FORM 10-Q
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
X Quarterly report pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934
For the quarterly period ended September 30, 1999 or
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from to
Commission File Number: 000-24843
AMERICA FIRST TAX EXEMPT INVESTORS, L.P.
(Exact name of registrant as specified in its
Agreement of Limited Partnership)
Delaware 47-0810385
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
Suite 400, 1004 Farnam Street, Omaha, Nebraska 68102
(Address of principal executive offices) (Zip Code)
(402) 444-1630
(Registrant's telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by the Section 13 or 15(d) of the Securities Exchange Act
of 1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports) and (2) has been subject to such
filing requirements for the past 90 days. Yes X No
<PAGE> -i-
Part I. Financial Information
Item 1. Financial Statements
AMERICA FIRST TAX EXEMPT INVESTORS, L.P.
BALANCE SHEETS
<TABLE>
<CAPTION>
Sept. 30, 1999
(unaudited) Dec. 31, 1998
-------------- --------------
<S> <C> <C>
Assets
Cash and temporary cash investments, at cost which
approximates market value (Note 4) $ 4,720,681 $ 920,801
Investment in tax-exempt mortgage bonds, at estimated fair value (Note 5) 71,720,000 71,720,000
Interest receivable 434,558 503,234
Other assets 1,213,067 277,890
-------------- --------------
$ 78,088,306 $ 73,421,925
============== ==============
Liabilities and Partners' Capital
Liabilities
Accounts payable (Note 6) $ 223,754 $ 276,184
Distribution payable (Note 3) 464,535 453,597
Debt financing 5,000,000 -
-------------- --------------
5,688,289 729,781
-------------- --------------
Partners' Capital
General Partner 2,504 5,426
Beneficial Unit Certificate Holders
($7.25 per BUC in 1999 and $7.28 in 1998) 72,397,513 72,686,718
-------------- --------------
72,400,017 72,692,144
-------------- --------------
$ 78,088,306 $ 73,421,925
============== ==============
The accompanying notes are an integral part of the combined financial statements.
</TABLE>
AMERICA FIRST TAX EXEMPT INVESTORS, L.P.
COMBINED STATEMENTS OF INCOME AND COMPREHENSIVE INCOME
(UNAUDITED)
<TABLE>
<CAPTION>
For the Nine
For the For the Months Ended For the Nine
Quarter Ended Quarter Ended Sept. 30, 1999 Months Ended
Sept. 30, 1999 Sept. 30, 1998 (combined) Sept. 30, 1998
-------------- -------------- -------------- --------------
<S> <C> <C> <C> <C>
Income
Mortgage bond investment income $ 1,379,794 $ 1,467,082 $ 4,393,032 $ 4,500,059
Interest income on temporary cash investments 23,258 12,608 33,140 38,300
Contingent interest income (Note 5) 26,408 36,874 68,508 86,107
-------------- -------------- -------------- --------------
1,429,460 1,516,564 4,494,680 4,624,466
-------------- -------------- -------------- --------------
Expenses
General and administrative expenses (Note 6) 200,563 200,777 659,729 604,959
Interest expense 28,100 - 28,100 -
-------------- -------------- -------------- --------------
228,663 200,777 687,829 604,959
-------------- -------------- -------------- --------------
Net income and comprehensive income $ 1,200,797 $ 1,315,787 $ 3,806,851 $ 4,019,507
============== ============== ============== ==============
Net income allocated to:
General Partner $ 18,345 $ 22,008 $ 54,510 $ 60,861
BUC Holders 1,182,452 1,293,779 3,752,341 3,958,646
-------------- -------------- -------------- --------------
$ 1,200,797 $ 1,315,787 $ 3,806,851 $ 4,019,507
============== ============== ============== ==============
Net income, basic and diluted, per BUC $ .12 $ .13 $ .38 $ .40
============== ============== ============== ==============
The accompanying notes are an integral part of the combined financial statements.
</TABLE>
<PAGE> -1-
AMERICA FIRST TAX EXEMPT INVESTORS, L.P.
STATEMENT OF PARTNERS' CAPITAL
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1999
(UNAUDITED)
<TABLE>
<CAPTION>
Beneficial Unit
General Certificate
Partner Holders Total
-------------- --------------- --------------
<S> <C> <C> <C>
Partners' Capital (excluding accumulated other comprehensive income)
Balance at December 31, 1998 $ 5,426 $ 73,592,718 $ 73,598,144
Net income (combined) 54,510 3,752,341 3,806,851
Cash distributions paid or accrued (Note 3) (combined) (57,432) (4,041,546) (4,098,978)
-------------- --------------- --------------
2,504 73,303,513 73,306,017
-------------- --------------- --------------
Accumulated Other Comprehensive Income
Balance at December 31, 1998 and September 30, 1999 - (906,000) (906,000)
-------------- --------------- --------------
Balance at September 30, 1999 $ 2,504 $ 72,397,513 $ 72,400,017
============== =============== ==============
The accompanying notes are an integral part of the combined financial statements.
</TABLE>
<PAGE> -2-
AMERICA FIRST TAX EXEMPT INVESTORS, L.P.
