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 March 31, 1998 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>
March 31, 1998 Dec. 31, 1997
-------------- --------------
<S> <C> <C>
Assets
Investment in real estate:
Land $ 2,800,750 $ 2,800,750
Buildings 23,055,361 23,055,361
Personal property 1,675,557 1,666,485
-------------- -------------
27,531,668 27,522,596
Less accumulated depreciation (6,496,209) (6,330,294)
-------------- -------------
Net investment in real estate 21,035,459 21,192,302
Cash and temporary cash investments, at cost
which approximates market value (Note 5) 638,563 1,240,992
Escrow deposits and property reserves 1,244,779 1,104,823
Investment in mortgage-backed securities (Note 5) 998,930 1,050,718
Interest and other receivables 17,060 19,443
Deferred mortgage issuance costs net of accumulated
amortization of $820,129 in 1998 and $792,341 in 1997 1,561,722 1,589,510
Other assets 214,679 241,498
-------------- --------------
$ 25,711,192 $ 26,439,286
============== ==============
Liabilities and Partners' Capital (Deficit)
Liabilities
Accounts payable and accrued expenses $ 1,202,646 $ 1,118,970
Distribution payable (Note 3) 546,968 546,968
Due to general partners and their affiliates (Note 4) 961,847 1,067,313
-------------- --------------
2,711,461 2,733,251
-------------- --------------
Minority interest 205,513 205,603
-------------- --------------
Partners' Capital (Deficit)
General Partners (338,516) (331,453)
Limited Partners ($5.77 per BAC in 1998 and $5.94 in 1997) 23,132,734 23,831,885
-------------- --------------
22,794,218 23,500,432
-------------- --------------
$ 25,711,192 $ 26,439,286
============== ==============
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
Quarter Ended Quarter Ended
March 31, 1998 March 31, 1997
-------------- --------------
<S> <C> <C>
Income
Rental income $ 1,259,898 $ 1,257,440
Interest on temporary cash investments 16,700 29,971
Mortgage-backed securities income 18,881 21,484
Other income 40,254 44,521
-------------- --------------
1,335,733 1,353,416
-------------- --------------
Expenses
Real estate operating expenses 628,702 528,958
Depreciation 165,915 165,982
Property development and management fees (Note 4) 701 -
General and administrative expenses (Note 4)
Investor servicing 119,620 78,360
Professional fees 196,562 11,650
Other expenses 44,212 4,526
Asset management and partnership administration fees (Note 4) 41,500 41,500
Amortization 27,788 27,800
-------------- --------------
1,225,000 858,776
-------------- --------------
Minority interest in losses of Operating Partnerships 90 147
-------------- --------------
Net income $ 110,823 $ 494,787
============== ==============
Net income allocated to:
General Partners $ 1,108 $ 4,948
Limited Partners 109,715 489,839
-------------- --------------
$ 110,823 $ 494,787
============== ==============
Net income, basic and diluted, per BAC $ .03 $ .12
============== ==============
</TABLE>
CONSOLIDATED STATEMENT OF PARTNERS' CAPITAL (DEFICIT)
FOR THE QUARTER ENDED MARCH 31, 1998
(UNAUDITED)
<TABLE>
<CAPTION>
General Limited
Partners Partners Total
-------------- -------------- --------------
<S> <C> <C> <C>
Partners' Capital (Deficit) (excluding net unrealized holding gains)
Balance at December 31, 1997 $ (331,875) $ 23,790,096 $ 23,458,221
Net income 1,108 109,715 110,823
Cash distributions paid or accrued (Note 3) (8,205) (812,247) (820,452)
-------------- -------------- --------------
(338,972) 23,087,564 22,748,592
-------------- -------------- --------------
Net unrealized holding gains
Balance at December 31, 1997 422 41,789 42,211
Net change 34 3,381 3,415
-------------- -------------- --------------
456 45,170 45,626
-------------- -------------- --------------
Balance at March 31, 1998 $ (338,516) $ 23,132,734 $ 22,794,218
============== ============== ==============
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 For the
Quarter Ended Quarter Ended
March 31, 1998 March 31, 1997
-------------- --------------
<S> <C> <C>
Cash flows from operating activities
Net income $ 110,823 $ 494,787
Adjustments to reconcile net income to net cash
from operating activities
Depreciation and amortization 193,703 193,782
Amortization of discount on government securities (610) (402)
Property development and management fees 701 -
Minority interest in losses of Operating Partnerships (90) (147)
Decrease in interest and other receivables 2,383 1,955
