial Statements and Supplementary Data . . . . . . . . . . . . 9
Item 9. Changes in and Disagreements With Accountants on Accounting and
Financial Disclosure. . . . . . . . . . . . . . . . . . . . . . . . 9
PART III
Item 10. Directors and Executive Officers of the Registrant . . . . . . . . 10
Item 11. Executive Compensation . . . . . . . . . . . . . . . . . . . . . . 12
Item 12. Security Ownership of Certain Beneficial Owners and Management . . 12
Item 13. Certain Relationships and Related Transactions . . . . . . . . . . 12
PART IV
Item 14. Exhibits, Financial Statement Schedules and Reports on Form 8-K. . 13
SIGNATURES . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 25
<PAGE> -ii-
PART I
Item 1. Business. Capital Source II L.P. A (the "Registrant" or the
"Partnership") hereby amends Items 1,2,5,6,7,8,10,13 and 14 of its Form 10-K
filed for the fiscal year ended December 31, 1997 to restate its financial
statements to reflect the Registrants investments in Operating Partnerships on
the equity method of accounting. Such investments had previously been
consolidated by the Registrant as more fully described in Note 2.H. to the
financial statements. Accordingly the financial statements, supplementary
tables and related disclosures have all been restated to the new basis of
accounting. The financial statements appearing in the Partnership's 10K for
the year ending December 31, 1997, should not be relied upon.
Capital Source II L.P.-A was formed in August 1986 under the Delaware
Revised Uniform Limited Partnership Act to invest principally in
federally-insured mortgages on multifamily housing properties and to acquire,
hold, sell, dispose of and otherwise deal with limited partnership interests
(the "Partnership Equity Investments") in the limited partnerships (the
"Operating Partnerships") which construct and operate these properties. The
Registrant's investment objectives generally are to (i) preserve and protect
the Registrant's capital; (ii) provide quarterly cash distributions to
investors; and (iii) achieve increasing current income and long-term capital
appreciation through increases in income from the Partnership Equity
Investments. Originally, there was a fourth investment objective which was to
make the BACs freely transferable 24 to 36 months after the Partnership
commenced operations by qualifying the BACs for quotation on NASDAQ. However,
at a Special Meeting of BAC Holders on December 17, 1990, amendments to the
Partnership Agreement were approved to only allow limited transferability of
BACs to preserve the tax status of the Partnership and avoid being designated
as a "publicly traded partnership".
A total of 4,011,101 beneficial assignment certificates representing
beneficial assignment of limited partnership interests in the Registrant
("BACs") were sold at $20 per BAC for total capital contributions of
$80,222,020 prior to the payment of certain organization and offering costs.
The Registrant originally acquired (i) four mortgage-backed securities
(the "GNMA Certificates") guaranteed as to principal and interest by the
Government National Mortgage Association ("GNMA") collateralized by first
mortgage loans on multifamily housing properties located in three states, (ii)
a first mortgage loan insured by the Federal Housing Administration (the "FHA
Loan") on a multifamily housing property located in Charlotte, North Carolina,
and (iii) Partnership Equity Investments in five limited partnerships which
own the multifamily housing properties financed by the GNMA Certificates and
the FHA Loan. The Partnership has been repaid by GNMA on one of the GNMA
Certificates and the related property has been deeded to GNMA in lieu of
foreclosure, thus eliminating the Partnership Equity Investment in this
property. Collectively, the remaining GNMA Certificates, the FHA Loan and the
Partnership Equity Investments are referred to as the "Permanent
Investments." A description of the properties financed by the Registrant
through December 31, 1997, appears in Item 7 hereof. The Partnership has also
invested amounts held in its reserve account in certain GNMA securities backed
by pools of single-family mortgages ("Reserve Investments").
While principal of and interest on the GNMA Certificates and the FHA Loan
are ultimately guaranteed by the United States government, the amount of cash
distributions received by the Registrant from the Partnership Equity
Investments is a function of the net rental revenues generated by the
properties owned by the Operating Partnerships. Net rental revenues from a
multifamily apartment complex depend on the rental and occupancy rates of the
property and on the level of operating expenses. Occupancy rates and rents
are directly affected by the supply of, and demand for, apartments in the
market area in which a property is located. This, in turn, is affected by
several factors such as local or national economic conditions, the amount of
new apartment construction and interest rates on single-family mortgage
loans. In addition, factors such as government regulation (such as zoning
laws), inflation, real estate and other taxes, labor problems and natural
disasters can affect the economic operations of a property.
In each city in which the Registrant's properties are located, such
properties compete with a substantial number of other apartment complexes.
Apartment complexes also compete with single-family housing that is either
owned or leased by potential tenants. The principal method of competition is
to offer competitive rental rates. The Registrant's properties also compete by
emphasizing regular maintenance and property amenities.
<PAGE> - 1 -
The Registrant believes that each of its properties is in compliance in
all material respects with federal, state and local regulations regarding
hazardous waste and other environmental matters and the Registrant is not
aware of any environmental contamination at any of such properties that would
require any material capital expenditure by the Registrant for the remediation
thereof.
The Registrant is engaged solely in the business of owning mortgages and
holding equity interests in real estate limited partnerships. Accordingly,
the presentation of information about industry segments is not applicable and
would not be material to an understanding of the Registrant's business taken
as a whole.
The Registrant has one employee. In addition to this employee, certain
services are provided to the Registrant by employees of an affiliate of the
general partners of the Registrant, and the Registrant reimburses such
affiliate for such services at cost. The Registrant is not charged and does
not reimburse for the services performed by managers and officers of the
general partners of the general partner of the Registrant.
Item 2. Properties. The Registrant does not directly own or lease any
physical properties. However, by virtue of its interest in the Partnership
Equity Investments in the Operating Partnerships, the Registrant indirectly
owns up to a 99% interest in three multifamily apartment projects. In
addition, the Registrant owns a 68.70% interest in another multifamily
appartment project known as The Ponds at Georgetown. The multifamily
apartment projects are described in the following table:
<TABLE>
<CAPTION>
Average
Number Square Feet Federal
Property Name Location of Units Per Unit Tax Basis
- -------------------------- ------------------- -------- ----------- ---------------
<S> <C> <C> <C> <C>
Crane's Landing Winter Park, FL 252 751 $ 8,684,275
Delta Crossing Charlotte, NC 178 880 4,975,895
Monticello Apartments Southfield, MI 106 1,027 4,113,831
The Ponds at Georgetown Ann Arbor, MI 134 1,002 5,565,607
-------- ---------------
670 $ 23,339,608
======== ===============
</TABLE>
Depreciation is taken by the Operating Partnerships on each property on a
straight-line basis over the estimated useful lives of the various components
of the properties ranging from five to 40 years.
The average annual occupancy rate and average effective rental rate per
unit for each of the properties for each of the last five years are listed in
the following table:
<TABLE>
<CAPTION>
1997 1996 1995 1994 1993
---------- ---------- ---------- ---------- ----------
<S> <C> <C> <C> <C> <C>
CRANE'S LANDING
Average Occupancy Rate 96% 94% 89% 90% 96%
Average Effective Annual Rental Per Unit $7,366 $6,954 $6,327 $6,322 $6,718
DELTA CROSSING
Average Occupancy Rate 93% 92% 94% 95% 92%
Average Effective Annual Rental Per Unit $7,260 $7,097 $6,866 $6,380 $5,691
MONTICELLO APARTMENTS
Average Occupancy Rate 97% 96% 99% 97% 95%
Average Effective Annual Rental Per Unit $8,873 $8,804 $8,630 $8,287 $8,000
THE PONDS AT GEORGETOWN
Average Occupancy Rate 97% 95% 95% 95% 90%
Average Effective Annual Rental Per Unit $9,883 $9,515 $9,174 $8,955 $8,398
</TABLE>
<PAGE> - 2 -
In the opinion of the Partnership's management, each of the properties is
adequately covered by insurance. For additional information concerning the
properties, see "Management's Discussion and Analysis of Financial Condition
and Results of Operations". A discussion of general competitive conditions to
which these properties are subject is included in Item 1 hereof.
Item 3. Legal Proceedings. There are no material pending legal
proceedings to which the Registrant is a party or to which any of its property
is subject.
Item 4. Submission of Matters to a Vote of Security Holders. No matter
was submitted during the fourth quarter of 1997 to a vote of the Registrant's
security holders.
PART II
Item 5. Market for Registrant's Common Equity and Related Stockholder
Matters.
(a) Market Information. The BACs are subject to various transfer
restrictions imposed to prevent the Registrant from being treated as a
publicly traded partnership for federal income tax purposes and, accordingly,
there is no public trading market for the BACs.