COMBINED STATEMENTS OF CASH FLOWS
(UNAUDITED)
<TABLE>
<CAPTION>
For the Nine
Months Ended For the Nine
Sept. 30, 1999 Months Ended
(combined) Sept. 30, 1998
-------------- --------------
<S> <C> <C>
Cash flows from operating activities
Net income $ 3,806,851 $ 4,019,507
Adjustments to reconcile net income to net cash
from operating activities
Decrease in interest receivable 68,676 11,015
Increase in other assets (5,126) (15,659)
Decrease in accounts payable (52,430) (26,086)
-------------- --------------
Net cash provided by operating activities 3,817,971 3,988,777
-------------- --------------
Cash flow used in investing activities
Bond issuance costs paid (142,886) (48,554)
Increase in other assets (787,165) -
-------------- --------------
Net cash used in investing activities (930,051) (48,554)
-------------- --------------
Cash flow from financing activities
Distributions paid (4,088,040) (4,103,245)
Proceeds from debt financing 5,000,000 -
-------------- --------------
Net cash provided by (used in) financing activities 911,960 (4,103,245)
-------------- --------------
Net increase (decrease) in cash and temporary cash investments 3,799,880 (163,022)
Cash and temporary cash investments at beginning of period 920,801 1,522,893
-------------- --------------
Cash and temporary cash investments at end of period $ 4,720,681 $ 1,359,871
============== ==============
The accompanying notes are an integral part of the combined financial statements.
</TABLE>
Supplemental disclosure of non-cash investing activity: During the nine months
ended September 30, 1999, the tax-exempt mortgage bonds secured by Shoals
Crossing and Ashley Square with principal balances of $4,500,000 and
$6,500,000, respectively, were refinanced by their local housing finance
authorities. The bonds held by the Partnership were terminated and new bonds
in the same principal amounts were issued to the Partnership.
Supplemental disclosure of non-cash financing activity:
In connection with the February 1, 1999, merger of the Partnership and America
First Tax Exempt Mortgage Fund Limited Partnership (the Prior Partnership)
described in Note 1 to the financial statements, unit holders of the Prior
Partnership received one Beneficial Unit Certificate (BUC) of the Partnership
for each BUC they held in the Prior Partnership as of the record date.
<PAGE> -3-
AMERICA FIRST TAX EXEMPT INVESTORS, L.P.
NOTES TO COMBINED FINANCIAL STATEMENTS
SEPTEMBER 30, 1999
(UNAUDITED)
1. Organization
America First Tax Exempt Investors, L.P. (the New Partnership) was formed on
April 2, 1998 under the Delaware Revised Uniform Limited Partnership Act for
the purpose of acquiring, holding, operating, selling and otherwise dealing
with a portfolio of federally tax-exempt mortgage bonds which have been issued
to provide construction and/or permanent financing of multifamily residential
apartments. The New Partnership commenced operations on February 1, 1999,
when it was merged with America First Tax Exempt Mortgage Fund Limited
Partnership (the Prior Partnership). Under the terms of the merger agreement,
the New Partnership was the surviving partnership and effectively took over
the operations of the Prior Partnership as of that date. Unit holders of the
Prior Partnership received one Beneficial Unit Certificate (BUC) of the New
Partnership for each BUC they held in the Prior Partnership as of the record
date. The Prior Partnership was terminated under the provisions of the Prior
Partnership's Partnership Agreement. The New Partnership will terminate on
December 31, 2050, unless terminated earlier under the provisions of its
Partnership Agreement. The General Partner of both the Prior Partnership and
the New Partnership is America First Capital Associates Limited Partnership
Two (AFCA 2). The New Partnership and the Prior Partnership are collectively
referred to as the Partnership.
2. Summary of Significant Accounting Policies
A)Financial Statement Presentation
The accompanying 1999 financial statements include the combined accounts
of the New Partnership from February 1, 1999 (the Merger Date), through
September 30, 1999, and the accounts of the Prior Partnership from January
1, 1999 until the Merger Date. The combination of the accounts of the
Prior Partnership and the New Partnership is reflected on an "as-if"
pooling basis for a merger of entities under common control. Financial
statements for 1998 include the accounts of the Prior Partnership.
The financial statements of the Partnership are prepared without audit on
the accrual basis of accounting in accordance with generally accepted
accounting principles. The financial statements should be read in
conjunction with the financial statements and notes thereto included in
the Prior Partnership's Annual Report on Form 10-K for the year ended
December 31, 1998 and the New Partnership's Annual Report on Form 10-K for
the year ended December 31, 1998. In the opinion of management, all
normal and recurring adjustments necessary to present fairly the financial
position at September 30, 1999, and results of operations for all periods
presented have been made.
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the
financial statements and the reported amounts of revenues and expenses
during the reporting period. Actual results could differ from those
estimates.
B)Investment in Tax-Exempt Mortgage Bonds
Investment securities are classified as held-to-maturity, available-for-
sale or trading. Investments classified as available-for-sale are reported
at fair value with any unrealized gains or losses excluded from earnings
and reflected in other comprehensive income. Subsequent increases and
decreases in the net unrealized gain/loss on available-for-sale securities
are reflected as adjustments to the carrying value of the portfolio and in
other comprehensive income. The Partnership does not have investment
securities classified as held-to-maturity or trading. The carrying value
of tax-exempt mortgage bonds is periodically reviewed and adjusted when
there are significant changes in the estimated net realizable value of the
underlying collateral.
Accrual of mortgage bond investment income is excluded from income, when,
in the opinion of management, collection of related interest is doubtful.
This interest is recognized as income when it is received.
<PAGE> -4-
AMERICA FIRST TAX EXEMPT INVESTORS, L.P.
NOTES TO COMBINED FINANCIAL STATEMENTS
SEPTEMBER 30, 1999
(UNAUDITED)
C)Income Taxes
No provision has been made for income taxes since the Beneficial Unit
Certificate (BUC) Holders are required to report their share of the
Partnership's taxable income for federal and state income tax purposes.
D)Temporary Cash Investments
Temporary cash investments are invested in federally tax-exempt securities
purchased with an original maturity of three months or less.
