FORM 10-K
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, 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 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. . . . . 11
Item 8. Financial Statements and Supplementary Data . . . . . . . . . . . . 11
Item 9. Changes in and Disagreements With Accountants on Accounting and
Financial Disclosure. . . . . . . . . . . . . . . . . . . . . . . . 11
PART III
Item 10. Directors and Executive Officers of the Registrant . . . . . . . . 12
Item 11. Executive Compensation . . . . . . . . . . . . . . . . . . . . . . 14
Item 12. Security Ownership of Certain Beneficial Owners and Management . . 14
Item 13. Certain Relationships and Related Transactions . . . . . . . . . . 14
PART IV
Item 14. Exhibits, Financial Statement Schedules and Reports on Form 8-K. . 15
SIGNATURES . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 32
<PAGE> -ii-
PART I
Item 1. Business. Capital Source II L.P.-A (the "Registrant" or the
"Partnership") 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.
On May 7, 1998, a registration statement on Form S-4 was filed with the
Securities and Exchange Commission by America First Real Estate Investment
Company, Inc. (AFRIC) relating to a proposed merger of the Registrant and
Capital Source, L.P. into AFRIC which was formed for the purpose of making
opportunistic, growth-oriented real estate investments. Due to significant
changes in the United States equity and real estate markets in the Fall of
1998, the general partners of the Registrant have reevaluated the terms of the
proposed merger and have decided to restructure it so that the resulting
entity is a publicly-traded limited partnership that will primarily invest in
residential apartment complexes and other commercial real estate. Therefore,
the investment objectives of the new limited partnership will be substantially
similar to those of the Registrant. The proposed merger will be subject to
the consent of the BAC holders of the Registrant and Capital Source, L.P.
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, 1998, appears in Item 7 hereof. The Partnership had also
invested amounts held in its reserve account in certain GNMA securities backed
by pools of single-family mortgages ("Reserve Investments"); however, at
December 31, 1998, the Partnership no longer held any GNMA securities in its
reserve account.
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.
<PAGE> - 1 -
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 property location, condition and amenities.
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.
At December 31, 1998 the Registrant had one employee. In addition,
certain services are provided to the Registrant by employees of America First
Companies L.L.C. which is an affiliate of the general partners of the
Registrant, and the Registrant reimburses America First Companies L.L.C. for
such services at cost. The Registrant is not charged and does not reimburse
for the services performed by managers and officers of America First
Companies L.L.C.
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
apartment 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 $ 8,466,230
Delta Crossing Charlotte, NC 178 880 4,777,733
Monticello Apartments Southfield, MI 106 1,027 3,968,783
The Ponds at Georgetown Ann Arbor, MI 134 1,002 5,406,133
-------- ---------------
670 $ 22,618,879
======== ===============
</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:
<PAGE> - 2 -
<TABLE>
<CAPTION>
1998 1997 1996 1995 1994
---------- ---------- ---------- ---------- ----------
<S> <C> <C> <C> <C> <C>
CRANE'S LANDING
Average Occupancy Rate 96% 96% 94% 89% 90%
Average Effective Annual Rental Per Unit $7,577 $7,366 $6,954 $6,327 $6,322
DELTA CROSSING
Average Occupancy Rate 94% 93% 92% 94% 95%
Average Effective Annual Rental Per Unit $7,457 $7,260 $7,097 $6,866 $6,380
MONTICELLO APARTMENTS
Average Occupancy Rate 98% 97% 96% 99% 97%
Average Effective Annual Rental Per Unit $9,627 $8,873 $8,804 $8,630 $8,287
THE PONDS AT GEORGETOWN
Average Occupancy Rate 99% 97% 95% 95% 95%
Average Effective Annual Rental Per Unit $10,362 $9,883 $9,515 $9,174 $8,955
</TABLE>
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. 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.
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 4. Submission of Matters to a Vote of Security Holders. No matter
was submitted during the fourth quarter of 1998 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
PAGE> - 3 -
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,
1998, was 5,309.
(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, 1998, and December 31, 1997, equaled $2,647,327 and
$3,248,992 respectively. The cash distributions paid per BAC during the
fiscal years ended December 31, 1998, and December 31, 1997, were as follows:
<TABLE>
<CAPTION>
Per BAC
Year Ended Year Ended
December 31, 1998 December 31, 1997
----------------- -----------------
<S> <C> <C>
Income $ .2175 $ .4082
Return of Capital .4425 .4018
----------------- -----------------
Total $ .6600 $ .8100
================= =================
</TABLE>
Effective with the August 1998 distribution payable in October 1998, the
Partnership reduced the level of distributions from $.0675 to $.0375 per
month. 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 in 1999
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.