In the event the General Partners have reason to believe that a requested
sale, transfer or assignment of BACs would cause the Partnership to be
characterized as a publicly traded partnership for federal income tax
purposes, the General Partners will, pursuant to their powers under Section
5.09 of the Partnership Agreement, refuse to process such requested sale,
transfer or assignment unless the General Partners receive an unqualified
opinion of Counsel to the effect that such sale, transfer or assignment of
BACs, would not cause the Partnership to be characterized as a publicly
traded partnership for federal income tax purposes. Neither the General
Partners nor the Partnership may be held liable for any losses resulting to a
holder of BACs or a purchaser of BACs as a result of a requested sale,
transfer or assignment of BACs not being processed due to these limitations.
The foregoing restrictions are intended to prevent the trading volume of
BACs from reaching a level that would cause the Partnership to be
characterized as a publicly traded partnership under Section 7704 of the Code.
In the event the Partnership were characterized as a publicly traded
partnership, the Partnership could be subject to entity level taxation. In
such event, amounts otherwise distributable to holders of BACs would be used
to satisfy federal income tax liabilities of the Partnership and, thus,
amounts received by holders of BACs would be less than anticipated.
(b) Investors. The approximate number of BAC Holders on December 31,
1997, was 5,499.
(c) Distributions. Cash distributions are being distributed on a monthly
basis to the record holders of BACs as of the last day of each month. Total
cash distributions paid or accrued to BAC Holders during the fiscal years
ended December 31, 1997, and December 31, 1996, equaled $3,248,992 each year.
The cash distributions paid per BAC during the fiscal years ended December 31,
1997, and December 31, 1996, were as follows:
<TABLE>
<CAPTION>
Per BAC
Year Ended Year Ended
December 31, 1997 December 31, 1996
----------------- -----------------
<S> <C> <C>
Income $ .4082 $ .5240
Return of Capital .4018 .2860
----------------- -----------------
Total $ .8100 $ .8100
================= =================
</TABLE>
PAGE> - 3 -
See Item 7, Management's Discussion and Analysis of Financial Condition
and Results of Operations, for information regarding the sources of funds
used for cash distributions and for a discussion of factors, if any, which may
adversely affect the Registrant's ability to make cash distributions at the
same levels in 1998 and thereafter.
Item 6. Selected Financial Data. Set forth below is selected financial
data for the Registrant. The information set forth below should be read in
conjunction with the Financial Statements and Notes thereto filed in response
to Item 8 hereof.
<TABLE>
<CAPTION>
For the For the For the For the For the
Year Ended Year Ended Year Ended Year Ended Year Ended
Dec. 31, 1997 Dec. 31, 1996 Dec. 31, 1995 Dec. 31, 1994 Dec. 31, 1993
------------- ------------- ------------- ------------- -------------
<S> <C> <C> <C> <C> <C>
Mortgage-backed securities income $ 2,499,844 $ 2,520,727 $ 2,561,901 $ 2,526,266 $ 2,715,851
Interest income on temporary cash investments
and U.S. government securities 91,327 147,530 200,678 181,315 345,962
Equity in losses of Operating Partnerships (121,450) - (109,900) (209,805) (343,842)
Other income 3,800 6,950 4,650 2,900 2,050
Gain on sale of mortgage-backed securities - - 15,670 - -
Operating and administrative expenses (819,516) (552,170) (499,903) (479,388) (464,457)
------------- ------------- ------------- ------------- -------------
Net income $ 1,654,005 $ 2,123,037 $ 2,173,096 $ 2,021,288 $ 2,255,564
============= ============= ============= ============= =============
Net income, basic and diluted, per
Beneficial Assignment Certificate (BAC) $ .41 $ .52 $ .54 $ .50 $ 4.0702
============= ============= ============= ============= =============
Cash distributions paid or accrued per BAC $ .8100 $ .8100 $ .8100 $ .8100 $ .8100
============= ============= ============= ============= =============
Investment in FHA Loans $ 6,538,424 $ 6,568,139 $ 6,595,251 $ 6,619,989 $ 6,642,560
============= ============= ============= ============= =============
Investment in GNMA Certificates $ 21,674,940 $ 21,895,675 $ 22,142,421 $ 22,799,369 $ 20,976,662
============= ============= ============= ============= =============
Total assets $ 29,829,534 $ 31,340,155 $ 32,541,767 $ 33,589,321 $ 34,883,519
============= ============= ============= ============= =============
</TABLE>
<PAGE> - 4 -
Item 7. 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. The Partnership has been repaid by GNMA
on one of the GNMA Certificates and the related property has been deeded to
GNMA in lieu of foreclosure, thus eliminating the Partnership Equity
Investment in this property. 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.
Distributions
Cash distributions paid or accrued per BAC were as follows:
<TABLE>
<CAPTION>
For the For the For the
Year Ended Year Ended Year Ended
Dec. 31, 1997 Dec. 31, 1996 Dec. 31, 1995
-------------- -------------- --------------
<S> <C> <C> <C>
Regular monthly distributions
Income $ .4082 $ .5240 $ .5364
Return of capital .4018 .2860 .2736
-------------- -------------- --------------
$ .8100 $ .8100 $ .8100
============== ============== ==============
Distributions
Paid out of cash flow .5172 $ .6019 $ .6497
Paid out of reserves .2928 .2081 .1603
-------------- -------------- --------------
$ .8100 $ .8100 $ .8100
============== ============== ==============
</TABLE>
Regular monthly distributions to BAC Holders consist primarily of interest
received on the FHA Loan, GNMA Certificates and the Reserve Investments.
Additional cash for distributions is received from other temporary
investments. The Partnership may draw on reserves to pay operating expenses
or to supplement cash distributions to BAC Holders. The Partnership is
permitted to replenish reserves with cash flows in excess of distributions
paid. During 1997, $1,186,163 was withdrawn from reserves to supplement
regular monthly cash distributions. The total amount held in reserves at
December 31, 1997, was $1,550,084 of which $1,050,718 was invested in
mortgaged-backed securities.
The Partnership has been supplementing cash flow from operations with
withdrawals from reserves in order to maintain distributions at the current
level. Consequently, it is likely that the level of distributions will be
reduced in the future. The General Partners will continue to review the level
of distributions each quarter in light of the Partnership's operating results
and financial position.
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 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.
<PAGE> - 5 -
Year 2000
The Partnership does not own or operate its own computer system and owns no
business or other equipment. However, the operation of the Partnership's
business relies on the computer system and other equipment maintained by
America First Companies L.L.C., the parent company of its general partners
("America First"). In addition, the Partnership has business relationships
with a number of third parties whose ability to perform their obligations to
the Partnership depend on such systems and equipment. Some or all of these
systems and equipment may be affected by the inability of certain computer
programs and embedded circuitry to correctly recognize dates occurring after
December 31, 1999. America First has adopted a plan to deal with this
so-called "Year 2000 problem" with respect to its information technology
("IT") systems, non-IT systems and third party business relationships.
State of Readiness
The IT system maintained by America First consists primarily of personal
computers, most of which are connected by a local area network. All
accounting and other record keeping functions relating to the Partnership that
are conducted in house by America First are performed on this PC-LAN system.
America First does not own or operate any "mainframe" computer systems. The
PC-LAN system runs software programs that America First believes are
compatible with dates after December 31, 1999. America First has engaged a
third party computer consulting firm to review and test its PC-LAN system to
ensure that it will function correctly after that date and expects that this
process, along with any necessary remediation, will be completed by March 31,
1999. America First believes any Year 2000 problems relating to its IT
systems will resolved without significant operational difficulties. However,
there can be no assurance that testing will discover all potential Year 2000
problems or that it will not reveal unanticipated material problems with the
America First IT systems that will need to be resolved.
Non-IT systems include embedded circuitry such as microcontrollers found in
telephone equipment, security and alarm systems, copiers, fax machines, mail
room equipment, heating and air conditioning systems and other infrastructure
systems that are used by America First in connection with the operation of the
Partnership's business. America First is reviewing its non-IT systems along
with the providers that service and maintain these systems, with initial
emphasis being placed on those, such as telephone systems, which have been
identified as necessary to America First's ability to conduct the operation of
the Partnership's business activities. America First expects that any
necessary modification or replacement of such "mission critical" systems will
be accomplished by mid-1999.
The Partnership has no control over the remediation efforts of third parties
with which it has material business relationships and the failure of certain
of these third parties to successfully remediate their Year 2000 issues could
have a material adverse effect on the Partnership. Accordingly, America First
has undertaken the process of contacting each such third party to determine
the state of their readiness for Year 2000. Such parties include, but are not
limited to, the obligors on the Partnership's GNMA Certificates and FHA Loan,
the Partnership's transfer and paying agent and the financial institutions
with which the Partnership maintains accounts. America First has received
initial assurances from certain of these third parties that their ability to
perform their obligations to the Partnership are not expected to be materially
adversely affected by the Year 2000 problem. America First will continue to
request updated information from these material third parties in order to
access their Year 2000 readiness. If a material third party vendor is unable
to provide assurance to America First that it is, or will be, ready for Year
2000, America First intends to seek an alternative vendor to the extent
practical.
