CAPITAL MORTGAGE PLUS L P - 10-K Annual Report

Back to GetFilings.com

UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549

FORM 10-K
(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, 2001

OR

TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
- ------- EXCHANGE ACT OF 1934

Commission File Number 0-18491

CAPITAL MORTGAGE PLUS L.P.
--------------------------
(Exact name of registrant as specified in its charter)

Delaware 13-3502020
- -------------------------------- ---------------------
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)

625 Madison Avenue, New York, New York 10022
- --------------------------------------- ---------------------
(Address of principal executive offices) (Zip Code)

Registrant's telephone number, including area code: (212) 421-5333

Securities registered pursuant to Section 12(b) of the Act:

None

Securities registered pursuant to Section 12(g) of the Act:

Beneficial Assignment Certificates

Indicate by check mark whether the registrant: (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes X No
--- ---

Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of 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]

DOCUMENTS INCORPORATED BY REFERENCE

Registrant's prospectus dated May 10, 1989, as supplemented July 7, 1989,
January 8, 1990, February 9, 1990, May 18, 1990, and October 24, 1990, as filed
with the Commission pursuant to Rules 424(b) and 424(c) of the Securities Act of
1933, but only to the extent expressly incorporated by reference in Parts I, II,
III and IV.

Index to exhibits may be found on page 25
Page 1 of 72

PART I

Item 1. Business.

GENERAL

Capital Mortgage Plus L.P. (the "Registrant") is a limited partnership formed
under the laws of the State of Delaware on November 23, 1988. The sole general
partner of the Registrant is CIP Associates, Inc., a Delaware corporation (the
"General Partner"). The General Partner manages and controls the affairs of the
Registrant. See Item 10, Directors and Executive Officers of the Registrant,
below.

INVESTMENT OBJECTIVES

The Registrant's principal investment objectives are to: (i) preserve and
protect the Registrant's capital; (ii) provide quarterly cash distributions of
adjusted cash from operations; and (iii) provide additional distributions from
additional interest arising from participations in the annual cash flow of the
developments and/or the sale or refinancing of a development. There can be no
assurance that all of the objectives can be achieved.

The Registrant originated federally insured and co-insured first mortgage
construction and permanent loans ("Mortgages") to finance multi-family
residential rental properties ("Developments" and each a "Development")
developed by unaffiliated entities. All base interest and initially at least 90%
in the aggregate of the principal of the Mortgages in which the Registrant
invests are insured or coinsured by the Department of Housing and Urban
Development ("HUD") and Related Mortgage Corporation ("RMC"), an affiliate of
the General Partner. The remaining 10% of the Registrant's portfolio is
comprised of uninsured non-interest bearing equity loans secured by the
assignment of the debtor's interests in the Development made directly to the
same developers as the Mortgages for, among other purposes, defrayal of certain
specific cash requirements of the properties. The Registrant made five mortgage
loans in the aggregate amount of $26,158,190 and five non-interest bearing
equity loans in the aggregate amount of $3,062,135 in connection with five
multi-family projects. The Registrant is a closed-end Company that made its last
mortgage investment in March 1993 and does not expect to make any additional
investments.

The Registrant is engaged solely in the business of investing in Mortgages and
equity loans; therefore, presentation of industry segment information is not
applicable.

For detailed financial information pertaining to the Registrant see Item 8,
Financial Statements and Supplementary Data, below.

2

INVESTMENTS

The following table lists the Mortgages and equity loans as of February 28,
2002.

(1) The minimum interest rate shown above includes interest payable under the
first mortgage note plus additional interest payable pursuant to the terms of a
Limited Operating Guaranty agreement for Fieldcrest III Apartments
("Fieldcrest") and Holly Ridge II Apartments ("Holly Ridge") and the Additional
Interest Guaranty agreements for Mortenson Manor Apartments ("Mortenson") and
Windemere Apartments ("Windemere").

(2) The Mortenson and Windemere mortgage loans are co-insured by HUD and RMC.
The Fieldcrest and Holly Ridge mortgage loans are fully insured by HUD. As of
February 28, 2002, all loan amounts have been disbursed.

(3) Default interest payments in the aggregate amount of approximately $738,000
for the years ended December 31, 1993 through 2001 have not been received and,
as a result, the Registrant established an allowance for uncollectability which
equals approximately $693,000 and $656,000 at December 31, 2001 and 2000,
respectively.

(4) Default interest payments in the aggregate amount of approximately $342,000
for the years ended December 31, 1999 through 2001 and $130,000 for the year
ended December 31, 1996 have not been received and as a result, the Registrant
established an allowance for uncollectability which equals approximately
$472,000 and $257,000 at December 31, 2001 and 2,000, respectively.

(5) A Contingent interest payment of $46,407 for the period January 2001 to
December 2001 is expected to be received during the second quarter of 2002.

(6) Default and Contingent interest payments, respectively, of $52,252 and
$8,262 and $51,844 and $34,561 for the periods July 2001 to December 2001 and
July 2000 to December 2000 are expected to be received during the second quarter
of 2002 and $34,561 was received in the first quarter of 2002, respectively.

(7) All Mortgages and equity loans have call provisions effective ten years
following final endorsement and a grace period. The Registrant, in order to
enforce such provisions, would be required to terminate the mortgage insurance
contract with FHA (and/or the coinsurer) with respect to each of the mortgages
not later than the accelerated payment date. Since the exercise

3

of such option would be at the Registrant's discretion, it is intended to be
exercised only where the Registrant determines that the value of the Development
has increased by an amount which would justify accelerating payment in full and
assuming the risks of foreclosure if the mortgagor failed to make the
accelerated payment. The Registrant presently expects to dispose of such
Mortgages and equity loans within 10 to 15 years after acquisition.

The following is the interest income from Mortgages as a percentage of total
revenues.

COMPETITION

The Registrant's business is affected by competition to the extent that the
underlying properties from which its borrowers derive interest and principal
payments may be subject to competition from neighboring properties. In
particular, the receipt of additional interest and the repayment of the equity
loans, neither of which is insured or guaranteed by government or
quasi-government agencies, is dependent upon the economic performance of the
underlying properties which could be adversely affected by competitive
conditions.

EMPLOYEES

The Registrant does not directly employ anyone. All services are performed for
the Registrant by its General Partner and that entity's affiliates. The General
Partner receives compensation in connection with such activities as set forth in
Items 11 and 13. In addition, the Registrant reimburses the General Partner and
certain of its affiliates for expenses incurred in connection with the
performance by their employees of services for the Registrant in accordance with
the Partnership Agreement.

Item 2. Properties.

The Registrant does not own or lease any property.

Item 3. Legal Proceedings.

There are no material legal proceedings pending against or involving the
Registrant.

Item 4. Submission of Matters to a Vote of Security Holders.

No matters were submitted to a vote of security holders during the fiscal year
covered by this report through the solicitation of proxies or otherwise.

4

PART II

Item 5. Market for the Registrant's Common Equity and Related Security Holder
Matters.

As of December 31, 2001, the Registrant had issued and outstanding 1,836,660
limited partnership interests ("Limited Partnership Interests"). All of the
issued and outstanding Limited Partnership Interests are issued to Related FI
BUC$ Associates, Inc. (the "Assignor Limited Partner"), which has issued
Beneficial Assignment Certificates ("BACs"). Each BAC represents all of the
economic and virtually all of the material ownership rights attributable to a
Limited Partnership Interest held by the Assignor Limited Partner. BACs may be
converted into Limited Partnership Interests at no cost to the holder, but
Limited Partnership Interests are not convertible back into BACs. There is
currently no established public trading market for BACs and it is not
anticipated that BACs will be listed for trading on any securities exchange or
included for quotation on the Nasdaq National Market.

The Registrant has 3,501 registered holders of an aggregate of $1,836,660 BACs,
as of March 1, 2002.

All of the Registrant's general partnership interests, representing an aggregate
capital contribution of $1,000, are held by the General Partner.

There are no material legal restrictions upon the Registrant's present or future
ability to make distributions in accordance with the provisions of the
Registrant's Amended and Restated Agreement of Limited Partnership.

DISTRIBUTION INFORMATION

Cash distributions per BAC made to the limited partners or BACs holders for the
following quarters in 2001, 2000 and 1999 were as follows:

Quarterly distributions are made 45 days following the close of the calendar
quarter.

