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, 1997 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: 0-15854
AMERICA FIRST PARTICIPATING/PREFERRED EQUITY MORTGAGE FUND LIMITED PARTNERSHIP
(Exact name of registrant as specified in its charter)
Delaware 47-0700550
(State or other jurisdiction (IRS Employer
of incorporation or organization) Identification No.)
Commission File Number: 0-15665
AMERICA FIRST PARTICIPATING/PREFERRED EQUITY MORTGAGE FUND
(Exact name of registrant as specified in its charter)
Delaware 47-0700551
(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 PARTICIPATING/PREFERRED EQUITY MORTGAGE FUND
AND
AMERICA FIRST PARTICIPATING/PREFERRED EQUITY MORTGAGE FUND LIMITED PARTNERSHIP
COMBINED BALANCE SHEETS
(UNAUDITED)
<TABLE>
<CAPTION>
Sept. 30, 1997 Dec. 31, 1996
-------------- --------------
<S> <C> <C>
Assets
Cash and temporary cash investments, at cost which approximates market value $ 10,393,926 $ 9,001,666
Investment in mortgage-backed securities (Note 4) 34,653,964 37,322,028
Investment in and advances to preferred equity participations (PEPs),
net of valuation allowance (Note 5) 1,503,551 324,607
Investment in real estate (Note 6) 4,021,034 6,381,300
Investment in participating loans, net of valuation allowance (Note 7) 860,000 2,960,000
Interest receivable 276,909 305,606
Investment evaluation fees, net 570,163 587,441
Other assets 2,304,670 3,262,057
-------------- --------------
$ 54,584,217 $ 60,144,705
============== ==============
Liabilities and Partners' Capital
Liabilities
Accounts payable (Note 9) $ 227,927 $ 338,586
Distributions payable (Note 3) 511,556 512,457
Mortgage notes payable (Note 10) 6,800,000 9,590,833
-------------- --------------
7,539,483 10,441,876
-------------- --------------
Partners' Capital
General Partner 100 100
Exchangeable Unit Holders ($8.15 per unit in 1997 and $8.61 in 1996) 47,044,634 49,702,729
-------------- --------------
47,044,734 49,702,829
-------------- --------------
$ 54,584,217 $ 60,144,705
============== ==============
The accompanying notes are an integral part of the combined financial statements.
</TABLE>
<PAGE> -1-
AMERICA FIRST PARTICIPATING/PREFERRED EQUITY MORTGAGE FUND
AND
AMERICA FIRST PARTICIPATING/PREFERRED EQUITY MORTGAGE FUND LIMITED PARTNERSHIP
COMBINED 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, 1997 Sept. 30, 1996 Sept. 30, 1997 Sept. 30, 1996
-------------- -------------- -------------- --------------
<S> <C> <C> <C> <C>
Income
Mortgage and mortgage-backed securities income $ 658,814 $ 735,828 $ 2,024,656 $ 2,298,465
Equity in earnings of property partnerships 147,302 84,125 377,458 206,224
Rental income 629,101 608,048 1,897,467 1,788,012
Interest income on participating loans 17,240 59,030 177,639 184,481
Interest income on temporary cash investments and
U.S. government securities 152,289 117,171 419,125 324,938
-------------- -------------- -------------- --------------
1,604,746 1,604,202 4,896,345 4,802,120
-------------- -------------- -------------- --------------
Expenses
General and administrative expenses (Note 9) 706,389 222,849 1,241,639 679,835
Real estate operating expenses 411,028 288,652 1,104,990 913,699
Depreciation 75,627 81,009 226,882 243,027
Interest expense 142,446 238,387 565,595 631,286
-------------- -------------- -------------- --------------
1,335,490 830,897 3,139,106 2,467,847
-------------- -------------- -------------- --------------
Net income $ 269,256 $ 773,305 $ 1,757,239 $ 2,334,273
============== ============== ============== ==============
Net income allocated to:
General Partner $ 1,673 $ 7,348 $ 15,160 $ 22,649
Exchangeable Unit Holders 267,583 732,821 1,742,079 2,211,933
Passthrough Certificate Holder - 33,136 - 99,691
-------------- -------------- -------------- --------------
$ 269,256 $ 773,305 $ 1,757,239 $ 2,334,273
============== ============== ============== ==============
Net income per exchangeable unit $ .04 $ .13 $ .30 $ .40
============== ============== ============== ==============
Net income per passthrough certificate $ - $ 331.36 $ - $ 996.91
============== ============== ============== ==============
Weighted average number of units outstanding 5,775,797 5,528,867 5,775,797 5,546,717
============== ============== ============== ==============
Weighted average number of certificates outstanding - 100 - 100
============== ============== ============== ==============
The accompanying notes are an integral part of the combined financial statements.
</TABLE>
<PAGE> -2-
AMERICA FIRST PARTICIPATING/PREFERRED EQUITY MORTGAGE FUND
AND
AMERICA FIRST PARTICIPATING/PREFERRED EQUITY MORTGAGE FUND LIMITED PARTNERSHIP
COMBINED STATEMENT OF PARTNERS' CAPITAL
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1997
(UNAUDITED)
<TABLE>
<CAPTION>
Exchangeable Unit Holders
----------------------------------
General
Partner # of Units Amount Total
-------------- -------------- -------------- --------------
<S> <C> <C> <C> <C>
Partners' Capital (excluding net unrealized
holding gains)
Balance at December 31, 1996 $ 100 5,775,797 $ 49,399,062 $ 49,399,162
Net income 15,160 - 1,742,079 1,757,239
Cash distributions paid or accrued (Note 3) (15,160) - (4,590,025) (4,605,185)
-------------- -------------- -------------- --------------
100 5,775,797 46,551,116 46,551,216
-------------- -------------- -------------- --------------
Net unrealized holding gains
Balance at December 31, 1996 - - 303,667 303,667
Net change - - 189,851 189,851
-------------- -------------- -------------- --------------
- - 493,518 493,518
-------------- -------------- -------------- --------------
Balance at September 30, 1997 $ 100 5,775,797 $ 47,044,634 $ 47,044,734
============== ============== ============== ==============
The accompanying notes are an integral part of the combined financial statements.