<PAGE> - 6 -
Costs
All of the IT systems and non-IT systems used to conduct the Partnership's
business operations are owned or leased by America First. Under the terms of
its partnership agreement, neither America First nor the Partnership's general
partners may be reimbursed by the Partnership for expenses associated with
their computer systems or other business equipment. Therefore, the costs
associated with the identification, remediation and testing of America First's
IT and non-IT systems will be paid by America First rather than the
Partnership. The Partnership will bear its proportionate share of the costs
associated with surveying the Year 2000 readiness of third parties. However,
the Partnership's share of the costs associated with these activities are
expected to be insignificant. Accordingly, the costs associated with
addressing the Partnership's Year 2000 issues are not expected to have a
material effect on the Partnership's results of operations, financial position
or cash flow.
Year 2000 Risks
The Partnership's general partners believe that the most reasonably likely
worst-case scenario will be that one or more of the third parties with which
it has a material business relationship will not have successfully dealt with
its Year 2000 issues and, as a result, is unable to provide services or
otherwise perform its obligations to the Partnership. For example, if an
obligor on the Partnership's GNMA Certificates or FHA Loan encounters a
serious and unexpected Year 2000 issue, it may be unable to make a timely
payment of principal and interest to the Partnership. This, in turn, could
cause a delay or temporary reduction in cash distributions to BAC holders. In
addition, if the Partnership's transfer and paying agent experiences Year
2000-related difficulties, it may cause delays in making distributions to BAC
holders or in the processing of transfers of BACs. It is also possible that
one or more of the IT and non-IT systems of America First will not function
correctly, and that such problems may make it difficult to conduct necessary
accounting and other record keeping functions for the Partnership. However,
based on currently available information, the general partners do not believe
that there will be any protracted systemic failures of the IT or non-IT
systems utilized by America First in connection with the operation of the
Partnership's business.
Contingency Plans
Because of the progress which America First has made toward achieving Year
2000 readiness, the Partnership has not made any specific contingency plans
with respect to the IT and non-IT systems of America First. In the event of a
Year 2000 problem with its IT system, America First may be required to
manually perform certain accounting and other record-keeping functions.
America First plans to terminate the Partnership's relationships with material
third party service providers that are not able to represent to America First
that they will be able to successfully resolve their material Year 2000 issues
in a timely manner. However, the Partnership will not be able to terminate
its relationships with certain third parties, such as the obligors on its GNMA
Certificates and FHA Loan, who may experience Year 2000 problems. The
Partnership has no specific contingency plans for dealing with Year 2000
problems experienced with these third parties.
All forecasts, estimates or other statements in this report relating to the
Year 2000 readiness of the Partnership and its affiliates are based on
information and assumptions about future events. Such "forward-looking
statements" are subject to various known and unknown risks and uncertainties
that may cause actual events to differ from such statements. Important
factors upon which the Partnership's Year 2000 forward-looking statements are
based include, but are not limited to, (a) the belief of America First that
the software used in IT systems is already able to correctly read and
interpret dates after December 31, 1999 and will require little or any
remediation; (b) the ability to identify, repair or replace mission critical
non-IT equipment in a timely manner, (c) third parties' remediation of their
internal systems to be Year 2000 ready and their willingness to test their
systems interfaces with those of America First, (d) no third party system
failures causing material disruption of telecommunications, data transmission,
payment networks, government services, utilities or other infrastructure, (e)
no unexpected failures by third parties with which the Partnership has a
material business relationship and (f) no material undiscovered flaws in
America First's Year 2000 testing process.
<PAGE> - 7 -
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 underlying the Operating Partnerships.
The fair value of the properties underlying the Operating Partnerships is
based on management's best estimate of the fair value of such properties,
however; the ultimate realized values may vary from these estimates. The fair
value of the properties is determined based on the discounted estimated future
cash flows from the properties, including estimated sales proceeds. The
calculation of discounted estimated future cash flows includes certain
variables such as the assumed inflation rates for rents and expenses,
capitalization rates and discount rates. These variables are supplied to
management by an independent real estate firm and are based on local market
conditions for each property. In certain cases, additional factors such as
the replacement value of the property or comparable sales of similar
properties are also taken into consideration.
The following table shows the occupancy levels of the properties financed by
the Partnership as of December 31, 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 252 237 94%
Delta Crossing Charlotte, NC 178 168 94%
Monticello Apartments Southfield, MI 106 104 98%
The Ponds at Georgetown Ann Arbor, MI 134 128 96%
--------- ---------- -----------
670 637 95%
========= ========== ===========
</TABLE>
Crane's Landing
Crane's Landing, located in Winter Park, Florida, is a 252-unit complex with
one-, two- and three-bedroom apartments on fourteen acres of land. Average
occupancy was 96% during 1997, compared to 94% during 1996. As a result of
the increase in average occupancy and rental rate increases, rental income
increased approximately 9% in 1997, compared to 1996. The increase in rental
income was partially offset by an increase in real estate operating expenses,
primarily an increase of approximately 23% in repairs and maintenance expenses
and 15% in labor expenses. This resulted in an increase of approximately 4.4%
in net cash flow generated by this property, before debt service, in 1997,
compared to 1996. The property generated cash flow in excess of debt service
and was current on its mortgage obligations during 1997.
Delta Crossing
Delta Crossing is a 178-unit apartment complex located in Charlotte, North
Carolina. Average occupancy was 93% in 1997, compared to 92% in 1996. As a
result of the increase in occupancy and rental rate increases, rental income
increased approximately 3% in 1997, compared to 1996. The increase in rental
income was offset by increases of approximately 11% in repairs and maintenance
expenses and property improvements, 9% in labor expenses and slight increases
in other expenses. Thus, net cash flow generated by this property in 1997 was
comparable to 1996. The property generated cash flow in excess of debt
service and was current on its mortgage obligations during 1997.
<PAGE> - 8 -
Monticello Apartments
Monticello Apartments, located in Southfield, Michigan, contains 106 rental
units. Average occupancy was 97% in 1997, compared to 96% in 1996. As a
result, rental income increased slightly in 1997, compared to 1996. The
increase in rental income, was more than offset by increases in real estate
operating expenses, primarily an increase of approximately 42% in repairs and
maintenance expenses and property improvements and 13% in labor expenses.
Thus, net cash flow generated by this property, before debt service, decreased
approximately 2.3% in 1997, compared to 1996. Despite the decrease in net
cash flow, the property generated cash flow in excess of debt service and was
current on its mortgage obligations during 1997.
The Ponds at Georgetown
The Ponds at Georgetown consists of 134 apartments located in Ann Arbor,
Michigan. Average occupancy was 97% in 1997 compared to 95% in 1996.
Operating revenue increased approximately 8% in 1997 compared to 1996,
primarily due to the increase in average occupancy, rental rate increases and
an increase in corporate unit rentals. Despite the increase in operating
revenue, the Operating Partnership remains in default on its mortgage loan and
is delinquent in paying property taxes and insurance. The Partnership
continues to explore a number of alternatives with the mortgage holder to
determine the best course of action to pursue, including a possible
restructuring of the mortgage loan.
Results of Operations
The tables below compare the results of operations for each year shown.
<TABLE>
<CAPTION>
For the For the For the
Year Ended Year Ended Year Ended
Dec. 31, 1997 Dec. 31, 1996 Dec. 31, 1995
--------------- --------------- ---------------
<S> <C> <C> <C>
Mortgage-backed securities income $ 2,499,844 $ 2,520,727 $ 2,561,901
Interest income on temporary cash investments
and U.S. government securities 91,327 147,530 200,678
Equity in losses of Operating Partnerships (121,450) - (109,900)
Other income 3,800 6,950 4,650
Gain on sale of mortgage-backed securities - - 15,670
-------------- --------------- ---------------
2,473,521 2,675,207 2,672,999
Operating and administrative expenses 819,516 552,170 499,903
-------------- --------------- ---------------
Net income $ 1,654,005 $ 2,123,037 $ 2,173,096
============== =============== ===============
</TABLE>
<TABLE>
<CAPTION>
<PAGE> - 9 -
Increase Increase
(Decrease) (Decrease)
From 1996 From 1995
--------------- ---------------
<S> <C> <C>
Mortgage-backed securities income $ (20,883) $ (41,174)
Interest income on temporary cash investments
and U.S. government securities (56,203) (53,148)
Equity in losses of Operating Partnerships (121,450) 109,900
Other income (3,150) 2,300
Gain on sale of mortgage-backed securities - (15,670)
-------------- ---------------
(201,686) 2,208
Operating and administrative expenses 267,346 52,267
-------------- ---------------
Net income $ (469,032) $ (50,059)
============== ===============
</TABLE>
Mortgage-backed securities income decreased $20,883 from 1996 to 1997 and
$41,174 from 1995 to 1996. The decreases were due to the continued
amortization of the principal balances of the Partnership's mortgage-backed
securities.
