FORM 10-Q
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
X Quarterly report pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934
For the quarterly period ended September 30, 1999 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
BALANCE SHEETS
<TABLE>
<CAPTION>
Sept. 30, 1999
(unaudited) Dec. 31, 1998
-------------- --------------
<S> <C> <C>
Assets
Cash and temporary cash investments, at cost which
approximates market value $ 369,876 $ 432,999
Investment in FHA Loan (Note 4) 6,479,397 6,505,857
Investment in GNMA Certificates (Note 4) 20,401,093 20,497,706
Investment in Operating Partnerships (Note 5) - -
Interest receivable 194,165 195,440
Other assets 59,140 139,204
-------------- --------------
$ 27,503,671 $ 27,771,206
============== ==============
Liabilities and Partners' Capital (Deficit)
Liabilities
Accounts payable (Note 6) $ 235,217 $ 347,446
Distribution payable (Note 3) 305,391 303,871
-------------- --------------
540,608 651,317
-------------- --------------
Partners' Capital (Deficit)
General Partner (296,827) (295,259)
Beneficial Assignment Certificate Holders
($6.80 per BAC in 1999 and $6.83 in 1998) 27,259,890 27,415,148
-------------- --------------
26,963,063 27,119,889
-------------- --------------
$ 27,503,671 $ 27,771,206
============== ==============
The accompanying notes are an integral part of the financial statements.
</TABLE>
<PAGE> - 1 -
CAPITAL SOURCE II L.P.-A
STATEMENTS OF INCOME AND COMPREHENSIVE INCOME
(UNAUDITED)
<TABLE>
<CAPTION>
For the For the For the Nine For the Nine
Quarter Ended Quarter Ended Months Ended Months Ended
Sept. 30, 1999 Sept. 30, 1998 Sept. 30, 1999 Sept. 30, 1998
--------------- --------------- --------------- ---------------
<S> <C> <C> <C> <C>
Income
Mortgage-backed securities income $ 579,202 $ 606,852 $ 1,740,248 $ 1,844,575
Interest income on temporary cash investments 3,534 8,462 11,025 27,779
Equity in losses of Operating Partnerships - (359,113) - (359,113)
Other income - 1,400 400 4,100
Gain on sale of mortgage-backed securities - 38,535 - 53,100
--------------- --------------- --------------- ---------------
582,736 296,136 1,751,673 1,570,441
Expenses
Operating and administrative expenses (Note 6) 224,203 158,660 541,078 850,107
--------------- --------------- --------------- ---------------
Net income 358,533 137,476 1,210,595 720,334
Other comprehensive income:
Unrealized gains on securities
Net unrealized holding gains arising
during the period - 30,280 - 10,889
Plus: reclassification adjustment for net
gains included in net income - (54,894) - (53,100)
--------------- --------------- -------------- --------------
Change in net unrealized holding gains - (24,614) - (42,211)
--------------- --------------- -------------- --------------
Net comprehensive income $ 358,533 $ 112,862 $ 1,210,595 $ 678,123
=============== =============== =============== ===============
Net income allocated to:
General Partners $ 3,585 $ 1,375 $ 12,106 $ 7,203
Limited Partners 354,948 136,101 1,198,489 713,131
--------------- --------------- --------------- ---------------
$ 358,533 $ 137,476 $ 1,210,595 $ 720,334
=============== =============== =============== ===============
Net income, basic and diluted, per BAC $ .09 $ .03 $ .30 $ .18
=============== =============== =============== ===============
</TABLE>
CAPITAL SOURCE II L.P.-A
STATEMENT OF PARTNERS' CAPITAL (DEFICIT)
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1999
(UNAUDITED)
<TABLE>
<CAPTION>
General BAC
Partner Holders Total
-------------- ---------------- ---------------
<S> <C> <C> <C>
Balance at December 31, 1998 $ (295,259) $ 27,415,148 $ 27,119,889
Net income 12,106 1,198,489 1,210,595
Cash distributions paid or accrued (Note 3) (13,674) (1,353,747) (1,367,421)
-------------- ---------------- ---------------
Balance at September 30, 1999 $ (296,827) $ 27,259,890 $ 26,963,063
============== ================ ===============
</TABLE>
The accompanying notes are an integral part of the financial statements.