</TABLE>
<PAGE> -3-
AMERICA FIRST PARTICIPATING/PREFERRED EQUITY MORTGAGE FUND
AND
AMERICA FIRST PARTICIPATING/PREFERRED EQUITY MORTGAGE FUND LIMITED PARTNERSHIP
COMBINED STATEMENTS OF CASH FLOWS
(UNAUDITED)
<TABLE>
<CAPTION>
For the Nine For the Nine
Months Ended Months Ended
Sept. 30, 1997 Sept. 30, 1996
-------------- --------------
<S> <C> <C>
Cash flows from operating activities
Net income $ 1,757,239 $ 2,334,273
Adjustments to reconcile net income to
net cash from operating activities:
Equity in earnings of property partnerships (377,458) (206,224)
Depreciation 226,882 243,027
Amortization of discount on mortgage-backed
and U.S. government securities (26,842) (46,317)
Decrease in interest receivable 28,697 64,355
Amortization of investment evaluation fees 17,278 17,277
Increase in other assets (454,090) (323,602)
Decrease in accounts payable (30,548) (51,675)
-------------- --------------
Net cash provided by operating activities 1,141,158 2,031,114
-------------- --------------
Cash flows from investing activities
Mortgage principal payments received 2,884,757 4,251,747
Repayment of participating loan 2,100,000 -
Distributions received from PEPs 474,117 219,578
Advances to PEPs (1,275,603) -
Cash transferred to mortgage holder (72,903) -
Investment in real estate (7,656) (11,118)
Maturity of U.S. government securities - 5,000,000
-------------- --------------
Net cash provided by investing activities 4,102,712 9,460,207
-------------- --------------
Cash flows from financing activities
Proceeds from issuance of mortgage note payable 6,800,000 -
Purchase of mortgage note payable (6,045,524) -
Distributions paid (4,606,086) (5,146,082)
Purchase of Units - (294,139)
-------------- --------------
Net cash used in financing activities (3,851,610) (5,440,221)
-------------- --------------
Net increase in cash and temporary cash investments 1,392,260 6,051,100
Cash and temporary cash investments at beginning of period 9,001,666 2,573,156
-------------- --------------
Cash and temporary cash investments at end of period $ 10,393,926 $ 8,624,256
============== ==============
Supplemental disclosure of cash flow information:
Cash paid during the period for interest $ 565,595 $ 631,286
============== ==============
Supplemental disclosure of non-cash investing activity:
Disposition of Meadow Brook Apartments assets and related liabilities
Real estate 2,141,040 -
Other assets 1,411,477 -
Accounts payable (80,111) -
Mortgage note payable (3,545,309) -
-------------- --------------
Net assets $ (72,903) $ -
============== ==============
The accompanying notes are an integral part of the combined financial statements.
</TABLE>
<PAGE> -4-
AMERICA FIRST PARTICIPATING/PREFERRED EQUITY MORTGAGE FUND
AND
AMERICA FIRST PARTICIPATING/PREFERRED EQUITY MORTGAGE FUND LIMITED PARTNERSHIP
NOTES TO COMBINED FINANCIAL STATEMENTS
SEPTEMBER 30, 1997
(UNAUDITED)
1. Organization
America First Participating/Preferred Equity Mortgage Fund (the Fund) was
formed on November 20, 1986, as a Nebraska general partnership for the purpose
of acquiring a portfolio of federally-insured multifamily mortgages or other
investments including preferred equity participations (PEPs). PEPs consist of
equity interests which are intended to provide the Fund with a participation
in the net cash flow and net sale or refinancing proceeds of the properties
collateralizing the mortgage loans. America First Participating/Preferred
Equity Mortgage Fund Limited Partnership (the Partnership) was also formed on
November 20, 1986, under the Delaware Revised Uniform Limited Partnership Act
to serve as the managing general partner of the Fund. The Fund and the
Partnership will continue in existence until December 31, 2036, unless
terminated earlier under the provisions of the Pooling and Servicing Agreement
forming the Fund and the Partnership Agreement forming the Partnership. The
General Partner of the Partnership is America First Capital Associates Limited
Partnership Three (AFCA 3).
2. Summary of Significant Accounting Policies
A)Financial Statement Presentation
The financial statements include the combined statements of the Fund and
the Partnership and have been prepared without audit. The combined
financial statements are prepared on the accrual basis of accounting in
accordance with generally accepted accounting principles. The combined
financial statements should be read in conjunction with the combined
financial statements and notes thereto included in the Fund's Annual Report
on Form 10-K for the year ended December 31, 1996. In the opinion of
management, all adjustments necessary to present fairly the financial
position at September 30, 1997, 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 Mortgage-Backed Securities
Investment securities are classified as held-to-maturity, available-for-
sale, or trading. Investments classified as held-to-maturity are carried
at amortized cost. Investments classified as available-for-sale are
reported at fair value 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 the
available-for-sale securities are reflected as adjustments to the carrying
value of the portfolio and adjustments to the component of partners'
capital. The Fund does not have investment securities classified as
trading.
C) Investment in Participating Loans
The investment in Participating Loans is recorded at cost and reduced by
principal payments received. Participating Loans are not insured or
guaranteed. The value of these investments is a function of the value of
the real estate collateralizing the Participating Loans. Interest income
on Participating Loans is excluded from income when, in the opinion of
management, collection of such interest is doubtful. This interest is
recognized as income when it is received.
<PAGE> -5-
AMERICA FIRST PARTICIPATING/PREFERRED EQUITY MORTGAGE FUND
AND
AMERICA FIRST PARTICIPATING/PREFERRED EQUITY MORTGAGE FUND LIMITED PARTNERSHIP
NOTES TO COMBINED FINANCIAL STATEMENTS
SEPTEMBER 30, 1997
(UNAUDITED)
The allowance for losses on Participating Loans is a valuation reserve
which has been established at a level that management feels is adequate to
absorb potential losses on outstanding loans. Reserves are established for
loans which management considers impaired. Loans are considered impaired
when it is probable that the Fund will be unable to collect amounts due
according to the contractual terms of the loan agreements. Based on this
analysis, the Fund's Participating Loan was considered impaired at
September 30, 1997. A reserve is established for the difference between the
recorded investment in the Participating Loans and the fair value of the
underlying collateral. The allowance is periodically reviewed and adjusted
when there are significant changes in the estimated net realizable value of
the underlying collateral for the Participating Loans.
D)Investment in Preferred Equity Participations (PEPs)
The investment in PEPs consist of interests in limited partnerships which
own the properties underlying the mortgage-backed securities and are
accounted for using the equity method. PEPs are not insured or guaranteed.
The value of these investments is a function of the value of the real estate
underlying the PEPs. PEPs also consist of advances made to limited
partnerships financed by the Fund.
The allowance for losses on investments in PEPs is a valuation reserve
which has been established at a level that management feels is adequate to
absorb potential losses on investments in PEPs. The allowance is based on
the fair value of the properties underlying the PEPs. The allowance is
periodically reviewed and adjusted when there are significant changes in the
fair value of the properties underlying the PEPs.
