10-K 1 a2075233z10-k.txt 10-K 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

CAPITAL MORTGAGE PLUS L P 10-K