<PAGE> - 4 -
<TABLE>
<CAPTION>
For the For the For the For the For the
Year Ended Year Ended Year Ended Year Ended Year Ended
Dec. 31, 1998 Dec. 31, 1997 Dec. 31, 1996 Dec. 31, 1995 Dec. 31, 1994
------------- ------------- ------------- ------------- -------------
<S> <C> <C> <C> <C> <C>
Mortgage-backed securities income $ 2,426,356 $ 2,499,844 $ 2,520,727 $ 2,561,901 $ 2,526,266
Interest income on temporary cash investments
and U.S. government securities 42,339 91,327 147,530 200,678 181,315
Equity in losses of Operating Partnerships (407,218) (121,450) - (109,900) (209,805)
Other income 4,750 3,800 6,950 4,650 2,900
Gain on sale of mortgage-backed securities 35,101 - - 15,670 -
Operating and administrative expenses (1,220,213) (819,516) (552,170) (499,903) (479,388)
------------- ------------- ------------- ------------- -------------
Net income $ 881,115 $ 1,654,005 $ 2,123,037 $ 2,173,096 $ 2,021,288
============= ============= ============= ============= =============
Net income, basic and diluted, per
Beneficial Assignment Certificate (BAC) $ .22 $ .41 $ .52 $ .54 $ .50
============= ============= ============= ============= =============
Cash distributions paid or accrued per BAC $ .6600 $ .8100 $ .8100 $ .8100 $ .8100
============= ============= ============= ============= =============
Investment in FHA Loans $ 6,505,857 $ 6,538,424 $ 6,568,139 $ 6,595,251 $ 6,619,989
============= ============= ============= ============= =============
Investment in GNMA Certificates $ 20,497,706 $ 21,674,940 $ 21,895,675 $ 22,142,421 $ 22,799,369
============= ============= ============= ============= =============
Total assets $ 27,771,206 $ 29,829,534 $ 31,340,155 $ 32,541,767 $ 33,589,321
============= ============= ============= ============= =============
</TABLE>
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 had also invested
amounts held in its reserve account in certain GNMA securities backed by pools
of single-family mortgages (Reserve Investments); however, at December 31,
1998 the Partnership no longer had any GNMA securities in its reserve account.
The obligations of GNMA and FHA are backed by the full faith and credit of the
United States government.
<PAGE> - 5 -
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, 1998 Dec. 31, 1997 Dec. 31, 1996
-------------- -------------- --------------
<S> <C> <C> <C>
Regular monthly distributions
Income $ .2175 $ .4082 $ .5240
Return of capital .4425 .4018 .2860
-------------- -------------- --------------
$ .6600 $ .8100 $ .8100
============== ============== ==============
Distributions
Paid out of cash flow .4005 $ .5172 $ .6019
Paid out of reserves .2595 .2928 .2081
-------------- -------------- --------------
$ .6600 $ .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 1998, the Partnership depleted its reserves.
As previously reported, the Partnership reduced the level of distributions
from $.0675 per month to $.0375 per month effective with the August 1998
distribution payable in October 1998. A reduction in the distribution was
required so that cash provided by operating activities and, if necessary,
withdrawals from the Partnership's reserves, to the extent available, 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 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 net realizable 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.
<PAGE> - 6 -
The following table shows the occupancy levels of the properties financed by
the Partnership as of December 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 252 242 96%
Delta Crossing Charlotte, NC 178 168 94%
Monticello Apartments Southfield, MI 106 104 98%
The Ponds at Georgetown Ann Arbor, MI 134 132 99%
--------- ---------- -----------
670 646 96%
========= ========== ===========
</TABLE>
The following sets forth certain information regarding the properties financed
by the Partnership.
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 1998 and 1997. Rental revenue remained constant from
1997 to 1998; however, real estate operating expenses increased approximately
17% in 1998, compared to 1997. Real estate operating expenses increased
primarily due to a 41% increase in repairs and maintenance expenses. As a
result, net operating income before depreciation, interest and amortization
decreased approximately 12% from 1997 to 1998. The property remained current
on its mortgage obligations during 1998.
Delta Crossing
Delta Crossing is a 178-unit apartment complex located in Charlotte, North
Carolina. Average occupancy was 94% in 1998, compared to 93% in 1997. As a
result of the increase in occupancy and rental rate increases, rental income
increased approximately 3% in 1998, compared to 1997. The increase in rental
income, combined with a decrease of approximately 7% in repairs and
maintenance expenses and property improvements, was more than offset by an
increase of 10% in labor expenses and slight increases in other expenses. As
a result, net operating income before depreciation, interest and amortization
decreased approximately 2% from 1997 to 1998. The property was current on its
mortgage obligations during 1998.
Monticello Apartments
Monticello Apartments, located in Southfield, Michigan, contains 106 rental
units. Average occupancy was 98% in 1998, compared to 97% in 1997. Due to
the slight increase in average occupancy and rental rate increases, rental
income increased approximately 5% in 1998, compared to 1997. The increase in
rental income, was partially offset by an increase of approximately 27% in
repairs and maintenance expenses. As a result, net operating income before
depreciation, interest and amortization increased approximately 6% from 1997
to 1998. The property was current on its mortgage obligations during 1998.
The Ponds at Georgetown
The Ponds at Georgetown consists of 134 apartments located in Ann Arbor,
Michigan. Average occupancy was 99% in 1998, compared to 97% in 1997. Rental
revenue increased approximately 3.5% in 1998, compared to 1997, primarily due
to the increase in average occupancy, while real estate operating expenses
increased approximately 8%. The increase in real estate operating expenses
was primarily due to an 8% increase in repairs and maintenance expenses which
was partially offset by a 17% decrease in real estate taxes. As previously
disclosed, the mortgage loan for the Ponds at Georgetown was restructured in
September 1998, which lowered the interest rate from 9.25% to 7.85%. In
connection with the restructuring, shortfalls of $407,218 were funded by the
Partnership's reserves. As a result of restructuring the mortgage loan, cash
flow from the property is now anticipated to be sufficient to cover all the
operating partnership's cash needs, including mortgage payments and taxes.
The property was current on its mortgage obligations as of December 31, 1998.