E)Investment in Real Estate
The investment in real estate is recorded at the lower of cost or estimated
net realizable value. The carrying value of each property is periodically
reviewed and adjusted when there are significant declines in the estimated
net realizable value.
Depreciation of real estate acquired in settlement of PEPs is based on the
estimated useful life of the properties (ranging from 6 to 27 1/2 years)
using the straight-line method.
F)Income Taxes
No provision has been made for income taxes since each Exchangeable Unit
Holder or Passthrough Certificate Holder is required to report their share
of the Partnership's or Fund's income for federal and state income tax
purposes.
G)Temporary Cash Investments
Temporary cash investments are invested in short-term debt securities
purchased with original maturities of three months or less.
H)Investment Evaluation Fees
The investment evaluation fees were incurred in connection with the
acquisition of assets. These fees are being amortized over the life of the
Fund.
I)Net Income Per Exchangeable Unit and Passthrough Certificate
Net income per Exchangeable Unit and Passthrough Certificate is allocated
based on the weighted average number of exchangeable units and passthrough
certificates outstanding during each period presented.
3. Fund and Partnership Income, Expenses and Cash Distributions
The Partnership Agreement and the Pooling and Servicing Agreement contain
provisions for distributing the cash available for distribution and for the
allocation of income and expenses for tax purposes among AFCA 3 and investors.
<PAGE> -6-
AMERICA FIRST PARTICIPATING/PREFERRED EQUITY MORTGAGE FUND
AND
AMERICA FIRST PARTICIPATING/PREFERRED EQUITY MORTGAGE FUND LIMITED PARTNERSHIP
NOTES TO COMBINED FINANCIAL STATEMENTS
SEPTEMBER 30, 1997
(UNAUDITED)
Cash distributions included in the combined financial statements represent the
actual cash distributions made during each period and the cash distributions
accrued at the end of each period.
4. Investment in Mortgage-Backed Securities
The mortgage-backed securities held by the Partnership represent Government
National Mortgage Association (GNMA) Certificates and Federal National
Mortgage Association (FNMA) Certificates. The GNMA Certificates are backed by
first mortgage loans on multifamily residential properties and pools of
single-family properties. The FNMA Certificates are backed by pools of
single-family properties. The GNMA Certificates are debt securities issued by
a private mortgage lender and are guaranteed by GNMA as to the full and timely
payment of principal and interest on the underlying loans. The FNMA
Certificates are debt securities issued by FNMA and are guaranteed by FNMA as
to the full and timely payment of principal and interest on the underlying
loans.
At September 30, 1997, the total amortized cost, gross unrealized holding
gains and aggregate fair value of held-to-maturity securities were
$14,116,484, $667,810 and $14,784,294, respectively.
At September 30, 1997, the total amortized cost, gross unrealized holding
gains, gross unrealized holding losses and the aggregate fair value of
available-for-sale securities were $20,043,962, $554,430, $60,912 and
$20,537,480 respectively.
Descriptions of the Fund's mortgage-backed securities at September 30, 1997,
are as follows:
<TABLE>
<CAPTION>
Number Interest Maturity Carrying
Type of Security and Name Location of Units Rate Date Amount
- ---------------------------------- ------------------ -------- -------- ------------ ------------
<S> <C> <C> <C> <C> <C>
Held-to-Maturity
GNMA Certificates:
The Parklane Salt Lake City, UT 94 9.25% 03/15/2029 $ 6,369,590
Grand Villa Grand Junction, CO 47 9.25% 03/15/2029 1,984,171
Cambridge Court Kearney, NE 42 9.25% 02/15/2029 1,935,854
Hickory Villa Omaha, NE 52 9.25% 02/15/2029 2,506,252
Pools of single-family mortgages 9.58% (1) 2017 1,299,264
Pools of single-family mortgages 9.62% (1) 2016 to 2017 21,353
------------
14,116,484
------------
Available-for-Sale
GNMA Certificates:
Pools of single-family mortgages 8.56% (1) 2016 to 2020 2,433,729 (2)
Pools of single-family mortgages 9.30% (1) 07/15/2021 1,153,819 (2)
Pools of single-family mortgages 8.76% (1) 2021 861,208 (2)
Pools of single-family mortgages 8.76% (1) 2021 372,083 (2)
Pools of single-family mortgages 8.25% (1) 2021 to 2022 1,685,198 (2)
Pools of single-family mortgages 6.50% (1) 2023 3,932,649 (2)
Pools of single-family mortgages 6.03% (1) 2008 2,011,279 (2)
Pools of single-family mortgages 7.13% (1) 2009 5,451,949 (2)
FNMA Certificates:
Pools of single-family mortgages 5.52% (1) 2000 2,635,566 (2)
------------
20,537,480
------------
Balance at September 30, 1997 $ 34,653,964
============
(1)Represents yield to the Fund.
(2)Reserve account asset - see Note 8.
</TABLE>
<PAGE> -7-
AMERICA FIRST PARTICIPATING/PREFERRED EQUITY MORTGAGE FUND
AND
AMERICA FIRST PARTICIPATING/PREFERRED EQUITY MORTGAGE FUND LIMITED PARTNERSHIP
NOTES TO COMBINED FINANCIAL STATEMENTS
SEPTEMBER 30, 1997
(UNAUDITED)
Reconciliation of the carrying amount of the mortgage-backed securities is
as follows:
<TABLE>
<S> <C>
Balance at December 31, 1996 $ 37,322,028
Addition
Amortization of discount on mortgage-backed securities 26,842
Net change in unrealized holding gains on available-for-sale securities 189,851
Deductions
Mortgage principal payments received (2,884,757)
------------
Balance at September 30, 1997 $ 34,653,964
============
</TABLE>
5. Investment in and Advances to Preferred Equity Participations (PEPs)
The PEPs consist of interests in limited partnerships which own properties
financed by the Fund. The limited partnership agreements provide for a
participation in the net cash flow and net sale or refinancing proceeds of the
properties subject to various priority payments. PEPs also consist of advances
made to limited partnerships financed by the Fund.