<PAGE> - 2 -
CAPITAL SOURCE II L.P.-A
STATEMENTS OF CASH FLOWS
(UNAUDITED)
<TABLE>
<CAPTION>
For the Nine For the Nine
Months Ended Months Ended
Sept. 30, 1999 Sept. 30, 1998
--------------- ---------------
<S> <C> <C>
Cash flows from operating activities
Net income $ 1,210,595 $ 720,334
Adjustments to reconcile net income to net cash
from operating activities
Equity in losses of Operating Partnerships - 359,113
Amortization of discount on mortgage-backed securities (236) (1,422)
Gain on the sale of mortgage-backed securities - (53,100)
Decrease in interest receivable 1,275 9,146
Decrease in other assets 80,064 48,110
Decrease in accounts payable (112,229) (194,628)
--------------- ---------------
Net cash provided by operating activities 1,179,469 887,553
--------------- ---------------
Cash flow provided by investing activity
FHA Loan and GNMA Certificate principal payments received 123,309 235,617
Disposition of mortgage-backed securities - 915,012
Investment in Operating Partnerships - (359,113)
--------------- --------------
Net cash provided by investing activities 123,309 791,516
--------------- --------------
Cash flow used in financing activity
Distributions paid (1,365,901) (2,461,358)
--------------- --------------
Net decrease in cash and temporary cash investments (63,123) (782,289)
Cash and temporary cash investments at beginning of period 432,999 1,240,992
--------------- ---------------
Cash and temporary cash investments at end of period $ 369,876 $ 458,703
=============== ===============
The accompanying notes are an integral part of the financial statements.
</TABLE>
<PAGE> - 3 -
CAPITAL SOURCE II L.P.-A
NOTES TO FINANCIAL STATEMENTS
SEPTEMBER 30, 1999
(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 was formed to invest principally in federally-insured
mortgages on multifamily housing properties and limited partnership interests
in 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. CS Properties II, Inc. also
serves as a co-general partner of The Ponds at Georgetown.
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 financial statements of the Partnership are prepared without audit on
the accrual basis of accounting in accordance with generally accepted
accounting principles. The financial statements should be read in
conjunction with the financial statements and notes thereto included in
the Partnership's Annual Report on Form 10-K for the year ended
December 31, 1998. In the opinion of management, all normal and recurring
adjustments necessary to present fairly the financial position at
September 30, 1999, 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 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 reference
to published sources. Any unrealized gains or losses are excluded from
earnings and reflected in other comprehensive income. 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 in other comprehensive income. The Partnership
does not have investment securities classified as trading or available-for-
sale.
<PAGE> - 4 -
CAPITAL SOURCE II L.P.-A
NOTES TO FINANCIAL STATEMENTS
SEPTEMBER 30, 1999
(UNAUDITED)
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 Partnerships 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
Partnership 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 distributions 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 is not the general
partner and it has no legal obligation to provide additional cash support
nor has it indicated any commitment to provide this support; accordingly,
it has not reduced its investment in these Operating Partnerships below
zero.
D) Income Taxes
No provision has been made for income taxes since Beneficial Assignment
Certificate (BAC) Holders are required to report their share of the
Partnership's income for federal and state income tax purposes.
E) Temporary Cash Investments
Temporary cash investments are invested in short-term debt securities
purchased with an original maturity of three months or less.
F) Net Income Per BAC
Net income per BAC has been calculated based on the number of BACs
outstanding (4,011,101) for all periods presented.
G) New Accounting Pronouncement
On January 1, 1999, the Partnership adopted Statement of Position 98-5,
"Reporting on the Costs of Start-up Activities" (SOP 98-5). SOP 98-5
requires costs of start-up activities and organization costs to be
expensed as incurred. The adoption of SOP 98-5 did not have an impact on
the Partnership's financial statements.