<PAGE> - 7 -
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, 1998 Dec. 31, 1997 Dec. 31, 1996
--------------- --------------- ---------------
<S> <C> <C> <C>
Mortgage-backed securities income $ 2,426,356 $ 2,499,844 $ 2,520,727
Interest income on temporary cash investments
and U.S. government securities 42,339 91,327 147,530
Equity in losses of Operating Partnerships (407,218) (121,450) -
Other income 4,750 3,800 6,950
Gain on sale of mortgage-backed securities 35,101 - -
-------------- --------------- ---------------
2,101,328 2,473,521 2,675,207
Operating and administrative expenses 1,220,213 819,516 552,170
-------------- --------------- ---------------
Net income $ 881,115 $ 1,654,005 $ 2,123,037
============== =============== ===============
</TABLE>
<TABLE>
<CAPTION>
Increase Increase
(Decrease) (Decrease)
From 1997 From 1996
--------------- ---------------
<S> <C> <C>
Mortgage-backed securities income $ (73,488) $ (20,883)
Interest income on temporary cash investments
and U.S. government securities (48,988) (56,203)
Equity in losses of Operating Partnerships (285,768) (121,450)
Other income 950 (3,150)
Gain on sale of mortgage-backed securities 35,101 -
-------------- ---------------
(372,193) (201,686)
Operating and administrative expenses 400,697 267,346
-------------- ---------------
Net income $ (772,890) $ (469,032)
============== ===============
</TABLE>
Mortgage-backed securities income decreased $73,488 from 1997 to 1998 and
$20,883 from 1996 to 1997. Approximately $31,000 of such decrease from 1997
to 1998 was attributable to the payoff of the GNMA Certificate on the Ponds at
Georgetown which had an interest rate of 9% and the issuance of a new GNMA
Certificate at 7.25%. The remaining decrease from 1997 to 1998 and from 1996
to 1997 was attributable to the continued amortization of the principal
balances of the Partnership's mortgage-backed securities.
Interest income on temporary cash investments and U.S. government securities
decreased $48,988 from 1997 to 1998 and $56,203 from 1996 to 1997. These
decreases were due to withdrawals made from the Partnership's reserves to
supplement distributions to BAC Holders.
The Partnership's 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 Partnership by
the Partnership.
The Partnership made additional investments in certain Operating Partnerships
during 1998 and 1997. As such, equity in losses of Operating Partnerships was
recorded in 1998 and 1997 to the extent of the additional investments in the
amount of $407,218 and $121,450, respectively. No such investments were made
and therefore no equity in losses was recorded in 1996.
During 1998, the Partnership sold the mortgage-backed securities held in its
reserves and realized a gain of $35,101 on the sale. There were no such sales
or gains during either 1996 or 1997.
<PAGE> - 8 -
Operating and administrative expenses increased $400,697 from 1997 to 1998.
The increase was due to: (i) an increase of approximately $341,000 in
transaction costs incurred in conjunction with the proposed merger described
in Note 8 to the financial statements; (ii) an increase of approximately
$152,000 in salaries and related expenses primarily due to additional
management time incurred in conjunction with the aforementioned merger; (iii)
and increase of approximately $31,000 in consulting fees incurred in
connection with a review of various options for restructuring to improve total
investment returns and provide liquidity to the Partnership's investors; (iv)
a decrease of $116,000 in asset management and partnership administration fees
payable to the General Partners and (v) decreases of approximately $7,000 in
other operating and administrative expenses.
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.
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 mid-1999.
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 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
<PAGE> - 9 -
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.
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
<PAGE> - 10 -
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 7A. Quantitative and Qualitative Disclosures About Market Risk.
The Partnership's primary market risk exposure is interest rate risk. The
Partnership's exposure to market risk for changes in interest rates relates
primarily to its investment securities which is comprised of investments in
debt securities with fixed interest rates. The Partnership does not use
derivative financial instruments to hedge its investment portfolio.
The table below presents principal amounts and weighted average interest rates
by year of maturity for the Partnership's investment portfolio:
<TABLE>
<CAPTION>
Principal Weighted Average
Maturity Amount Interest Rate
------------ ----------------- -----------------
<C> <C> <C>
1999 $ 168,912 8.6%
2000 184,103 8.6%
2001 200,668 8.6%
2002 218,402 8.6%
2003 238,427 8.6%
Thereafter 26,033,070 8.6%
</TABLE>
The aggregate fair value of the Partnership's investment securities at
December 31, 1998 was $27,248,970.
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.
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, 1998 and 1997.
The information required by this Item 9 relating to a change in accountants
has been previously reported (as that term is defined by Rule 12a-2 of the
Exchange Act) with the Commission by the Partnership on its Current Report on
Form 8-K dated October 2, 1998, as amended, and is hereby incorporated by
reference.
<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
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
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, 65, 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, Level 3 Communications, Inc., Freedom Communications, Inc.,
Magnum Resources, RCN Corporation, Rio Grande Medical Technologies, Inc., and
PKS Information Services, Inc.
Michael Thesing, 44, has been Vice President and Chief Financial Officer
of affiliates of America First Companies L.L.C. since July 1984. He serves as
President of America First Investment Advisors, L.L.C. and is a member of the
Board of Managers of America First Companies L.L.C. 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.
<PAGE> - 12 -
William S. Carter, M.D., 72, is a retired physician. Dr. Carter
practiced medicine for 30 years in Omaha, Nebraska, specializing in
otolaryngology (disorders of the ears, nose and throat).
Martin A. Massengale, 65, 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, 76, 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, 62, 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, 38, 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. Ms.
Byerwalter currently serves on the board of directors of Redwood Trust, Inc.
<PAGE> - 13 -
Item 11. Executive Compensation. The Registrant does not have any
directors or officers. Certain services are provided to the Registrant by
managers and officers of America First. 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, 1998, is described in Note 6 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
1998, the General Partners earned, and the Registrant incurred $50,000 in
such asset management and partnership administration fees.
During 1998, the Registrant paid or reimbursed the General Partners
$842,272 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 6 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 4% 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,
1998, the Manager was paid property management fees of $41,167.
