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: 0-17582
AMERICA FIRST PREP FUND 2 PENSION SERIES LIMITED PARTNERSHIP
(Exact name of registrant as specified in its charter)
Delaware 47-0719051
(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 PREP FUND 2 PENSION SERIES LIMITED PARTNERSHIP
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 $ 2,568,226 $ 2,072,577
Investment in mortgage-backed securities (Note 5) 7,534,693 8,506,853
Investment in preferred real estate participations (PREPs),
net of valuation allowance (Note 6) - -
Interest receivable 56,488 60,561
Other assets 34,922 50,805
-------------- --------------
$ 10,194,329 $ 10,690,796
============== ==============
Liabilities and Partners' Capital
Liabilities
Accounts payable (Note 7) $ 45,830 $ 54,401
Distribution payable (Note 4) 98,193 101,945
-------------- --------------
144,023 156,346
-------------- --------------
Partners' Capital
General Partner 100 100
Beneficial Unit Certificate Holders
($11.09 per BUC in 1997 and $11.63 in 1996) 10,050,206 10,534,350
-------------- --------------
10,050,306 10,534,450
-------------- --------------
$ 10,194,329 $ 10,690,796
============== ==============
</TABLE>
AMERICA FIRST PREP FUND 2 PENSION SERIES LIMITED PARTNERSHIP
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-backed securities income $ 139,052 $ 163,273 $ 424,589 $ 501,796
Equity in earnings (losses) of property partnerships 12,791 (24,919) 59,852 17,808
Interest income on temporary cash investments 35,317 24,262 103,058 69,793
--------------- --------------- --------------- ---------------
187,160 162,616 587,499 589,397
Expenses
General and administrative expenses (Note 7) 120,526 45,278 218,942 137,083
--------------- --------------- --------------- ---------------
Net income $ 66,634 $ 117,338 $ 368,557 $ 452,314
=============== =============== =============== ===============
Net income allocated to:
General Partner $ 2,958 $ 3,109 $ 8,987 $ 9,437
BUC Holders 63,676 114,229 359,570 442,877
--------------- --------------- --------------- ---------------
$ 66,634 $ 117,338 $ 368,557 $ 452,314
=============== =============== =============== ===============
Net income per BUC $ .07 $ .13 $ .40 $ .49
=============== =============== =============== ===============
The accompanying notes are an integral part of the financial statements.
</TABLE>
<PAGE> - 1 -
AMERICA FIRST PREP FUND 2 PENSION SERIES LIMITED PARTNERSHIP
STATEMENT OF PARTNERS' CAPITAL
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1997
(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, 1996 $ 100 $ 10,573,074 $ 10,573,174
Net income 8,987 359,570 368,557
Cash distributions paid or accrued (Note 4) (8,987) (889,759) (898,746)
-------------- ---------------- ---------------
100 10,042,885 10,042,985
-------------- ---------------- ---------------
Net unrealized holding gains (losses)
Balance at December 31, 1996 - (38,724) (38,724)
Net change - 46,045 46,045
-------------- ---------------- ---------------
- 7,321 7,321
-------------- ---------------- ---------------
Balance at September 30, 1997 $ 100 $ 10,050,206 $ 10,050,306
============== ================ ===============
</TABLE>
AMERICA FIRST PREP FUND 2 PENSION SERIES LIMITED PARTNERSHIP
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 $ 368,557 $ 452,314
Adjustments to reconcile net income to net cash
provided by operating activities
Equity in earnings of property partnerships (59,852) (17,808)
Amortization of discount on mortgage-backed securities (6,495) (8,421)
Decrease in interest receivable 4,073 3,595
Decrease in other assets 15,883 5,585
Decrease in accounts payable (8,571) (6,029)
--------------- ---------------
Net cash provided by operating activities 313,595 429,236
--------------- ---------------
Cash flows from investing activities
Mortgage principal payments received 1,024,700 649,228
Distributions received from PREPs 59,852 65,804
Investment in PREPs - (47,996)
--------------- ---------------
Net cash provided by investing activities 1,084,552 667,036
--------------- ---------------
Cash flow used in financing activity
Distributions paid (902,498) (1,053,608)
--------------- ---------------
Net increase in cash and temporary cash investments 495,649 42,664
Cash and temporary cash investments at beginning of period 2,072,577 1,813,499
--------------- ---------------
Cash and temporary cash investments at end of period $ 2,568,226 $ 1,856,163
=============== ===============
The accompanying notes are an integral part of the financial statements.