Interest on temporary cash investments and U.S. government securities
decreased $56,203 from 1996 to 1997 and $53,148 from 1995 to 1996. The
decreases were due to withdrawals made from the Partnership's reserves to
supplement distributions to BAC Holders.
The recognition of equity in losses of Operating Partnerships have been
suspended, limited to the extent distributions are received and capital
investments are made.
The Partnership made additional investments in certain Operating Partnerships
during 1997 and 1995. As such, Equity in losses of Operating Partnerships was
recorded in 1997 and 1995 to the extent of the additional investments. No
such investments were made and no equity in losses was recorded in 1996.
During 1995, the Partnership sold a portion of its mortgage-backed securities
and realized a gain of $15,670 on the sale. There were no such sales during
either 1996 or 1997.
Operating and administrative expenses increased $267,346 from 1996 to 1997.
Approximately $126,000 of such increase was due to costs incurred in
connection with a review of various options available to the Partnership to
improve total investment returns and provide liquidity to the Partnership's
investors. The remaining increase of $141,346 from 1996 to 1997 was due
primarily to increases in salaries and related expenses. Operating and
administrative expenses increased $52,267 from 1995 to 1996 primarily due to
increases in salaries and related expenses.
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 7A. Quantitative and Qualitative Disclosures About Market Risk.
The requirements of Item 7A of Form 10-K are not applicable to the Partnership
prior to its Annual Report on Form 10-K for the year ended December 31, 1998.
Item 8. Financial Statements and Supplementary Data. The Financial
Statements and supporting schedules of the Registrant are set forth in Item 14
hereof and are incorporated herein by reference.
<PAGE> - 10 -
Item 9. Changes in and Disagreements With Accountants on Accounting and
Financial Disclosure. There were no disagreements with the Registrant's
independent accountants on accounting principles and practices or financial
disclosure during the fiscal years ended December 31, 1997 and 1996.
<PAGE> - 11 -
PART III
Item 10. Directors and Executive Officers of Registrant. The Registrant
has no directors or officers. The general partners of the Registrant are
America First Capital Source II, L.L.C., (the "America First General Partner")
and Insured Mortgage Equities II L.P., (the "IME II General Partner"), each of
which is controlled by America First Companies L.L.C. ("America First").
Collectively, the America First General Partner and the IME II General Partner
are referred to as the "General Partners".
The following individuals are the officers, directors and managers of the
America First General Partner, the general partner of the IME II General
Partner and America First, and each serves for a term of one year.
<TABLE>
<CAPTION>
Name Position Held Position Held Since
- ----------------------- ---------------------------------- -----------------------
<S> <C> <C>
Michael B. Yanney Chairman of the Board, President, 1984
Chief Executive Officer and
Manager of America First
Chairman and Chief Executive 1991
Officer of the America First
General Partner
Director of the general partner of the IME II
General Partner 1997
Paul L. Abbott President of the America First 1997
General Partner
President of the general partner of the IME II
General Partner 1997
Michael Thesing Vice President, Secretary, Treasurer and 1984
Manager of America First
Vice President, Secretary and 1991
Treasurer of the America First
General Partner
Vice President, Secretary and 1997
Treasurer of the IME II
General Partner
William S. Carter, M.D. Manager of America First 1994
George Kubat Manager of America First 1994
Martin A. Massengale Manager of America First 1994
Alan Baer Manager of America First 1994
Gail Walling Yanney Manager of America First 1996
Mariann Byerwalter Manager of America First 1997
</TABLE>
Michael B. Yanney, 64, has served as the Chairman, President and Chief
Executive Officer of America First Companies L.L.C. and its predecessors since
1984. From 1977 until the organization of the first such fund in 1984, Mr.
Yanney was principally engaged in the ownership and management of commercial
banks. Mr. Yanney also has investments in private corporations engaged in a
variety of businesses. From 1961 to 1977, Mr. Yanney was employed by Omaha
National Bank and Omaha National Corporation (now part of U.S. Bank), where he
held various positions, including the position of Executive Vice President and
Treasurer of the holding company. Mr. Yanney also serves as a member of the
boards of directors of Burlington Northern Santa Fe Corporation, Forest Oil
Corporation, Lozier Corporation, Freedom Communications, Inc., Magnum
Resources, RCN Corporation, Rio Grande Medical Technologies, Inc., and PKS
Information Services, Inc.
<PAGE> - 12 -
Paul L. Abbott, 52, joined America First in 1997. From 1988 until 1997,
Mr. Abbott was a Managing Director of Lehman Brothers, Inc. ("Lehman
Brothers"). At Lehman Brothers, Mr. Abbott served as chief executive of over
50 investment funds controlled by Lehman Brothers. The assets owned by those
funds included 50,000 multifamily units; 5,100 manufactured housing sites; 5
million square feet of retail; 950,000 feet of self-service storage; and a
variety of other debt and equity real estate investments. His
responsibilities included acquisitions, financings, planning, investment
management and workouts. Mr. Abbott served on various committees responsible
for approving acquisitions, financings, sales, workouts and similar
decisions. Prior to joining Lehman Brothers, from 1983 until 1988, Mr. Abbott
was a Senior Vice President of Daseke & Co., Inc., a predecessor to Walden
Residential, a NYSE-traded real estate investment trust. At Daseke, Mr.
Abbott was responsible for asset management of 20,000 multifamily units and
arranging over $500 million of financings.
Michael Thesing, 43, has been Vice President and Chief Financial Officer
of affiliates of America First Companies L.L.C. since July 1984. From January
1984 until July 1984 he was employed by various companies controlled by Mr.
Yanney. He was a certified public accountant with Coopers & Lybrand from 1977
through 1983.
William S. Carter, M.D., 71, is a retired physician. Dr. Carter
practiced medicine for 30 years in Omaha, Nebraska, specializing in
otolaryngology (disorders of the ears, nose and throat).
George Kubat, 52, is the President and Chief Executive Officer of
Phillips Manufacturing Co., an Omaha, Nebraska, based manufacturer of drywall
metals and construction materials. Prior to assuming that position in
November 1992, Mr. Kubat was a certified public accountant with Coopers &
Lybrand in Omaha, Nebraska, from 1969. He was the tax partner in charge of
the Omaha office from 1981 to 1992. Mr. Kubat currently serves on the board
of directors of Sitel Corporation and InfoUSA.
Martin A. Massengale, 64, is President Emeritus of the University of
Nebraska, Director of the Center for Grassland Studies and Foundation
Distinguished Professor. Prior to becoming President in 1991, he served as
Interim President from 1989, as Chancellor of the University of Nebraska
Lincoln from 1981 until 1990 and as Vice Chancellor for Agriculture and
Natural Resources from 1976 to 1981. Prior to that time, he was a professor
and associate dean of the College of Agriculture at the University of
Arizona. Dr. Massengale currently serves on the board of directors of Woodmen
Accident & Life Insurance Company and IBP, Inc. and is a member of the Board
of Trustees of the Great Plains Funds, Inc.
Alan Baer, 75, is presently Chairman of Alan Baer & Associates, Inc., a
management company located in Omaha, Nebraska. He is also Chairman of Lancer
Hockey, Inc., Baer Travel Services, Wessan Telemarketing, Total Security
Systems, Inc. and several other businesses. Mr. Baer is the former Chairman
and Chief Executive Officer of the Brandeis Department Store chain which,
before its acquisition, was one of the larger retailers in the Midwest. Mr.
Baer has also owned and served on the board of directors of several banks in
Nebraska and Illinois.
Gail Walling Yanney, 61, is a retired physician. Dr. Walling practiced
anesthesia and was most recently the Executive Director of the Clarkson
Foundation until October of 1995. In addition, she was a director of FirsTier
Bank, N.A., Omaha prior to its merger with First Bank, N.A.. Ms. Yanney is
the wife of Michael B. Yanney.
Mariann Byerwalter, 37, is Vice President of Business Affairs and Chief
Financial Officer of Stanford University. Ms. Byerwalter was Executive Vice
President of America First Eureka Holdings, Inc. ("AFEH") and EurekaBank from
1988 to January 1996. Ms. Byerwalter was Chief Financial Officer and Chief
Operating Officer of AFEH, and Chief Financial Officer of EurekaBank from 1993
to January 1996. She was an officer of BankAmerica Corporation and its
venture capital subsidiary from 1984 to 1987. She served as Vice President
and Executive Assistant to the President of Bank of America and was a Vice
President in the bank's Corporate Planning and Development Department.