<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 Auditors' Report
Balance Sheets of the Registrant as of December 31, 1998,
and December 31, 1997.
Statements of Income and Comprehensive Income of the Registrant for the
years ended December 31, 1998, December 31, 1997, and December 31, 1996.
Statements of Partners' Capital (Deficit) of the Registrant for the
years ended December 31, 1998, December 31, 1997, and December 31, 1996.
Statements of Cash Flows of the Registrant for the years
ended December 31, 1998, December 31, 1997, and December 31, 1996.
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
27. Financial Data Schedule
(b) The Registrant filed the following reports on Form 8-K during the last
quarter of the period covered by this report:
Date of Report Item Reported Financial Statements Filed
--------------- -------------------- --------------------------
October 2, 1998 Item 4. Change in No
Registrant's
Certifying
Accountant
Item 5. Other Events
Item 7. Financial
Statements
and Exhibits
<PAGE> - 15 -
Independent Auditors' Report
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, 1998 and 1997, and the related statements of income and
comprehensive income, partners' capital (deficit) and cash flows for the three
years in the period ended December 31, 1998. 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, 1998 and 1997, and the results of its operations and its cash
flows for each of the three years in the period ended December 31, 1998, in
conformity with generally accepted accounting principles.
Omaha, Nebraska
March 19, 1999 /s/KPMG Peat Marwick LLP
<PAGE> - 16 -
CAPITAL SOURCE II L.P.-A
Balance Sheets
<TABLE>
<CAPTION>
Dec. 31, 1998 Dec. 31, 1997
--------------- ---------------
<S> <C> <C>
Assets
Cash and temporary cash investments, at cost which
approximates market value $ 432,999 $ 1,240,992
Investment in FHA Loan (Note 4) 6,505,857 6,538,424
Investment in GNMA Certificates (Note 4) 20,497,706 21,674,940
Investment in Operating Partnerships (Note 5) - -
Interest receivable 195,440 213,024
Other assets 139,204 162,154
--------------- ---------------
$ 27,771,206 $ 29,829,534
=============== ===============
Liabilities and Partners' Capital (Deficit)
Liabilities
Accounts payable (Note 6) $ 347,446 $ 327,513
Distribution payable (Note 3) 303,871 546,968
--------------- ---------------
651,317 874,481
--------------- ---------------
Partners' Capital (Deficit)
General Partner (295,259) (276,907)
Beneficial Assignment Certificate Holders
($6.83 per BAC in 1998 and $7.29 in 1997) 27,415,148 29,231,960
--------------- ---------------
27,119,889 28,955,053
--------------- ---------------
$ 27,771,206 $ 29,829,534
=============== ===============
</TABLE>
The accompanying notes are an integral part of the financial statements.
<PAGE> - 17 -
CAPITAL SOURCE II L.P.-A
STATEMENTS OF INCOME AND COMPREHENSIVE INCOME
<TABLE>
<CAPTION>
For the For the For the
Year Ended Year Ended Year Ended
Dec. 31, 1998 Dec. 31, 1997 Dec. 31, 1996
--------------- --------------- ---------------
<S> <C> <C> <C>
Income
Mortgage-backed securities income (Note 4) $ 2,426,356 $ 2,499,844 $ 2,520,727
Interest income on temporary cash investments
and U.S. government securities 42,339 91,327 147,530
Equity in losses of Operating Partnerships (Note 5) (407,218) (121,450) -
Other income 4,750 3,800 6,950
Gain on sale of mortgage-backed securities 35,101 - -
--------------- --------------- ---------------
2,101,328 2,473,521 2,675,207
Expenses
Operating and administrative expenses (Note 6) 1,220,213 819,516 552,170
--------------- --------------- ---------------
Net income 881,115 1,654,005 2,123,037
Other comprehensive income:
Unrealized gains on securities
Net unrealized holding gains (losses) arising during the year (7,110) 5,969 (42,500)
Plus: reclassification adjustment for losses included in net income (35,101) - -
-------------- -------------- --------------
Change in net unrealized holding gains (42,211) 5,969 (42,500)
-------------- -------------- --------------
Net comprehensive income $ 838,904 $ 1,659,974 $ 2,080,537
============== ============== ==============
Net income allocated to:
General Partner $ 8,811 $ 16,540 $ 21,230
BAC Holders 872,304 1,637,465 2,101,807
--------------- --------------- ---------------
$ 881,115 $ 1,654,005 $ 2,123,037
=============== =============== ===============
Net income, basic and diluted, per BAC $ .22 $ .41 $ .52
=============== =============== ===============
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> - 18 -
CAPITAL SOURCE II L.P.-A
STATEMENTS OF PARTNERS' CAPITAL (DEFICIT)
FROM DECEMBER 31, 1995 TO DECEMBER 31, 1998
<TABLE>
<CAPTION>
General BAC
Partners Holders Total
--------------- --------------- ---------------
<S> <C> <C> <C>
Partners' Capital (Deficit) (excluding
accumulated other comprehensive income)
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 3) (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 3) (32,818) (3,248,992) (3,281,810)
--------------- --------------- ---------------
Balance at December 31, 1997 (277,329) 29,190,171 28,912,842
Net income 8,811 872,304 881,115
Cash distributions paid or accrued (Note 3) (26,741) (2,647,327) (2,674,068)
--------------- --------------- ---------------
(295,259) 27,415,148 27,119,889
--------------- --------------- ---------------
Accumulated Other Comprehensive Income
Balance at December 31, 1995 787 77,955 78,742
Other comprehensive income (425) (42,075) (42,500)
--------------- --------------- ---------------
Balance at December 31, 1996 362 35,880 36,242
Other comprehensive income 60 5,909 5,969
--------------- --------------- ---------------
Balance at December 31, 1997 422 41,789 42,211
Other comprehensive income (422) (41,789) (42,211)
--------------- --------------- ---------------
- - -
--------------- --------------- ---------------
Balance at December 31, 1998 $ (295,259) $ 27,415,148 $ 27,119,889
=============== =============== ===============
The accompanying notes are an integral part of the financial statements.