</TABLE>
<PAGE> - 2 -
AMERICA FIRST PREP FUND 2 PENSION SERIES LIMITED PARTNERSHIP
NOTES TO FINANCIAL STATEMENTS
SEPTEMBER 30, 1997
(UNAUDITED)
1. Organization
America First PREP Fund 2 Pension Series Limited Partnership (the Partnership)
was formed on February 2, 1988, under the Delaware Revised Uniform Limited
Partnership Act for the purpose of acquiring a portfolio of federally-insured
multifamily mortgages and other investments including preferred real estate
participations (PREPs). PREPs consist of equity interests which are intended
to provide the Partnership with a participation in the net cash flow and net
sale or refinancing proceeds of the properties collateralizing the mortgage
loans. The Partnership began operations with the first escrow closing on May
25, 1988, and will continue in existence until December 31, 2017, unless
terminated earlier under the provisions of the Partnership Agreement. The
General Partner of the Partnership is America First Capital Associates Limited
Partnership Six (AFCA 6).
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, 1996. In the opinion of management, all normal and recurring
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 Partnership does not have investment
securities classified as trading.
C) Investment in PREPs
The investment in PREPs consists of interests in limited partnerships
which own properties underlying the mortgage-backed securities and is
accounted for using the equity method. When an investment in a PREP has
been reduced to zero, earnings are recorded to the extent that
distributions are received. PREPs are not insured or guaranteed. The
value of these investments is a function of the value of the real estate
underlying the PREPs.
D) Allowance for Losses on Investments in PREPs
The allowance for losses on investments in PREPs is a valuation reserve
which has been established at a level that management feels is adequate to
absorb potential losses on investments in PREPs. The allowance is based
on the fair value of the properties underlying the PEPs. The allowance is
periodically reviewed and adjustments are made to the allowance when there
are significant changes in the estimated fair value of the properties
underlying the PREPs.
<PAGE> - 3 -
AMERICA FIRST PREP FUND 2 PENSION SERIES LIMITED PARTNERSHIP
NOTES TO FINANCIAL STATEMENTS
SEPTEMBER 30, 1997
(UNAUDITED)
E) Income Taxes
No provision has been made for income taxes since Beneficial Unit
Certificate (BUC) Holders are required to report their share of the
Partnership's income for federal and state income tax purposes.
F) Temporary Cash Investments
Temporary cash investments are invested in short-term debt securities
purchased with an original maturity of three months or less.
G) Net Income Per BUC
Net income per BUC has been calculated based on the number of BUCs
outstanding (905,974) for all periods presented.
3. Partnership Reserve Account
The Partnership maintains a reserve account which consists of the following
at September 30, 1997:
<TABLE>
<S> <C>
Cash and temporary cash investments $ 2,483,206
GNMA Certificates 1,347,533
FNMA Certificates 983,046
---------------
$ 4,813,785
===============
</TABLE>
The reserve account was established to maintain working capital for the
Partnership and is available for distribution to BUC Holders and for any
contingencies related to Permanent Investments and the operation of the
Partnership. See Note 5 regarding the investment in mortgage-backed
securities.
4. Partnership Income, Expenses and Cash Distributions
The Partnership Agreement contains provisions for distributing the cash
available for distribution and for the allocation of income and expenses for
tax purposes among AFCA 6 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.
5. 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 housing 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 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, gross unrealized holding losses, and aggregate fair value of
available-for-sale securities are $2,323,258, $26,478, $19,157 and $2,330,579,
respectively. The total amortized cost, gross unrealized holding gains, gross
unrealized holding losses, and aggregate fair value of held-to-maturity
securities are $5,204,114, $159,205, $284,681 and $5,078,638, respectively.