Increase in escrow deposits and property reserves (139,956) (123,933)
Decrease (increase) in other assets 26,819 (16,823)
Increase in accounts payable and accrued expenses 83,676 23,573
Decrease in due to general partners and their affiliates (106,167) (43,478)
-------------- --------------
Net cash provided by operating activities 171,282 529,314
-------------- --------------
Cash flows from investing activities
Principal payments on mortgage-backed securities 55,813 36,698
Acquisition of personal property (9,072) (6,694)
-------------- --------------
Net cash provided by investing activities 46,741 30,004
-------------- --------------
Cash flow used in financing activity
Distributions (820,452) (820,452)
-------------- --------------
Net decrease in cash and temporary cash investments (602,429) (261,134)
Cash and temporary cash investments at beginning of period 1,240,992 2,430,937
-------------- --------------
Cash and temporary cash investments at end of period $ 638,563 $ 2,169,803
============== ==============
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
MARCH 31, 1998
(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, 1997. In the opinion of management, all normal and
recurring adjustments necessary to present fairly the financial position at
March 31, 1998, 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 is reviewed
for impairment whenever events or circumstances indicate that the carrying
value may not be recoverable. If the sum of the expected undiscounted
future cash flows is less than the carrying amount, an impairment is
recorded based on fair value.
<PAGE> -4-
CAPITAL SOURCE II L.P.-A
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 1998
(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.
I) Comprehensive Income
In the first quarter of 1998, the Partnership adopted Statement of
Financial Accounting Standards No. 130, "Reporting Comprehensive Income"
(SFAS 130). SFAS 130 requires the display and reporting of comprehensive
income, which includes all changes in partners' capital with the exception
of additional investments by partners or distributions to partners.
Comprehensive income for the Partnership includes net income and the
change in net unrealized holding gains (losses) on investments charged or
credited to Partners' Capital. Comprehensive income for the quarters
ended March 31, 1998 and 1997 was as follows:
<TABLE>
<CAPTION>
For the For the
Quarter Ended Quarter Ended
Mar. 31, 1998 Mar. 31, 1997
-------------- --------------
<S> <C> <C>
Net income $ 110,823 $ 494,787
Change in net unrealized holding gains (losses) 3,415 (14,209)
-------------- --------------
Comprehensive income $ 114,238 $ 480,578
============== ==============
</TABLE>
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
<PAGE> -5-
CAPITAL SOURCE II L.P.-A
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 1998
(UNAUDITED)
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.
4. Transactions with Related Parties
The General Partners, certain of their affiliates and the operating
partnerships' general partners have received or may receive fees,
compensation, income, distributions and payments from the Partnership in
connection with the offering and the investment, management and sale of the
Partnership's assets (other than disclosed elsewhere) as follows.
The Operating Partnerships' general partners provide various on-site property
development and management services. Property development and management fees
amounted to $701 in 1998. 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 in accordance with
the respective Operating Partnership's limited partnership agreement.
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 $41,500 were incurred during 1998.
Amounts due to general partners and their affiliates consisted of the
following at March 31, 1998:
Unpaid property development and management fees $ 112,492
Operating deficit and construction loans 807,855
Unpaid asset management and partnership administrative fees 41,500
--------------
$ 961,847
==============
Substantially all of the Partnership's general and administrative expenses are
paid by a General Partner or an affiliate and reimbursed by the Partnership.
The amount of such expenses reimbursed to the General Partner during 1998 was
$354,820. The reimbursed expenses are presented on a cash basis and do not
reflect accruals made at quarter end.
