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, 1998 or
Transition report pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934
For the transition period from to
Commission File Number: 0-14314
AMERICA FIRST TAX EXEMPT MORTGAGE FUND LIMITED PARTNERSHIP
(Exact name of registrant as specified in its charter)
Delaware 47-0695511
(State or other jurisdiction (IRS Employer
of incorporation or organization) Identification No.)
Suite 400, 1004 Farnam Street, Omaha, Nebraska 68102
(Address of principal executive offices) (Zip Code)
(402) 444-1630
(Registrant's telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to
such filing requirements for the past 90 days.
YES X NO
<PAGE> -i-
Part I. Financial Information
Item 1. Financial Statements
AMERICA FIRST TAX EXEMPT MORTGAGE FUND LIMITED PARTNERSHIP
BALANCE SHEETS
(UNAUDITED)
<TABLE>
<CAPTION>
Sept. 30, 1998 Dec. 31, 1997
-------------- --------------
<S> <C> <C>
Assets
Cash and temporary cash investments, at cost which
approximates market value (Note 4) $ 1,359,871 $ 1,522,893
Investment in tax-exempt mortgage bonds, at estimated fair value (Note 5) 71,126,000 71,126,000
Interest receivable 545,002 556,017
Other assets 72,319 8,106
-------------- --------------
$ 73,103,192 $ 73,213,016
============== ==============
Liabilities and Partners' Capital
Liabilities
Accounts payable (Note 6) $ 130,483 $ 156,569
Distribution payable (Note 3) 453,597 453,597
-------------- --------------
584,080 610,166
-------------- --------------
Partners' Capital
General Partner 9,636 10,473
Beneficial Unit Certificate Holders
($7.27 per BUC in 1998 and in 1997) 72,509,476 72,592,377
-------------- --------------
72,519,112 72,602,850
-------------- --------------
$ 73,103,192 $ 73,213,016
============== ==============
</TABLE>
STATEMENTS OF INCOME
(UNAUDITED)
<TABLE>
<CAPTION>
For the For the For the Nine For the Nine
Quarter Ended Quarter Ended Months Ended Months Ended
Sept. 30, 1998 Sept. 30, 1997 Sept. 30, 1998 Sept. 30, 1997
-------------- -------------- -------------- --------------
<S> <C> <C> <C> <C>
Income
Mortgage bond investment income $ 1,467,082 $ 1,559,640 $ 4,500,059 $ 4,640,665
Interest income on temporary cash investments 12,608 13,371 38,300 39,288
Contingent interest income (Note 5) 36,874 35,346 86,107 110,229
-------------- -------------- -------------- --------------
1,516,564 1,608,357 4,624,466 4,790,182
Expenses
General and administrative expenses (Note 6) 200,777 160,828 604,959 535,559
-------------- -------------- -------------- --------------
Net income $ 1,315,787 $ 1,447,529 $ 4,019,507 $ 4,254,623
============== ============== ============== ==============
Net income allocated to:
General Partner $ 22,008 $ 22,959 $ 60,861 $ 69,001
BUC Holders 1,293,779 1,424,570 3,958,646 4,185,622
-------------- -------------- -------------- --------------
$ 1,315,787 $ 1,447,529 $ 4,019,507 $ 4,254,623
============== ============== ============== ==============
Net income per BUC $ .13 $ .14 $ .40 $ .42
============== ============== ============== ==============
The accompanying notes are an integral part of the financial statements.