E)Debt Financing
The Partnership has deposited $25,250,000 of its tax-exempt mortgage bonds
into a trust (the Primary Trust) which issued $25,250,000 in trust
certificates (the Primary Trust Certificates). The Primary Trust issued
and delivered to a Merrill Lynch affiliate $5,000,000 in Primary Trust
Certificates which have a first priority claim on principal and base
interest on the underlying tax-exempt mortgage bonds. The $5,000,000 in
Primary Trust Certificates were placed in a secondary trust (the Secondary
Trust) and credit enhanced by a Merrill Lynch affiliate. The Merrill
Lynch affiliate sold to institutional investors floating rate securities
(the Secondary Securities) in the amount of $4,995,000. The Partnership
also pledged and transferred an additional $3,000,000 of Primary Trust
Certificates to a Merrill Lynch affiliate to secure payment of the
$5,000,000 principal amount of and accrued interest on the aforementioned
Primary Trust Certificates. The Partnership obtained ownership of the
remaining Primary Trust Certificates in the principal amount of
$17,250,000 and the rights to all subordinate interest paid on the related
tax-exempt mortgage bonds. The Partnership also acquired a residual
interest in the Secondary Trust with a face amount of $5,000 and proceeds
of the transfer of the Primary Trust Certificates to the Merrill Lynch
affiliate in the amount of $4,995,000. The Partnership has a call right
on the Secondary Securities and upon exercise of such right may collapse
the Secondary and Primary Trusts. The purchase price of Secondary
Securities is equal to the par amount plus 10% of any increase in the
market price of the underlying Primary Trust Certificates. (Also see
Note 5 (5)).
For financial statement purposes, the transaction is accounted for as a
financing transaction and, accordingly, the $5 million of tax-exempt
mortgage bonds financed is restricted to be held in trust, the net cash
proceeds are classified as cash and temporary cash investments, and the
subordinated interest is classified as other assets. The financing debt
of $5 million bears interest at a weekly floating bond rate which averaged
approximately 3.5% from August 12, 1999, the date of closing, through
September 30, 1999.
F)Net Income per BUC
Net income per BUC has been calculated based on the number of BUCs
outstanding (9,979,128) for all periods presented.
G)New Accounting Pronouncement
On January 1, 1999, the Partnership adopted Statement of Position 98-5,
"Reporting on the Costs of Start-up Activities" (SOP 98-5). SOP 98-5
requires costs of start-up activities and organization costs to be
expensed as incurred. The adoption of SOP 98-5 did not have an impact on
the Partnership's financial statements.
H)Reclassifications
Certain prior period amounts have been reclassified to conform with the
current period classification.
3. Partnership Income, Expenses and Cash Distributions
The Partnership Agreement contains provisions for the distribution of Net
Interest Income and Net Residual Proceeds and for the allocation of income and
expenses for tax purposes among AFCA 2 and BUC Holders.
Cash distributions included in the financial statements represent the actual
cash distributions made during each period and the cash distributions accrued
at the end of each period.
<PAGE> -5-
AMERICA FIRST TAX EXEMPT INVESTORS, L.P.
NOTES TO COMBINED FINANCIAL STATEMENTS
SEPTEMBER 30, 1999
(UNAUDITED)
4. Partnership Reserve Account
The Partnership maintains a reserve account which totaled $ 4,926,310 at
September 30, 1999. The reserve account was established to maintain working
capital for the Partnership and is available to supplement distributions to
BUC Holders or for any other contingencies related to the ownership of the
mortgage bonds and the operation of the Partnership.
5. Investment in Tax-Exempt Mortgage Bonds
Descriptions of the tax-exempt mortgage bonds owned by the Partnership at
September 30, 1999, are as follows:
<TABLE>
Base
Number Maturity Interest
Property Name Location of Units Date Rate
- ------------------------ ----------------- -------- -------- ---------
<S> <C> <C> <C> <C>
Arama Apartments Miami, FL 293 07/01/10 8.5% (1)
Woodbridge Apts. of
Bloomington III (6) Bloomington, IN 280 12/01/27 7.5% (2)
Shoals Crossing Atlanta, GA 176 12/01/25 7.5% (2), (3)
Ashley Pointe at
Eagle Crest Evansville, IN 150 12/01/27 7.0% (2)
Woodbridge Apts. of
Louisville II Louisville, KY 190 12/01/27 7.5% (2)
Northwoods Lake
Apartments (5) Duluth, GA 492 09/01/25 7.5% (2)
Ashley Square Des Moines, IA 144 12/01/25 7.5% (3), (4)
</TABLE>
(1) In addition to the base interest rate shown, the bond bears additional
contingent interest as defined in the revenue note which, when combined with
the base interest, is limited to a cumulative, noncompounded amount not
greater than 12% per annum. The Partnership received additional contingent
interest from Arama Apartments of $45,806 during the quarter and nine months
ended September 30, 1999.
(2) In addition to the base interest rates shown, the bonds bear additional
contingent interest as defined in each revenue note of an additional 3.5% per
annum that is payable out of 50% (100% in the case of Shoals Crossing, Ashley
Pointe at Eagle Crest and Northwoods Lake Apartments) of the net cash flow
generated by the respective property. The Partnership received additional
contingent interest from Ashley Pointe at Eagle Crest of $22,702 during the
nine months ended September 30, 1999 (none during the quarter ended September
30, 1999).
(3) The tax-exempt bonds secured by these properties were reissued by their
local housing finance authority on February 25, 1999, and June 16, 1999, for
Shoals Crossing and Ashley Square, respectively. The existing tax-exempt
bonds held by the Partnership were terminated and new bonds in the same
principal amounts were issued to the Partnership. The new bonds provide for
the payment of base interest to the Partnership at a rate of 7.5% per annum
compared to 8.5% per annum for the previous bonds.
(4) In addition to the base interest rate shown, the bond bears additional
contingent interest as defined in the revenue note of an additional 3% per
annum payable out of the net cash flow generated by the property. Past due
unpaid contingent interest compounds at a rate of 10.5% per annum.