An affiliate of the General Partners has been retained to provide property
management services for The Ponds at Georgetown. The fees for services
provided were $10,024 for 1998 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 March 31, 1998:
Cash and temporary cash investments $ 1,589
GNMA Certificates 998,930
--------------
$ 1,000,519
==============
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
<PAGE> -6-
CAPITAL SOURCE II L.P.-A
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 1998
(UNAUDITED)
March 31, 1998, the total amortized cost, gross unrealized holding gains and
aggregate fair value of available-for-sale securities were $953,304, $45,626
and $998,930, respectively.
6. Parent Company Only Financial Information
Generally accepted accounting principles require that the Partnership's
financial statements consolidate the Operating Partnerships since the
Partnership holds a majority ownership interest and, through CS Properties II,
Inc., it can influence decisions of the general partners in certain
circumstances. In the consolidated financial statements, the Partnership's
investment in FHA Loans and GNMA Certificates is eliminated against the
related mortgage payable recorded by the operating partnership. If a mortgage
loan goes into default and is foreclosed upon by FHA or GNMA, the respective
agency may, at their discretion, repay the FHA Loan or the GNMA Certificate.
If this occurs, the Partnership's investment in the operating partnership
would be eliminated, resulting in the recognition of a gain on the
Partnership's financial statements. This arises because consolidation
accounting does not allow the Partnership to stop recording losses from the
Operating Partnerships when the net investment is reduced to zero.
The parent company only financial information below represents the condensed
financial information of the Partnership using the equity method of accounting
for the investment in Operating Partnerships, rather than the consolidation of
those partnerships. Under the equity method of accounting, the Partnership's
capital contributions are adjusted to reflect its share of operating
partnership profits or losses and distributions. The investment in Operating
Partnerships represents the Partnership's limited partnership interest in the
accumulated deficits of those Operating Partnerships. The parent company only
information is provided to more clearly present the Partnership's investment
in the Operating Partnerships. Since the Partnership is not a general
partner, it is not obligated to fund the negative balances. If the
investments in all Operating Partnerships were eliminated at March 31, 1998,
Partnership capital would increase by $5,560,660 ($1.37 per BAC).
The FHA Loan 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 loan is 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>
March 31, 1998 Dec. 31, 1997
-------------- --------------
<S> <C> <C>
Assets
Cash and temporary cash investments $ 638,563 $ 1,240,992
Investment in FHA Loan 6,530,560 6,538,424
Investment in GNMA Certificates 21,596,610 21,674,940
Investment in Operating Partnerships (5,560,660) (5,454,621)
Interest receivable 210,045 213,024
Other assets 145,232 162,154
-------------- --------------
$ 23,560,350 $ 24,374,913
============== ==============
Liabilities and Partners' Capital
Liabilities
Accounts payable $ 219,164 $ 327,513
Distribution payable 546,968 546,968
-------------- --------------
766,132 874,481
-------------- --------------
Partners' Capital 22,794,218 23,500,432
-------------- --------------
$ 23,560,350 $ 24,374,913
============== ==============
</TABLE>
<PAGE> -7-
CAPITAL SOURCE II L.P.-A
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 1998
(UNAUDITED)
Parent Company Only
Condensed Statements of Income
<TABLE>
<CAPTION>
For the For the
Quarter Ended Quarter Ended
March 31, 1998 March 31, 1997
-------------- --------------
<S> <C> <C>
Income
Mortgage and mortgage-backed securities income $ 621,444 $ 626,978
Interest on temporary cash investments 11,756 28,167
Equity in losses of Operating Partnerships (106,039) (9,528)
Other income 1,150 800
-------------- --------------
528,311 646,417
Expenses
Operating and administrative 417,488 151,630
-------------- --------------
Net income $ 110,823 $ 494,787
============== ==============
</TABLE>
Parent Company Only
Condensed Statements of Cash Flows
<TABLE>
<CAPTION>
For the For the
Quarter Ended Quarter Ended
March 31, 1998 March 31, 1997
-------------- --------------
<S> <C> <C>
Cash flows from operating activities
Net income $ 110,823 $ 494,787
Adjustments to reconcile net income to net cash
from operating activities
Equity in losses of Operating Partnerships 106,039 9,528
Amortization 15,594 15,594
Other non-cash adjustments (104,652) (28,715)
-------------- --------------
Net cash provided by operating activities 127,804 491,194
-------------- --------------
Cash flow provided by investing activity
FHA Loan and GNMA Certificate principal payments 90,219 68,124
-------------- --------------
Cash flow used in financing activity
Distributions (820,452) (820,452)
-------------- --------------
Net decrease in cash and temporary cash investments (602,429) (261,134)
Cash and temporary cash investments at beginning of period 1,240,992 2,430,937
-------------- --------------
Cash and temporary cash investments at end of period $ 638,563 $ 2,169,803
============== ==============
</TABLE>
7. Subsequent Event
On May 7, 1998, a Registration Statement on Form S-4 was filed by America
First Real Estate Investment Company, Inc. (the Company) with the Securities
and Exchange Commission which includes a consent solicitation statement of the
Partnership and Capital Source L.P., a sister partnership with assets and
investment objectives similar to the Partnership. Upon approval of the
proposed plan by investors in both partnerships, the partnerships will be
combined into the Company which will be engaged in the business of making
real estate and related investments. At their election and subject to certain
limitations, investors in each partnership will receive, in exchange for their
partnership units, shares of common stock in the Company (the Common Stock) or
variable rate notes (the Notes) of the Company. The Company intends to list
shares of Common Stock issued pursuant to the planned merger on a national
securities exchange.