</TABLE>
<PAGE> -1-
AMERICA FIRST TAX EXEMPT MORTGAGE FUND LIMITED PARTNERSHIP
STATEMENT OF PARTNERS' CAPITAL
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1998
(UNAUDITED)
<TABLE>
<CAPTION>
Beneficial Unit
General Certificate
Partner Holders Total
-------------- --------------- --------------
<S> <C> <C> <C>
Partners' Capital (excluding net unrealized holding losses)
Balance at December 31, 1997 $ 10,473 $ 78,092,377 $ 78,102,850
Net income 60,861 3,958,646 4,019,507
Cash distributions paid or accrued (Note 3)
Income (61,698) (4,041,547) (4,103,245)
-------------- --------------- --------------
9,636 78,009,476 78,019,112
-------------- --------------- --------------
Net unrealized holding losses
Balance at December 31, 1997 and September 30, 1998 - (5,500,000) (5,500,000)
-------------- --------------- --------------
Balance at September 30, 1998 $ 9,636 $ 72,509,476 $ 72,519,112
============== =============== ==============
</TABLE>
STATEMENTS OF CASH FLOWS
(UNAUDITED)
<TABLE>
<CAPTION>
For the Nine For the Nine
Months Ended Months Ended
Sept. 30, 1998 Sept. 30, 1997
-------------- --------------
<S> <C> <C>
Cash flows from operating activities
Net income $ 4,019,507 $ 4,254,623
Adjustments to reconcile net income to net cash
from operating activities
Decrease in interest receivable 11,015 23,503
Increase in other assets (64,213) (6,935)
Decrease in accounts payable (26,086) (107,405)
-------------- --------------
Net cash provided by operating activities 3,940,223 4,163,786
Cash flow used in financing activity
Distributions paid (4,103,245) (4,109,092)
-------------- --------------
Net increase in cash and temporary cash investments (163,022) 54,694
Cash and temporary cash investments at beginning of period 1,522,893 1,379,560
-------------- --------------
Cash and temporary cash investments at end of period $ 1,359,871 $ 1,434,254
============== ==============
The accompanying notes are an integral part of the financial statements.
</TABLE>
<PAGE> -2-
AMERICA FIRST TAX EXEMPT MORTGAGE FUND LIMITED PARTNERSHIP
NOTES TO FINANCIAL STATEMENTS
SEPTEMBER 30, 1998
(UNAUDITED)
1. Organization
America First Tax Exempt Mortgage Fund Limited Partnership (the Partnership)
was formed on November 11, 1985, under the Delaware Revised Uniform Limited
Partnership Act for the purpose of acquiring a portfolio of federally
tax-exempt mortgage bonds collateralized by income-producing real estate
consisting of multifamily residential apartments. The Partnership will
terminate on December 31, 2015, unless terminated earlier under the provisions
of the Partnership Agreement. The General Partner of the Partnership is
America First Capital Associates Limited Partnership Two (AFCA 2).
2. Summary of Significant Accounting Policies
A)Financial Statement Presentation
The financial statements of the Partnership are prepared without audit on
the accrual basis of accounting in accordance with generally accepted
accounting principles. The financial statements should be read in
conjunction with the financial statements and notes thereto included in
the Partnership's Annual Report on Form 10-K for the year ended
December 31, 1997. In the opinion of management, all normal and recurring
adjustments necessary to present fairly the financial position at
September 30, 1998, 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 as a separate component of partners' capital. 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 adjustments to the component of partners' capital. 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.
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)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.
F)Comprehensive Income
In the first quarter of 1998, the Partnership adopted Statement of
Financial Accounting Standards No. 130, "Reporting Comprehensive Income"
(SFAS 130). SFAS 130 requires the display and reporting of comprehensive
income, which includes all changes in partners' capital with the exception
of additional investments by partners or distributions to partners.
Comprehensive income for the Partnership includes net income and unrealized
holding losses on investments charged or credited to Partners' Capital.
<PAGE> -3-
AMERICA FIRST TAX EXEMPT MORTGAGE FUND LIMITED PARTNERSHIP
NOTES TO FINANCIAL STATEMENTS
SEPTEMBER 30, 1998
(UNAUDITED)
Comprehensive income for the quarters and nine months ended September 30,
1998 and 1997 equaled net income as there were no changes in the net
unrealized holding losses for the respective periods.
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.