<PAGE> - 13 -
Item 11. Executive Compensation. The Registrant does not have any
directors or officers. None of the directors or officers of the General
Partners or the managers or officers of America First receive compensation
from the Registrant and neither General Partner receives reimbursement from
the Registrant for any portion of their salaries. Remuneration paid by the
Registrant to the General Partners pursuant to the terms of its agreement of
limited partnership during the period ending December 31, 1997, is described
in Note 7 to the Notes to the Financial Statements filed in response to Item 8
hereof.
Item 12. Security Ownership of Certain Beneficial Owners and Management.
(a) No person is known by Registrant to own beneficially more than 5% of
the BACs.
(b) No director or officers of the General Partners or managers or
officers of America First own any BACs.
(c) There are no arrangements known to the Registrant the operation of
which may at any subsequent date result in a change in control of the
Registrant.
Item 13. Certain Relationships and Related Transactions. The members of
the America First General Partner are America First Companies L.L.C and Mr.
Yanney. The general partner of the IME II General Partner is CS Housing II,
Inc. ("CSII"), which is owned by America First. Except as described herein,
the Registrant is not a party to any transaction or proposed transaction with
either General Partner or with any person who is (i) a member, director or
executive officer of the America First General Partner or manager or officer
of America First or a director or officer of CSII, (ii) a nominee for election
as a director or manager of the America First General Partner, or a manager of
America First or CSII, (iii) an owner of more than 5% of the BACs or (iv) a
member of the immediate family of any of the foregoing persons.
The General Partners are entitled to receive an asset management and
partnership administrative fee equal to 0.5% of invested assets per annum, the
first $50,000 of which shall 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 of 0.5% of invested assets will be
paid in those years that an 11.5% annual return has been paid to investors on
a cumulative basis. Any unpaid amounts will accrue and be payable only after
a 11.5% annual return to investors has been paid on a cumulative basis and the
investors have received the return of their capital contributions. During
1997, the General Partners earned, and the Registrant incurred $166,000 in
such asset management and partnership administration fees.
During 1997, the Registrant paid or reimbursed the General Partners
$494,165 for certain costs and expenses incurred in connection with the
operation of the Registrant, including legal and accounting fees and investor
communication costs, such as printing and mailing charges. See Note 7 to
Notes to Financial Statements filed in response to Item 8 hereof for a
description of these costs and expenses.
America First Properties Management, L.L.C. (the "Manager") has been
retained to provide property management services with respect to the
day-to-day operation of The Ponds at Georgetown. The property management
agreement provides that the Manager is entitled to receive a management fee
equal to a stated percentage of the gross revenues generated by the property
under management. Management fees payable to the Manager are 3% of gross
revenues. Because the Manager is an affiliate of the General Partner the
management fees payable by the Registrant to the Manager may not exceed the
lesser of (i) the rates that the Registrant would pay an unaffiliated manager
for similar services in the same geographic location or (ii) the Manager's
actual cost for providing such services. During the year ended December 31,
1997, the Registrant paid the Manager property management fees of $31,924.
<PAGE> - 14 -
PART IV
Item 14. Exhibits, Financial Statement Schedules and Reports on Form 8 K.
(a) The following documents are filed as part of this report:
1. Financial Statements. The following financial statements are included
in response to Item 8 of this report:
Independent Accountants' Report
Balance Sheets of the Registrant as of December 31, 1997,
and December 31, 1996.
Statements of Income of the Registrant for the years ended
December 31, 1997, December 31, 1996, and December 31, 1995.
Statements of Partners' Capital (Deficit) of the Registrant for the
years ended December 31, 1997, December 31, 1996, and December 31, 1995.
Statements of Cash Flows of the Registrant for the years
ended December 31, 1997, December 31, 1996, and December 31, 1995.
Notes to Financial Statements of the Registrant.
2. Financial Statement Schedules. The information required to be set
forth in the financial statement schedules is included in the Financial
Statements filed in response to Item 8 hereof.
3. Exhibits. The following exhibits were filed as required by Item 14(c)
of this report. Exhibit numbers refer to the paragraph numbers under Item 601
of Regulation S-K:
4(a). Agreement of Limited Partnership of Capital Source 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)).
24. Power of Attorney (incorporated herein by reference to form 10-K
dated December 31, 1997, filed pursuant to section 13 or 15(d) of the
Securities Exchange Act of 1934 by Capital Source II L.P.-A (Commission
File No. 0-16862)).
(b) The Registrant did not file any reports on Form 8-K during the last
quarter of the period covered by this report.
Independent Accountants' Report
<PAGE> - 15 -
To the Partners
Capital Source II L.P.-A:
We have audited the accompanying balance sheets of Capital Source II L.P.-A as
of December 31, 1997 and 1996, and the related statements of income, partners'
capital (deficit) and cash flows for each of the three years in the period
ended December 31, 1997. These financial statements are the responsibility of
the Partnership's management. Our responsibility is to express an opinion on
these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of Capital Source II L.P.-A as
of December 31, 1997 and 1996, and the results of its operations and its cash
flows for each of the three years in the period ended December 31, 1997, in
conformity with generally accepted accounting principles.
As discussed in Note 2.H., the accompanying financial statements have been
restated to reflect the investments made by Capital Source II L.P. in
Operating Partnerships on the equity method of accounting. Such investments
had previously been consolidated by Capital Source II L.P..
Omaha, Nebraska
October 23, 1998 KPMG Peat Marwick LLP
<PAGE> - 16 -
CAPITAL SOURCE II L.P.-A
Balance Sheets
<TABLE>
<CAPTION>
Dec. 31, 1997 Dec. 31, 1996
--------------- ---------------
<S> <C> <C>
Assets
Cash and temporary cash investments, at cost which
approximates market value $ 1,240,992 $ 2,430,937
Investment in FHA Loan (Note 5) 6,538,424 6,568,139
Investment in GNMA Certificates (Note 5) 21,674,940 21,895,675
Investment in Operating Partnerships (Note 6) - -
Interest receivable 213,024 219,661
Other assets 162,154 225,743
--------------- ---------------
$ 29,829,534 $ 31,340,155
=============== ===============
Liabilities and Partners' Capital (Deficit)
Liabilities
Accounts payable (Note 7) $ 327,513 $ 216,298
Distribution payable (Note 4) 546,968 546,968
--------------- ---------------
874,481 763,266
--------------- ---------------
Partners' Capital (Deficit)
General Partner (276,907) (260,689)
Beneficial Assignment Certificate Holders
($7.29 per BAC in 1997 and $7.69 in 1996) 29,231,960 30,837,578
--------------- ---------------
28,955,053 30,576,889
--------------- ---------------
$ 29,829,534 $ 31,340,155
=============== ===============
</TABLE>
CAPITAL SOURCE II L.P.-A
STATEMENTS OF INCOME
<TABLE>
<CAPTION>
For the For the For the
Year Ended Year Ended Year Ended
Dec. 31, 1997 Dec. 31, 1996 Dec. 31, 1995
--------------- --------------- ---------------
<S> <C> <C> <C>
Income
Mortgage-backed securities income (Note 5) $ 2,499,844 $ 2,520,727 $ 2,561,901
Interest income on temporary cash investments
and U.S. government securities 91,327 147,530 200,678
Equity in losses of Operating Partnerships (Note 6) (121,450) - (109,900)
Other income 3,800 6,950 4,650
Gain on sale of mortgage-backed securities - - 15,670
--------------- --------------- ---------------
2,473,521 2,675,207 2,672,999
Expenses
Operating and administrative expenses (Note 7) 819,516 552,170 499,903
--------------- --------------- ---------------
Net income $ 1,654,005 $ 2,123,037 $ 2,173,096
=============== =============== ===============
Net income allocated to:
General Partner $ 16,540 $ 21,230 $ 21,731
BAC Holders 1,637,465 2,101,807 2,151,365
--------------- --------------- ---------------
$ 1,654,005 $ 2,123,037 $ 2,173,096
=============== =============== ===============
Net income, basic and diluted, per BAC $ .41 $ .52 $ .54
=============== =============== ===============
Weighted average number of BACs outstanding 4,011,101 4,011,101 4,011,101
=============== =============== ===============
The accompanying notes are an integral part of the financial statements.