<PAGE> - 4 -
AMERICA FIRST PREP FUND 2 PENSION SERIES LIMITED PARTNERSHIP
NOTES TO FINANCIAL STATEMENTS
SEPTEMBER 30, 1997
(UNAUDITED)
Descriptions of the Partnership'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:
Broadmoor Court Colorado Springs, CO 47 9.25% 10/15/29 $ 579,348
Owings Chase Apartments Pikesville, MD 234 6.75% 12/15/23 3,163,129
Pools of single-family mortgages 8.74%(1) 2016 to 2018 1,461,637
--------------
5,204,114
--------------
Available-for-Sale
GNMA Certificates:
Pools of single-family mortgages 6.03%(1) 2008 668,780(2)
Pools of single-family mortgages 7.58%(1) 2008 678,753(2)
FNMA Certificates:
Pools of single-family mortgages 5.52%(1) 2000 983,046(2)
---------------
2,330,579
---------------
Balance at September 30, 1997 $ 7,534,693
===============
</TABLE>
(1) Represents yield to the Partnership.
(2) Reserve account asset - see Note 3.
Reconciliation of the carrying amount of the mortgage-backed securities is as
follows:
<TABLE>
<S> <C>
Balance at December 31, 1996 $ 8,506,853
Additions
Amortization of discount on mortgage-backed securities 6,495
Change in net unrealized holding gains (losses) on
available-for-sale securities 46,045
Deduction
Mortgage principal payments received (1) (1,024,700)
---------------
Balance at September 30, 1997 $ 7,534,693
===============
(1) Includes proceeds of $556,444 received from GNMA due to the redemption
of the GNMA Certificate related to Ashwood Apartments.
</TABLE>
6. Investment in PREPs
The Partnership's PREPs consist of interests in limited partnerships which own
multifamily properties financed by the Partnership. The limited partnership
agreements originally provided for the payment of a base return on the equity
provided to the limited partnerships and for the payment of additional amounts
out of a portion of the net cash flow or net sale or refinancing proceeds of
the properties subject to various priority payments. Certain of the
agreements have been amended to defer payment of the base return.
<PAGE> - 5 -
AMERICA FIRST PREP FUND 2 PENSION SERIES LIMITED PARTNERSHIP
NOTES TO FINANCIAL STATEMENTS
SEPTEMBER 30, 1997
(UNAUDITED)
Descriptions of the PREPs at September 30, 1997, are as follows:
<TABLE>
<CAPTION>
Carrying
Name Location Partnership Name Amount
-------------------------- -------------------- ----------------------------- -----------------
<S> <C> <C> <C>
Broadmoor Court Colorado Springs, CO Stazier Associates Colorado Springs, Ltd. $ 53,547
Owings Chase Apartments Pikesville, MD Owings Chase Limited Partnership 150,000
Laurel Park Apartments Riverdale, GA Gold Key Venture -
-----------------
203,547
Less valuation allowance (203,547)
-----------------
Balance at September 30, 1997 $ -
=================
</TABLE>
Reconciliation of the carrying amount of the PREPs is as follows:
<TABLE>
<S> <C>
Balance at December 31, 1996 $ -
Addition
Equity in earnings of property partnerships 59,852
Deduction
Distributions received from PREPs (59,852)
-----------------
Balance at September 30, 1997 $ -
=================
</TABLE>
7. Transactions with Related Parties
Substantially all the Partnership's general and administrative expenses are
paid by AFCA 6 or an affiliate and reimbursed by the Partnership. The amount
of such expenses reimbursed to AFCA 6 during 1997 was $213,258 ($105,171 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 6 is entitled to an administrative fee of .35% per annum of the
outstanding principal amounts invested in mortgage-backed securities, PREPs,
and temporary cash investments to be paid by the Partnership to the extent
such amount is not paid by property owners. During 1997, AFCA 6 earned
administrative fees of $18,599 ($6,138 for the quarter ended September 30,
1997), all of which was paid by the Partnership.
The general partner of the property partnership which owns Owings Chase
Apartments is principally owned by an employee of an affiliate of AFCA 6.