A total of $9,391,855 was distributed to the limited partners or BACs holders
during the years 2001, 2000 and 1999. The Registrant utilized the original
working capital reserve, in the aggregate amount of $477,532, for distributions
from 1989 through 1991, which was considered to be a return of capital. An
additional working capital reserve of approximately $2,800,000 was established
from uninvested offering proceeds, a portion of which was applied to pay a part
of the 2001, 2000 and 1999 distributions (which was considered to be a return of
capital). Approximately $396,000, $274,000 and $4,686,000 (see below) paid to
the limited partners or BACs holders in each of the years ended December 31,
2001, 2000 and 1999, respectively, represented a return of capital. A total of
$145,290 was distributed to the General Partner during 2001, 2000 and 1999.

The 1998 fourth quarter distribution was paid on February 14, 1999, and was
funded primarily by the Willow Trace repayment proceeds, $2.45 per BAC of which
was considered to be a return of capital.

5

Item 6. Selected Financial Data.

The information set forth below presents selected financial data of the
Registrant. Additional financial information is set forth in the audited
financial statements and footnotes thereto contained in Item 8 hereof.

6

Item 7. Management's Discussion and Analysis of Financial Condition and Results
of Operations.

CAPITAL RESOURCES AND LIQUIDITY

Sources of Registrant funds included interest earned on (1) investments in
Mortgages and equity loans (see also Item 1, Business) and (2) the working
capital reserve.

During the year ended December 31, 2001, cash and cash equivalents of the
Registrant increased by approximately $191,000 due to cash provided by operating
activities ($1,678,000), collections of principal on Mortgages and equity loans
approximately ($156,000) and distributions paid to partners and BACs holders
($1,643,000). Included in the adjustments to reconcile the net income to cash
flow provided by operating activities is amortization of approximately $218,000.

Subject to the future performance of the Registrant's investments and results of
operations, the General Partner anticipates that there will be sufficient cash
from operations generated to cover anticipated expenses in 2002 and to fund
future distributions at the same accrued level paid in 2001.

Distributions of approximately $1,611,000 and $1,613,000 were made to the
limited partners or BACs holders during the years ended December 31, 2001 and
2000 were made from adjusted cash flow from operations and, to a lesser extent,
from working capital reserves which is considered to be a return of capital.
Approximately $33,000 was distributed to the General Partner in each of the
years ended December 31, 2001 and 2000, respectively.

Management is not aware of any trends or events, commitments or uncertainties
that will impact liquidity in a material way. Management believes the only
impact would be from laws that have not yet been adopted. All base interest and
the principal of the Registrant's investments in Mortgages are insured or
co-insured by HUD and a private mortgage lender (which is an affiliate of the
General Partner). The Registrant's investments in uninsured non-interest bearing
equity loans (which represent approximately 10% of the Registrant's portfolio)
are secured by a Registrant interest in properties which are diversified by
location so that if one area of the country is experiencing downturns in the
economy, the remaining properties may be experiencing upswings. However, the
geographic diversification of the portfolio may not protect against a general
downturn in the national economy.

RESULTS OF OPERATIONS

2001 VS. 2000

Results of operations for the years ended December 31, 2001 and 2000 consisted
primarily of interest income of $1,944,000 and $1,995,000, respectively, earned
from investments in Mortgages.

Interest income from temporary investments decreased approximately $8,000 for
the year ended December 31, 2001 as compared to 2000 primarily due to lower
interest rates in 2001.

General and administrative decreased approximately $15,000 for the year ended
December 31, 2001 as compared to 2000 primarily due to a decrease in legal and
printing costs in 2001.

A provision for bad debts of approximately $262,000 and $175,000 was charged for
the years ended December 31, 2001 and 2000, respectively, representing the 2001
Guaranteed Interest due from Mortenson and the 2001 and 2000 Guaranteed Interest
due from Windemere and

7

2000 Guaranteed Interest due from Mortenson and 1999 Guaranteed Interest due
from Windemere.

2000 VS. 1999

Results of operations for the years ended December 31, 2000 and 1999 consisted
primarily of interest income of $1,995,000 and $1,988,000, respectively, earned
from investments in Mortgages.

Interest income from temporary investments decreased approximately $16,000 for
the year ended December 31, 2000 as compared to 1999 primarily due to higher
cash and cash equivalents balances in 1999 resulting from the cash received from
the repayment of the Willow Trace mortgage in 1998. A significant amount of the
cash received from the repayment of the Willow Trace mortgage was distributed to
BACs holders on February 15, 1999.

General and administrative increased approximately $21,000 for the year ended
December 31, 2000 as compared to 1999 primarily due to an increase in printing
costs and accounting expense in 2000.

A provision for bad debts of approximately $175,000 and $55,000 was charged for
the years ended December 31, 2000 and 1999, respectively, representing the 2000
Guaranteed Interest due from Mortenson and the 1999 Guaranteed Interest due from
Windemere and the 1999 Guaranteed Interest due from Mortenson, respectively.

Item 7A. Quantitative and Qualitative Disclosure About Market Risk.

Not Applicable

8

Item 8. Financial Statements and Supplementary Data.

9

INDEPENDENT AUDITORS' REPORT

To the Partner of
Capital Mortgage Plus L.P.

We audited the accompanying statements of financial condition of Capital
Mortgage Plus, L.P. (a Delaware Limited Partnership) as of December 31, 2001 and
2000 and the related statements of income, changes in partners' capital
(deficit) and cash flows for each of the three years in the period ended
December 31, 2001. These financial statements are the responsibility of the
General Partners. Our responsibility is to express an opinion on these financial
statements based on our audits.

We conducted our audits in accordance with auditing standards generally accepted
in the United States of America. 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 the General Partner, 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 Mortgage Plus, L.P. as
of December 31, 2001 and 2000, and the results of its operations and its cash
flows for each of the three years in the period ended December 31, 2001, in
conformity with accounting principles generally accepted in the United States of
America.

Bethesda, Maryland /s/REZNICK, FEDDER & SILVERMAN
March 25, 2002

10

CAPITAL MORTGAGE PLUS L.P.
(a limited partnership)
STATEMENTS OF FINANCIAL CONDITION

See accompanying notes to financial statements.

11

CAPITAL MORTGAGE PLUS L.P.
(a limited partnership)
STATEMENTS OF INCOME

See accompanying notes to financial statements.

12

CAPITAL MORTGAGE PLUS L.P.
(a limited partnership)
STATEMENTS OF CHANGES IN PARTNERS' CAPITAL (DEFICIT)
FOR THE YEARS ENDED DECEMBER 31, 2001, 2000 and 1999

See accompanying notes to financial statements.

13

CAPITAL MORTGAGE PLUS L.P.
(a limited partnership)
STATEMENTS OF CASH FLOWS

See Accompanying Notes to Financial Statements.

14

CAPITAL MORTGAGE PLUS L.P.
(a limited partnership)
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 2001, 2000 and 1999

NOTE 1 - General

Capital Mortgage Plus L.P., a Delaware limited partnership (the "Partnership")
commenced a public offering (the "Offering") on May 10, 1989 of 5,000,000
($100,000,000) Beneficial Assignment Certificates ("BACs") representing
assignments of limited partnership interests. The BACs represent an assignment
of all of the economic and all of the material ownership rights attributable to
the limited partnership interests in the Partnership. The BACs holders have
virtually the same rights and, for all practical purposes, are limited partners
of the Partnership.

Pursuant to the Offering, the Partnership received $36,733,200 of gross proceeds
from the BACs holders representing the issuance of 1,836,660 BACs. The final
closing of the Offering occurred on May 23, 1991 and no further issuance of BACs
is anticipated.

The Partnership was organized on November 23, 1988 and will continue until
December 31, 2041 unless terminated sooner under the provisions of its
partnership agreement.

The general partner of the Partnership is CIP Associates, Inc., a Delaware
corporation (the "General Partner"). Related FI BUC$ Associates, Inc. is the
Assignor Limited Partner of the Partnership. CIP Associates, Inc. and Related FI
BUC$ Associates, Inc. are under substantially common ownership.