Descriptions of the PEPs held at September 30, 1997, are as follows:
<TABLE>
Carrying
Name Location Partnership Name Amount
- -------------------------- ------------------ -------------------------------------- ------------
<S> <C> <C> <C>
Harmony Bay Apartments Roswell, GA Harmony Bay Associates, Ltd. $ 2,162,991
Grand Villa Grand Junction, CO Stazier Associates Grand Junction Ltd. 152,070
Cambridge Court Kearney, NE Stazier Associates Kearney Ltd. 92,739
The Parklane Salt Lake City, UT Congregate Care Company -
Hickory Villa Omaha, NE Stazier Associates Omaha Ltd. -
------------
2,407,800
Less valuation allowance (904,249)
------------
Balance at September 30, 1997 $ 1,503,551
============
Reconciliation of the carrying amount of the PEPs is as follows:
Balance at December 31, 1996 $ 324,607
Advances to PEPs (1) 1,275,603
Equity in earnings of property partnerships 377,458
Equity distributions received from PEPs (474,117)
------------
Balance at September 30, 1997 $ 1,503,551
============
</TABLE>
(1) In conjunction with refinancing the mortgage note payable on Harmony Bay
Apartments, the Fund provided a working capital loan of $1,275,603 to the
limited partnership which owns such property.
6. Real Estate Acquired in Settlement of PEPs
The rental income and real estate operating, interest and depreciation
expenses of the properties owned by the Fund have been consolidated with the
Fund's operations and are reflected in the combined financial statements.
<PAGE> -8-
AMERICA FIRST PARTICIPATING/PREFERRED EQUITY MORTGAGE FUND
AND
AMERICA FIRST PARTICIPATING/PREFERRED EQUITY MORTGAGE FUND LIMITED PARTNERSHIP
NOTES TO COMBINED FINANCIAL STATEMENTS
SEPTEMBER 30, 1997
(UNAUDITED)
Real estate acquired in settlement of PEPs is comprised of the following
multifamily housing properties:
<TABLE>
Number Carrying
Name Location of Units Amount
- -------------------------- ------------------ -------- ------------
<S> <C> <C> <C>
Morrowood Townhouses Morrow, GA 264 6,024,558
Less accumulated depreciation (2,003,524)
------------
Balance at September 30, 1997 $ 4,021,034
============
Reconciliation of the carrying amount of the real estate held is as follows:
Balance at December 31, 1996 $ 6,381,300
Investment in real estate 7,656
Property deeded in lieu of foreclosure (1) (2,141,040)
Depreciation (226,882)
------------
Balance at September 30, 1997 $ 4,021,034
============
</TABLE>
(1) On September 12, 1997, Meadow Brook Apartments was deeded to the owner of
the mortgage in lieu of foreclosure (See Note 10).
7. Investment in Participating Loans
The Participating Loans are collateralized by first mortgages on properties
jointly financed with America First Apartment Investors, L.P., whose general
partner is an affiliate of AFCA 3. The Participating Loan agreements call for
payment of base interest and additional interest out of a portion of the net
cash flow or net sale or refinancing proceeds of the properties. On
April 30, 1997, the Jackson Park Place Participating Loan was repaid in full
to the Partnership. Accordingly, the Fund has one remaining Participating
Loan.
The description of the Participating Loan held as of September 30, 1997, is as
follows:
<TABLE>
<CAPTION>
Base
Number Interest Maturity Carrying
Name Location of Units Rate (1) Date Amount
- ---------------------------------- ------------------ -------- -------- ------------ ------------
<S> <C> <C> <C> <C> <C>
Avalon Ridge Renton, WA 356 10% (2) 09/01/99 $ 1,245,000
Valuation allowance to net realizable value (385,000)
------------
Balance at September 30, 1997 $ 860,000
============
</TABLE>
(1)In addition to the base interest rate, the note bears additional contingent
interest which, when combined with the base interest, is limited to a
cumulative, non-compounded amount not greater than 13% per annum. The Fund
did not receive any contingent interest in 1997.
(2)Interest is recognized as income on the cash basis which is at a rate lower
than the base interest rate. The amount of foregone interest for 1997 was
$55,216 ($13,885 for the quarter ended September 30, 1997)
<PAGE> -9-
AMERICA FIRST PARTICIPATING/PREFERRED EQUITY MORTGAGE FUND
AND
AMERICA FIRST PARTICIPATING/PREFERRED EQUITY MORTGAGE FUND LIMITED PARTNERSHIP
NOTES TO COMBINED FINANCIAL STATEMENTS
SEPTEMBER 30, 1997
(UNAUDITED)
<TABLE>
<S> <C>
Reconciliation of the carrying amount of the Participating Loans held is as follows:
Balance at December 31, 1996 $ 2,960,000
Repayment of Jackson Park Place Participating Loan (2,100,000) (1)
------------
Balance at September 30, 1997 $ 860,000
============
</TABLE>
(1)In addition to receiving the principal balance on April 30, 1997, the Fund
also received contingent interest as due under the terms of the
Participating Loan of $69,480.
8. Fund Reserve Account
The Fund maintains a reserve account which consisted of the following at
September 30, 1997:
Cash and temporary cash investments $ 9,914,362
GNMA Certificates 17,901,914
FNMA Certificates 2,635,566
--------------
$ 30,451,842
==============
The reserve account was established to maintain working capital for the Fund
and is available to supplement distributions to investors and for any
contingencies related to the ownership of the investments and the operation of
the Fund. The GNMA Certificates mature between 2008 and 2023 and the FNMA
Certificates mature in 2000. See Note 4 regarding the investment in
mortgage-backed securities.
The General Partner previously announced the Partnership's intent to utilize a
portion of the reserve account to acquire a maximum of 200,000 Exchangeable
Units (Units) in the over-the-counter market. On June 17, 1997, the General
Partner decided the Partnership should cease acquiring Units. Through
June 17, 1997, 196,730 Units (none during 1997) had been acquired at a total
cost of $1,823,521.
9. Transactions with Related Parties
Substantially all of the Fund's general and administrative expenses are paid
by AFCA 3 or an affiliate and reimbursed by the Fund. The amount of such
expenses reimbursed to AFCA 3 during 1997 was $1,225,415 ($655,752 for the
quarter ended September 30, 1997). The reimbursed expenses are presented on a
cash basis and do not reflect accruals made at quarter end.
AFCA 3 is entitled to an administrative fee of .35% per annum of the
outstanding amount of investments of the Fund to be paid by the Fund to the
extent such amount is not paid by property owners. During 1997, AFCA 3 earned
administrative fees of $170,066 ($56,476 for the quarter ended
September 30, 1997). Of this amount, $140,069 ($41,491 for the quarter ended
September 30, 1997) was paid by the Fund and the remainder was paid by
property owners. AFCA 3 also received administrative fees of $88,780 in
conjunction with the repayment of the Jackson Park Place Participating Loan
described in Note 7.