3. 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 period and the change in cash distributions accrued at the
end of each period.
The General Partners will receive 1% of the net proceeds from any sale of
Partnership assets. The General Partners will receive a termination fee equal
to 3% of all sales proceeds less actual costs incurred in connection with all
sales transactions, payable only after the investors have received a return of
their capital contributions and an 11.5% annual return on a cumulative basis.
The General Partners will also receive a fee equal to 9.1% of all cash
available for distribution and sales proceeds (after deducting from cash
available or sales proceeds any termination fee paid therefrom) after
investors have received a return of their capital contributions and an 11.5%
annual return on a cumulative basis.
<PAGE> - 5 -
CAPITAL SOURCE II L.P.-A
NOTES TO FINANCIAL STATEMENTS
SEPTEMBER 30, 1999
(UNAUDITED)
4. Investment in Mortgage-Backed Securities
The mortgage-backed securities held by the Partnership represent Government
National Mortgage Association (GNMA) Certificates and a Federal Housing
Administration (FHA) Loan. 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
loan.
At September 30, 1999, all of the Partnership's mortgage-backed securities were
classified as held-to-maturity. The total amortized cost, gross unrealized
holding gains and aggregate fair value of such securities were $26,880,490,
$244,204 and $27,124,694, respectively.
Descriptions of the Partnership's mortgage-backed securities at September 30,
1999, are as follows:
<TABLE>
<CAPTION>
Number Interest Maturity Carrying
Type of Security and Name Location of Units Rate Date Amount
---------------------------------- -------------------- -------- -------- ------------- ---------------
<S> <C> <C> <C> <C> <C>
GNMA Certificates:
Crane's Landing Winter Park, FL 252 8.75% 12-15-2030 $ 10,134,218
Monticello Apartments Southfield, MI 106 8.75% 11-15-2029 5,273,542
The Ponds at Georgetown Ann Arbor, MI 134 7.50% 12-15-2029 4,993,333
---------------
20,401,093
FHA Loan:
Delta Crossing Charlotte, NC 178 9.10% 10-01-2030 6,479,397
---------------
Balance at September 30, 1999 $ 26,880,490
===============
</TABLE>
Reconciliation of the carrying amount of the mortgage-backed securities is as
follows:
<TABLE>
<S> <C>
Balance at December 31, 1998 $ 27,003,563
Addition
Amortization of discount on mortgage-backed securities 236
Deduction
FHA Loan and GNMA Certificate principal payments received (123,309)
---------------
Balance at September 30, 1999 $ 26,880,490
===============
</TABLE>
<PAGE> - 6 -
CAPITAL SOURCE II L.P.-A
NOTES TO FINANCIAL STATEMENTS
SEPTEMBER 30, 1999
(UNAUDITED)
5. Investment in Operating Partnerships
The Partnership's Investment in 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 September 30, 1999, are as
follows:
<TABLE>
<CAPTION>
Carrying
Name Location Partnership Name Amount
- ------------------------ --------------------- ----------------------------------------- ------------
<S> <C> <C> <C>
Delta Crossing Charlotte, NC Delta Crossing Limited Partnership $ -
Crane's Landing Winter Park, FL Crane's Landing Partnership, Ltd. -
Monticello Apartments Southfield, MI Centrum Monticello Limited Partnership -
The Ponds at Georgetown Ann Arbor, MI Ponds at Georgetown Limited Partnership -
------------
Balance at September 30, 1999 $ -
============
</TABLE>
6. 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
of $12,500 and $37,500 were incurred during the quarter and nine months ended
September 30, 1999, respectively.
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 quarter
and nine months ended September 30, 1999 was $187,545 and $441,030,
respectively. These 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 $10,701 and $31,987 for the quarter and nine months ended
September 30, 1999, 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.