</TABLE>
<PAGE> - 17 -
CAPITAL SOURCE II L.P.-A
STATEMENTS OF PARTNERS' CAPITAL (DEFICIT)
FROM DECEMBER 31, 1994 TO DECEMBER 31, 1997
<TABLE>
<CAPTION>
General BAC
Partners Holders Total
--------------- --------------- ---------------
<S> <C> <C> <C>
Partners' Capital (Deficit) (excluding net
unrealized holding gains)
Balance at December 31, 1994, $ (280,672) $ 28,859,231 $ 28,578,559
as previously reported
Effect of restatement (Note 2.I.) 42,296 4,187,279 4,229,575
--------------- --------------- ---------------
Balance at December 31, 1994, as restated (238,376) 33,046,510 32,808,134
Net income 21,731 2,151,365 2,173,096
Cash distributions paid or accrued (Note 4) (32,818) (3,248,992) (3,281,810)
--------------- --------------- ---------------
Balance at December 31, 1995 (249,463) 31,948,883 31,699,420
Net income 21,230 2,101,807 2,123,037
Cash distributions paid or accrued (Note 4) (32,818) (3,248,992) (3,281,810)
--------------- --------------- ---------------
Balance at December 31, 1996 (261,051) 30,801,698 30,540,647
Net income 16,540 1,637,465 1,654,005
Cash distributions paid or accrued (Note 4) (32,818) (3,248,992) (3,281,810)
--------------- --------------- ---------------
(277,329) 29,190,171 28,912,842
--------------- --------------- ---------------
Net unrealized holding gains
Balance at December 31, 1994 - - -
Net change 787 77,955 78,742
--------------- --------------- ---------------
Balance at December 31, 1995 787 77,955 78,742
Net change (425) (42,075) (42,500)
--------------- --------------- ---------------
Balance at December 31, 1996 362 35,880 36,242
Net change 60 5,909 5,969
--------------- --------------- ---------------
422 41,789 42,211
--------------- --------------- ---------------
Balance at December 31, 1997 $ (276,907) $ 29,231,960 $ 28,955,053
=============== =============== ===============
The accompanying notes are an integral part of the financial statements.
</TABLE>
<PAGE> - 18 -
CAPITAL SOURCE II L.P.-A
STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
For the For the For the
Year Ended Year Ended Year Ended
Dec. 31, 1997 Dec. 31, 1996 Dec. 31, 1995
--------------- --------------- ---------------
<S> <C> <C> <C>
Cash flows from operating activities
Net income $ 1,654,005 $ 2,123,037 $ 2,173,096
Adjustments to reconcile net income to
net cash provided by operating activities
Equity in losses of Operating Partnerships 121,450 - 109,900
Amortization of discount on mortgage-backed securties (1,397) (9,400) (25,076)
Gain on sale of mortgage-backed securities - - (15,670)
Decrease (increase) interest receivable 6,637 26,654 (15,159)
Decrease in other assets 63,589 62,156 62,871
Increase (decrease) in accounts payable 111,215 (339) (17,582)
--------------- --------------- ---------------
Net cash provided by operating activities 1,955,499 2,202,108 2,272,380
--------------- --------------- ---------------
Cash flows from investing activities
FHA Loan and GNMA principal payments received 257,816 253,258 286,952
Maturity of U.S. government securities - 2,500,000 -
Disposition of mortgage-backed securities - - 470,667
Investment in Operating Partnerships (121,450) - (109,900)
Acquisition of U.S. government securities - - (2,468,945)
--------------- --------------- ---------------
Net cash provided by (used in) investing activities 136,366 2,753,258 (1,821,226)
--------------- --------------- ---------------
Cash flows from financing activities
Distributions paid (3,281,810) (3,281,810) (3,281,810)
--------------- --------------- ---------------
Net increase (decrease) in cash and temporary cash investments (1,189,945) 1,673,556 (2,830,656)
Cash and temporary cash investments at beginning of year 2,430,937 757,381 3,588,037
--------------- --------------- ---------------
Cash and temporary cash investments at end of year $ 1,240,992 $ 2,430,937 $ 757,381
=============== =============== ===============
</TABLE>
The accompanying notes are an integral part of the financial statements.
<PAGE> - 19 -
CAPITAL SOURCE II L.P.-A
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1997
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 was formed to invest principally in federally-insured
mortgages on multifamily housing properties and limited partnership interests
in the Operating Partnerships which construct and operate these properties.
Each federally insured loan is guaranteed in amounts equal to the face amount
of the mortgage, by the Federal Housing Administration (FHA) or the Government
National Mortgage Association (GNMA). Hereinafter, the Partnership's
investments in such mortgages are referred to as investments in
mortgage-backed securities. The Operating Partnerships are
geographically located as follows: (i) two in Michigan; and, (ii) one each in
Florida and North Carolina.
CS Properties II, Inc. which is owned by the General Partners, serves as the
Special Limited Partner for the Operating Partnerships. The Special Limited
Partner has the power, among other things, to remove the general partners of
the Operating Partnerships under certain circumstances and to consent to the
sale of the operating partnerships' assets.
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)Method of Accounting
The financial statements of the Partnership are prepared on the accrual
basis of accounting in accordance with generally accepted accounting
principles.
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the
financial statements and the reported amounts of revenues and expenses
during the reporting period. Actual results could differ from those
estimates.
B) Investment in Mortgage-Backed Securities
Investment securities are classified as held-to-maturity,
available-for-sale, or trading. Investments classified as
held-to-maturity are carried at amortized cost. Investments classified as
available-for-sale are reported at fair value, as determined by references
to published sources. Any unrealized gains or losses are 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.
<PAGE> - 20 -
CAPITAL SOURCE II L.P.-A
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1997
C) Investment in Operating Partnerships
The investment in Operating Partnerships consists of interests in limited
partnerships which own properties underlying the mortgage-backed securities
and are accounted for using the equity method. The investments
by the Partnership in the Operating Partnership were recorded at the cost
to acquire such interests. Subsequently losses were recorded by the
Partnership as they were realized by the Operating Partnerships. The
Partnerships suspended recognizing losses in the Operating Partnerships
when its entire initial investment had been consumed by such losses.
Subsequently, losses have been recognized only to the extent of additional
contributions net of distribution received, to the Operating Partnerships
by the Partnership. The Operating Partnerships are not insured or
guaranteed. The value of these investments is a function of the value of
the real estate owned by the Operating Partnerships. With regard to the
Operating Partnerships, the Partnership has no legal obligation to provide
additional cash support as they are not the general partner, nor have they
indicated any commitment to provide this support; accordingly they have
not reduced their investment in these operating partnerships below zero.
D)Income Taxes
No provision has been made for income taxes since BAC Holders are required
to report their share of the Partnership's income for federal and state
income tax purposes. The tax basis of the Partnership's assets and
liabilities exceeded the reported amounts by $1,817,163 and $2,147,478 at
December 31, 1997, and December 31, 1996, respectively.
E)Temporary Cash Investments
Temporary cash investments are invested in short-term debt securities
purchased with original maturities of three months or less.
F)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 year presented.
G)New Accounting Pronouncement
The Financial Accounting Standards Board has issued Financial Accounting
Standards No. 128 "Earnings Per Share" (FAS 128). FAS 128, which is
effective for periods ending after December 15, 1997, did not
have an impact on the Partnership's computation, presentation or
disclosure of earnings per BAC as no dilutive common share equivalents
existed at December 31, 1997.
H)Restatement
The Partnership holds a majority ownership interest and through
Capital Source Properties II, Inc. can influence the decisions of the
general partners of the Operating Partnerships in certain
circumstances. Accordingly, the Partnership had consolidated the
Operating Partnerships since inception. In 1998 it was determined that
this influence did not constitute control of the Operating Partnerships.
Therefore, the accompanying financial statements have been restated to
deconsolidate the Operating Partnerships and to account for the
investments in Operating Partnerships under the equity method of accounting
rather than consolidation.
Under the equity method of accounting, the Partnership's investments are
adjusted to reflect its share of Operating Partnership profits or losses
and distributions. As required by consolidation accounting, the Partnership
had recorded losses from the Operating Partnerships substantially in excess
of its investments. As previously disclosed, the Partnership is not
the general partner, nor is it obliged to fund the negative balances. Under
equity accounting, the Partnership does not reduce the carrying value of
its investments below zero. As restated, investments in the Operating
Partnerships are reflected at zero and profits and losses are recorded
based on capital contributions made and distributions received from the
Operating Partnerships.
<PAGE> - 21 -
CAPITAL SOURCE II L.P.-A
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1997
The restatement increased partners' capital at December 31, 1994 by
$4,229,575 which was the negative balance of the investment in Operating
Partnerships at that date. The restatement further increased net income for
1997, 1996 and 1995 by $256,455, $523,809 and $444,782, respectively. Net
income per BAC (basic and diluted) increased by $.07, $.13 and $.11,
respectively.
3. Partnership Reserve Account
The Partnership maintains a reserve account which consisted of the following
at December 31, 1997:
<TABLE>
<S> <C>
Cash and temporary cash investments $ 499,366
GNMA Certificates 1,050,718
---------------
$ 1,550,084
===============
</TABLE>
The reserve account was established to maintain working capital for the
Partnership and is available for distribution to BAC Holders and for any
contingencies related to mortgage backed securities and the operation of the
Partnership. See Note 5 regarding the investment in mortgage backed
securities.
4. Partnership Income, Expenses and Cash Distributions
Profits and losses from continuing operations and cash available for
distribution will be allocated 99% to the investors and 1% to the General
Partners. Certain fees payable to the General Partners will not become due
until investors have received certain priority returns. Cash distributions
included in the financial statements represent the actual cash distributions
made during each year and the change in cash distributions accrued at the end
of each year.