Such employee has a nominal interest in the affiliate. Affiliates of AFCA 6
also own small interests in the general partner. The general partner has a
nominal interest in the property partnership's profits, losses and cash flow
which is subordinate to the interest of the Partnership. The general partner
did not receive cash distributions from the property partnership in 1997.
An affiliate of AFCA 6 has been retained to provide property management
services for Laurel Park Apartments and Owings Chase Apartments. 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 $32,086 in 1997 ($10,660 for
the quarter ended September 30, 1997).
<PAGE> - 6 -
AMERICA FIRST PREP FUND 2 PENSION SERIES LIMITED PARTNERSHIP
NOTES TO FINANCIAL STATEMENTS
SEPTEMBER 30, 1997
(UNAUDITED)
8. 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 Participating Preferred Equity Mortgage Fund
Limited Partnership, a Delaware limited partnership (Prep Fund 1), America
First PREP Fund 2 Limited Partnership, a Delaware limited partnership (Prep
Fund 2 and together with the Partnership and Prep Fund 1, 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 Prep Fund 1 and Prep Fund 2 will
merge with AFM, with AFM surviving such merger, and the Partnership will merge
with AFM L.P., with the Partnership 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 Prep Fund 1 and Prep Fund 2
participate in the Merger. The participation of the Partnership is not a
condition to the closing of the Merger with respect to Prep Fund 1 and Prep
Fund 2.
As a result of the Merger, (i) the outstanding BUCs of the Partnership
(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, par
value $0.01 per share, of AFM (the Common Stock), (ii) the outstanding
Exchangeable Units of Prep Fund 1 will be converted, at the rate of 1.00 share
for each Exchangeable Unit, into 5,775,797 shares of Common Stock and (iii)
the outstanding BUCs 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. If the Partnership 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 the Partnership (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
the Partnership is the Terminating Fund, Prep Fund 1 and Prep Fund 2 shall
have the right (i) to continue with the Merger, (ii) to terminate the
Partnership's obligations under the Merger Agreement and (iii) to be
reimbursed by the Partnership for its share of such expenses.
<PAGE> - 7 -
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations
Liquidity and Capital Resources
The Partnership originally acquired: (i) five 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 four 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);
and (iii) limited partnership interests (PREPs) in five limited partnerships
which own the multifamily housing properties financed by the GNMA
Certificates. The Partnership has been repaid by GNMA on the GNMA
Certificates collateralized by the Villages at Moonraker, Laurel Park
Apartments and, during January of 1997, Ashwood Apartments. During 1995, the
Partnership withdrew as a limited partner of the operating partnership which
owns the Villages at Moonraker and, therefore, no longer holds its PREP in
this property. During the fourth quarter of 1996, the Partnership sold its
PREP in Ashwood Apartments. The Partnership has retained its PREP in Laurel
Park Apartments. Collectively, the two remaining GNMA Certificates and the
three remaining PREPs are referred to as the Permanent Investments. In
addition, the Partnership held various Single-Family Certificates at September
30, 1997.
The following table shows the occupancy levels of the properties financed by
the Partnership and in which the Partnership continues to hold an equity
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>
Broadmoor Court Colorado Springs, CO 47 41 87%
Laurel Park Apartments Riverdale, GA 387 368 95%
Owings Chase Apartments Pikesville, MD 234 221 94%
--------- ---------- -----------
668 630 94%
========= ========== ===========
</TABLE>
Distributions
Cash distributions paid or accrued per Beneficial Unit Certificate (BUC) were
as follows:
<TABLE>
<CAPTION>
For the Nine For the Nine
Months Ended Months Ended
Sept. 30, 1997 Sept. 30, 1996
-------------- --------------
<S> <C> <C>
Regular monthly distributions
Income $ .3969 $ .4888
Return of Capital .5852 .5424
-------------- --------------
$ .9821 $ 1.0312
============== ==============
Distributions
Paid out of cash flow (including mortgage principal payments) $ .9821 $ 1.0312
============== ==============
</TABLE>
<PAGE> - 8 -
Regular monthly distributions to investors consist primarily of interest and
principal received on GNMA Certificates and Single-Family Certificates.