</TABLE>
<PAGE> - 19 -
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, 1998 Dec. 31, 1997 Dec. 31, 1996
--------------- --------------- ---------------
<S> <C> <C> <C>
Cash flows from operating activities
Net income $ 881,115 $ 1,654,005 $ 2,123,037
Adjustments to reconcile net income to
net cash provided by operating activities
Equity in losses of Operating Partnerships 407,218 121,450 -
Amortization of discount on mortgage-backed securities (1,471) (1,397) (9,400)
Gain on sale of mortgage-backed securities (35,101) - -
Decrease in interest receivable 17,584 6,637 26,654
Decrease in other assets 22,950 63,589 62,156
Increase (decrease) in accounts payable 19,933 111,215 (339)
--------------- --------------- ---------------
Net cash provided by operating activities 1,312,228 1,955,499 2,202,108
--------------- --------------- ---------------
Cash flows from investing activities
FHA Loan and GNMA principal payments received 271,807 257,816 253,258
Disposition of mortgage-backed securities 5,046,437 - -
Proceeds from sale of available-for-sale securities 915,012 - -
Acquisition of GNMA Certificate (5,029,094) - -
Investments in Operating Partnerships (407,218) (121,450) -
Maturity of U.S. government securities - - 2,500,000
--------------- --------------- ---------------
Net cash provided by investing activities 796,944 136,366 2,753,258
--------------- --------------- ---------------
Cash flows from financing activities
Distributions paid (2,917,165) (3,281,810) (3,281,810)
--------------- --------------- ---------------
Net increase (decrease) in cash and temporary cash investments (807,993) (1,189,945) 1,673,556
Cash and temporary cash investments at beginning of year 1,240,992 2,430,937 757,381
--------------- --------------- ---------------
Cash and temporary cash investments at end of year $ 432,999 $ 1,240,992 $ 2,430,937
=============== =============== ===============
</TABLE>
The accompanying notes are an integral part of the financial statements.
<PAGE> - 20 -
CAPITAL SOURCE II L.P.-A
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1998
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. 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)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 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.
<PAGE> - 21 -
CAPITAL SOURCE II L.P.-A
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1998
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 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 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 $1,236,222 and $1,817,163 at
December 31, 1998, and December 31, 1997, 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)Comprehensive Income
In 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. The adopotion of SFAS 130 had no
impact on total Partners' Capital.
H)Segment Reporting
In 1998, the Partnership adopted Statement of Financial Accounting
Standards No. 131, "Disclosures about Segments of an Enterprise and
Related Information" (SFAS 131). SFAS 131 requires that a public business
enterprise report financial and descriptive information about its
reportable operating segments. The adoption of SFAS 131 did not have an
impact on the financial reporting of the Partnership as it is engaged
solely in the business of owning mortgages and holding equity interests
in real estate limited partnerships.
I)New Accounting Pronouncements
In June 1998, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No 133, "Accounting for Derivative
Instruments and Hedging Activities" (SFAS 133). This statement provides new
accounting and reporting standards for the use of derivative instruments.
Adoption of this statement is required by the Partnership effective
January 1, 2000. Management believes that the impact of such adoption will
not be material to the financial statements.
In April 1998, the Accounting Standards Executive Committee issued
Statement of Position 98-5, "Reporting on the Costs of
Start-Up Activities" (SOP 98-5). This statement requires costs of start-up
activities and organization costs to be expensed as incurred. Adoption of
this statement is required by the Partnership effective January 1, 1999.
Management intends to adopt the statement as required in fiscal 1999.
Management believes that the impact of such adoption will not have an
impact to the financial statements.
<PAGE> - 22 -
CAPITAL SOURCE II L.P.-A
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1998
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 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.
4. 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, 1998, there were no available-for-sale securities. At
December 31, 1998, the total amortized cost, gross unrealized holding gains
and aggregate fair value of held-to-maturity securities were $27,003,563,
$245,407, and $27,248,970, respectively.
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.
During May and August of 1998, the Partnership sold available-for-sale
mortgage-backed securities with an amortized cost of $879,911 for $915,012
thereby recognizing a gain of $35,101 on the sales.
<PAGE> - 23 -
CAPITAL SOURCE II L.P.-A
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1998
Descriptions of the Partnership's mortgage-backed securities held during the
year ended December 31, 1998, are as follows:
<TABLE>
<CAPTION>
Income
Number Interest Maturity Carrying Earned
Type of Security and Name Location of Units Rate Date Amount in 1998
- - ------------------------------- ------------------- ---------- ---------- ------------ -------------- ------------
<S> <C> <C> <C> <C> <C> <C>
Held-to-Maturity
FHA Loan:
Delta Crossing Charlotte, NC 178 9.10% 10/01/30 $ 6,505,857 $ 593,414
GNMA Certificates:
Crane's Landing Winter Park, FL 252 8.75% 12/15/30 10,176,802 892,610
Monticello Apartments Southfield, MI 106 8.75% 11/15/29 5,298,123 464,821
The Ponds at Georgetown Ann Arbor, MI 134 7.50% (1) 12/15/29 5,022,781 436,281
-------------- ------------
20,497,706 1,793,712
-------------- ------------
27,003,563 2,387,126
Availible-for-sale:
GNMA Certificates:
Pools of single-family properties 7.58% (2) 2008 to 2009 - (3) 39,230
-------------- ------------
Balance at December 31, 1998 $ 27,003,563 $ 2,426,356
============== ============
(1) During the fourth quarter of 1998, this GNMA Certificate was repaid and
a new GNMA Certificate was issued. The interest rate on the reissued GNMA
Certificate is 7.5% compared to 9% on the repaid GNMA Certificate.