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.
5. Investment in Mortgage-Backed Securities
The mortgage-backed securities held by the Partnership represent Government
National Mortgage Association (GNMA) Certificates and Federal Housing
Administration (FHA) loans. The GNMA Certificates are backed by
first mortgage loans on multifamily housing properties and pools of
single-family properties. The GNMA Certificates are debt securities issued by
a private mortgage lender and are guaranteed by GNMA as to the full and timely
payment of principal and interest on the underlying loans. The FHA loan is
guaranteed as to the full and timely payment of principal and interest on the
underlying loans.
At December 31, 1997, the total amortized cost, gross unrealized holding gains
and aggregate fair value of available-for-sale securities were $1,008,507,
$42,211, and $1,050,718, respectively. At December 31, 1997, the total
amortized cost, gross unrealized holding gains and aggregate fair value of
held-to-maturity securities were $27,162,646, $331,442, and $27,494,088,
respectively.
<PAGE> - 22 -
CAPITAL SOURCE II L.P.-A
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1997
At December 31, 1996, the total amortized costs, gross unrealized holding
gains and aggregate fair value of available-for-sale securities were
$1,134,837, $36,242 and $1,171,079, respectively. At December 31, 1996, the
total amortized cost, gross unrealized holding gains and aggregate fair value
of held-to-maturity securities were $27,292,735, $211,781, and $27,504,516,
respectively.
During 1995, the Partnership sold a portion of the securities in the available
- -for-sale portfolio. The total amortized cost and realized gain for sales of
securities classified as available-for-sale were $454,997 and $15,670,
respectively.
Prior to June 30, 1995, the Partnership classified all investment securities
as held-to-maturity. However, during the quarter ending June 30, 1995, the
Partnership reassessed the appropriateness of the classification of securities
held in the reserve account. The Partnership concluded, given the nature of
the reserve account, it would be more appropriate to classify securities held
in the reserve account as available-for-sale rather than as held-to-maturity.
Accordingly, on June 30, 1995, the Partnership transferred all securities held
in the reserve account from the held-to-maturity classification to the
available-for-sale classification. The total amortized cost, gross unrealized
holding gains and aggregate fair value of the securities transferred were
$4,283,759, $67,199, $4,350,958, respectively.
Descriptions of the Partnership's mortgage-backed securities held during the
year ended December 31, 1997, are as follows:
<TABLE>
<CAPTION>
Income
Number Interest Maturity Carrying Earned
Type of Security and Name Location of Units Rate Date Amount in 1997
- ------------------------------- ------------------- ---------- ---------- ------------ -------------- ------------
<S> <C> <C> <C> <C> <C> <C>
Held-to-Maturity
FHA Loan:
Delta Crossing Charlotte, NC 178 9.10% 10/01/30 $ 6,538,424 $ 596,257
GNMA Certificates:
Crane's Landing Winter Park, FL 252 8.75% 12/15/30 10,229,304 897,020
Monticello Apartments Southfield, MI 106 8.75% 11/15/29 5,328,430 467,367
The Ponds at Georgetown Ann Arbor, MI 134 9.00% 12/15/29 5,066,488 457,018
-------------- ------------
20,624,222 1,821,405
-------------- ------------
27,162,646 2,417,662
Availible-for-sale:
GNMA Certificates:
Pools of single-family properties 7.58% (1) 2008 to 2009 1,050,718 (2) 82,182
-------------- ------------
Balance at December 31, 1997 $ 28,213,364 $ 2,499,844
============== ============
(1) Represents yield to the Partnership
(2) Reserve account asset See Note 3.
<PAGE> - 23 -
CAPITAL SOURCE II L.P.-A
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1997
Reconciliation of the carrying amount of the mortgage-backed securities is as
follows:
</TABLE>
<TABLE>
<CAPTION>
For the For the For the
Year Ended Year Ended Year Ended
Dec. 31, 1997 Dec. 31, 1996 Dec. 31, 1995
--------------- --------------- ---------------
<S> <C> <C> <C>
Balance at beginning of year $ 28,463,814 $ 28,737,672 $ 29,419,358
Additions
Amortization of discount on mortgage-backed securities 1,397 1,470 1,951
Change in net unrealized holding gains on
available-for-sale mortgage-backed securities 5,969 (22,070) 58,312
Deductions
Mortgage principal payments received (257,816) (253,258) (286,952)
Disposition of mortgage-backed securities - - (454,997)
--------------- --------------- ---------------
Balance at end of year $ 28,213,364 $ 28,463,814 $ 28,737,672
=============== =============== ===============
</TABLE>
6. Investment in Operating Partnerships
The Partnership's Operating Partnerships consist of interests in limited
partnerships which own multifamily properties financed by the GNMA
Certificates and FHA Loan held by the Partnership. The limited partnership
agreements originally provided for the payment of a base return on the equity
provided to the limited partnerships and for the payment of additional amounts
out of a portion of the net cash flow or net sale or refinancing proceeds of
the properties subject to various priority payments.
Descriptions of the Operating Partnerships held at December 31, 1997, are as
follows:
<TABLE>
<CAPTION>
Equity in
Losses of
Carrying Operating
Name Location Partnership Name Amount Partnerships
- ------------------------ --------------------- ----------------------------------------- ------------ -------------
<S> <C> <C> <C> <C>
Delta Crossing Charlotte, NC Delta Crossing Limited Partnership $ - $ -
Crane's Landing Winter Park, FL Crane's Landing Partner, Ltd. - -
Monticello Apartments Southfield, MI Centrum Monticello Limited Partnership - -
The Ponds at Georgetown Ann Arbor, MI Ponds at Georgetown Limited Partnership - (121,450)
------------ ------------
Balance at December 31, 1997 $ - $ (121,450)
============ ============
</TABLE>
Reconciliation of the carrying amount of the Operating Partnerships is as
follows:
<TABLE>
<CAPTION>
For the For the For the
Year Ended Year Ended Year Ended
Dec. 31, 1997 Dec. 31, 1996 Dec. 31, 1995
--------------- --------------- ---------------
<S> <C> <C> <C>
Balance at beginning of year $ - $ - $ -
Addition
Investment in Operating Partnerships 121,450 - 109,900
Deduction
Equity in losses of Operating Partnerships (121,450) - (109,900)
--------------- --------------- ---------------
Balance at end of year $ - $ - $ -
=============== =============== ===============
</TABLE>
<PAGE> - 24 -
CAPITAL SOURCE II L.P.-A
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1997
Combined Financial Statements of the Operating Partnerships are as follows:
CAPITAL SOURCE II L.P.
OPERATING PARTNERSHIPS BALANCE SHEET
<TABLE>
<CAPTION>
Dec. 31, 1997 Dec. 31, 1996
--------------- ---------------
<S> <C> <C>
Assets
Investment in real estate:
Land $ 2,800,750 $ 2,800,750
Buildings 24,396,923 24,396,923
Personal Property 1,666,485 1,597,666
-------------- ---------------
28,864,158 28,795,339
Less accumulated depreciation (6,598,576) (5,899,183)
-------------- ---------------
Net investment in real estate 22,265,582 22,896,156
Cash and temporary cash investments, at cost
which approximates market value 491,562 283,185
Escrow deposits and property reserves 613,261 487,876
Interest and other receivables 7,442 5,450
Deferred mortgage issuance cost, net of
accumulated amortization 1,428,684 1,477,452
Other assets 234,560 211,891
-------------- ---------------
$ 25,041,091 $ 25,362,010
============== ===============
Liabilities and Partners' Capital (Deficit)
Liabilities
Accounts payable and accrued expenses $ 850,743 $ 740,469
Mortgage loan payable 27,164,788 27,294,690
Intercompany interest payable 247,487 248,281
Due to general partners and their affiliates 961,563 971,209
--------------- ---------------
29,224,581 29,254,649
--------------- ---------------
Partners' Capital (Deficit)
General Partners (4,183,490) (3,892,639)
Limited Partners - -
--------------- ---------------
(4,183,490) (3,892,639)
$ 25,041,091 $ 25,362,010
=============== ===============
</TABLE>
<PAGE> - 25 -
CAPITAL SOURCE II L.P.-A
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1997
<TABLE>
CAPITAL SOURCE II L.P.