An affiliate of AFCA 3 has been retained to provide property management
services for Morrowood Townhouses, Avalon Ridge, Harmony Bay Apartments and
Meadow Brook Apartments (beginning in September 1996 and ending in
September 1997). 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. Total fees amounted
to $175,448 in 1997 ($56,812 for the quarter ended September 30, 1997).
<PAGE> -10-
AMERICA FIRST PARTICIPATING/PREFERRED EQUITY MORTGAGE FUND
AND
AMERICA FIRST PARTICIPATING/PREFERRED EQUITY MORTGAGE FUND LIMITED PARTNERSHIP
NOTES TO COMBINED FINANCIAL STATEMENTS
SEPTEMBER 30, 1997
(UNAUDITED)
10. Mortgage Notes Payable
The mortgage loan payable on real estate acquired in settlement of PEPs is as
follows:
<TABLE>
<CAPTION>
Interest Maturity Monthly
Collateral Rate Date Payment Balance
- ------------------------ -------- ---------- ------------ ------------
<S> <C> <C> <C> <C>
Morrowood Townhouses 7.75% 09/12/2027 $ 48,857 6,800,000
------------
Balance at September 30, 1997 $ 6,800,000
============
Reconciliation of the carrying amount of the mortgage notes payable is as follows:
Balance at December 31, 1996 $ 9,590,833
Payoff of mortgage note payable (1) (6,045,524)
Property deeded in lieu of foreclosure (2) (3,545,309)
Issuance of mortgage note payable (1) 6,800,000
------------
Balance at September 30, 1997 $ 6,800,000
============
</TABLE>
(1) As previously reported, the mortgage note payable on Morrowood Townhouses
was in default; however the property remained in compliance with the terms of
its Provisional Workout agreement (PWA). On September 17, 1997, the Fund
refinanced the mortgage note payable with an unaffiliated party which resulted
in the payoff of the existing note of $6,045,524 and the issuance of a new
mortgage note payable of $6,800,000. The Fund did not recognize a gain or
loss as a result of the refinancing. The new mortgage note payable is
collateralized by Morrowood Townhouses and is guaranteed by an affiliate of
AFCA 3.
(2) As previously reported, the owner of the mortgage on Meadow Brook
Apartments gave notice that it intended to terminate the PWA effective
April 30, 1997, despite the property's compliance with the terms of the PWA.
The property operated under a cash management agreement with the owner of the
mortgage from May 1, 1997, to September 12, 1997, at which time the property
was deeded to the owner of the mortgage in lieu of foreclosure. Since the
Fund's net equity in the property had previously been reduced to zero, this
action had no financial statement impact on the Fund.
The Fund effectively has no risk with respect to the mortgage notes payable
since the Fund's net equity in the properties had previously been reduced to
zero. Therefore, for accounting purposes, the Fund records interest expense
on the notes only when it is paid.
11. Proposed Merger
On July 29, 1997, the Partnership announced that it had signed an Agreement
and Plan of Merger, dated as of July 29, 1997 (the Merger Agreement), among
the Partnership, America First PREP Fund 2 Limited Partnership, a Delaware
limited partnership (Prep Fund 2), America First PREP Fund 2 Pension Series
Limited Partnership, a Delaware limited partnership (Pension Fund and together
with the Partnership and Prep Fund 2, the Funds), America First Mortgage
Investments, Inc., a newly formed Maryland corporation (AFM), and AF Merger,
L.P., a newly formed Delaware limited partnership and a subsidiary of AFM (AFM
L.P.), which contemplates a business combination transaction (the Merger)
pursuant to which the Partnership and Prep Fund 2 will merge with AFM, with
AFM surviving such merger, and Pension Fund will merge with AFM L.P., with the
Pension Fund surviving such merger. The Merger, which is expected to be
accomplished on a tax-deferred basis for investors in the Funds, will not be
consummated unless both the Partnership and Prep Fund 2 participate in the
Merger. The participation of Pension Fund is not a condition to the closing
of the Merger with respect to the Partnership and Prep Fund 2.
<PAGE> -11-
AMERICA FIRST PARTICIPATING/PREFERRED EQUITY MORTGAGE FUND
AND
AMERICA FIRST PARTICIPATING/PREFERRED EQUITY MORTGAGE FUND LIMITED PARTNERSHIP
NOTES TO COMBINED FINANCIAL STATEMENTS
SEPTEMBER 30, 1997
(UNAUDITED)
As a result of the Merger, (i) the outstanding Exchangeable Units of the
Partnership will be converted, at the rate of 1.00 share for each Exchangeable
Unit, into 5,775,797 shares of Common Stock, par value $0.01 per share, of AFM
(the Common Stock), (ii) the outstanding Beneficial Unit Certificates of Prep
Fund 2 (Prep Fund 2 BUCs) will be converted, at the rate of approximately 1.26
shares for each Prep Fund 2 BUC, into 2,012,336 shares of Common Stock and
(iii) the outstanding Beneficial Unit Certificates of Pension Fund (Pension
BUCs) will be converted, at the rate of approximately 1.31 shares for each
Pension BUC, into a maximum of 1,183,373 shares of Common Stock. If Pension
Fund participates in the Merger, holders of Pension BUCs will be given the
option, in lieu of receiving shares of Common Stock, to remain as investors in
Pension Fund (the Retention Option). To the extent that holders of Pension
BUCs elect the Retention Option, the aggregate number of shares of Common
Stock otherwise issuable to the such holders in the Merger will be accordingly
reduced. In connection with the organization of AFM, the general partners of
the Funds (the General Partners) were issued 90,621 shares of Common Stock and
will not be issued any additional shares as a result of the Merger.
Upon consummation of the Merger, AFM will become an externally advised
mortgage real estate investment trust owning, directly and indirectly, the
mortgage-backed securities, mortgage loans and other assets, subject to
liabilities, held by the Funds. AFM's business strategy will be to build on
and extend the business plans and investment methods and policies of the Funds
by employing leverage, investing primarily in adjustable-rate mortgage-backed
securities and mortgage loans and varying its investments over time.
Consequently, following the Merger, AFM intends to replace a substantial
portion of the Funds' current portfolio with a portfolio of adjustable-rate
mortgage-backed securities, mortgage loans and other related assets.