(2) Represents effective yield to the Partnership.
(3) Reserve account asset.
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, 1998 Dec. 31, 1997 Dec. 31, 1996
--------------- --------------- ---------------
<S> <C> <C> <C>
Balance at beginning of year $ 28,213,364 $ 28,463,814 $ 28,737,672
Additions
Acquisition of GNMA Certificate 5,029,094 - -
Amortization of discount on mortgage-backed securities 1,471 1,397 1,470
Deductions
FHA Loan and GNMA principal payments received (271,807) (257,816) (253,258)
Disposition of mortgage-backed securities (5,046,437) - -
Proceeds from sale of available-for-sale securities (915,012) - -
Change in net unrealized holding gains on
available-for-sale mortgage-backed securities (42,211) 5,969 (22,070)
--------------- --------------- ---------------
Balance at end of year $ 27,003,563 $ 28,213,364 $ 28,463,814
=============== =============== ===============
</TABLE>
<PAGE> - 24 -
CAPITAL SOURCE II L.P.-A
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1998
5. 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, 1998 are as
follows:
<TABLE>
<CAPTION>
1998
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 - (407,218)
------------ ------------
Balance at December 31, 1998 $ - $ (407,218)
============ ============
</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, 1998 Dec. 31, 1997 Dec. 31, 1996
--------------- --------------- ---------------
<S> <C> <C> <C>
Balance at beginning of year $ - $ - $ -
Addition
Investment in Operating Partnerships 407,218 121,450 -
Deduction
Equity in losses of Operating Partnerships (407,218) (121,450) -
--------------- --------------- ---------------
Balance at end of year $ - $ - $ -
=============== =============== ===============
</TABLE>
<PAGE> - 25 -
CAPITAL SOURCE II L.P.-A
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1998
Combined Financial Statements of the Operating Partnerships are as follows:
CAPITAL SOURCE II L.P.
OPERATING PARTNERSHIPS BALANCE SHEETS
<TABLE>
<CAPTION>
Dec. 31, 1998 Dec. 31, 1997
--------------- ---------------
<S> <C> <C>
Assets
Investment in real estate:
Land $ 2,800,750 $ 2,800,750
Buildings 24,406,463 24,396,923
Personal Property 1,757,049 1,666,485
-------------- ---------------
28,964,262 28,864,158
Less accumulated depreciation (7,290,932) (6,598,576)
-------------- ---------------
Net investment in real estate 21,673,330 22,265,582
Cash and temporary cash investments, at cost
which approximates market value 632,149 491,562
Escrow deposits and property reserves 606,575 613,261
Interest and other receivables 19,437 7,442
Deferred mortgage issuance cost, net of
accumulated amortization 1,394,161 1,428,684
Other assets 193,964 234,560
-------------- ---------------
$ 24,519,616 $ 25,041,091
============== ===============
Liabilities and Partners' Capital (Deficit)
Liabilities
Accounts payable and accrued expenses $ 307,981 $ 850,743
Mortgage loan payable 27,186,893 27,164,788
Intercompany interest payable 294,222 247,487
Due to general partners and their affiliates 920,347 961,563
--------------- ---------------
28,709,443 29,224,581
--------------- ---------------
Partners' Capital (Deficit)
General Partners (4,189,827) (4,183,490)
Limited Partners - -
--------------- ---------------
(4,189,827) (4,183,490)
$ 24,519,616 $ 25,041,091
=============== ===============
</TABLE>
<PAGE> - 26 -
CAPITAL SOURCE II L.P.-A
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1998
<TABLE>
CAPITAL SOURCE II L.P.
OPERATING PARTNERSHIPS INCOME STATEMENTS
Dec. 31, 1998 Dec. 31, 1997 Dec. 31, 1996
--------------- --------------- ---------------
<S> <C> <C> <C>
Income
Rental income $ 5,220,888 $ 5,105,108 $ 4,854,898
Interest on temporary cash investments 19,993 13,084 20,781
Other income 351,218 198,870 154,855
--------------- --------------- ---------------
5,592,099 5,317,062 5,030,534
--------------- --------------- ---------------
Expenses
Real estate operating expenses 2,779,741 2,504,026 2,325,848
Depreciation expense 692,357 700,297 725,922
Property development and management fees - - 314
Interest expense 2,493,145 2,476,272 2,487,587
Amortization 46,008 48,768 48,819
--------------- --------------- ---------------
6,011,251 5,729,363 5,588,490
--------------- --------------- ---------------
Net Loss $ (419,152) $ (412,301) $ (557,956)
=============== =============== ===============
Net Loss allocated to:
General Partners (11,934) (290,851) (557,956)
Limited Partners (407,218) (121,450) -
--------------- --------------- ---------------
$ (419,152) $ (412,301) $ (557,956)
=============== =============== ===============
</TABLE>
<PAGE> - 27 -
<TABLE>
Financial Statements
CAPITAL SOURCE II L.P.