OPERATING PARTNERSHIPS INCOME STATEMENT
Dec. 31, 1997 Dec. 31, 1996 Dec. 31, 1995
--------------- --------------- ---------------
<S> <C> <C> <C>
Income
Rental income $ 5,105,108 $ 4,854,898 $ 4,656,371
Interest on temporary cash investments
and U.S. government securities 13,084 20,781 17,399
Other income 198,870 154,855 140,317
--------------- --------------- ---------------
5,317,062 5,030,534 4,814,087
--------------- --------------- ---------------
Expenses
Real estate operating expenses 2,504,026 2,325,848 2,075,218
Depreciation expense 700,297 725,922 737,694
Property development and management fees - 314 28,769
Interest expense 2,476,272 2,487,587 2,497,927
Amortization 48,768 48,819 64,920
--------------- --------------- ---------------
5,729,363 5,588,490 5,404,528
--------------- --------------- ---------------
Net Loss $ (412,301) $ (557,956) $ (590,411)
=============== =============== ===============
Net Loss allocated to:
General Partners (290,851) (557,956) (480,541)
Limited Partners (121,450) - (109,900)
--------------- --------------- ---------------
$ (412,301) $ 557,956) $ (590,441)
=============== =============== ===============
</TABLE>
<PAGE> - 26 -
<TABLE>
Financial Statements
CAPITAL SOURCE II L.P.
OPERATING PARTNERSHIPS CASH FLOW
For the For the For the
Year Ended Year Ended Year Ended
Dec. 31, 1997 Dec. 31, 1996 Dec. 31, 1995
--------------- --------------- ---------------
<S> <C> <C> <C>
Cash flows from operating activities
Net loss $ (412,301) $ (557,956) $ (590,441)
Adjustments to reconcile net loss to net cash
provided by operating activities
Depreciation and amortization 749,065 774,741 802,614
Property development and management fees - 314 28,769
Decrease (increase) in interest and other receivables (1,992) 10,467 (11,443)
Decrease (increase) in escrow deposits and property reserves (125,385) 63,524 56,250
Decrease in other assets (22,669) (21,816) (64,138)
Increase in accounts payable and accrued expenses 110,274 22,040 137,065
Decrease in intercompany interest payable (794) (728) (665)
Increase (decrease) in due to general partners and their affiliates (9,646) 15,090 (110,296)
--------------- --------------- ---------------
Net cash provided by operating activities 286,552 305,676 247,715
--------------- --------------- ---------------
Cash flows from investing activities
Acquisition of real estate - (60,663) (34,527)
Acquisition of personal property (68,819) (102,292) (100,757)
--------------- --------------- ---------------
Net cash used in investing activities (68,819) (162,955) (135,284)
--------------- --------------- ---------------
Cash flows from financing activities
Principal payments on mortgage loan payable (129,902) (118,650) (108,374)
Capital contributions 121,450 - 109,900
Other net (904) (17,956) 27,391
--------------- --------------- ---------------
Net cash provided by (used in) financing activities (9,356) (136,606) 28,917
--------------- --------------- ---------------
Net increase in cash and temporary cash investments 208,377 6,115 141,348
Cash and temporary cash investments at beginning of year 283,185 277,070 135,722
--------------- --------------- ---------------
Cash and temporary cash investments at end of year $ 491,562 $ 283,185 $ 277,070
=============== =============== ===============
</TABLE>
<PAGE> - 27 -
7. Transactions with Related Parties
The General Partners, certain of their affiliates and the Operating
Partnerships' general partners have received or may receive fees,
compensation, income, distributions and payments from the Partnership in
connection with the offering and the investment, management and sale of the
Partnership's assets (other than disclosed elsewhere) as follows.
The General Partners are entitled to receive an asset management and
partnership 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
for the years ended December 31, 1997, 1996 and 1995 amounted to $166,000
for each year.
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 the years
ended December 31, 1997, 1996 and 1995 amounted to $494,165, $313,049 and
$281,606, respectively. These reimbursed amounts are presented on a cash
basis and do not reflect accruals made at each year end.
An affiliate of the General Partners has been retained to provide property
management services for The Ponds at Georgetown beginning in November 1996.
The fees for services provided were $31,924 for 1997 and $4,933 for 1996,
respectively, and represented the lower of costs incurred in providing
management of the property or customary fees for such services determined on a
competitive basis.
8. Fair Value of Financial Instruments
The following methods and assumptions were used by the Partnership in
estimating the fair value of its financial instruments:
Cash and temporary cash investments, interest receivable, other assets,
accounts payable, distribution payable: Fair value approximates the carrying
value of such assets.
Investment in FHA Loan and GNMA Certificates: Fair values are based on
prices obtained from an independent pricing source, adjusted for estimated
prepayments.
<TABLE>
<CAPTION>
At December 31, 1997 At December 31, 1996
----------------------------------- -----------------------------------
Carrying Estimated Carrying Estimated
Amount Fair Value Amount Fair Value
--------------- --------------- --------------- ---------------
<S> <C> <C> <C> <C>
Cash and temporary cash investments $ 1,240,992 $ 1,240,992 $ 2,430,937 $ 2,430,937
Investment in FHA Loan $ 6,538,424 $ 6,645,393 $ 6,568,139 $ 6,644,328
Investment in GNMA Certificates $ 21,674,940 $ 21,899,413 $ 21,895,675 $ 22,031,267
</TABLE>
<PAGE> - 28 -
10. Summary of Unaudited Quarterly Results of Operations (Restated)
<TABLE>
<CAPTION> First Second Third Fourth
From January 1, 1997, to December 31, 1997 Quarter Quarter Quarter Quarter
--------------- --------------- --------------- ---------------
<S> <C> <C> <C> <C>
Total income $ 655,945 $ 529,318 $ 646,693 $ 641,565
Total expenses (151,630) (148,583) (164,872) (354,431)
--------------- --------------- --------------- ---------------
Net income $ 504,315 $ 380,735 $ 481,821 $ 287,134
=============== =============== =============== ===============
Net income, basic and diluted, per BAC $ .12 $ .10 $ .12 $ .07
=============== =============== =============== ===============
</TABLE>
<TABLE>
<CAPTION>
First Second Third Fourth
From January 1, 1996, to December 31, 1996 Quarter Quarter Quarter Quarter
--------------- --------------- --------------- ---------------
<S> <C> <C> <C> <C>
Total income $ 679,515 $ 674,522 $ 659,196 $ 661,974
Total expenses (140,501) (141,908) (140,608) (129,153)
--------------- --------------- --------------- ---------------
Net income $ 539,014 $ 532,614 $ 518,588 $ 532,821
=============== =============== =============== ===============
Net income per BAC $ .13 $ .13 $ .13 $ .13
=============== =============== =============== ===============
</TABLE>
<PAGE> - 29 -
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Registrant has duly caused this report to be signed
on its behalf by the undersigned, thereunto duly authorized.
CAPITAL SOURCE 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
Date: October 26, 1998
<PAGE> - 30 -
Pursuant to the requirements of the Securities and Exchange Act of 1934,
this report has been signed below by the following persons on behalf of the
Registrant and in the capacities and on the dates indicated.
Date: October 26, 1998 By /s/ Michael B. Yanney*
Michael B. Yanney,
Chairman and Chief Executive Officer of
the America First General Partner
(Principal Executive Officer)
Chairman of the Board, President,
Chief Executive Officer and Manager of
America First Companies L.L.C.
Date: October 26, 1998 By /s/ Michael Thesing
Michael Thesing, Vice
President, Secretary and
Treasurer (Principal Financial Officer)
of the America First General Partner
Vice President, Secretary, Treasurer
and Manager of America First Companies L.L.C.
Date: October 26, 1998 By /s/ William S. Carter, M.D.*
William S. Carter, M.D.
Manager of America First Companies L.L.C.
Date: October 26, 1998 By /s/ George Kubat*
George Kubat
Manager of America First Companies L.L.C.
Date: October 26, 1998 By /s/ Martin A. Massengale*
Martin A. Massengale
Manager of America First Companies L.L.C.
Date: October 26, 1998 By /s/ Alan Baer*
Alan Baer
Manager of America First Companies L.L.C.
Date: October 26, 1998 By /s/ Gail Walling Yanney*
Gail Walling Yanney
Manager of America First Companies L.L.C.
Date: October 26, 1998 By /s/ Mariann Byerwalter*
Mariann Byerwalter
Manager of America First Companies L.L.C.
*By Michael Thesing,
Attorney in Fact
/s/ Michael Thesing
Michael Thesing
<PAGE> - 31 -
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-END> DEC-31-1997
<CASH> 1,240,992
<SECURITIES> 28,213,364
<RECEIVABLES> 213,024
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 29,829,534
<PP&E> 0
<DEPRECIATION> 0
<TOTAL-ASSETS> 29,829,534
<CURRENT-LIABILITIES> 874,481
<BONDS> 0
<COMMON> 0
0
0
<OTHER-SE> 28,955,053
<TOTAL-LIABILITY-AND-EQUITY> 29,829,534
<SALES> 0
<TOTAL-REVENUES> 2,473,521
<CGS> 0
<TOTAL-COSTS> 0
<OTHER-EXPENSES> 819,516
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> 1,654,005
<INCOME-TAX> 0
<INCOME-CONTINUING> 1,654,005
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 1,654,005
<EPS-PRIMARY> 0
<EPS-DILUTED> 0
</TABLE>