The Partnership was formed to invest in insured or guaranteed mortgage
investments. The Partnership has invested in first mortgage construction and
permanent loans ("Mortgages") to finance multifamily residential rental
properties ("Developments") developed by unaffiliated entities. A substantial
portion of the Mortgages provide additional interest based on the annual cash
flow from the Developments and the proceeds of prepayments, sales or other
dispositions. All base interest and initially at least 90% of the principal of
the Mortgages is insured or coinsured by the Department of Housing and Urban
Development ("HUD") and a private mortgage lender (which is an affiliate of the
General Partner). The Partnership has also invested in uninsured equity loans
made directly to developers of developments on which the Partnership holds a
first mortgage.

Net income and distributions from operations of the Partnership are allocated 2%
to the General Partner and 98% to the limited partners, until the limited
partners have received an 11% per annum non-cumulative non-compounded return on
their adjusted contributions as defined in the Amended and Restated Agreement of
Limited Partnership. Thereafter, net income and distributions will be allocated
90% to the limited partners and 10% to the General Partner. Distributions of
disposition proceeds are allocated 1% to the General Partner and 99% to the
limited partners until each limited partner has received an amount equal to his
original contribution plus an amount which, when added to all prior
distributions equals a 7% per annum cumulative non-compounded return on his
adjusted contribution; then 2% and 98% of disposition proceeds, until each
limited partner has received an amount which, when added to all prior
distributions equals an 11% per annum cumulative non-compounded return on his
adjusted contribution; and thereafter 10% to the General Partner and 90% to the
limited partners.

The distributions per BAC were approximately $.88 for 2001, 2000 and 1999. The
2001, 2000 and 1999 distributions were made from adjusted cash flow from
operations including return of capital due to principal amortization in
connection with its mortgage investments and to a

15

lesser extent were supplemented from working capital reserves, which was
considered to be a return of capital.

NOTE 2 - Accounting Policies

a) Basis of Accounting

The books and records of the Partnership are maintained on the accrual basis of
accounting in accordance with generally accepted accounting principles ("GAAP").

The preparation of financial statements in conformity with GAAP requires the
General Partner to make estimates and assumptions that affect the reported
amounts of assets and liabilities and the disclosure of contingent assets and
liabilities at the date of the financial statements as well as the reported
amounts of revenues and expenses during the reporting period. Significant
estimates are made when accounting for the allowance for the interest
receivable. Actual results could differ from those estimates.

Acquisition expenses incurred for the investment of Mortgages have been
capitalized and are included in loan origination costs, which are amortized over
the average expected lives of the respective mortgages when acquired and written
off when the loan is repaid.

The equity loans are considered to be premiums paid to obtain the Mortgages and
are amortized over the average expected lives of the respective Mortgages.

Interest rate buydowns are amortized as an adjustment to the effective interest
rate over the average expected lives of the respective Mortgages.

b) Cash and Cash Equivalents
Cash and cash equivalents include temporary investments with original maturity
dates of less than 3 months when acquired and are carried at cost plus accrued
interest, which approximates market.

c) Income Taxes
The Partnership is not required to provide for, or pay, any federal income
taxes. Income tax attributes that arise from its operation are passed directly
to the individual partners. The Partnership may be subject to state and local
taxes in jurisdictions in which it operates.

d) Revenue Recognition
Interest income on the mortgage loans consists of contingent and non-contingent
interest as defined in the mortgage notes and other additional interest
agreements. Non-contingent interest consists of base and default interest, which
is recognized as earned. Contingent interest is based on the development's cash
flows and is recognized when received.

16

CAPITAL MORTGAGE PLUS L.P.
(a limited partnership)
NOTES TO FINANCIAL STATEMENTS
December 31, 2001, 2000 and 1999
(Unaudited)

Note 3 - Investments in Loans

Information relating to investments in Mortgages and equity loans as of December
31, 2001 and 2000 is as follows:

17

CAPITAL MORTGAGE PLUS L.P.
(a limited partnership)
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 2001, 2000 and 1999

(A) Base interest on the Mortgages is that amount that is insured/co-insured by
HUD and is being shown net of service fee.

(B) Default Interest is the minimum amount due over the base rate, and is not
contingent upon cash flow. This interest is secured by partnership interests in
the borrower.

(C) Annual Yield is the amount over the default rate and is contingent upon
property cash flow.

(D) Cash Flow Participation is the percent of cash flow due to the Partnership
after payment of the Annual Yield and is contingent upon property cash flow.
Fieldcrest provided sufficient cash flow in 1999 to pay the partnership cash
flow participation during 1999 and 2000.

(E) The Investments in Loans amount reflects the unpaid balance of the Mortgages
and the unamortized balance of the equity loans in the amounts of $20,651,303
and $351,069 respectively, at December 31, 2001 and $20,807,677 and $549,747,
respectively, at December 31, 2000.

The Mortenson Manor and Windemere Mortgages are co-insured by HUD and Related
Mortgage Corporation ("RMC"), an affiliate of the General Partner. The
Fieldcrest III and Holly Ridge II Mortgages are insured by HUD.

In addition to the interest rate payable, the Partnership will be entitled to
payment of 30% of cash flow, if any, remaining after payment of the permanent
loan interest, accrued interest and proceeds received by the local partnership
from a sale or refinancing.

18

The equity loans are non-interest bearing and are secured by the assignment of
the owner/developers' interests in the development's. The equity loans are not
insured by HUD or any other party and, for financial statement reporting
purposes, are considered to be premiums paid to obtain the Mortgages. These
premiums are amortized over the average expected lives of the respective
Mortgages.

At December 31, 2001, all of the loans due to the Partnership are current with
respect to their Federal Housing Authority ("FHA") mortgage obligations.
Mortenson has not paid its default interest of approximately $93,000, $39,000
and $53,000 for the years ended December 31, 2001, 2000 and 1999, respectively.
During the first quarter of 2001 and the fourth quarter of 1999, the Partnership
received default interest of approximately $42,000 and $40,000 representing
partial payment for 1999 and 1998. Windmere has not paid its default interest of
approximately $88,000, $126,000 and $127,000 for the years ended December 31,
2001, 2000 and 1999. Hollyridge II has not paid its default interest of
approximately $86,000 for the year ended December 31, 2000. During the first
quarter of 2002, the Partnership received default interest of approximately
$86,000 representing the payment for 2000. As a result, an allowance for
uncollectability relating to the default interest amounted to approximately
$1,165,000 and $913,000 at December 31, 2001 and 2000, respectively.

Previously, the operations of Mortenson were not able to support the payment of
the required interest. Accordingly, effective January 1, 1995 the Partnership
entered into a modification agreement whereby the annual yield was modified to a
cumulative yield of 9.4% per annum from the Permanent Loan Date and the default
interest rate was redefined as 8.43% per annum. The modification agreement also
provided that pre-1995 accrued interest not accrue further interest on and after
January 1, 1995, and shall be paid solely out of Capital Proceeds prior to the
calculation of participation percentages. Mortenson also agreed to defer the
management fee payable up to the default interest rate. Pursuant to this
modification agreement, default interest for 2001, 2000 and 1999 of
approximately $93,000, $94,000 and $94,000, has been accrued and approximately
$48,000, $39,000 and $53,000 for 2001, 2000 and 1999 has been included in the
allowance account.

NOTE 4 - Related Parties

The costs incurred to related parties for the years ended December 31, 2001,
2000 and 1999 were as follows:

(a) A Partnership management fee for managing the affairs of the Partnership
equal to .5% per annum of invested assets is payable out of cash flow to the
General Partner and years ended December 31, 2001, 2000 and 1999, payments of
approximately $126,000, $126,000 and

19

$126,000 were made, respectively. At both December 31, 2001 and 2000, a balance
of approximately $32,000 was due to the General Partner for these fees.

(b) The General Partner and its affiliates perform services for the Partnership
which include, but are not limited to: accounting and financial management,
registrar, transfer and assignment functions, asset management; investor
communications, printing services and other administrative services. The amount
of reimbursement from the Partnership is limited by the provisions of the
Partnership Agreement. An affiliate of the General Partner performs asset
monitoring services for the Partnership. These asset monitoring services include
site visits and evaluations of the performance of the properties securing the
loans. During the years ended December 31, 2001, 2000 and 1999, payments of
approximately $41,000, $83,000 and $84,000 were made, respectively, relating to
these costs. As of December 31, 2001 and 2000, the General Partner and its
affiliates were due approximately $41,000 and $15,000, respectively.