(5) Tax-exempt mortgage bonds of $25,250,000 have been deposited with a trust
(the Primary Trust as described in Note 2 (E)). The Partnership also pledged
Primary Trust Certificates representing a beneficial interest in $2,000,000 in
principal amount of such bonds as described in (6) below.
<PAGE> -6-
AMERICA FIRST TAX EXEMPT INVESTORS, L.P.
NOTES TO COMBINED FINANCIAL STATEMENTS
SEPTEMBER 30, 1999
(UNAUDITED)
(6) Tax-exempt bonds of $12,600,000 in addition to the $2,000,000 of Primary
Trust Certificates described in (5) above, have been pledged as security for a
reimbursement obligation regarding a $17,350,000 letter of credit. Such
letter of credit was issued for the benefit of the purchaser of Iona Lakes
Apartments (the Project) located in Ft. Myers, Florida as part of a plan by
the Partnership to acquire certain securities representing an interest in
tax-exempt bonds secured by the Project which are anticipated to be issued on
or around April 1, 2000. Pending issuance of such bonds and certain other
events, the Partnership's obligations under the reimbursement obligation will
cease and the $12,600,000 of tax-exempt mortgage bonds and $2 million of
Primary Trust Certificates will be released from such pledge.
The Partnership classified its investment in tax-exempt mortgage bonds as
available-for-sale. At September 30, 1999 and December 31, 1998, the total
amortized cost, gross unrealized holding losses and aggregate fair value of
available-for-sale securities were $72,626,000, $906,000 and $71,720,000
respectively.
6. Transactions with Related Parties
Substantially all of the Partnership's general and administrative expenses and
certain costs capitalized by the Partnership are paid by AFCA 2 or an
affiliate and are reimbursed by the Partnership. The capitalized costs were
incurred in connection with the reissuance of the tax-exempt bonds. The
amount of such expenses reimbursed to AFCA 2 during 1999 was $837,684
($217,663 for the quarter ended September 30, 1999). The reimbursed expenses
are presented on a cash basis and do not reflect accruals made at quarter end.
AFCA 2 is entitled to receive an administrative fee from the Partnership equal
to 0.45% of the outstanding principal balance of any tax-exempt bond or other
mortgage investment, unless the owner of the property financed by such
tax-exempt bond or other mortgage investment or another third party is
required to pay such administrative fee. Under the terms of each of the
Partnership's existing tax-exempt mortgage bonds, the property owners are
obligated to pay the administrative fee to AFCA 2. Therefore, the Partnership
did not pay any administrative fees to AFCA 2 during the quarter or nine
months ended September 30, 1999. The Partnership may become obligated to pay
administrative fees to AFCA 2 in the event it acquires additional tax-exempt
bonds or other mortgage investments and is not able to negotiate the payment
of these fees by the property owners or in the event it acquires title to any
of the properties securing its existing tax-exempt bonds by reason of
foreclosure. In addition, AFCA 2 was entitled to receive approximately
$359,000 in administrative fees from the Partnership for the year ended
December 31, 1989. The payment of these fees, which has been deferred by AFCA
2, is contingent upon, and will be paid only out of future profits realized by
the Partnership from the disposition of any Partnership assets. This amount
will be recorded as an expense by the Partnership when it is probable that
these fees will be paid.
AFCA 2 received administrative fees of $224,573 during 1999 ($64,380 for the
quarter ended September 30, 1999), from the owners of properties financed by
the tax-exempt bonds held by the Partnership. Since these administrative fees
are not Partnership expenses, they have not been reflected in the accompanying
financial statements. However, such fees are payable by the property owners
prior to the payment of any contingent interest on the tax-exempt bonds
secured by these properties.
An affiliate of AFCA 2 has been retained by the owners of Ashley Square,
Northwoods Lake Apartments, Ashley Pointe at Eagle Crest and Shoals Crossing
to provide property management services for these properties. The management
fees paid to the affiliate of AFCA 2 reflect market rates for such services in
the areas in which these properties are located and totaled $233,692 in 1999
($75,545 for the quarter ended September 30, 1999). These management fees are
not Partnership expenses and, accordingly, have not been reflected in the
accompanying financial statements. However, such fees are paid out of the
revenues generated by these properties prior to the payment of any interest on
the tax-exempt bonds held by the Partnership on these properties.
<PAGE> -7-
Item 2.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
Liquidity and Capital Resources
On February 1, 1999, America First Tax Exempt Investors, L.P. (the New
Partnership) commenced operations when it merged with America First Tax Exempt
Mortgage Fund Limited Partnership (the Prior Partnership). Under the terms of
the merger agreement, the New Partnership was the surviving partnership and
effectively took over the operations of the Prior Partnership as of that
date. Unit holders of the Prior Partnership received one Beneficial Unit
Certificate (BUC) of the New Partnership for each BUC they held in the Prior
Partnership as of the record date. The Prior Partnership was terminated under
the provisions of the Prior Partnership's Partnership Agreement. The General
Partner of both the Prior Partnership and the New Partnership is America First
Capital Associates Limited Partnership Two (AFCA 2). The New Partnership and
the Prior Partnership are collectively referred to as the Partnership.