OPERATING PARTNERSHIPS STATEMENTS OF CASH FLOWS
For the For the For the
Year Ended Year Ended Year Ended
Dec. 31, 1998 Dec. 31, 1997 Dec. 31, 1996
--------------- --------------- ---------------
<S> <C> <C> <C>
Cash flows from operating activities
Net loss $ (419,152) $ (412,301) $ (557,956)
Adjustments to reconcile net loss to net cash
provided by operating activities
Depreciation and amortization 738,365 749,065 774,741
Property development and management fees - - 314
Decrease (increase) in interest and other receivables (11,995) (1,992) 10,467
Decrease (increase) in escrow deposits and property reserves 6,686 (125,385) 63,524
Decrease in other assets 13,654 (22,669) (21,816)
Increase (decrease) in accounts payable and accrued expenses (542,762) 110,274 22,040
Decrease in intercompany interest payable 46,735 (794) (728)
Increase (decrease) in due to general partners and their affiliates (41,216) (9,646) 15,090
--------------- --------------- ---------------
Net cash provided by operating activities (209,685) 286,552 305,676
--------------- --------------- ---------------
Cash flows from investing activities
Acquisition of real estate (9,540) - (60,663)
Acquisition of personal property (90,564) (68,819) (102,292)
--------------- --------------- ---------------
Net cash used in investing activities (100,104) (68,819) (162,955)
--------------- --------------- ---------------
Cash flows from financing activities
Principal payments on mortgage loan payable (141,789) (129,902) (118,650)
Capital contributions 407,218 121,450 -
Other, net 184,947 (904) (17,956)
--------------- --------------- ---------------
Net cash provided by (used in) financing activities 450,376 (9,356) (136,606)
--------------- --------------- ---------------
Net increase in cash and temporary cash investments 140,587 208,377 6,115
Cash and temporary cash investments at beginning of year 491,562 283,185 277,070
--------------- --------------- ---------------
Cash and temporary cash investments at end of year $ 632,149 $ 491,562 $ 283,185
=============== =============== ===============
</TABLE>
<PAGE> - 28 -
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
amounted to $50,000, $166,000 and $166,000 for the years ended December 31,
1998, 1997 and 1996 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 years
ended December 31, 1998, 1997 and 1996 amounted to $842,272, $494,165 and
$313,049, 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 $41,167, $31,924 and $4,933 for 1998, 1997
and 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.
7. 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, 1998 At December 31, 1997
----------------------------------- -----------------------------------
Carrying Estimated Carrying Estimated
Amount Fair Value Amount Fair Value
--------------- --------------- --------------- ---------------
<S> <C> <C> <C> <C>
Cash and temporary cash investments $ 432,999 $ 432,999 $ 1,240,992 $ 1,240,992
Investment in FHA Loan $ 6,505,857 $ 6,531,230 $ 6,538,424 $ 6,645,393
Investment in GNMA Certificates $ 20,497,706 $ 20,717,740 $ 21,674,940 $ 21,899,413
</TABLE>
<PAGE> - 29 -
8. Proposed Merger
Due to significant changes in the United States equity and real estate markets
in the Fall of 1998, the general partners of the Partnership have reevaluated
the terms of the proposed merger of the Partnership and Capital Source, L.P.
into a newly formed corporation that would have made opportunistic,
growth-oriented real estate investments that had the potential for higher than
average returns with correspondingly greater risks. The general partners have
decided to restructure the proposed transaction so that the resulting entity
is a publicly-traded limited partnership that will primarily invest in
residential apartment complexes and other commercial real estate. Therefore,
the investment objectives of the new limited partnership will be substantially
different than those of the originally proposed merger but similar to those of
the Partnership.
9. Legal Proceedings
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. At this time, the general partners are unable
to estimate the effect of the litigation on the financial statements of the
Partnership.
10. Summary of Unaudited Quarterly Results of Operations
<TABLE>
<CAPTION> First Second Third Fourth
From January 1, 1998, to December 31, 1998 Quarter Quarter Quarter Quarter
--------------- --------------- --------------- ---------------
<S> <C> <C> <C> <C>
Total income $ 634,350 $ 639,955 $ 296,136 (1) $ 530,887 (2)
Total expenses (417,488) (3) (273,959) (3) (158,660) (370,106) (3)
--------------- --------------- --------------- ---------------
Net income $ 216,862 $ 365,996 $ 137,476 $ 160,781
=============== =============== =============== ===============
Net income, basic and diluted, per BAC $ .06 $ .09 $ .03 $ .04
=============== =============== =============== ===============
</TABLE>
<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 (1) $ 646,693 $ 641,565
Total expenses (151,630) (148,583) (164,872) (354,431) (4)
--------------- --------------- --------------- ---------------
Net income $ 504,315 $ 380,735 $ 481,821 $ 287,134
=============== =============== =============== ===============
Net income, basic and diluted, per BAC $ .12 $ .10 $ .12 $ .07
=============== =============== =============== ===============
</TABLE>
(1) The Partnership had equity in losses of Operating Partnerships of $359,113
for the third quarter of 1998 and $121,450 for the second quarter of 1997.
<PAGE> - 30 -
(2) The Partnership earned less interest income during the quarter due
primarily to withdrawals from reserves to supplement monthly distributions
to BAC Holders, a reduction in the interest rate on The Ponds at
Georgetown GNMA Certificate (See Note 4), and an additional equity
contribution made to The Ponds at Georgetown Operating Partnership. In
addition, the Partnership had equity in losses of Operating Partnerships
of $48,105 for the quarter.
(3) The Partnership incurred expenses of approximately $186,000, $66,000,
$38,000 and $177,000 during the first, second, third and fourth quarters,
respectively, in conjunction with the proposed merger described in Note 8.
(4) The Partnership incurred additional expenses in connection with a review
of various options for restructuring to improve total investment returns
and provide liquidity to the Partnership's investors.
<PAGE> - 31 -
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: March 29, 1999
<PAGE> - 32 -
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: March 29 1999 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: March 29, 1999 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: March 29, 1999 By /s/ William S. Carter, M.D.*
William S. Carter, M.D.