RMC is a co-insurer on the Mortenson and Windemere Mortgages in which the
Partnership has invested. RMC is entitled to a mortgage insurance premium which
is paid by the mortgagors.

NOTE 5 - Concentration of Credit Risk

The Partnership maintains its cash in several banks which are insured by the
Federal Deposit Insurance Corporation (FDIC) for a balance up to $100,000. At
times during 2001, 2000 and 1999, the account balance exceeded the FDIC limit.

NOTE 6 - Fair Value of Financial Instruments

Financial Accounting Standards Board SFAS No. 107, "Disclosures about Fair Value
of Financial Instruments," requires that the estimated fair value of financial
instruments, as defined by SFAS No. 107, be disclosed. Financial instruments are
defined as cash, evidence of an ownership interest in an entity or a contract
which creates obligations and rights to exchange cash and/or other financial
instruments. SFAS No. 107 also requires disclosures of the methods and
significant assumptions used to estimate the fair value of financial
instruments.

Considerable judgment is required in interpreting data to develop the estimates
of fair value. Accordingly, the estimates presented herein are not necessarily
indicative of the amounts that the Partnership could realize in a current market
exchange. The use of different market assumptions and/or estimation
methodologies may have a material effect on the estimated fair value amounts.

The following methods/assumptions were used to estimate the fair value of each
class of financial instrument:

CASH AND CASH EQUIVALENTS

Fair value is determined to be the carrying value because each class of
financial instrument matures in three months or less and does not represent
unanticipated credit concerns.

INVESTMENTS IN LOANS

At December 31, 2001, the estimated carrying value of the Mortgages and equity
loans approximated fair value. The estimated fair values at December 31, 2001
were based on internal

20

valuations of the four properties collateralizing these loans. Fair value
estimates are made at a specific point in time, based on relevant market
information and information about the financial instrument which sets forth the
terms of a loan. This estimate is subjective in nature and involves
uncertainties and matters of significant judgment. Changes in assumptions could
significantly affect estimates. Due to the property-specific nature of the loans
and the lack of a ready market for such investments, this fair value estimate
does not necessarily represent the amount which the Partnership could realize
upon a current sale of its investments.

NOTE 7 - Subsequent Event

On February 14, 2002, distributions of $406,229 and $8,290 were paid to BAC
holders and the General Partner, respectively, representing the 2001 fourth
quarter distributions.

21

Item 9. Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure.

None.
PART III

Item 10. Directors and Executive Officers of the Registrant.

The Registrant has no directors or executive officers. The Registrant's affairs
are managed and controlled by the General Partner. The General Partner was
organized in Delaware in November 1988. The executive officers and director of
the General Partner have held their positions as indicated below. Certain
information concerning the director and executive officers of the General
Partner is set forth below.

The Registrant, the General Partner and its director and executive officers, and
any BACs holder holding more than ten percent of the Registrant's BACs are
required to report their initial ownership of such BACs and any subsequent
changes in that ownership to the Securities and Exchange Commission on Forms 3,
4 and 5. Such executive officers, directors (and ten percent holders) are
required by Securities and Exchange Commission regulators to furnish the
Registrant with copies of all Forms 3, 4 or 5 they file. The Registrant is not
aware of any BACs holders who own more than ten percent of the BACs. All of
these filing requirements were satisfied by the officers and director of the
General Partner on a timely basis. In making these disclosures, the Registrant
has relied solely on written representations of the General Partner's director
and executive officers or copies of the reports they have filed with the
Securities and Exchange Commission during and with respect to its most recent
fiscal year.

CIP Associates Inc.

NAME POSITION POSITION HELD SINCE
---- -------- -------------------
Stephen M. Ross Director 1988

Stuart J. Boesky Senior Vice President 1988

Alan P. Hirmes Senior Vice President 1988

Glenn F. Hopps Treasurer 1998

Teresa Wicelinski Secretary 1998

STEPHEN M. ROSS, 61, is a Director of the General Partner. Mr. Ross is President
of The Related Companies, L.P. He graduated from The University of Michigan with
a Bachelor of Business Administration degree and from Wayne State School of Law.
Mr. Ross then received a Master of Law degree in taxation from New York
University School of Law. He joined the accounting firm of Coopers & Lybrand in
Detroit as a tax specialist and later moved to New York, where he worked for two
large Wall Street investment banking firms in their real estate and corporate
finance departments. Mr. Ross formed The Related Companies, Inc. ("Related") in
1972, to develop, manage, finance and acquire subsidized and conventional
apartment developments. To date, Related has developed multi-family properties
totaling in excess of 25,000 units, all of which it manages. Mr. Ross also
serves on the Board of Trustees of Charter Municipal Mortgage Acceptance Company
("Charter Mac") which is a public company managed by an affiliate of the General
Partner.

22

STUART J. BOESKY, 45, is a Vice President of the General Partner. Mr. Boesky
practiced real estate and tax law in New York City with the law firm of Shipley
& Rothstein from 1984 until February 1986 when he joined Capital where he
presently serves as Managing Director. From 1983 to 1984 Mr. Boesky practiced
law with the Boston law firm of Kaye, Fialkow Richard & Rothstein (which
subsequently merged with Strook & Strook & Lavan) and from 1978 to 1980 was a
consultant specializing in real estate at the accounting firm of Laventhol &
Horwath. Mr. Boesky graduated from Michigan State University with a Bachelor of
Arts degree and from Wayne State School of Law with a Juris Doctor degree. He
then received a Master of Law degree in Taxation from Boston University School
of Law. Mr. Boesky also serves on the Board of Trustees of CharterMac and
American Mortgage Acceptance Company and the Board of Directors of Aegis
Reality, Inc. ("Aegis"), each of which public companies is managed by an
affiliate of the General Partner.

ALAN P. HIRMES, 47, is a Vice President of the General Partner. Mr. Hirmes has
been a Certified Public Accountant in New York since 1978. Prior to joining
Capital in October 1983, Mr. Hirmes was employed by Weiner & Co., certified
public accountants. Mr. Hirmes is also a Managing Director of Capital. Mr.
Hirmes graduated from Hofstra University with a Bachelor of Arts degree. Mr.
Hirmes also serves on the Board of Directors of Aegis and Board of Trustees of
CharterMac.

GLENN F. HOPPS, 39, joined Related in December, 1990, and prior to that date was
employed by Marks Shron & Company and Weissbarth, Altman and Michaelson,
certified public accountants. Mr. Hopps graduated from New York State University
at Albany with a Bachelor of Science Degree in Accounting.

TERESA WICELINSKI, 36, joined Related in June 1992, and prior to that date was
employed by Friedman, Alprin & Green, certified public accountants. Ms.
Wicelinski graduated from Pace University with a Bachelor of Arts Degree in
Accounting.

There are no family relationships between the foregoing director and/or
executive officers.

23

Item 11. Executive Compensation.

The Registrant has no officers or directors. The Registrant does not pay or
accrue any fees, salaries or other forms of compensation to directors or
officers of the General Partner for their services. The director and certain
officers of the General Partner receive compensation from the General Partner
and its affiliates for services performed for various affiliated entities which
may include services performed for the Registrant. Such compensation may be
based in part on the performance of the Registrant; however, the General Partner
believes that any compensation attributable to services performed for the
Registrant is immaterial. See also Note 4-Related Parties, in Notes to the
Financial Statements, included in Item 8 above.

Item 12. Security Ownership of Certain Beneficial Owners and Management.

As of March 1, 2002, no person was known by the Registrant to be the beneficial
owner of more than five percent of the Limited Partnership Interests and/or
BACs; and neither the General Partner nor any director or officer of the General
Partner owns any Limited Partnership Interests or BACs.

As of March 1, 2002, the director and officers of the General Partner as a group
own, in the aggregate, 95.2% of the common stock of CIP Associates Inc.

Item 13. Certain Relationships and Related Transactions.

The Registrant has and will continue to have certain relationships with the
General Partner and its affiliates, as discussed in Item 11, Executive
Compensation. However, there have been no direct financial transactions between
the Registrant and the director and/or officers of the General Partner. See Note
4-Related Parties, in Notes to the Financial Statements, included in Item 8
above.