<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. 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 such 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.
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
March 31, 1998. Interest income from the FHA Loan and GNMA Certificates is
the primary source of cash available for distribution to investors.
<TABLE>
<CAPTION>
Guaranteed Interest Maturity Principal
Property Name or Insured by Rate Date Balance
- ----------------------------------- --------------- ------------ -------------- --------------
<S> <C> <C> <C> <C>
Crane's Landing GNMA 8.75% 12-15-2030 $ 10,216,616
Delta Crossing FHA 9.10% 10-01-2030 6,530,560
Monticello Apartments GNMA 8.75% 11-15-2029 5,321,106
The Ponds at Georgetown GNMA 9.00% 12-15-2029 5,059,958
Pools of single-family mortgages GNMA 7.58% (1) 2008 to 2009 998,930
--------------
$ 28,127,170
==============
(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 For the
Quarter Ended Quarter Ended
March 31, 1998 March 31, 1997
-------------- --------------
<S> <C> <C>
Regular monthly distributions
Income $ .0274 $ .1221
Return of capital .1751 .0804
-------------- --------------
$ .2025 $ .2025
============== ==============
Distributions
Paid out of cash flow $ .0797 $ .1451
Paid out of reserves .1228 .0574
-------------- --------------
$ .2025 $ .2025
============== ==============
</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 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 quarter
ended March 31, 1998, $497,777 was withdrawn from reserves to supplement
regular monthly cash distributions. The total amount held in reserves at
March 31, 1998, was $1,000,519 of which $998,930 was invested in
mortgage-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.
Asset Quality
The FHA Loan and GNMA Certificates owned by the Partnership are guaranteed as
to principal and interest by FHA and GNMA, respectively. The obligations of
FHA and GNMA are backed by the full faith and credit of the United States
government. The Partnership Equity Investments, however, are not insured or
guaranteed. The value of these investments is a function of the value of the
real estate owned by the Operating Partnerships.
The overall status of the Partnership's investments has remained relatively
constant since December 31, 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 March 31, 1998:
<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 178 174 98%
Monticello Apartments Southfield, MI 106 103 97%
The Ponds at Georgetown Ann Arbor, MI 134 131 98%
--------- ---------- ----------
670 652 97%
========= ========== ==========
</TABLE>
Results of Operations
The table below compares the results of operations for each period shown.