<PAGE> - 7 -
CAPITAL SOURCE II L.P.-A
NOTES TO FINANCIAL STATEMENTS
SEPTEMBER 30, 1999
(UNAUDITED)
7. Legal Proceedings
The Partnership has been named as a defendant in a purported class action
lawsuit filed in the Delaware Court of Chancery on February 3, 1999 by two BAC
holders, Alvin M. Panzer and Sandra G. Panzer, against the Partnership, its
general partners, America First and various of their affiliates (including
Capital Source L.P., a similar partnership with general partners that are
affiliates of America First) and Lehman Brothers, Inc. The plaintiffs seek to
have the lawsuit certified as a class action on behalf of all BAC holders of
the Partnership and Capital Source L.P. The lawsuit alleges, among
other things, that a proposed merger transaction involving the Partnership and
Capital Source L.P. is deficient and coercive, that the defendants have
breached the terms of the Partnership's partnership agreement and that the
defendants have acted in manners which violate their fiduciary duties to the
BAC holders. The plaintiffs seek to enjoin the proposed merger transaction
and to appoint an independent BAC holder representative to investigate
alternative transactions. The lawsuit also requests a judicial dissolution of
the Partnership, an accounting, and unspecified damages and costs.
On July 12, 1999, Sandra G. Panzer, one of the named plaintiffs in the action
described above, filed an additional complaint against the Partnership, its
general partners and America First in the Delaware Court of Chancery. The
complaint seeks to compel the general partners to supply the plaintiff with a
list of all BAC holders of the Partnership and copies of the limited
partnership agreements of the Operating Partnerships.
At this time, the general partners are unable to estimate the effect of either
of these lawsuits, if any, on the financial statements of the Partnership.
The general partners have determined not to pursue the merger transaction
which was the subject of the initial lawsuit and intend to propose an
alternative transaction to BAC holders.
<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. 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 Nine For the Nine
Months Ended Months Ended
Sept. 30, 1999 Sept. 30, 1998
-------------- --------------
<S> <C> <C>
Regular monthly distributions
Income $ .2988 $ .1778
Return of capital .0387 .3697
-------------- --------------
$ .3375 $ .5475
============== ==============
Distributions
Paid out of cash flow $ .3375 $ .3361
Paid out of reserves - .2114
-------------- --------------
$ .3375 $ .5475
============== ==============
</TABLE>
Regular monthly distributions to BAC Holders consist primarily of interest
received on the FHA Loan and GNMA Certificates. Additional cash for
distributions is received from other investments. The Partnership is
permitted to replenish its reserves with cash flows in excess of distributions
paid. For the nine months ended September 30, 1999, $13,265 was placed into
reserves for cash flow in excess of the regular monthly cash distributions.
For the quarter ended September 30, 1999 $39,676 was withdrawn from reserves
for distributions in excess of cash flow.
The Partnership believes that cash provided by operating and investing
activities and, if necessary, withdrawals from the Partnership's reserves, to
the extent available, will be adequate to meet 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> - 9 -
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 net realizable value of such properties; however, the ultimate
realized values may vary from these estimates.
The overall status of the Partnership's investments has remained relatively
constant since June 30, 1999.
The following table shows the occupancy levels of the properties financed by
the Partnership as of September 30, 1999:
<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 252 246 98%
Delta Crossing Charlotte, NC 178 161 90%
Monticello Apartments Southfield, MI 106 90 85%
The Ponds at Georgetown Ann Arbor, MI 134 134 100%
--------- ---------- ----------
670 631 94%
========= ========== ==========
</TABLE>
Results of Operations
The tables below compare the results of operations for each period shown.