24

PART IV

27

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 MORTGAGE PLUS L.P.
(Registrant)

By: CIP ASSOCIATES, INC.
General Partner

Date: March 29, 2002 By: /s/ Alan P. Hirmes
------------------
Alan P. Hirmes
Senior Vice President
(Principal Executive and
Financial Officer)

28

Pursuant to the requirements of the Securities Exchange Act of 1934, as amended,
this report has been signed by the following persons on behalf of the registrant
and in the capacities and on the dates indicated:

29

WINDEMERE DEVELOPMENT, INC

Financial Statements
December 31, 2001 and 2000

CONTENTS

Independent Auditors' Report

Financial Statements

Balance Sheets

Statements of Income

Statements of Changes in Stockholders' Equity

Statements of Cash Flows

Notes to Financial Statements

30

INDEPENDENT AUDITORS' REPORT

Board of Directors
Windemere Development, Inc.
Wichita, Kansas

We have audited the accompanying balance sheets of Windemere Development, Inc.
(a subchapter S corporation), as of December 31, 2001 and 2000, and the related
statements of income, changes in stockholders' deficit and cash flows for the
years then ended. These financial statements are the responsibility of the
Company's management. Our responsibility is to express an opinion on these
financial statements based on our audit.

We conducted our audit in accordance with auditing standards generally accepted
in the United States of America. 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 audit provides 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 Windemere Development, Inc., as
of December 31, 2001 and 2000, and the results of its operations, changes in
stockholders' deficit and cash flows for the years then ended in conformity with
accounting principles generally accepted in the United States of America.

/s/ Peterson, Peterson & Goss L.C.

March 4, 2002

31

WINDEMERE DEVELOPMENT, INC.
Balance Sheets
December 31, 2001 and 2000

See notes to financial statements.

32

WINDEMERE DEVELOPMENT, INC.
Balance Sheets
December 31, 2001 and 2000

See notes to financial statements.

33

WINDEMERE DEVELOPMENT, INC.
Statements of Income
Years Ended December 31, 2001 and 2000

See notes to financial statements.

34

WINDEMERE DEVELOPMENT, INC.
Statements of Changes in Stockholders' Equity (Deficit)
Years Ended December 31, 2001 and 2000

See notes to financial statements.

35

WINDEMERE DEVELOPMENT, INC.
Statements of Cash Flows
Years Ended December 31, 2001 and 2000

See notes to financial statements.

36

WINDEMERE DEVELOPMENT, INC.
Statements of Cash Flows
Years Ended December 31, 2001 and 2000

See notes to financial statements.

37

WINDEMERE DEVELOPMENT, INC.
Notes to Financial Statements
December 31, 2001 and 2000

1. Summary of Significant Accounting Policies

METHOD OF ACCOUNTING

The Company presents it's financial statements in accordance with
accounting principles generally accepted in the United States of America.

HISTORY AND BUSINESS ACTIVITY

Windemere Development, Inc. was founded in 1991 to develop and operate a
206-unit apartment complex in Wichita, Kansas, known as Windemere at
Tallgrass.

The apartments are located at 8220 East Oxford Circle, Wichita, Kansas
67226 and consist of one and two bedroom units.

PROPERTY AND EQUIPMENT

Depreciation is computed by using the straight-line method over the
following estimated useful lives:

Buildings - 40 years
Landscape improvements - 20 years
Furniture and equipment - 10 years

Expenditures for maintenance and repairs are charged to income as
incurred. Expenditures materially extending the useful lives of assets or
increasing their productivity are capitalized.

INCOME TAXES

An income tax provision has not been included in the financial statements
since the shareholder reports the income or loss of the Company on his
respective income tax return.

CASH AND CASH EQUIVALENTS

The Company considers all highly liquid investments with original
maturities of three months or less to be cash equivalents.

USE OF ESTIMATES

The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect certain reported amounts and disclosures.
Accordingly, actual results could differ from those estimates.

38

1. Summary of Significant Accounting Policies (continued)

ADVERTISING

The Company follows the policy of charging the costs of advertising to
expense as incurred. Advertising expense was $11,610 and $10,711 for the
years ended December 31, 2001 and 2000, respectively.

2. Restricted Deposits and Funded Reserves

The Company has deposited with the lender the following amounts:

An evaluation of the adequacy of certain escrows is as follows:

Estimated amount required as of December 31, 2001 and 2000 for future
payment of:

3. Tenant Security Deposits and Funded Reserves

Tenant security deposits are held in a separate account in the name of the
project. The total held in the account is $6,583 more than the deposits
held for tenants. The account consists of interest bearing deposits and a
mutual fund that has been adjusted to market value at December 31, 2001.

4. Reserve for Replacements

In accordance with the provisions of the Regulatory Agreement restricted
cash is held by the mortgagee to be used for replacement of property with
the approval of HUD as follows:

39

4. Reserve for Replacements (continued)

5. Long-Term Liabilities

Long-term debt at December 31, 2001 and 2000 consisted of the following
obligations:

Maturities of debt are as follows:

40

6. Accrued Real Estate Taxes

Accrued real estate taxes at December 31, 2001 consist of the following:

7. Related Party Transactions

Gaddis Properties, Inc., a related entity controlled by Jerry A. Gaddis,
manages the Apartments. Under the terms of the management agreement with
Gaddis Properties, Inc., a management fee not in excess of 6% of cash
basis rental revenue, is payable monthly for management services. The
total management fees earned in 2001 were $74,724.

The following summarizes other related party transactions for 2001:

8. Operations

The project has incurred increasing accrual basis operating losses over
the last two years. Management has maintained positive cash flow by
deferring payment of management fees and reducing salaries. Occupancy
rates have increased slightly during the year. Management has also been
researching lower rate financing for the project. The accrued management
fees in the amount of $210,087 are not expected to require payment during
the next year. Based on terms in the loan agreement, $536,660 of the
accrued interest payable will not require payment until the project
generates excess cash flow.

41

FINANCIAL STATEMENTS AND
INDEPENDENT AUDITORS' REPORT

MORTENSEN II
HUD PROJECT NO.: 074-36605

DECEMBER 31, 2001

Mortensen II
HUD Project No.: 074-36605

TABLE OF CONTENTS

PAGE

MORTGAGOR'S CERTIFICATION 4

MANAGING AGENT'S CERTIFICATION 5

INDEPENDENT AUDITORS' REPORT 6

FINANCIAL STATEMENTS

BALANCE SHEET 8

STATEMENT OF OPERATIONS 10

STATEMENT OF PARTNERS' EQUITY
(DEFICIT) 13

STATEMENT OF CASH FLOWS 14

NOTES TO FINANCIAL STATEMENTS 16

SUPPLEMENTAL INFORMATION

RESERVE FOR REPLACEMENTS 21

COMPUTATION OF SURPLUS CASH, DISTRIBUTIONS
AND RESIDUAL RECEIPTS 22

CHANGES IN FIXED ASSET ACCOUNTS 23

DETAIL OF ACCOUNTS -- STATEMENT OF OPERATIONS 24

OTHER INFORMATION 25

INDEPENDENT AUDITORS' REPORT ON
INTERNAL CONTROL 26

INDEPENDENT AUDITORS' REPORT ON
COMPLIANCE WITH SPECIFIC
REQUIREMENTS APPLICABLE TO MAJOR
HUD PROGRAMS 28

INDEPENDENT AUDITORS' REPORT ON
COMPLIANCE WITH SPECIFIC REQUIREMENTS
APPLICABLE TO FAIR HOUSING AND
NON-DISCRIMINATION 29

43

INDEPENDENT AUDITORS' REPORT

To the Partners
Mortensen II

We have audited the accompanying balance sheet of Mortensen II as of December
31, 2001, and the related statements of operations, partners' equity (deficit)
and cash flows for the year then ended. 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 audit.

We conducted our audit in accordance with auditing standards generally accepted
in the United States of America and GOVERNMENT AUDITING STANDARDS, issued by the
Comptroller General of the United States. 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 audit provides 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 Mortensen II as of December 31,
2001, and the results of its operations, changes in partners' equity (deficit)
and cash flows for the year then ended, in conformity with accounting principles
generally accepted in the United States of America.