Pursuant to the Merger Agreement, each of the Funds shall generally bear their
own expenses in connection with the Merger. However, if the Merger Agreement
is terminated because a Fund (the Terminating Fund) has triggered certain of
the events of termination specified therein and such Terminating Fund has, on
or prior to the date of such termination, received a proposal constituting a
superior Competing Transaction (as such term is defined in the Merger
Agreement) that has not been offered on substantially equivalent terms to any
of the other Funds (each, an Excluded Fund), then each Terminating Fund agrees
to reimburse each Excluded Fund for its share of the out-of-pocket expenses
incurred in connection with the Merger Agreement, plus any expenses incurred
in enforcing the provisions of the obligations thereunder. Furthermore, if
Pension Fund is the Terminating Fund, the Partnership and Prep Fund 2 shall
have the right (i) to continue with the Merger, (ii) to terminate Pension
Fund's obligations under the Merger Agreement and (iii) to be reimbursed by
Pension Fund for its share of such expenses.
<PAGE> -12-
Item 2.
AMERICA FIRST PARTICIPATING/PREFERRED EQUITY MORTGAGE FUND
AND
AMERICA FIRST PARTICIPATING/PREFERRED EQUITY MORTGAGE FUND LIMITED PARTNERSHIP
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
Liquidity and Capital Resources
The Fund originally acquired: (i) ten mortgage-backed securities guaranteed as
to principal and interest by the Government National Mortgage Association
(GNMA) collateralized by first mortgage loans on multifamily housing
properties located in seven states, (the GNMA Certificates); (ii) various
mortgage-backed securities collateralized by pools of single-family mortgages
and guaranteed as to principal and interest by either GNMA or the Federal
National Mortgage Association (FNMA) (the Single-Family Certificates); (iii) a
first mortgage loan insured by the Federal Housing Administration (the FHA
Loan) on a retirement living center located in California; (iv) limited
partnership interests (PEPs) in eleven limited partnerships which own the
multifamily properties financed by the GNMA Certificates and the FHA Loan; and
(v) two participating first mortgage loans (the Participating Loans) on
multifamily housing properties financed in part by an affiliated mortgage
fund. The FHA Loan and six of the GNMA Certificates collateralized by
multifamily properties have been repaid by GNMA or the Department of Housing
and Urban Development which left the Fund with only the PEPs on these
properties. Under the terms of the limited partnership agreements for the
PEPs, the Fund has removed the general partners of seven of the limited
partnerships owning multifamily properties. In three cases, the Fund acquired
the general partners' interest in the limited partnerships in addition to its
PEP. Accordingly, the Fund became the indirect owner of the entire equity
interest in these properties and began accounting for them as investments in
real estate (the Real Estate Interests). One of these properties was
foreclosed upon by GNMA in 1989 and Meadow Brook Townhouses was deeded to the
owner of the mortgage in lieu of foreclosure on September 12, 1997.
Therefore, the Fund no longer holds interests in these properties. In the
remaining four limited partnerships, a substitute limited partner was admitted
and acquired a portion of the removed general partner's interest. The Fund
continued to own PEPs in these properties until 1995 when Casa Sandoval was
sold in foreclosure and the Fund withdrew as the limited partner from
Moonraker Apartments. Additionally, effective September 29, 1996, Timber Cove
Apartments was sold at a foreclosure auction. On April 30, 1997, the Jackson
Park Place Participating Loan was repaid. As a result of the foregoing, at
September 30, 1997, the Fund holds four GNMA Certificates, various
Single-Family Certificates, five PEPs, one Real Estate Interest and one
Participating Loan.
The following table shows the occupancy levels of the properties financed by
the Fund in which the Fund continues to hold an interest at September 30, 1997:
<TABLE>
<CAPTION>
Number Percentage
Number of Units of Units
Property Name Location of Units Occupied Occupied
- ------------------------------------- ------------------ -------------- -------------- --------------
<S> <C> <C> <C> <C>
The Parklane (1) Salt Lake City, UT 94 94 100%
Grand Villa (1) Grand Junction, CO 47 44 94%
Cambridge Court (1) Kearney, NE 42 37 88%
Hickory Villa (1) Omaha, NE 52 47 90%
Harmony Bay Apartments (2) Roswell, GA 300 294 98%
Morrowood Townhouses (3) Morrow, GA 264 256 97%
Avalon Ridge (4) Renton, WA 356 343 96%
-------------- -------------- --------------
1,155 1,115 97%
============== ============== ==============
</TABLE>
(1)The Fund's investment consists of a GNMA Certificate and a PEP.
(2)The Fund's investment consists of a PEP.
(3)The Fund's investment consists of a Real Estate Interest.
(4)The Fund's investment consists of a Participating Loan.
<PAGE> -13-
AMERICA FIRST PARTICIPATING/PREFERRED EQUITY MORTGAGE FUND
AND
AMERICA FIRST PARTICIPATING/PREFERRED EQUITY MORTGAGE FUND LIMITED PARTNERSHIP
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
Distributions
Cash distributions paid or accrued were as follows:
<TABLE>
<CAPTION>
For the Nine Months Ended For the Nine Months Ended
Sept. 30, 1997 Sept. 30, 1996
------------------------------- -------------------------------
Per
Per Unit Per Unit Certificate
------------- ------------- -------------
<S> <C> <C> <C>
Regular monthly distributions
Income distributed $ .3016 $ .3988 $ 996.91
Return of capital .4931 .3959 989.84
------------- ------------- -------------
$ .7947 $ .7947 $ 1,986.75
============= ============= =============
Distributions
Paid out of current and prior undistributed cash flow $ .7947 $ .7947 $ 1,986.75
============= ============= =============
</TABLE>
Regular monthly distributions to investors consist primarily of interest and
principal received on the GNMA Certificates and Single-Family Certificates.
Additional cash for distributions is received from PEPs, Participating Loans,
and other investments. The Real Estate Interests do not generate cash flow to
the Fund as all net cash flow is used to pay debt service on the mortgage
notes. The Fund may draw on reserves to pay operating expenses or to
supplement cash distributions to investors. The Fund is permitted to
replenish its reserves through the sale or refinancing of assets. During
1997, a net amount of $133,470 of undistributed mortgage principal payments
was placed in reserves ($240,077 of undistributed mortgage principal payments
was withdrawn from reserves for the quarter ended September 30, 1997). The
total amount held in reserves at September 30, 1997, was $30,451,842 of which
$20,537,480 was invested in GNMA and FNMA Certificates.
The Fund believes that cash provided by operating and investing activities
and, if necessary, withdrawals from the Fund's reserves will be adequate to
meet its short-term and long-term liquidity requirements, including the
payments of distributions to investors. The Fund has no other internal or
external sources of liquidity. Under the terms of the Pooling and Servicing
agreement, the Fund is not authorized to enter into short-term or long-term
debt financing arrangements or issue additional Units or Certificates to meet
short-term and long-term liquidity requirements.