Manager of America First Companies L.L.C.
Date: March 29, 1999 By /s/ Martin A. Massengale*
Martin A. Massengale
Manager of America First Companies L.L.C.
Date: March 29, 1999 By /s/ Alan Baer*
Alan Baer
Manager of America First Companies L.L.C.
Date: March 29, 1999 By /s/ Gail Walling Yanney*
Gail Walling Yanney
Manager of America First Companies L.L.C.
Date: March 29, 1999 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> - 33 -
EXHIBIT 24
POWER OF ATTORNEY
<PAGE> - 34 -
POWER OF ATTORNEY
The undersigned hereby appoints Michael Thesing as his agent and
attorney-in-fact for the purpose of executing and filing all reports on Form
10-K relating to the year ending December 31, 1998, and any amendments
thereto, required to be filed with the Securities and Exchange Commission by
the following persons:
America First Tax Exempt Investors, L.P.
America First Tax Exempt Mortgage Fund Limited Partnership
America First Apartment Investors, L.P.
Capital Source L.P.
Capital Source II L.P.-A
IN WITNESS WHEREOF, the undersigned has executed this Power of Attorney
on the 1st day of February, 1999.
/s/ Michael B. Yanney
Michael B. Yanney
<PAGE> - 35 -
POWER OF ATTORNEY
The undersigned hereby appoints Michael Thesing as his agent and
attorney-in-fact for the purpose of executing and filing all reports on Form
10-K relating to the year ending December 31, 1998 and any amendments
thereto, required to be filed with the Securities and Exchange Commission by
the following persons:
America First Tax Exempt Investors, L.P.
America First Tax Exempt Mortgage Fund Limited Partnership
America First Apartment Investors, L.P.
Capital Source L.P.
Capital Source II L.P.-A
IN WITNESS WHEREOF, the undersigned has executed this Power of Attorney
on the 1st day of February, 1999.
/s/ William S. Carter, M.D.
William S. Carter, M.D.
<PAGE> - 36 -
POWER OF ATTORNEY
The undersigned hereby appoints Michael Thesing as his agent and
attorney-in-fact for the purpose of executing and filing all reports on Form
10-K relating to the year ending December 31, 1998, and any amendments
thereto, required to be filed with the Securities and Exchange Commission by
the following persons:
America First Tax Exempt Investors, L.P.
America First Tax Exempt Mortgage Fund Limited Partnership
America First Apartment Investors, L.P.
Capital Source L.P.
Capital Source II L.P.-A
IN WITNESS WHEREOF, the undersigned has executed this Power of Attorney
on the 1st day of February, 1999.
/s/ Martin A. Massengale
Martin A. Massengale
<PAGE> - 37 -
POWER OF ATTORNEY
The undersigned hereby appoints Michael Thesing as his agent and
attorney-in-fact for the purpose of executing and filing all reports on Form
10-K relating to the year ending December 31, 1998, and any amendments
thereto, required to be filed with the Securities and Exchange Commission by
the following persons:
America First Tax Exempt Investors, L.P.
America First Tax Exempt Mortgage Fund Limited Partnership
America First Apartment Investors, L.P.
Capital Source L.P.
Capital Source II L.P.-A
IN WITNESS WHEREOF, the undersigned has executed this Power of Attorney
on the 1st day of February, 1999.
/s/ Alan Baer
Alan Baer
<PAGE> - 38 -
POWER OF ATTORNEY
The undersigned hereby appoints Michael Thesing as his agent and
attorney-in-fact for the purpose of executing and filing all reports on Form
10-K relating to the year ending December 31, 1998 and any amendments
thereto, required to be filed with the Securities and Exchange Commission by
the following persons:
America First Tax Exempt Investors, L.P.
America First Tax Exempt Mortgage Fund Limited Partnership
America First Apartment Investors, L.P.
Capital Source L.P.
Capital Source II L.P.-A
IN WITNESS WHEREOF, the undersigned has executed this Power of Attorney
on the 1st day of February, 1999.
/s/ Gail Walling Yanney
Gail Walling Yanney
<PAGE> - 39 -
POWER OF ATTORNEY
The undersigned hereby appoints Michael Thesing as his agent and
attorney-in-fact for the purpose of executing and filing all reports on Form
10-K relating to the year ending December 31, 1998 and any amendments
thereto, required to be filed with the Securities and Exchange Commission by
the following persons:
America First Tax Exempt Investors, L.P.
America First Tax Exempt Mortgage Fund Limited Partnership
America First Apartment Investors, L.P.
Capital Source L.P.
Capital Source II L.P.-A
IN WITNESS WHEREOF, the undersigned has executed this Power of Attorney
on the 1st day of February, 1999.
/s/ Mariann Byerwalter
Mariann Byerwalter
<PAGE> - 40 -
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-END> DEC-31-1998
<CASH> 432,999
<SECURITIES> 27,003,563
<RECEIVABLES> 266,820
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 27,801,832
<PP&E> 0
<DEPRECIATION> 0
<TOTAL-ASSETS> 27,801,832
<CURRENT-LIABILITIES> 650,310
<BONDS> 0
<COMMON> 0
0
0
<OTHER-SE> 27,151,522
<TOTAL-LIABILITY-AND-EQUITY> 27,801,832
<SALES> 0
<TOTAL-REVENUES> 2,132,961
<CGS> 0
<TOTAL-COSTS> 0
<OTHER-EXPENSES> 1,220,213
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> 929,220
<INCOME-TAX> 0
<INCOME-CONTINUING> 929,220
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 929,220
<EPS-PRIMARY> 0
<EPS-DILUTED> 0
</TABLE>