Our audit was made for the purpose of forming an opinion on the basic financial
statements taken as a whole. The supplemental information on pages 21 through 25
is presented for purposes of additional analysis and is not a required part of
the basic financial statements. Such information has been subjected to the
auditing procedures applied in the audit of the basic financial statements and,
in our opinion, is fairly stated in all material respects in relation to the
basic financial statements taken as a whole.

In accordance with GOVERNMENT AUDITING STANDARDS and the "Consolidated Audit
Guide for Audits of HUD Programs," we have also issued reports dated January 25,
2002 on our consideration of Mortensen II's internal control and on its
compliance with specific requirements applicable to major HUD programs and fair
housing and non-discrimination. Those reports are an integral part of an audit
performed in accordance with GOVERNMENT AUDITING STANDARDS and should be read in
conjunction with this report considering the results of our audit.

/s/ Reznick Fedder & Silverman

Charlotte, North Carolina Federal Employer
January 25, 2002 Identification Number:
52-1088612

Audit Principal: Thomas A. Fassett

44

Mortensen II
HUD Project No.: 074-36605

BALANCE SHEET

December 31, 2001

See notes to Financial Statements.

45

Mortensen II
HUD Project No.: 074-36605

BALANCE SHEET (continued)

December 31, 2001

See notes to Financial Statements.

46

Mortensen II
HUD Project No.: 074-36605

STATEMENT OF OPERATIONS

Year ended December 31, 2001

(continued)

47

Mortensen II
HUD Project No.: 074-36605

STATEMENT OF OPERATIONS - CONTINUED

Year ended December 31, 2001

ADMINISTRATIVE EXPENSES
6210 Advertising and marketing 5,849
6311 Office expenses 16,105
6312 Office or model apartment rent 6,900
6320 Management fee 42,958
6330 Manager or superintendent salaries 32,035
6340 Legal expense - project 3,256
6350 Auditing expense 7,500
6351 Bookkeeping fees/accounting services 7,220
6390 Miscellaneous administrative expenses 37,515
-----------

Total administrative expenses 159,338

UTILITIES EXPENSES
6450 Electricity 8,869
6451 Water 2,217
6452 Gas 5,172
6453 Sewer 1,848
-----------

Total utilities expenses 18,106

OPERATING AND MAINTENANCE EXPENSES
6510 Payroll 54,542
6515 Supplies 76,462
6520 Contracts 18,426
6521 Operating and maintenance rent free unit 2,160
6525 Garbage and trash removal 9,911
6570 Vehicle and maintenance equipment
operation and 4,661
-----------

Total operating and maintenance expenses 166,162

(continued)

48

Mortensen II
HUD Project No.: 074-36605
STATEMENT OF OPERATIONS - CONTINUED
Year ended December 31, 2001

TAXES AND INSURANCE
6710 Real estate taxes 163,046
6711 Payroll taxes 8,349
6720 Property and liability
insurance 12,203
6721 Fidelity bond insurance 243
6722 Workmen's compensation 4,304
6723 Health insurance and other
employee benefits 7,433
6790 Miscellaneous taxes, licenses,
permits and insurance 1,180
----------

Total taxes and insurance 196,758

FINANCIAL EXPENSES
6820 Interest on mortgage payable 297,354
6850 Mortgage insurance
premium/service change 34,573
6890 Miscellaneous financial
expenses 98
----------

Total financial expenses 332,025

DEPRECIATION AND AMORTIZATION
6600 Depreciation expense 182,510
6610 Amortization expense 15,044
----------

Total depreciation and amortization 197,554

CORPORATE OR MORTGAGOR ENTITY REVENUE
AND EXPENSES
7190 Other expenses 92,545
----------
Total corporate or mortgagor
entity revenue and expenses 92,545
-----------

Total expenses 1,162,488
-----------

Net income (loss) $ (296,667)
============

See notes of financial statements

49

Mortensen II
HUD Project No.: 074-36605
STATEMENT OF PARTNERS' EQUITY (DEFICIT)
Year ended December 31, 2001

50

Mortensen II
HUD Project No.: 074-36605

STATEMENT OF CASH FLOWS

Year ended December 31, 2001

Cash flows from operating activities
Rental receipts $ 798,848
Interest receipts 6,983
Other operating receipts 58,872
Administrative expenses paid (77,880)
Management fees paid (96,155)
Utilities paid (19,150)
Salaries and wages paid (86,577)
Operating and maintenance paid (118,327)
Real estate taxes paid (157,184)
Property insurance paid (11,950)
Miscellaneous taxes and insurance paid (1,180)
Other operating expenses paid (20,329)
Interest paid on mortgages (297,618)
Mortgage insurance premium paid (34,573)
Miscellaneous financial expenses paid (98)
-------------
Net cash provided by (used in) operating activities (56,318)
-------------

Cash flows from investing activities
Net deposits to mortgage escrows 2,926
Net deposits to reserve for replacements 21,951
Net deposits to other reserves (37)
-------------
Net cash provided by (used in) investing activities 24,840
------------

Cash flows from financing activities
Mortgage principal payments (49,769)
-------------
Net cash provided by (used in) financing activities (49,769)
-------------

NET INCREASE (DECREASE) IN CASH (81,247)
Cash, beginning 95,681
------------
Cash, end $ 14,434
============

51

Mortensen II
HUD Project No.: 074-36605

STATEMENT OF CASH FLOWS - CONTINUED

Year ended December 31, 2001

Reconciliation of net income (loss) to net
cash provided by (used in) operating activities
Net income (loss) $(296,667)
----------
Adjustments to reconcile net income (loss) to net
cash provided by (used in) operating activities
Depreciation 182,510
Amortization 15,044
Changes in asset and liability account
(increase) decrease in assets
Tenant accounts receivable 11,045
Miscellaneous prepaid expenses 253
Tenant security deposits funded 4,722
Increase (decrease) in liabilities
Accounts payable (7,751)
Accrued real estate taxes 5,862
Accrued management fee payable (53,197)
Accrued interest payable (264)
Tenant security deposits held in trust (4,722)
Prepaid revenue (5,698)
Entity/construction liability accounts
(include detail)
Accrued interest payable 92,545
-------
92,545
---------
Total adjustments 240,349
---------

Net cash provided by (used in) operating
activities $ (56,318)
==========

See notes to Financial Statements.

52

Mortensen II
HUD Project No.: 074-36605

NOTES TO FINANCIAL STATEMENTS

December 31, 2001

NOTE A - ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

The partnership was formed as a limited partnership under the laws of the
State of Iowa on August 23, 1990, for the purpose of constructing and
operating a rental housing project under Section 221(d)4 of the National
Housing Act. The project consists of 104 units located in Ames, Iowa, and
is currently operating under the name of Celtic Manor.

Cash distributions are limited by agreements between the partnership and
HUD to the extent of surplus cash as defined by HUD.

NOTE B - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

USE OF ESTIMATES

The preparation of financial statements in conformity with accounting
principles generally accepted in the United States of America 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 revenue and expenses during the reporting period. Actual results
and could differ from the estimates.

RENTAL PROPERTY

Rental property is carried at cost. Depreciation is provided for in amounts
sufficient to relate the cost of depreciable assets to operations over
their estimated service lives by use of the straight-line method for
buildings and accelerated methods for equipment. Improvements are
capitalized, while expenditures for maintenance and repairs are charged to
expense as incurred. Upon disposal of depreciable property, the appropriate
property accounts are reduced by the related costs and accumulated
depreciation. The resulting gains and losses are reflected in the statement
of operations. Estimated service lives are as follows:

Buildings 27.5 years
Building equipment - fixed 7 years

AMORTIZATION

Loan costs are amortized over the term of the loan period using the
straight-line method.

53

Mortensen II
HUD Project No.: 074-36605

NOTES TO FINANCIAL STATEMENTS - CONTINUED

December 31, 2001

NOTE B - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)

INCOME TAXES

No provision or benefit for income taxes has been included in these financial
statements since taxable income or loss passes through to, and is reportable
by, the partners individually.

RENTAL INCOME

Rental income is recognized as rentals become due. Rental payments received
in advance are deferred until earned. All leases between the partnership and
tenants of the property are operating leases.

NOTE C - MORTGAGE PAYABLE

The mortgage note is co-insured by the Federal Housing Administration (FHA)
and is collateralized by a deed of trust on the rental property. The note
bears interest at the rate of 6.45%. Principal and interest are payable by
the partnership in monthly installments of $28,949 through maturity in August
2031. As of December 31, 2001, the outstanding balance on this loan is
$4,587,002.