<TABLE>
<CAPTION>
For the For the Increase
Quarter Ended Quarter Ended (Decrease)
March 31, 1998 March 31, 1997 From 1997
-------------- -------------- --------------
<S> <C> <C> <C>
Rental income $ 1,259,898 $ 1,257,440 $ 2,458
Interest on temporary cash investments 16,700 29,971 (13,271)
Mortgage-backed securities income 18,881 21,484 (2,603)
Other income 40,254 44,521 (4,267)
-------------- -------------- --------------
1,335,733 1,353,416 (17,683)
-------------- -------------- --------------
Real estate operating expenses 628,702 528,958 99,744
Depreciation 165,915 165,982 (67)
Property development and management fees 701 - 701
Investor servicing 119,620 78,360 41,260
Professional fees 196,562 11,650 184,912
Other expenses 44,212 4,526 39,686
Asset management and partnership administration fees 41,500 41,500 -
Amortization 27,788 27,800 (12)
-------------- -------------- --------------
1,225,000 858,776 366,224
-------------- -------------- --------------
Minority interest in losses of Operating Partnerships 90 147 (57)
-------------- -------------- --------------
Net income $ 110,823 $ 494,787 $ (383,964)
============== ============== ==============
</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 $97,207 for the quarter ended March 31, 1998,
compared to the same period in 1997. Although rental income increased
slightly for the quarter ended March 31, 1998, compared to the same period in
1997, this increase was more than offset by an increase in real estate
operating expenses. The increase in real estate operating expenses was
primarily due to increases in repairs and maintenance expenses and property
improvements at Crane's Landing and increases in taxes, insurance and other
administrative costs at several of the Partnership's properties.
Interest on temporary cash investments decreased for the quarter ended
March 31, 1998, compared to the same period in 1997, due to withdrawls made
from the Partnership's reserves during 1997 and 1998 to supplement
distributions to BAC holders.
<PAGE> -11-
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
Mortgage-backed securities income decreased for the quarter ended
March 31, 1998, compared to the same period in 1997, due to the continued
amortization of the principal balances of the Partnership's mortgage-backed
securities.
Other income consists primarily of corporate unit rentals, garage rentals,
washer/dryer and vending income generated by the Partnership's properties.
Other income decreased for the quarter ended March 31, 1998, compared to the
same period in 1997, due primarily to a decrease in corporate unit rentals.
Investor servicing expenses increased for the quarter ended March 31, 1998,
compared to the same period in 1997, due primarily to an increase in salaries
and related expenses. The Partnership incurred costs of approximately
$186,500 during 1998 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. Excluding such costs, professional fees
decreased $1,600 for the quarter ended March 31, 1998, compared to the same
period in 1997, due primarily to a decrease in legal fees. Other expenses
increased $39,686 for the quarter ended March 31, 1998, compared to the same
period in 1997, primarily due to an increase in consulting fees and travel
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 3. Quantitative and Qualitative Disclosures About Market Risk.
The requirements of Item 3 of Form 10-Q are not applicable to the Partnership
prior to its Annual Report on Form 10-K for the year ending December 31, 1998.
<PAGE> -12-
PART II. OTHER INFORMATION
Item 5. Other Information
On May 7, 1998, a Registration Statement on Form S-4 was filed by America
First Real Estate Investment Company, Inc. (the Company) with the Securities
and Exchange Commission which includes a consent solicitation statement of the
Partnership and Capital Source L.P., a sister partnership with assets and
investment objectives similar to the Partnership. Upon approval of the
proposed plan by investors in both partnerships, the partnerships will be
combined into the Company which will be engaged in the business of making
real estate and related investments. At their election and subject to certain
limitations, investors in each partnership will receive, in exchange for their
partnership units, shares of common stock in the Company (the Common Stock) or
variable rate notes (the Notes) of the Company. The Company intends to list
shares of Common Stock issued pursuant to the planned merger on a national
securities exchange.
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: May 13, 1998 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> 3-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-END> MAR-31-1998
<CASH> 638,563
<SECURITIES> 998,930
<RECEIVABLES> 17,060
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 1,654,553
<PP&E> 27,531,668
<DEPRECIATION> (6,496,209)
<TOTAL-ASSETS> 25,711,192
<CURRENT-LIABILITIES> 1,749,614
<BONDS> 0
<COMMON> 0
0
0
<OTHER-SE> 22,794,218
<TOTAL-LIABILITY-AND-EQUITY> 25,711,192
<SALES> 0
<TOTAL-REVENUES> 1,335,733
<CGS> 0
<TOTAL-COSTS> 1,225,000
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> 110,823
<INCOME-TAX> 0
<INCOME-CONTINUING> 0
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 110,823
<EPS-PRIMARY> 0
<EPS-DILUTED> 0
</TABLE>