<TABLE>
<CAPTION>
For the For the Increase
Quarter Ended Quarter Ended (Decrease)
Sept. 30, 1999 Sept. 30, 1998 From 1998
--------------- --------------- ---------------
<S> <C> <C> <C>
Mortgage-backed securities income $ 579,202 $ 606,852 $ (27,650)
Interest income on temporary cash investments 3,534 8,462 (4,928)
Equity in losses of Operating Partnerships - (359,113) 359,113
Other income - 1,400 (1,400)
Gain on sale of mortgage-backed securities - 38,535 (38,535)
--------------- --------------- ---------------
582,736 296,136 286,600
Operating and administrative expenses 224,203 158,660 65,543
--------------- --------------- ---------------
Net income $ 358,533 $ 137,476 $ 221,057
=============== =============== ===============
</TABLE>
<TABLE>
<CAPTION>
For the Nine For the Nine Increase
Months Ended Months Ended (Decrease)
Sept. 30, 1999 Sept. 30, 1998 From 1998
--------------- --------------- ---------------
<S> <C> <C> <C>
Mortgage-backed securities income $ 1,740,248 $ 1,844,575 $ (104,327)
Interest income on temporary cash investments 11,025 27,779 (16,754)
Equity in losses of Operating Partnerships - (359,113) 359,113
Other income 400 4,100 (3,700)
Gain on sale of mortgage-backed securities - 53,100 (53,100)
--------------- --------------- ---------------
1,751,673 1,570,441 181,232
Operating and administrative expenses 541,078 850,107 (309,029)
--------------- --------------- ---------------
Net income $ 1,210,595 $ 720,334 $ 490,261
=============== =============== ===============
</TABLE>
<PAGE> - 10 -
Mortgage-backed securities income decreased for the quarter ended September
30, 1999, compared to the same period in 1998. Approximately $19,000 of such
decrease was primarily due to the October 1998 payoff of The Ponds at
Georgetown GNMA Certificate which had an interest rate of 9% and the issuance
of a new GNMA Certificate at 7.25%. Approximately $6,000 of the remaining
decrease of $8,700 was attributable to the 1998 sales of GNMA Certificates
held in the Partnership's reserves with the remaining $2,700 decrease due to
the continued amortization of the principal balances of the Partnership's
mortgage-backed securities.
Mortgage-backed securities income decreased for the nine months ended
September 30, 1999, compared to the same period in 1998. Approximately
$57,000 of such decrease was primarily due to the October 1998 payoff of The
Ponds at Georgetown GNMA Certificate which had an interest rate of 9% and the
issuance of a new GNMA Certificate at 7.25%. Approximately $39,000 of the
remaining decrease of $47,300 was attributable to the 1998 sales of GNMA
Certificates held in the Partnership's reserves with the remaining $8,300
decrease due to the continued amortization of the principal balances of the
Partnership's mortgage-backed securities.
Interest income on temporary cash investments decreased for the quarter and
nine months ended September 30, 1999, compared to the same periods in 1998,
due to withdrawals made from the Partnership's reserves during 1998 to
supplement distributions to BAC Holders.
The Partnership 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 distributions received, to the Operating Partnerships by
the Partnership.
The Partnership made an additional investment of $359,113 in The Ponds at
Georgetown Operating Partnership during the quarter and nine months ended
September 30, 1998. As such, equity in losses of Operating Partnerships of
$359,113 was recorded for the respective periods. No additional investments
were made and; therefore, no equity in losses were recorded during the quarter
and nine months ended September 30, 1999.
The Partnership realized gains of $38,535 and $53,100 for the quarter and nine
months ended September 30, 1998, respectively, on mortgage-backed securities
it sold during such periods. No such sales or gains occurred during the
comparable periods in 1999.
The Partnership incurred costs of approximately $101,000 and $116,000 during
the quarter and nine months ended September 30, 1999, respectively, in
conjunction with developing an alternative transaction to the proposed merger
under consideration in 1998. Similarly, the Partnership incurred costs of
approximately $37,000 and $290,000 during the quarter and nine months ended
September 30, 1998, respectively, in conjunction with the proposed merger
under consideration during such periods. Excluding such costs, operating and
administrative expenses for the quarter ended September 30, 1999, were
comparable to the same period in 1998. Excluding such costs, operating and
administrative costs for the nine months ended September 30, 1999, decreased
approximately $135,000 compared to the same period in 1998. This decrease was
primarily due to a reduction in salaries and related expenses and consulting
fees.