The Partnership's primary capital resources consist of seven tax-exempt
mortgage bonds which were issued to the Partnership in order to provide
construction and/or permanent financing for the seven multifamily housing
projects listed in the following table:
<TABLE>
At September 30, 1999
----------------------------------
Number Percentage
Number of Units of Units
Property Name Location of Units Occupied Occupied
- ------------------------------------- ------------------ -------------- -------------- --------------
<S> <C> <C> <C> <C>
Woodbridge Apts. of Bloomington III Bloomington, IN 280 244 87%
Ashley Pointe at Eagle Crest Evansville, IN 150 142 95%
Woodbridge Apts. of Louisville II Louisville, KY 190 178 94%
Northwoods Lake Apartments Duluth, GA 492 472 96%
Shoals Crossing Atlanta, GA 176 175 99%
Ashley Square Des Moines, IA 144 136 94%
Arama Apartments Miami, FL 293 288 98%
-------------- -------------- --------------
1,725 1,635 95%
============== ============== ==============
</TABLE>
The aggregate carrying value of the tax-exempt bonds at September 30, 1999 was
$71,720,000. Because the sole source of funds available for the repayment of
principal of the bonds is the net proceeds from the sale or refinancing of the
financed properties, the carrying value of the bonds reflects the general
partner's current estimate of the aggregate fair market value of the financed
properties.
Each of the bonds bears interest at a fixed rate and provides for the payment
of additional contingent interest that is payable solely from available net
cash flow generated by the financed property. The principal amounts of the
bonds do not amortize over their respective terms.
The tax-exempt bonds secured by Shoals Crossing and Ashley Square were
reissued by their respective local housing finance authorities on February 25,
1999 and June 16, 1999. The existing tax-exempt bonds held by the Partnership
were terminated and new bonds in the same principal amounts were issued to the
Partnership. The new bonds have terms expiring on December 1, 2025, and
provide for the payment of base interest to the Partnership at a rate of 7.5%
per annum. The tax exempt bonds also bear contingent interest of up to an
additional 3.5% per annum in the case of Shoals Crossing and up to an
additional 3% per annum in the case of Ashley Square. Contingent interest
is payable out of the net cash flow generated by the respective property.
Unpaid contingent interest on Ashley Square compounds at a rate of 10.5% per
annum.
<PAGE> -8-
As a result of refinancing all but one of the tax-exempt bonds in 1998 and
1999 and the reduction in the base and contingent interest rates, AFCA 2
anticipates that base and contingent interest earned on the mortgage bonds in
1999 will be approximately $150,000 to $250,000 less than that earned in
1998. In addition, the reduction in the base interest rates will make it more
likely that AFCA 2 will receive its administrative fees from the property
owners on a current basis. A reduction in the contingent interest rates will
limit the Partnership's potential participation in future increases, if any,
in the net cash flow generated by the financed properties and in the net
proceeds generated by the ultimate sale or refinancing of these properties.
Management is considering the possible sale or refinancing of the property
securing the sole remaining tax-exempt mortgage bond.
Tax-exempt interest earned on the bonds represents the Partnership's principal
source of liquidity. The Partnership also earns tax-exempt interest on
temporary investments. The Partnership's principal uses of cash are the
payment of operating expenses and distributions to BUC holders. The following
table sets forth information relating to cash distributions paid to BUC
holders for the periods shown:
<TABLE>
For the Nine
Months Ended For the Nine
Sept. 30, 1999 Months Ended
(combined) Sept. 30, 1998
-------------- --------------
<S> <C> <C>
Regular monthly distributions
Income $ .4050 $ .4050
============== ==============
Distributions
Paid out of current cash flow $ .3760 $ .3967
Paid out of prior undistributed cash flow .0290 .0083
-------------- --------------
$ .4050 $ .4050
============== ==============
</TABLE>
In addition to current interest income, the Partnership may draw on its
reserve to pay operating expenses or to supplement cash distributions to BUC
holders. As of September 30, 1999, the amount held by the Partnership in the
reserve was $4,926,310. During the nine months ended September 30, 1999, a
net amount of undistributed income totaling $292,127 was withdrawn from
reserves ($166,395 of income was withdrawn from reserves for the quarter ended
September 30, 1999). Future distributions to BUC Holders will depend upon the
amount of base and contingent interest received on the mortgage bonds, the
size of the reserves established by the Partnership and the extent to which
withdrawals are made from reserves.
The Partnership believes that cash provided by interest income from its
tax-exempt bonds and temporary investments, supplemented, if necessary, by
withdrawals from its reserve, will be adequate to meet its projected
short-term and long-term liquidity requirements, including the payments of
expenses and distributions to BUC Holders. Income from the tax-exempt
mortgage bond secured by Arama Apartments is expected to be substantially
reduced beginning in the year 2000. Since 1986, Arama Apartments has been
receiving rent subsidies from the Department of Housing and Urban Development
and it is expected that these subsidies will be significantly reduced next
year. As a result, the General Partner may have to lower the per share
distribution rate in the year 2000 to keep from depleting its cash reserves.
The Partnership intends to invest in additional tax-exempt mortgage bonds and
related investments and expects to finance such acquisitions through the sale
of senior interests in its existing tax-exempt bonds and/or by issuing
additional BUCs. By acquiring additional investments, AFCA 2 hopes to (i)
increase the amount of tax-exempt interest available for distribution to BUC
holders, (ii) reduce risk through increased asset diversification and (iii)
achieve improved economies of scale. By financing the acquisition of
additional investments through the sale of senior interests in its existing
tax-exempt bonds, the Partnership will forego a portion of the interest it
currently earns on its existing tax-exempt bonds, but expects to reinvest the
sale proceeds in instruments which generate a greater amount of interest
<PAGE> -9-
income. To the extent the Partnership sells such senior interests and is
unable to reinvest the proceeds in investments that generate interest at least
as great as the interest paid on the senior interests, the amount of interest
income available to the Partnership will decline. AFCA 2 is unable to
estimate the amount, if any, of additional tax-exempt mortgage bonds and other
investments that the Partnership may acquire and there can be no assurance
that the Partnership will be able to achieve any of the goals stated above.