4. Partnership Reserve Account
The Partnership maintains a reserve account which totaled $1,393,012 at
September 30, 1998. 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, 1998, are as follows:
<TABLE>
Base
Number Maturity Interest Carrying
Property Name Location of Units Date Rate(1) Amount
- ------------------------ ----------------- -------- -------- --------- --------------
<S> <C> <C> <C> <C> <C>
Performing:
Arama Apartments Miami, FL 293 07/01/10 8.5% $ 12,100,000
Woodbridge Apts. of
Bloomington III Bloomington, IN 280 12/01/15 8.5%(3) 12,600,000
--------------
24,700,000
--------------
Nonperforming:(2)
Shoals Crossing Atlanta, GA 176 12/01/09 8.5% 4,500,000
Ashley Pointe at
Eagle Crest Evansville, IN 150 12/01/15 8.5%(3) 6,700,000
Woodbridge Apts. of
Louisville II Louisville, KY 190 12/01/15 8.5%(3) 8,976,000
Northwoods Lake
Apartments Duluth, GA 492 12/01/06 8.5% 25,250,000
Ashley Square Des Moines, IA 144 12/01/09 8.5% 6,500,000
--------------
51,926,000
--------------
76,626,000
Unrealized holding losses (5,500,000)
--------------
Balance at September 30, 1998 (at estimated fair value) $ 71,126,000
==============
</TABLE>
(1) In addition to the base interest rate shown, the bonds bear additional
contingent interest as defined in each revenue note which, when combined with
the base interest, is limited to a cumulative, noncompounded amount not greater
than 16% per annum. The Partnership received additional contingent interest
from Arama Apartments of $86,107 during 1998 ($36,874 for the quarter ended
September 30, 1998).
(2) Nonperforming bonds are bonds which are not fully current as to interest
payments. The amount of foregone interest on nonperforming bonds for 1998 was
$451,339 ($176,135 for the quarter ended September 30, 1998).
(3) See footnote 8, Subsequent Events.
<PAGE> -4-
AMERICA FIRST TAX EXEMPT MORTGAGE FUND LIMITED PARTNERSHIP
NOTES TO FINANCIAL STATEMENTS
SEPTEMBER 30, 1998
(UNAUDITED)
6. Transactions with Related Parties
Substantially all of the Partnership's general and administrative expenses are
paid by AFCA 2 or an affiliate and are reimbursed by the Partnership. The
amount of such expenses reimbursed to AFCA 2 during 1998 was $690,096
($174,542 for the quarter ended September 30, 1998). The reimbursed expenses
are presented on a cash basis and do not reflect accruals made at quarter end.
AFCA 2 received from property owners administrative fees of $40,838 during
1998 ($13,613 for the quarter ended September 30, 1998). Since these fees are
not Partnership expenses, they have not been reflected in the accompanying
financial statements.
AFCA 2 is entitled to an administrative fee from the Partnership in the event
the Partnership becomes the equity owner of a property by reason of
foreclosure. AFCA 2 was not entitled to any administrative fees from the
Partnership during 1998. 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.
An affiliate of AFCA 2 was retained to provide property management services
for Ashley Square, Northwoods Lake Apartments, Ashley Pointe at Eagle Crest
and Shoals Crossing. The fees for services provided represent the lower of
(i) costs incurred in providing management of the property, or (ii) customary
fees for such services determined on a competitive basis, and amounted to
$231,008 in 1998 ($77,679 for the quarter ended September 30, 1998).
7. Proposed Merger
On June 12, 1998, the Partnership entered into an Amended Agreement of Merger
with America First Tax Exempt Investors, L.P., a newly formed Delaware limited
partnership (the New Fund), pursuant to which the Partnership will merge with
and into the New Fund and the New Fund will be the surviving limited
partnership. The merger is subject to numerous conditions, including the
consent of the holders of a majority of the BUCs of the Partnership. Consent
solicitation statements have been delivered to BUC holders of record as of
September 25, 1998 and the Partnership is currently in the process of
collecting BUC holder consents. If the merger is approved, each BUC holder of
the Partnership will receive similar BUCs in the New Fund. The General Partner
of the New Fund is AFCA 2 and, accordingly, the merger will not result in a
change of control. The New Fund will have additional authority to reconfigure
its assets and sell interests therein, to issue additional BUCs and to invest
the proceeds of such asset sales and BUC issuances in additional tax exempt
bonds secured by multifamily housing properties.