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.
<PAGE> - 11 -
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 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. This process, along with any
necessary remediation or plans for remediation, has been completed. America
First believes any Year 2000 problems relating to its IT systems will be
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 reviewed 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. Based on this review, a need for
significant modification or replacement of such "mission critical" systems was
not identified.
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
assess 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.
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 is
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
<PAGE> - 12 -
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.
Forward Looking Statements
This report contains forward looking statements that reflect management's
current beliefs and estimates of future economic circumstances, industry
conditions, the Partnership's performance and financial results. All
statements, trend analysis and other information concerning possible or
assumed future results of operations of the Partnership and the real estate
investments it has made (including, but not limited to, the information
contained in "Management's Discussion and Analysis of Financial Condition and
Results of Operations"), constitute forward-looking statements. BAC Holders
and others should understand that these forward looking statements are subject
to numerous risks and uncertainties and a number of factors could affect the
future results of the Partnership and could cause those results to differ
materially from those expressed in the forward looking statements contained
herein.
Item 3. Quantitative and Qualitative Disclosures About Market Risk.
There have been no material changes in the Partnership's market risk since
December 31, 1998.
<PAGE> - 13 -
PART II. OTHER INFORMATION
Item 1. Legal Proceedings
PART II. OTHER INFORMATION
Item 1. Legal Proceedings
The Registrant has been named as a defendant in a purported
class action lawsuit filed in the Delaware Court of Chancery
on February 3, 1999 by two BAC holders, Alvin M. Panzer and
Sandra G. Panzer, against the Registrant, its general
partners, America First and various of their affiliates
(including Capital Source L.P., a similar partnership
with general partners that are affiliates of America First)
and Lehman Brothers, Inc. The plaintiffs seek to have the
lawsuit certified as a class action on behalf of all BAC
holders of the Registrant and Capital Source L.P. The
lawsuit alleges, among other things, that a proposed merger
transaction involving the Registrant and Capital Source
L.P. is deficient and coercive, that the defendants have
breached the terms of the Registrant's partnership agreement
and that the defendants have acted in manners which violate
their fiduciary duties to the BAC holders. The plaintiffs seek
to enjoin the proposed merger transaction and to appoint an
independent BAC holder representative to investigate
alternative transactions. The lawsuit also requests a judicial
dissolution of the Registrant, an accounting, and unspecified
damages and costs.
On July 12, 1999, Sandra G. Panzer, one of the named plaintiffs
in the action described above, filed an additional complaint
against the Partnership, its general partners and America First
in the Delaware Court of Chancery. The complaint seeks to
compel the general partners to supply the plaintiff with a list
of all BAC holders of the Partnership and copies of the limited
partnership agreements of the Operating Partnerships.
The general partners intend to defend these lawsuits vigorously,
but are unable to estimate the effect of either of these
lawsuits, if any, on the financial statements of the Partnership
or on the ability of the Partnership to consummate the proposed
merger with Capital Source L.P.
The general partners have determined not to pursue the merger
transaction which was the subject of the initial lawsuit and
intend to propose an alternative transaction to BAC holders.
There are no other material pending legal proceedings to which
the Registrant is a party or to which any of its property is
subject.
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) Amendment to the Capital Source II L.P.-A Limited
Partnership Agreement (incorporated by reference to Exhibit
3.09 to Pre-Effective Amendment No. 3 to the Registration
Statement on Form S-4 filed by America First Real Estate
Investment Partners, L.P. on July 21, 1999 (Commission
File No. 333-52117)).
4(c) 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)).
<PAGE> - 14 -
27. Financial Data Schedule
(b) Reports on Form 8-K
The Registrant did not file a report on Form 8-K during the
quarter for which this report is filed.
<PAGE> - 15 -
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
Dated: November 11, 1999
<PAGE> - 16 -
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