In keeping with the above, on August 12, 1999, the Partnership deposited
$25,250,000 of its Northwoods Lake tax-exempt mortgage bonds into a trust (the
Primary Trust) which issued $25,250,000 in trust certificates (the Primary
Trust Certificates). The Primary Trust issued and delivered to a Merrill
Lynch affiliate $5,000,000 in Primary Trust Certificates which have a first
priority claim on principal and base interest on the underlying tax-exempt
mortgage bonds. The $5,000,000 in Primary Trust Certificates were placed in a
secondary trust (the Secondary Trust) and credit enhanced by a Merrill Lynch
affiliate. The Merrill Lynch affiliate sold to institutional investors
floating rate securities (the Secondary Securities) in the amount of
$4,995,000. The Partnership also pledged and transferred an additional
$3,000,000 of Primary Trust Certificates to a Merrill Lynch affiliate to
secure payment of the $5,000,000 principal amount of and accrued interest on
the aforementioned Primary Trust Certificates. The Partnership obtained
ownership of the remaining Primary Trust Certificates in the principal amount
of $17,250,000 and the rights to all subordinate interest paid on the related
tax-exempt mortgage bonds. The Partnership also acquired a residual interest
in the Secondary Trust with a face amount of $5,000 and proceeds of the
transfer of the Primary Trust Certificates to the Merrill Lynch affiliate in
the amount of $4,995,000. The Partnership has a call right on the Secondary
Securities and upon exercise of such right may collapse the Secondary and
Primary Trusts. The purchase price of Secondary Securities is equal to the
par amount plus 10% of any increase in the market price of the underlying
Primary Trust Certificates. As described in Note 2 (E) to the financial
statements, this arrangement has been accounted for as a financing transaction.
In addition to the aforementioned financing arrangement, on September 1, 1999,
the Partnership pledged $12,600,000 of its Woodbridge Apartments of
Bloomington III tax-exempt mortgage bonds and Primary Trust Certificates
representing a beneficial interest in $2,000,000 in principal amount of the
Northwoods Lake tax-exempt mortgage bonds as security for a reimbursement
obligation regarding a $17,350,000 letter of credit. Such letter of credit
was issued for the benefit of the purchaser of Iona Lakes Apartments (the
Project) located in Ft. Myers, Florida as part of a plan by the Partnership to
acquire certain securities representing an interest in tax-exempt bonds
secured by the Project which are anticipated to be issued on or around April
1, 2000. Pending issuance of such bonds and certain other events, the
Partnership's obligations under the reimbursement obligation will cease and
the $12,600,000 of tax-exempt mortgage bonds and $2 million of Primary Trust
Certificates will be released from such pledge.
Asset Quality
It is the policy of the Partnership to make a periodic review of the real
estate collateralizing the Partnership's mortgage bonds in order to adjust,
when necessary, the carrying value of the mortgage bonds. Mortgage bonds are
classified as available-for-sale and are therefore carried at the estimated
fair value of the underlying collateral. The fair value of the underlying
collateral is based on management's best estimate of the net realizable value
of the properties; however the ultimate realized values may vary from these
estimates. Adjustments are made to the carrying value when there are
significant changes in the estimated net realizable value of the underlying
collateral. Internal property valuations and reviews performed during the
nine months ended September 30, 1999, indicated that the mortgage bonds
recorded on the balance sheet at September 30, 1999, required no adjustments
to their current carrying amounts.
The overall status of the Partnership's mortgage bonds has generally remained
constant since June 30, 1999.
<PAGE> -10-
Results of Operations
The tables below compare the results of operations for each period shown.
<TABLE>
For the For the Increase
Quarter Ended Quarter Ended (Decrease)
Sept. 30, 1999 Sept. 30, 1998 From 1998
-------------- -------------- --------------
<S> <C> <C> <C>
Mortgage bond investment income $ 1,379,794 $ 1,467,082 $ (87,288)
Interest income on temporary cash investments 23,258 12,608 10,650
Contingent interest income 26,408 36,874 (10,466)
-------------- -------------- --------------
1,429,460 1,516,564 (87,104)
General and administrative expenses 200,563 200,777 (214)
Interest expense 28,100 - 28,100
-------------- -------------- --------------
228,663 200,777 27,886
-------------- -------------- --------------
Net income $ 1,200,797 $ 1,315,787 $ (114,990)
============== ============== ==============
For the Nine
Months Ended For the Nine Increase
Sept. 30, 1999 Months Ended (Decrease)
(combined) Sept. 30, 1998 From 1998
-------------- -------------- --------------
<S> <C> <C> <C>
Mortgage bond investment income $ 4,393,032 $ 4,500,059 $ (107,027)
Interest income on temporary cash investments 33,140 38,300 (5,160)
Contingent interest income 68,508 86,107 (17,599)
-------------- -------------- --------------
4,494,680 4,624,466 (129,786)
General and administrative expenses 659,729 604,959 54,770
Interest expense 28,100 - 28,100
-------------- -------------- --------------
687,829 604,959 82,870
-------------- -------------- --------------
Net income $ 3,806,851 $ 4,019,507 $ (212,656)
============== ============== ==============
</TABLE>
Mortgage-backed securities income decreased $87,288 for the quarter ended
September 30, 1999, compared to the same period in 1998. This decrease was
primarily attributable to a decrease in such income from Woodbridge Apartments
of Bloomington III which experienced decreased occupancy and increased capital
expenditures as compared to the same period in 1998. In addition, during 1998
the Partnership received cash flow in excess of base interest which
represented past due accrued base interest whereas it received no such cash
flow in 1999.
Mortgage-backed securities income decreased $107,027 for the nine months ended
September 30, 1999, compared to the same period in 1998. This decrease was
primarily attributable to a decrease in such income from Woodbridge Apartments
of Louisville II. Although base interest was current on the tax-exempt
mortgage bond secured by such property for both 1999 and 1998, the Partnership
received less in past due accrued base interest in 1999 than 1998.