<PAGE> -5-
8. Subsequent Event
The tax-exempt bonds secured by Woodbridge Apartments of Louisville II
("Louisville"), Ashley Pointe at Eagle Crest ("Ashley Pointe") and Woodbridge
Apartments of Bloomington III ("Bloomington") were reissued by the respective
local housing finance authorities on October 28, 29 and 30, 1998,
respectively. In each case, the existing tax-exempt bond held by the
Partnership was terminated and a new bond in the same principal amount was
issued to the Partnership. Each new bond has a term expiring on December 1,
2026. The new bonds for Louisville and Bloomington provide for the payment of
base interest to the Partnership at a rate of 7.5% per annum. The new bond
for Ashley Pointe provides for the payment of base interest to the Partnership
at a rate of 7.0% per annum. Each of the new bonds provides for the payment
to the Partnership of contingent interest of up to an additional 3.5% per
annum that is payable out of 50% (100% in the case of Ashley Pointe) of the
net cash flow generated by the financed property. In each case, the
obligations of the owner of a financed property to pay principal and interest
on the loan underlying the bond is secured by a first mortgage on the financed
property, an assignment of rents and a security interest in personal property
associated with the financed property.
<PAGE> -6-
Item 2.
AMERICA FIRST TAX EXEMPT MORTGAGE FUND LIMITED PARTNERSHIP
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
Liquidity and Capital Resources
The Partnership's primary capital resource consists of the seven tax-exempt
mortgage bonds which were issued to the Partnership in 1985 and 1986 in order
to provide construction and/or permanent financing for the seven multifamily
housing projects listed in the following table:
<TABLE>
<CAPTION>
At September 30, 1998
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 280 269 96%
Ashley Pointe at Eagle Crest Evansville, IN 150 145 97%
Woodbridge Apts. of Louisville II Louisville, KY 190 177 93%
Northwoods Lake Apartments Duluth, GA 492 475 97%
Shoals Crossing Atlanta, GA 176 159 90%
Ashley Square Des Moines, IA 144 137 95%
Arama Apartments Miami, FL 293 284 97%
-------------- -------------- --------------
1,725 1,646 95%
============== ============== ==============
</TABLE>
The aggregate carrying value of the tax-exempt bonds at September 30, 1998 was
$71,126,000 which represents the aggregate principal amount of the bonds, less
an allowance for holding losses of $5,500,000. 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. Each of the bonds originally
earned base interest at the rate of 8.5% per annum and provided for additional
contingent interest which, when combined with base interest, could equal up to
a maximum of 16% per annum.
The principal amount of the bonds does not amortize over its terms. However,
the principal of six of the bonds was to be repaid to the Partnership on
December 1, 1997 and the principal of the remaining bond was to repaid to the
Partnership on July 1, 1998. Because the net sale or refinancing proceeds
from the properties is the sole source of principal repayment and the
aggregate fair value of the properties is less than the total principal amount
of the bonds, the repayment of the bonds according to their original terms was
likely to have caused a loss of capital to the Partnership. In order to avoid
this result, the Partnership elected to continue to hold the bonds beyond
their original repayment date. However, in order to allow the bonds to
continue to generate tax-exempt interest for the Partnership, the bonds will
need to be reissued by the local housing finance authorities at interest rates
that will allow debt service on the bonds to be paid from the net revenues
projected to be generated by the financed properties.
In this regard, the tax-exempt bonds secured by Woodbridge Apartments of
Louisville II (Louisville), Ashley Pointe at Eagle Crest (Ashley Pointe)
and Woodbridge Apartments of Bloomington III (Bloomington) were reissued by
the respective local housing finance authorities on October 28, 29 and 30,
1998, respectively. In each case, the existing tax-exempt bond held by the
Partnership was terminated and a new bond in the same principal amount was
issued to the Partnership. Each new bond has a term expiring on December 1,
2026. The new bonds for Louisville and Bloomington provide for the payment of
base interest to the Partnership at a rate of 7.5% per annum. The new bond
for Ashley Pointe provides for the payment of base interest to the Partnership
<PAGE> -7-
AMERICA FIRST TAX EXEMPT MORTGAGE FUND LIMITED PARTNERSHIP
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
at a rate of 7.0% per annum. Each of the new bonds provides for the payment
to the Partnership of contingent interest of up to an additional 3.5% per
annum that is payable out of 50% (100% in the case of Ashley Pointe) of the
net cash flow generated by the financed property.