Asset Quality
The Fund continues to receive the full amount of monthly principal and
interest payments on its GNMA Certificates and Single-Family Certificates.
The GNMA Certificates and Single-Family Certificates are fully guaranteed as
to principal and interest by either GNMA or FNMA. The obligations of GNMA are
backed by the full faith and credit of the United States government.
PEPs, the Real Estate Interest, and the Participating Loan, however, are not
insured or guaranteed. The value of these investments is a function of the
value of the real estate underlying the PEPs, the Real Estate Interest, or
the real estate collateralizing the Participating Loan. It is the policy of
the management of the Fund to make a periodic review of such real estate in
order to establish, when necessary, valuation reserves on investments in PEPs
and the Participating Loan or adjust the carrying value of the Real Estate
Interest. The allowance for losses on investments in PEPs is based on the
fair value of the properties underlying the PEPs. A reserve for the
Participating Loan is established for the difference between the recorded
investment in the Participating Loan and the fair value of the underlying
collateral. The carrying value of the Real Estate Interest is recorded at
the lower of cost or net realizable value.
<PAGE> -14-
AMERICA FIRST PARTICIPATING/PREFERRED EQUITY MORTGAGE FUND
AND
AMERICA FIRST PARTICIPATING/PREFERRED EQUITY MORTGAGE FUND LIMITED PARTNERSHIP
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
The fair value of the properties underlying the PEPs, the Real Estate
Interest, and the collateral for the Participating Loan is based on
management's best estimate of the net realizable value of such properties;
however, the ultimate realized values may vary from these estimates. The
valuation allowances for losses on PEPs and the Participating Loan are
periodically reviewed and adjustments are made to the allowances when there
are significant changes in the estimated net realizable value of the
properties underlying the PEPs or the underlying collateral for the
Participating Loan. The carrying value of the Real Estate Interest is
adjusted when there are significant declines in the estimated net realizable
value. Internal property valuations and reviews performed during the nine
months ended September 30, 1997, indicated that the investment in PEPs, the
Real Estate Interest, and the Participating Loan recorded on the balance
sheet at September 30, 1997, required no adjustments to current carrying
amounts.
On July 24, 1997, the limited partnerships which own Morrowood Townhouses and
Harmony Bay Apartments entered into a Loan Purchase Agreement with the owner
of such mortgages (the Seller) to acquire the mortgage loans from the current
owner on a discounted basis for $16,550,000. The Fund did not recognize a
gain or loss as a result of this transaction. The limited partnerships which
own Morrowood Townhouses and Harmony Bay Apartments financed the acquisitions
through refinancing these mortgage loans at lower interest rates than those
currently on the mortgage loans. The refinancing was completed on
September 17, 1997. In conjunction with the refinancing, the Fund provided a
working capital loan of $1,275,603 to the limited partnership which owns
Harmony Bay Apartments. The General Partner believes that refinancing these
mortgage loans will increase the earnings potential of Morrowood Townhouses
and Harmony Bay Apartments which will ultimately increase cash flow to the
Fund.
As previously reported, the owner of the mortgage on Meadow Brook Apartments
gave notice that it intended to terminate the PWA effective April 30, 1997,
despite the property's compliance with the terms of the PWA. The property
operated under a cash management agreement with the owner of the mortgage from
May 1, 1997, to September 12, 1997, at which time the property was deeded to
the owner of the mortgage in lieu of foreclosure. Since the Fund's net equity
in the property had previously been reduced to zero, this action had no
financial statement impact on the Fund.
The overall status of the Fund's other Permanent Investments has remained
relatively constant since June 30, 1997.
<PAGE> -15-
AMERICA FIRST PARTICIPATING/PREFERRED EQUITY MORTGAGE FUND
AND
AMERICA FIRST PARTICIPATING/PREFERRED EQUITY 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, 1997 Sept. 30, 1996 From 1996
-------------- -------------- --------------
<S> <C> <C> <C>
Mortgage and mortgage-backed securities income $ 658,814 $ 735,828 $ (77,014)
Equity in earnings of property partnerships 147,302 84,125 63,177
Rental income 629,101 608,048 21,053
Interest income on participating loans 17,240 59,030 (41,790)
Interest income on temporary cash investments
and U.S. government securities 152,289 117,171 35,118
-------------- -------------- --------------
1,604,746 1,604,202 544
-------------- -------------- --------------
General and administrative expenses 706,389 222,849 483,540
Real estate operating expenses 411,028 288,652 122,376
Depreciation 75,627 81,009 (5,382)
Interest expense 142,446 238,387 (95,941)
-------------- -------------- --------------
1,335,490 830,897 504,593
-------------- -------------- --------------
Net income $ 269,256 $ 773,305 $ (504,049)
============== ============== ==============
</TABLE>
<TABLE>
<CAPTION>
For the Nine For the Nine Increase
Months Ended Months Ended (Decrease)
Sept. 30, 1997 Sept. 30, 1996 From 1996
-------------- -------------- --------------
<S> <C> <C> <C>
Mortgage and mortgage-backed securities income $ 2,024,656 $ 2,298,465 $ (273,809)
Equity in earnings of property partnerships 377,458 206,224 171,234
Rental income 1,897,467 1,788,012 109,455
Interest income on participating loans 177,639 184,481 (6,842)
Interest income on temporary cash investments
and U.S. government securities 419,125 324,938 94,187
-------------- -------------- --------------
4,896,345 4,802,120 94,225
-------------- -------------- --------------
General and administrative expenses 1,241,639 679,835 561,804
Real estate operating expenses 1,104,990 913,699 191,291
Depreciation 226,882 243,027 (16,145)
Interest expense 565,595 631,286 (65,691)
-------------- -------------- --------------
3,139,106 2,467,847 671,259
-------------- -------------- --------------
Net income $ 1,757,239 $ 2,334,273 $ (577,034)
============== ============== ==============
</TABLE>
The decrease in mortgage and mortgage-backed securities income for the quarter
and nine months ended September 30, 1997, compared to the same periods in
1996, is due to the continued amortization of the principal balances of the
mortgage-backed securities.
Equity in earnings of property partnerships is a function of the cash flow
received by the Fund from its PEP interests in the operating partnerships
which own certain of the properties as well as the Fund's allocable share of
earnings generated by these properties. Equity in earnings of property
partnerships increased for the quarter and nine months ended
September 30, 1997, compared to the same periods in 1996. Such increases are
due primarily to an increase in equity distributions of approximately $75,000
and $185,000, respectively, received from The Parklane during the quarter and
nine months ended September 30, 1997, compared to the same periods in 1996.