Interest income on temporary cash investments increased $10,650 for the
quarter ended September 30, 1999 compared to the same period in 1998. This
increase is attributable to an increase in the Partnership's cash reserve
resulting from $5 million in debt financing obtained in August. Interest
income on temporary cash investments declined $5,160 for nine months ended
September 30, 1999 compared to the same period in 1998 due primarily to a
decrease in the Partnership's average cash reserve resulting from withdrawals
made from the Partnership's reserve in 1998 and 1999 to supplement
distributions to BUC holders.
The decreases in contingent interest income for the quarter and nine months
ended September 30, 1999, compared to the same period in 1998 is attributable
to a slight reduction in net operating income generated by the Arama
<PAGE> -11-
Apartments which was partially offset by contingent interest paid by Ashley
Pointe at Eagle Crest.
General and administrative expenses increased $54,770 for the nine months
ended September 30, 1999, compared to the same period in 1998 due primarily to
increases in salaries and related expenses, insurance expense, and travel
expense.
The Partnership incurred interest expense of $28,100 for the quarter and nine
months ended September 30, 1999, related to the $5 million in debt financing.
No such costs were incurred during the comparable periods in 1998.
Year 2000
The Partnership does not own or operate its own computer system and owns no
business or other equipment. However, the operation of the Partnership's
business relies on the computer system and other equipment maintained by
America First Companies L.L.C., the parent company of its general partner
("America First"). In addition, the Partnership has business relationships
with a number of third parties whose ability to perform their obligations to
the Partnership depend on such systems and equipment. Some or all of these
systems and equipment may be affected by the inability of certain computer
programs and embedded circuitry to correctly recognize dates occurring after
December 31, 1999. America First has adopted a plan to deal with this
so-called "Year 2000 problem" with respect to its information technology
("IT") systems, non-IT systems and third party business relationships.
State of Readiness
The IT system maintained by America First consists primarily of personal
computers, most of which are connected by a local area network. All
accounting and other record keeping functions relating to the Partnership that
are conducted in house by America First are performed on this PC-LAN system.
America First does not own or operate any "mainframe" computer systems. The
PC-LAN system runs software programs that America First believes are
compatible with dates after December 31, 1999. America First engaged a third
party computer consulting firm to review and test its PC-LAN system to ensure
that it will function correctly after that date. This process, along with any
necessary remediation or plans for remediation, has been completed. America
First believes any Year 2000 problems relating to its IT systems will be
resolved without significant operational difficulties. However, there can be
no assurance that testing will discover all potential Year 2000 problems or
that it will not reveal unanticipated material problems with the America First
IT systems that will need to be resolved.
Non-IT systems include embedded circuitry such as microcontrollers found in
telephone equipment, security and alarm systems, copiers, fax machines, mail
room equipment, heating and air conditioning systems and other infrastructure
systems that are used by America First in connection with the operation of the
Partnership's business. America First reviewed its non-IT systems along with
the providers that service and maintain these systems, with initial emphasis
being placed on those, such as telephone systems, which have been identified
as necessary to America First's ability to conduct the operation of the
Partnership's business activities. Based on this review, a need for
significant modification or replacement of such "mission critical" systems was
not identified.
The Partnership has no control over the remediation efforts of third parties
with which it has material business relationships and the failure of certain
of these third parties to successfully remediate their Year 2000 issues could
have a material adverse effect on the Partnership. Accordingly, America First
has undertaken the process of contacting each such third party to determine
the state of their readiness for Year 2000. Such parties include, but are not
limited to, the obligors on the Partnership's tax-exempt mortgage bonds,
the Partnership's transfer and paying agent and the financial institutions
with which the Partnership maintains accounts. America First has received
initial assurances from certain of these third parties that their ability to
perform their obligations to the Partnership are not expected to be materially
adversely affected by the Year 2000 problem. America First will continue to
request updated information from these material third parties in order to
assess their Year 2000 readiness. If a material third party vendor is unable
to provide assurance to America First that it is or will be, ready for Year
2000, America First intends to seek an alternative vendor to the extent
practical.
<PAGE> -12-
Costs
All of the IT systems and non-IT systems used to conduct the Partnership's
business operations are owned or leased by America First. Under the terms of
its partnership agreement, neither America First nor the Partnership's general
partner may be reimbursed by the Partnership for expenses associated with
their computer systems or other business equipment. Therefore, the costs
associated with the identification, remediation and testing of America First's
IT and non-IT systems will be paid by America First rather than the
Partnership. The Partnership will bear its proportionate share of the costs
associated with surveying the Year 2000 readiness of third parties. However,
the Partnership's share of the costs associated with these activities is
expected to be insignificant. Accordingly, the costs associated with
addressing the Partnership's Year 2000 issues are not expected to have a
material effect on the Partnership's results of operations, financial position
or cash flow.
Year 2000 Risks
The Partnership's general partner believes that the most reasonably likely
worst-case scenario will be that one or more of the third parties with which
it has a material business relationship will not have successfully dealt with
its Year 2000 issues and, as a result, is unable to provide services or
otherwise perform its obligations to the Partnership. For example, if an
obligor on the Partnership's tax-exempt mortgage bonds encounters a serious
and unexpected Year 2000 issue, it may be unable to make a timely payment of
interest to the Partnership. This, in turn, could cause a delay or temporary
reduction in cash distributions to BUC holders. In addition, if the
Partnership's transfer and paying agent experiences Year 2000-related
difficulties, it may cause delays in making distributions to BUC holders or in
the processing of trading of BUCs. It is also possible that one or more of
the IT and non-IT systems of America First will not function correctly, and
that such problems may make it difficult to conduct necessary accounting and
other record keeping functions for the Partnership. However, based on
currently available information, the general partner does not believe that
there will be any protracted systemic failures of the IT or non-IT systems
utilized by America First in connection with the operation of the
Partnership's business.