The Partnership expects that the remaining tax-exempt bonds will be reissued
in a similar manner and anticipates that the base and contingent interest
rates on these reissued bonds will also be less than the current base and
contingent interest rates. Notwithstanding the reduction in the base and
contingent interest rates, although the interest income generated from the
reissued bonds will decrease compared to the existing bonds, the Partnership
does not anticipate that the decrease will be material. This is because the
Partnership has not been receiving the full amount of base interest on five of
the existing bonds for some time. In addition, only one of the tax-exempt
bonds has generated contingent interest to date and the amount paid to the
Partnership has been substantially below the maximum anticipated rate of
contingent interest on the reissued bonds. However, a reduction in the base
and contingent interest rates will limit the Partnership's potential
participation in future increase, 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.
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>
<CAPTION>
For the Nine For the Nine
Months Ended Months Ended
Sept. 30, 1998 Sept. 30, 1997
-------------- --------------
<S> <C> <C>
Regular monthly distributions
Income $ .4050 $ .4050
============== ==============
Distributions
Paid out of current and prior undistributed cash flow $ .4050 $ .4050
============== ==============
</TABLE>
In addition to cash generated from interest income, the Partnership may also
draw on its reserve to pay operating expenses and to supplement cash
distributions. As of September 30, 1998, the amount held by the Partnership
in the reserve equaled $1,393,012. During the nine months ended September 30,
1998, a total of $83,738 of undistributed income was withdrawn from the
reserve ($53,942 of which was withdrawn during the quarter ended September 30,
1998) and distributed to BUC holders. Future distributions to BUC holders
will depend on the amount of interest income earned the Partnership and the
amount available in the reserve. The Partnership believes that the cash
provided by interest income from its tax-exempt bonds and temporary
investments, supplemented, if necessary, by withdraws from its reserve, will
be adequate to meet its projected short-term and long-term liquidity
requirements. Under the terms of the Partnership Agreement, the Partnership
has the authority to enter into short-term and long-term debt financing
arrangements. However, the Partnership currently does not anticipate entering
into such arrangements. The Partnership is not authorized to issue additional
BUCs to meet short-term or long-term liquidity requirements.
<PAGE> -8-
AMERICA FIRST TAX EXEMPT MORTGAGE FUND LIMITED PARTNERSHIP
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
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. 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 first nine months of 1998
indicated that the mortgage bonds recorded on the balance sheet at September
30, 1998, required no adjustments to their current carrying amounts.
The overall status of the Partnership's mortgage bonds has remained relatively
constant since June 30, 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 has engaged a
third party computer consulting firm to review and test its PC-LAN system to
ensure that it will function correctly after that date and expects that this
process, along with any necessary remediation, will be completed by March 31,
1999. America First believes any Year 2000 problems relating to its IT
systems will resolved without significant operational difficulties. However,
there can be no assurance that testing will discover all potential Year 2000
problems or that it will not reveal unanticipated material problems with the
America First IT systems that will need to be resolved.
Non-IT systems include embedded circuitry such as microcontrollers found in
telephone equipment, security and alarm systems, copiers, fax machines, mail
room equipment, heating and air conditioning systems and other infrastructure
systems that are used by America First in connection with the operation of the
Partnership's business. America First is reviewing its non-IT systems along
with the providers that service and maintain these systems, with initial
emphasis being placed on those, such as telephone systems, which have been
identified as necessary to America First's ability to conduct the operation of
the Partnership's business activities. America First expects that any
necessary modification or replacement of such "mission critical" systems will
be accomplished by mid-1999.