Under agreements with the lender and FHA, the partnership is required to make
monthly escrow deposits for taxes, insurance and replacement of project
assets, and is subject to restrictions as to operating policies, rental
charges, operating expenditures and distributions to partners.

Aggregate maturities of mortgage payable are as follows:

December 31, 2002 $ 53,076
2003 56,602
2004 60,363
2005 64,373
2006 68,650
Thereafter 4,283,938
----------

$4,587,002
==========

54

Mortensen II
HUD Project No.: 074-36605

NOTES TO FINANCIAL STATEMENTS - CONTINUED

December 31, 2001
NOTE D - NOTES PAYABLE

EQUITY LOAN

An equity loan of $577,885 has been provided by Capital Mortgage Plus, L.P.
to fund construction costs of the project and the mortgage buydown escrow.
The loan is noninterest bearing and matures in August 2031. The loan is
secured by a conditional third mortgage, a security agreement and the
mortgage buydown escrow.

SUBORDINATED PROMISSORY NOTE

The partnership has executed a subordinated promissory note, which requires
additional interest payments on the mortgage loan from Capital Mortgage Plus,
L.P. The note is secured by a second mortgage on the property, a security
agreement and the mortgage buydown escrow. Effective January 1, 1995, the
note provides for a cumulative annual yield of 9.4% on the outstanding
principal of the mortgage loan and requires payment of interest equal to the
prior year's annual yield shortfall (as defined in the note) plus 30% of all
remaining excess cash. The interest payment is also limited to 50% of excess
cash for the prior year. Prior to January 1, 1995, the cumulative annual
yield rate was 10.95%. The obligation to make payments under this note
commenced on final endorsement of the mortgage (February 4, 1992) and ends in
August 2031.

As additional security for this note, the partners have executed an
additional interest guaranty whereby the general partner has guaranteed to
fund the interest due under this note calculated at an alternative interest
rate referred to as the "default rate" of 8.43%. Interest of $92,545 was
accrued during 2001 at this default rate and $835,607 of interest remains
payable at December 31, 2001. Prior to January 1, 1995, the default rate was
9.84%. The general partner has also guaranteed payment of interest up to the
lesser of the management fee or interest calculated at the default rate. The
general partner has also agreed to utilize funds to pay the interest, which
would otherwise be used to pay the management fee.

The loans are secured by deeds of trust on the property. The liability of the
partnership is limited to the underlying value of the real estate collateral
plus other amounts deposited with the lender.

55

Mortensen II
HUD Project No.: 074-36605

NOTES TO FINANCIAL STATEMENTS - CONTINUED

December 31, 2001

NOTE E - MANAGEMENT FEE

The property is managed by EV Cochrane and Associates, an affiliate of the
general partner. The current management agreement provides for a management
fee of 5% of monthly rental collections. The fee charged to operations in
2001 was $42,958. During 2001, $96,155 of accrued management fees were paid.
As of December 31, 2001, $112,657 of management fees remain payable.

56

SUPPLEMENTAL INFORMATION

SUPPORTING DATA REQUIRED BY HUD

57

Mortensen II
HUD Project No.: 074-36605

SUPPLEMENTAL INFORMATION

SUPPORTING DATA REQUIRED BY HUD

Year ended December 31, 2001

RESERVE FOR REPLACEMENTS

Balance at December 31, 2000 $ 126,485
Total monthly deposits 20,440
Interest income 2,537
Approved withdrawals (44,928)
---------

Balance at December 31, 2001 $ 104,534
=========

58

Mortensen II
HUD Project No.: 074-36605

SUPPLEMENTAL INFORMATION - CONTINUED

SUPPORTING DATA REQUIRED BY HUD

Year ended December 31, 2001

COMPUTATION OF SURPLUS CASH, DISTRIBUTIONS AND RESIDUAL RECEIPTS

PART A - COMPUTE SURPLUS CASH
Cash (ACCOUNTS 1120, 1170 AND 1191) $ 76,644
Tenant subsidy vouchers due for period covered by
financial statements --
Other (DESCRIBE IN DETAIL) ---------
--
---------
Total cash 76,644
---------

Accrued mortgage interest payable 24,317
Delinquent mortgage principal payments --
Delinquent deposits to reserve for replacements --
Accounts payable (DUE WITHIN 30 DAYS) 3,263
Loans and notes payable (DUE WITHIN 30 DAYS) --
Deficient tax, insurance or MIP escrow deposits 4,605
Accrued expenses (NOT ESCROWED) 112,657
Prepaid revenue (ACCOUNT 2210) --
Tenant security deposits liability (ACCOUNT 2191) 62,210
Other current obligations (DESCRIBE IN DETAIL) ---------
--
---------
Less total current obligations 207,052
---------

Surplus cash (deficiency) $(130,408)
=========

PART B - COMPUTE DISTRIBUTIONS TO OWNERS AND
REQUIRED DEPOSIT TO RESIDUAL RECEIPTS
Surplus cash $(130,408)
---------

LIMITED DIVIDEND PROJECTS
Annual distribution earned during fiscal period
covered by the statements --
Distribution accrued and unpaid as of the end of
the prior fiscal period --
Distributions and entity expenses paid during
fiscal period covered by the statements --
---------

Amount remaining as distribution earned by unpaid --
---------

Amount available for distribution during next fiscal period $ --
=========

Deposit due residual receipts reserve $ --
=========

59

Mortensen II
HUD Project No.: 074-36605

SUPPLEMENTAL INFORMATION - CONTINUED

SUPPORTING DATA REQUIRED BY HUD

Year ended December 31, 2001

CHANGES IN FIXED ASSETS ACCOUNTS

60

Mortensen II
HUD Project No.: 074-36605

SUPPLEMENTAL INFORMATION - CONTINUED

SUPPORTING DATA REQUIRED BY HUD

Year ended December 31, 2001

DETAIL OF ACCOUNTS - STATEMENT OF OPERATIONS

MISCELLANEOUS ADMINISTRATIVE EXPENSES (ACCOUNT NO. 6390)

Cable television $ 24,397
Rental expense 8,920
Internet expense 3,672
Dues and subscriptions 526
-------------

$ 37,515
=============

OTHER ENTITY EXPENSES (ACCOUNT NO. 7190)

Contingent interest $ 92,545
-------------

$ 92,545
=============

61

Mortensen II
HUD Project No.: 074-36605

SUPPLEMENTAL INFORMATION - CONTINUED

SUPPORTING DATA REQUIRED BY HUD

Year ended December 31, 2001

OTHER INFORMATION

Total mortgage principal payments required during the audit year (12
monthly payments). Applies to all direct loans and HUD- held and
fully-insured mortgages. Any HUD-approved second mortgages are included
$ 49,769
===========

Total of 12 monthly deposits in the audit year made to the replacement
reserve account, as required by the regulatory agreement, even if
payments are temporarily suspended or reduced $ 20,440
===========

Replacement reserve and residual receipts reserve releases which are
included as expense items on the statement of operations $ --
===========

Project improvement reserve releases under the flexible subsidy program
which are included as expense items on the statement of operations NA
===========

Mortgage payable note detail (Section 236 only)
Interest reduction payments from subsidy NA
===========

Schedule of notes payable:

62

HRII ASSOCIATES

Financial Statements and Supplemental Data

December 31, 2001 and 2000

63

[Hansen, Bradshaw, Malmrose & Erickson Letterhead]

To the Owners of
HRII Associates

We have audited the accompanying balance sheets of HRII Associates (the
Partnership) as of December 31, 2001 and 2000, and the related statements of
operations, changes in partners' deficit, and cash flows for the years then
ended. 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 auditing standards generally accepted
in the United States of America and the standards applicable to financial audit
contained in Government Auditing Standards, issued by the Comptroller General of
the United States. 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 HRII Associates as of December
31, 2001 and 2000, and the results of its operations, changes in partners'
deficit, and cash flows for the years then ended in conformity with accounting
principles generally accepted in the United States of America.