Contingency Plans
Because of the progress which America First has made toward achieving Year
2000 readiness, the Partnership has not made any specific contingency plans
with respect to the IT and non-IT systems of America First. In the event of a
Year 2000 problem with its IT system, America First may be required to
manually perform certain accounting and other record-keeping functions.
America First plans to terminate the Partnership's relationships with material
third party service providers that are not able to represent to America First
that they will be able to successfully resolve their material Year 2000 issues
in a timely manner. However, the Partnership will not be able to terminate
its relationships with certain third parties, such as the obligors on its
tax-exempt mortgage bonds, who may experience Year 2000 problems. The
Partnership has no specific contingency plans for dealing with Year 2000
problems experienced with these third parties.
All forecasts, estimates or other statements in this report relating to the
Year 2000 readiness of the Partnership and its affiliates are based on
information and assumptions about future events. Such "forward-looking
statements" are subject to various known and unknown risks and uncertainties
that may cause actual events to differ from such statements. Important
factors upon which the Partnership's Year 2000 forward-looking statements are
based include, but are not limited to, (a) the belief of America First that
the software used in IT systems is already able to correctly read and
interpret dates after December 31, 1999 and will require little or any
remediation; (b) the ability to identify, repair or replace mission critical
non-IT equipment in a timely manner, (c) third parties' remediation of their
internal systems to be Year 2000 ready and their willingness to test their
systems interfaces with those of America First, (d) no third party system
failures causing material disruption of telecommunications, data transmission,
payment networks, government services, utilities or other infrastructure, (e)
no unexpected failures by third parties with which the Partnership has a
material business relationship and (f) no material undiscovered flaws in
America First's Year 2000 testing process.
<PAGE> -13-
Forward Looking Statements
This report contains forward looking statements that reflect management's
current beliefs and estimates of future economic circumstances, industry
conditions, the Partnership's performance and financial results. All
statements, trend analysis and other information concerning possible or
assumed future results of operations of the Partnership and the real estate
investments it has made (including, but not limited to, the information
contained in Management's Discussion and Analysis of Financial Condition and
Results of Operations"), constitute forward-looking statements. BUC holders
and others should understand that these forward looking statements are subject
to numerous risks and uncertainties and a number of factors could affect the
future results of the Partnership and could cause those results to differ
materially from those expressed in the forward looking statements contained
herein.
Item 3. Quantitative and Qualitative Disclosures About Market Risk.
There have been no material changes in the Partnerships market risk since
December 31, 1998.
PART II. OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K
(a) The following documents are filed as part of this report:
3. Exhibits. The following exhibits were filed as required
by Item 14(c) of this report. Exhibit numbers refer to the
paragraph numbers under Item 601 of Regulation S-K:
3. Articles of Incorporation and Bylaws of America First
Fiduciary Corporation Number Five (incorporated herein by
reference to Form S-11 Registration Statement filed August 30,
1985, with the Securities and Exchange Commission by America
First Tax Exempt Mortgage Fund Limited Partnership (Commission
File No. 2-99997)).
4(a) Form of Certificate of Beneficial Unit Certificate
incorporated by reference to Exhibit 4.1 to Registration
Statement on Form S-4 (No. 333-50513) filed by the Registrant
on April 17, 1998.
4(b) Agreement of Limited Partnership of the Registrant
(incorporated by reference to Form 10-K dated December 31, 1998
filed pursuant to Section 13 or 15(d) of the Securities Act of
1934 by America First Tax Exempt Investors, L.P. (commission
file No. 000-24843)).
4(c) Amended Agreement of Merger, dated June 12, 1998,
between the Registrant and America First Tax Exempt Mortgage
Fund Limited Partnership (incorporated by reference to Exhibit
4.3 to Amendment No. 3 to Registration Statement on Form S-4
(No. 333-50513) filed by the Registrant on September 14, 1998.
27. Financial Data Schedule.
(b) The following report on Form 8-K was filed during the period
covered by this report:
Financial
Date of Report Item Reported Statements Filed
---------------- ------------------------- ----------------
August 12, 1999 Item 5. Other Events No
<PAGE> -14-
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
Dated: November 11, 1999 AMERICA FIRST TAX EXEMPT INVESTORS, L.P.
By America First Capital
Associates Limited
Partnership Two, General
Partner of the Registrant
By America First Companies L.L.C.,
General Partner of America First
Capital Associates Limited
Partnership Two
By /s/ Michael Thesing
Michael Thesing
Vice President
and Principal Financial Officer
<PAGE> -15-
WARNING: THE EDGAR SYSTEM ENCOUNTERED ERROR(S) WHILE PROCESSING THIS SCHEDULE.
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-END> SEPT-30-1999
<CASH> 4,720,681
<SECURITIES> 0
<RECEIVABLES> 434,558
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 1,213,067
<PP&E> 0
<DEPRECIATION> 0
<TOTAL-ASSETS> 78,088,306
<CURRENT-LIABILITIES> 688,289
<BONDS> 0
<COMMON> 0
0
0
<OTHER-SE> 72,400,017
<TOTAL-LIABILITY-AND-EQUITY> 78,088,306
<SALES> 0
<TOTAL-REVENUES> 4,494,680
<CGS> 0
<TOTAL-COSTS> 687,829
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> 3,806,851
<INCOME-TAX> 0
<INCOME-CONTINUING> 0
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 3,806,851
<EPS-BASIC> .38
<EPS-DILUTED> .38
</TABLE>