The Partnership has no control over the remediation efforts of third parties
with which it has material business relationships and the failure of certain
of these third parties to successfully remediate their Year 2000 issues could
have a material adverse effect on the Partnership. Accordingly, America First
has undertaken the process of contacting each such third party to determine
the state of their readiness for Year 2000. Such parties include, but are not
limited to, the obligors on the Partnership's 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
<PAGE> -9-
AMERICA FIRST TAX EXEMPT MORTGAGE FUND LIMITED PARTNERSHIP
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
initial assurances from certain of these third parties that their ability to
perform their obligations to the Partnership are not expected to be materially
adversely affected by the Year 2000 problem. America First will continue to
request updated information from these material third parties in order to
assess their Year 2000 readiness. If a material third party vendor is unable
to provide assurance to America First that it is, or will be, ready for Year
2000, America First intends to seek an alternative vendor to the extent
practical.
Costs
All of the IT systems and non-IT systems used to conduct the Partnership's
business operations are owned or leased by America First. Under the terms of
its partnership agreement, neither America First nor the Partnership's general
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.
<PAGE> -10-
AMERICA FIRST TAX EXEMPT MORTGAGE FUND LIMITED PARTNERSHIP
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
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> -11-
AMERICA FIRST TAX EXEMPT MORTGAGE FUND LIMITED PARTNERSHIP
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
Results of Operations
The tables below compare the results of operations for each period shown.
<TABLE>
<CAPTION>
For the For the Increase
Quarter Ended Quarter Ended (Decrease)
Sept. 30, 1998 Sept. 30, 1997 From 1997
-------------- -------------- --------------
<S> <C> <C> <C>
Mortgage bond investment income $ 1,467,082 $ 1,559,640 $ (92,558)
Interest income on temporary cash investments 12,608 13,371 (763)
Contingent interest income 36,874 35,346 1,528
-------------- -------------- --------------
1,516,564 1,608,357 (91,793)
General and administrative expenses 200,777 160,828 39 949
-------------- -------------- --------------
Net income $ 1,315,787 $ 1,447,529 $ (131,742)
============== ============== ==============
<CAPTION>
For the Nine For the Nine Increase
Months Ended Months Ended (Decrease)
Sept. 30, 1998 Sept. 30, 1997 From 1997
-------------- -------------- --------------
<S> <C> <C> <C>
Mortgage bond investment income $ 4,500,059 $ 4,640,665 $ (140,606)
Interest income on temporary cash investments 38,300 39,288 (988)
Contingent interest income 86,107 110,229 (24,122)
-------------- -------------- --------------
4,624,466 4,790,182 (165,716)
General and administrative expenses 604,959 535,559 69,400
-------------- -------------- --------------
Net income $ 4,019,507 $ 4,254,623 $ (235,116)
============== ============== ==============
</TABLE>
The decrease in mortgage bond investment income for the quarter ended
September 30, 1998, compared to the same period in 1997, is primarily
attributable to a reduction in interest income on the Shoals Crossing
tax-exempt mortgage bond. This mortgage bond has been reclassified from a
performing status to a non-performing status. As a result, interest is
recognized on such bond when it is received. The Partnership did not record
any interest income on this bond during the quarter ended September 30, 1998,
while the Partnership recorded approximately $96,000 of income on this bond
during the comparable period in 1997. In addition to the decrease in mortgage
bond investment income from Shoals Crossing, mortgage bond investment income
from Ashley Square decreased approximately $18,000 due to lower occupancy
rates and market competition. Such decrease were partially offset by an
increase of approximately $21,000 in mortgage bond investment income from
Northwoods Lake Apartments. This increase was primarily due to rental rate
increases and increases in the average occupancy of this property accompanied
by a decrease in real estate operating expenses, primarily taxes, labor and
administrative expenses.