In accordance with Government Auditing Standards and the Consolidated Audit
Guide for Audits of HUD Programs issued by the U.S. Department of Housing and
Urban Development we have also issued a report dated February 19, 2001, on our
consideration of the Project's internal controls, and reports dated February 19,
2001, on its compliance with specific requirements applicable to major HUD
programs and specific requirements applicable to Fair Housing and
Non-Discrimination.

Our audit was conducted for the purpose of forming an opinion on the basic
financial statements taken as a whole. The accompanying supplementary
information on pages 19 to 32 is presented for purposes of additional analysis
and is not required part of the basic financial statements of the Partnership.
Such information has been subjected to the auditing procedures applied in the
audit of the basic financial statements and, in our opinion, is fairly stated in
all material respects in relation to the financial statements taken as a whole.

/s/ Hansen, Bradshaw, Malmrose & Erickson

February 19, 2002

64

HRII ASSOCIATES

Balance Sheets

December 31, 2001 and 2000

The accompanying notes are an integral part of these financial statements.

65

HRII ASSOCIATES

Statements of Operations and Partners' Deficit

For the Years Ended December 31, 2001 and 2000

The accompanying notes are an integral part of these financial statements.

66

HRII ASSOCIATES

Statements of Cash Flows

For the Years Ended December 31, 2001 and 2000

67

HRII ASSOCIATES

Statements of Cash Flows (Continued)

For the Years Ended December 31, 2001 and 2000

The accompanying notes are an integral part of these financial statements.

68

HRII ASSOCIATES

Notes to Financial Statements

December 31, 2001 and 2000

1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

BUSINESS ORGANIZATION

HRII Associates (HUD Project No. 126-35216) (the Partnership) is a Utah Limited
Partnership which was organized in 1989. The Project consists of 144 units in
apartment buildings in Gresham, Oregon. The apartment complex is financed with a
loan which is insured by the U.S. Department of Housing and Urban Development
(HUD), under section 221(d)(4) of the National Housing Act (HUD Project No.
126-35216). The Partnership's operating methods are regulated by HUD under the
terms of a regulatory agreement.

USE OF ESTIMATES IN THE PREPARATION OF FINANCIAL STATEMENTS

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.

CONCENTRATION OF CREDIT RISK

Financial instruments which potentially subject the Partnership to concentration
of credit risk consist primarily of tenant rents receivable. The Partnership
maintains allowances for possible losses which, when realized, have been within
range of management's expectations.

The Partnership maintains its cash in bank deposit accounts which, at times, may
exceed federally insured limits. The Partnership has not experienced any losses
in such accounts and believes it is not exposed to any significant credit risk
on cash and cash equivalents.

CASH AND CASH EQUIVALENTS

For purposes of the statements of cash flows, the Partnership considers all
highly liquid debt instruments with an original maturity of three months or less
to be cash equivalents.

LAND, BUILDINGS AND EQUIPMENT

Land, buildings and equipment are recorded at cost and are depreciated using the
straight-line method over estimated useful lives ranging from 5 to 40 years.
Major additions and improvements are capitalized while minor replacements,
maintenance and repairs which do not increase the useful lives of the property
are expensed as incurred.

LOAN COSTS

Costs incurred by the Partnership in connection with obtaining the construction
loan and long-term financing have been capitalized and are amortized using the
straight-line method over the term of the HUD insured mortgage.

69

HRII ASSOCIATES

Notes to Financial Statements

December 31, 2001 and 2000

1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)

REVENUE RECOGNITION

Prepaid rents are accrued as a liability by the Partnership and the associated
revenue is recognized as it is earned. Tenant security deposits are recognized
as income when forfeited.

COST ALLOCATION

On March 1, 1993, the Partnership entered into a cross easement agreement with
Holly Ridge Associates, an entity which owns Phase I of Holly Ridge. Holly Ridge
Phase I is located on property adjacent to the Phase II property. The two phases
share common amenities such as the exercise facilities, sauna, tanning beds,
swimming pools, tennis courts, maintenance building, etc. In addition, the same
management company (The Stoddard Group, L.L.C.) manages both projects. Under the
terms of the agreement, joint costs of the two phases are allocated based on the
number of units in each phase.

MANAGEMENT FEE

The Partnership paid a management fee equal to 4% of defined gross revenues.

INCOME TAXES

Under tax law provisions, the Partnership does not pay income taxes on its
income. Instead, the income or loss of the Partnership is allocated to the
partners, and the partners are responsible for any income taxes related to their
share of allocated income.

FINANCIAL INSTRUMENTS

None of the Partnership's financial instruments are held for trading purposes.
The Partnership estimates that the fair value of all financial instruments at
December 31, 2001 and 2000, does not differ materially from the aggregate
carrying values of its financial instruments recorded in the accompanying
balance sheet. The estimated fair value amounts have been determined by the
Partnership using available market information and appropriate valuation
methodologies. Considerable judgement is required in interpreting market data to
develop the estimates of fair value, and, accordingly, the estimates are not
necessarily indicative of the amounts that the Partnership could realized in a
current market exchange

2. RELATED PARTY TRANSACTIONS

A general partner of HRII Associates also owns The Stoddard Group, L.L.C.
(Stoddard). Stoddard provides services for the Partnership, which include
accounting services and management functions. The management fee expensed to
Stoddard for the year ended December 31, 2001 was $46,682 ($43,777 in 2000). In
addition, $120,273 was paid to Stoddard in 2001 to reimburse costs of payroll,
payroll taxes and workman's compensation insurance for their employees who
provide on-site labor to the Project ($117,170 in 2000).

70

HRII ASSOCIATES

Notes to Financial Statements

December 31, 2001 and 2000

2. RELATED PARTY TRANSACTIONS (CONTINUED)

Accrued workman's compensation and payroll taxes of $4,970 at December 31, 2001
represents a payable to Stoddard ($5,243 in 2000).

The Partnership also made cash advances to entities formerly under common
ownership and management and had a net receivable from those entities in the
amount of $239,440 at December 31, 1999. The funds advanced were partnership
funds not related to the operations of the apartment complex. During 2000, the
Partnership terminated its relationship with these entities and determined that
this receivable was uncollectible. The Partnership wrote off the net receivable
of $239,440 in 2000 as an other expense in the statement of operations.

3. RESTRICTED DEPOSITS

Restricted deposits consist of the following at December 31, 2001:

Property tax and insurance escrow $ 23,342
Replacement reserve escrow 160,116
Tenant security deposits 34,789
-----------

$ 218,247
===========

4. LAND, BUILDING AND EQUIPMENT

Land, buildings and equipment consist of the following:

71

HRII ASSOCIATES

Notes to Financial Statements

December 31, 2001 and 2000

5. MORTGAGE PAYABLE AND NOTE PAYABLE

The HUD insured mortgage note is payable to a financial institution in monthly
installments of $37,921 including interest at 8.25%. The loan is secured by the
apartment complex and matures on August 1, 2034.

The Partnership has a note payable to a corporation due in semi-annual
installments of $7,130, including interest at 6%. The loan matures on September
1, 2005. The loan balance at December 31, 2001 includes accrued interest of
$1,576.

Future maturities over the next five years are as follows:

6. EQUITY LOAN

The Partnership also has an equity loan payable to a financial institution
payable upon maturity of the HUD insured mortgage in the amount of $684,400.
This is non-interest equity loan. The Partnership also has a Subordinated
Promissory Note payable to a financial institution related to both the mortgage
loan and the equity loan. This note requires additional interest payments based
on the outstanding balance of the mortgage note to assure an annual yield of
9.89%. The total amount of interest payable related to this loan at December 31,
2001 was $91,380.

7. COMMITMENT AND CONTINGENCY

The Partnership entered into an agreement in March 1993 with an entity which
provided funds for certain costs in connection with the construction of the
Project. Under the terms of the agreement, HRII Associates is obligated to pay
additional interest amounts to this entity from the proceeds of events such as
sale or refinancing of the Project.

8. ALLOWABLE DISTRIBUTIONS TO PARTNERS

Under the HUD regulatory agreement for Section 221(d)(4) projects, distributions
to partners from funds provided by rental operations are allowed, provided: 1)
surplus cash, as defined by HUD, is available for such purposes, 2) the project
is in compliance with all outstanding notices of requirements for proper
maintenance and 3) there is no default under the regulatory agreement or under
the mortgage note. For the year ended December 31, 2001, surplus cash was
$88,811 ($160,851 in 2000).

72