These increases were partially offset by decreases in equity distributions of
<PAGE> -16-
AMERICA FIRST PARTICIPATING/PREFERRED EQUITY MORTGAGE FUND
AND
AMERICA FIRST PARTICIPATING/PREFERRED EQUITY MORTGAGE FUND LIMITED PARTNERSHIP
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
approximately $12,000 and $14,000 received from the Partnership's other PEP
interests for the quarter and nine months, respectively.
Interest income on Participating Loans decreased for the quarter and nine
months ended September 30, 1997, compared to the same periods in 1996.
Approximately $53,000 of such decrease for the quarter and $88,000 of such
decrease for the nine months is due to the Fund no longer receiving base
interest on the Jackson Park Place Participating Loan due to the payoff of its
principal balance in April 1997. The decrease for the quarter was partially
offset by an increase in interest earned of $11,000 on the Avalon Ridge
Participating Loan. The decrease of $88,000 in base interest on the Jackson
Park Place Participating Loan for the nine months ended September 30, 1997,
was partially offset by approximately $69,500 in contingent interest received
on such loan upon repayment of its principal balance and an increase of
approximately $11,500 in interest earned on the Avalon Ridge Participating
loan.
Rental income, net of real estate operating expenses and depreciation, from
the properties acquired by the Fund in settlement of PEPs decreased $95,941
for the quarter and $65,691 for the nine months ended September 30, 1997,
compared to the same periods in 1996. This decrease resulted from an increase
in rental income resulting primarily from an increase in average occupancy and
a decrease in depreciation expense which was more than offset by higher real
estate operating expenses. The increase in real estate operating expenses is
due primarily to expenses incurred in connection with the refinancing of the
mortgage loan payable on Morrowood Townhouses and to increases in repairs and
maintenance expenses and property improvements. The decrease in net rental
income was entirely offset by decreases in interest paid by the Fund on the
mortgage loans it has assumed on these properties. Since interest is paid
only to the extent of available cash flow from these properties, the Fund
records less interest expense as such cash flow decreases.
Interest income on temporary cash investments and U.S. government securities
increased for the quarter and nine months ended September 30, 1997, compared
to the same periods in 1996, primarily due to an increase in cash held in the
Fund's reserve.
The increase in general and administrative expenses for the quarter ended
September 30, 1997, compared to the same period in 1996, was due to:
(i) transaction costs of approximately $395,000 incurred in conjunction with
the proposed merger described in Note 11 to the financial statements; and
(ii) increases in salaries and related expenses of approximately $95,000;
partially offset by (iii) a net decrease in other general and administrative
expenses of approximately $6,000. The increase in general and administrative
expenses for the nine months ended September 30, 1997, compared to the same
period in 1996, is due to: (i) transaction costs of approximately $428,000 as
described above; (ii) an increase in salaries and related expenses of
approximately $115,000; (iii) an increase in administrative fees of
approximately $11,000 and (iv) a net increase in other general and
administrative expenses of approximately $8,000.
<PAGE> -17-
PART II. OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
4(a) Agreement of Limited Partnership dated November 20, 1986
(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 Participating/
Preferred Equity Mortgage Fund Limited Partnership
(Commission File No. 0-15854)).
4(b) Form of Certificate of Beneficial Unit Certificate
(incorporated herein by reference to Form S-11 Registration
Statement filed February 24, 1986 with the Securities and
Exchange Commission by America First Participating/
Preferred Equity Mortgage Fund Limited Partnership
(Commission File No. 33-3566)).
4(c) Pooling and Servicing Agreement dated November 20, 1986
(including as an exhibit thereto the Form of Exchangeable
Passthrough Certificate) (incorporated herein by reference
to Form 10-K dated December 31, 1986 filed pursuant to
Section 13 or 15(d) of the Securities Exchange Act of 1934
by America First Participating/Preferred Equity Mortgage
Fund (Commission File No. 0-15665)).
4(d) Agreement and Plan of Merger, dated as of July 29, 1997,
among the Registrant, America First Prep Fund 2 Limited
Partnership, America First Prep Fund 2 Pension Series
Limited Partnership and AF Merger, L.P. (incorporated
herein by reference to Form 10-Q dated June 30, 1997,
filed pursuant to Section 13 or 15(d) of the Securities
Act of 1934 by America First Participating Preferred
Equity Mortgage Fund Limited Partnership (Commission File
No. 0-15854)).
(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> -18-
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Registrants have duly caused this report to be
signed on their behalf by the undersigned, thereunto duly authorized.
AMERICA FIRST PARTICIPATING/
PREFERRED EQUITY MORTGAGE FUND
By America First Participating/
Preferred Equity Mortgage
Fund Limited Partnership,
Managing General Partner
of the Registrant
By America First Capital
Associates Limited Partnership
Three, General Partner of America First
Participating/Preferred Equity Mortgage
Fund Limited Partnership
By America First Companies L.L.C, General
Partner of America First Capital
Associates Limited Partnership
Three
By /s/ Michael Thesing
Michael Thesing,
Vice President and
Principal Financial Officer
Dated: November 12, 1997 AMERICA FIRST PARTICIPATING/
AMERICA FIRST PARTICIPATING/
PREFERRED EQUITY MORTGAGE
FUND LIMITED PARTNERSHIP
By America First Capital
Associates Limited Partnership
Three, General Partner of America First
Participating/Preferred Equity Mortgage
Fund Limited Partnership
By America First Companies L.L.C, General
Partner of America First Capital
Associates Limited Partnership
Three
By /s/ Michael Thesing
Michael Thesing,
Vice President and
Principal Financial Officer
Dated: November 12, 1997
<PAGE> -19-
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-END> SEP-30-1997
<CASH> 10,393,926
<SECURITIES> 34,653,964
<RECEIVABLES> 276,909
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 10,670,835
<PP&E> 6,024,558
<DEPRECIATION> (2,003,524)
<TOTAL-ASSETS> 54,584,217
<CURRENT-LIABILITIES> 739,483
<BONDS> 0
<COMMON> 0
0
0
<OTHER-SE> 47,044,734
<TOTAL-LIABILITY-AND-EQUITY> 54,584,217
<SALES> 0
<TOTAL-REVENUES> 4,896,345
<CGS> 0
<TOTAL-COSTS> 2,573,511
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 565,595
<INCOME-PRETAX> 1,757,239
<INCOME-TAX> 0
<INCOME-CONTINUING> 0
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 1,757,239
<EPS-PRIMARY> 0
<EPS-DILUTED> 0
</TABLE>