Excluding a decrease of approximately $191,000 from Shoals Crossing as
discussed above, mortgage bond investment income increased approximately
$50,000 for the nine months ended September 30, 1998, compared to the same
period in 1997. This increase resulted from increases of approximately
$87,000, $14,000, and $10,000 in interest received from Northwoods Lake
Apartments, Ashley Pointe at Eagle Crest Apartments, and Woodbridge Apartments
of Louisville II, respectively. These increases were partially offset by a
decrease of approximately $61,000 in cash flow received from Ashley Square
resulting from lower occupancy rates, lower market rents, and higher operating
expenses, primarily repairs and maintenance expenses and property improvements.
<PAGE> -12-
AMERICA FIRST TAX EXEMPT MORTGAGE FUND LIMITED PARTNERSHIP
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
The decrease in contingent interest income for the nine months ended September
30, 1998, compared to the same period in 1997, is attributable to a decrease
in net operating income generated by the Arama Apartments primarily due to an
increase in operating expenses. Interest income on temporary cash investments
for the quarter and nine months ended September 30, 1998, is comparable to the
same period in 1997. General and administrative expenses increased for the
quarter and nine months ended September 30, 1998, compared to the same periods
in 1997, primarily as a result of costs incurred in connection with the
proposed merger described in Note 7 to the financial statements. For the nine
months ended September 30, 1998, such proposed merger costs were partially
offset by a decrease in salaries and related expenses.
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.
The requirements of Item 3 of Form 10-Q are not applicable to the Partnership
prior to its Annual Report on Form 10-K for the year ending December 31, 1998.
<PAGE> -13-
PART II. OTHER INFORMATION
Item 4. Submission of Matters to Vote of Security Holders
On September 30, 1998, AFCA 2 began to deliver consent solicitation
statements to BUC holders of record as of September 25, 1998 seeking
their consent to a proposed merger of the Partnership with America
First Tax Exempt Investors, L.P., a newly formed Delaware limited
partnership, (the "New Fund") pursuant to the terms of an Amended
Agreement of Merger, dated June 12, 1998 (the "Merger Agreement").
The Merger Agreement provides that the New Fund will be the
surviving limited partnership and that the merger is subject to the
consent of the holders of a majority of the BUCs of the Partnership.
AFCA 2 is continuing to solicit BUC holder consents as of the date of
this report and may continue to do so until January 29, 1999.
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
4(a) Agreement of Limited Partnership dated November 11, 1985
(incorporated herein by reference to Form 10-K dated
December 31, 1986 filed pursuant to Section 13 or 15(d) of
the Securities Act of 1934 by America First Tax Exempt
Mortgage Fund Limited Partnership (Commission File
No. 0-14314)).
4(b) Form of Certificate of Beneficial Unit Certificate
(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(c) Amended Agreement of Merger, dated June 12, 1998, between
the Partnership and America First Tax Exempt Investors,
L.P. (incorporated herein by reference to Exhibit 4.3 of
Amendment No. 3 to Form S-4, dated September 14, 1998,
filed pursuant to the Securities Act of 1933 by America
First Tax Exempt Investors, L.P. (Commission File No.
333-50513)).
(b) Form 8-K
The registrant did not file a report on Form 8-K during the
quarter for which this report is filed.
<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 13, 1998 AMERICA FIRST TAX EXEMPT MORTGAGE
FUND LIMITED PARTNERSHIP
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-
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-END> SEP-30-1998
<CASH> 1,359,871
<SECURITIES> 0
<RECEIVABLES> 545,002
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 72,319
<PP&E> 0
<DEPRECIATION> 0
<TOTAL-ASSETS> 73,103,192
<CURRENT-LIABILITIES> 584,080
<BONDS> 0
<COMMON> 0
0
0
<OTHER-SE> 72,519,112
<TOTAL-LIABILITY-AND-EQUITY> 73,103,192
<SALES> 0
<TOTAL-REVENUES> 4,624,466
<CGS> 0
<TOTAL-COSTS> 604,959
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> 4,019,507
<INCOME-TAX> 0
<INCOME-CONTINUING> 0
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 4,019,507
<EPS-PRIMARY> 0
<EPS-DILUTED> 0
</TABLE>