Additional cash for distributions is received from PREPs and temporary cash
investments. The Partnership may draw on reserves to pay operating expenses
or to supplement cash distributions to BUC Holders. The Partnership is
permitted to replenish its reserves through the sale or refinancing of
assets. During 1997, a net amount of $494,511 of undistributed mortgage
principal payments was placed in reserves (a net amount of $2,188 was
withdrawn from reserves for the quarter ended September 30, 1997). The total
amount held in reserves at September 30, 1997, was $4,813,785 of which
$2,330,579 was invested in Single-Family Certificates.
The Partnership believes that cash provided by operating and investing
activities and, if necessary, withdrawals from the Partnership's reserves will
be adequate to meet its short-term and long-term liquidity requirements,
including the payments of distributions to BUC Holders. 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 and
long-term liquidity requirements.
Asset Quality
The Partnership continues to receive monthly principal and interest payments
on its GNMA Certificates and Single-family Certificates which are fully
guaranteed either by GNMA or FNMA. The obligations of GNMA are backed by the
full faith and credit of the United States government.
PREPs, however, are not insured or guaranteed. The value of these investments
is a function of the value of the real estate underlying the PREPs. It is the
policy of the Partnership to make a periodic review of the real estate
underlying the PREPs in order to establish, when necessary, a valuation
reserve on the investment in PREPs. The allowance for losses on investment in
PREPs is based on the fair value of the properties underlying the PREPs. The
fair value of the properties underlying the PREPs 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 allowance is
periodically reviewed and adjustments are made to the allowance when there are
significant changes in the estimated net realizable value of the properties
underlying the PREPs. Internal property valuations and reviews performed
during the nine months ended September 30, 1997, indicated that the PREPs
recorded on the balance sheet at September 30, 1997, required no adjustments
to their current carrying amounts.
The overall status of the Partnership's Permanent Investments has remained
relatively constant since June 30, 1997.
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-backed securities income $ 139,052 $ 163,273 $ (24,221)
Equity in earnings (losses) of property partnerships 12,791 (24,919) 37,710
Interest income on temporary cash investments 35,317 24,262 11,055
--------------- --------------- ---------------
187,160 162,616 24,544
General and administrative expenses 120,526 45,278 75,248
--------------- --------------- ---------------
Net income $ 66,634 $ 117,338 $ (50,704)
=============== =============== ===============
</TABLE>
<PAGE> - 9 -
<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-backed securities income $ 424,589 $ 501,796 $ (77,207)
Equity in earnings of property partnerships 59,852 17,808 42,044
Interest income on temporary cash investments 103,058 69,793 33,265
--------------- --------------- ---------------
587,499 589,397 (1,898)
General and administrative expenses 218,942 137,083 81,859
--------------- --------------- ---------------
Net income $ 368,557 $ 452,314 $ (83,757)
=============== =============== ===============
</TABLE>
Mortgage-backed securities income decreased for the quarter and nine months
ended September 30, 1997, compared to the same periods in 1996. Approximately
$13,000 of such decrease for the quarter and $38,800 of such decrease for the
nine months was due to the redemption of the GNMA Certificate related to
Ashwood Apartments. The remaining decrease of approximately $11,200 for the
quarter and $38,400 for the nine months was due to the continued amortization
of the principal balances of the Partnership's other mortgage-backed
securities.
Equity in earnings (losses) of property partnerships is a function of the cash
flow received by the Partnership from its interest in the operating
partnerships which own the properties. Prior to the write-down of each
investment in PREPs to zero, equity in earnings (losses) of property
partnerships also reflects the Partnership's allocable share of earnings
generated by each of the properties. The Partnership recorded a loss of
approximately $48,000 for Laurel Park Apartments for the quarter and nine
months ended September 30, 1996, which reduced the Partnership's investment in
Laurel Park Apartments to zero. Excluding such loss, equity in earnings
(losses) of property partnerships decreased approximately $10,300 and $6,000,
respectively, for the quarter and nine months ended September 30, 1997,
compared to the same periods in 1996. Approximately $2,600 and $17,300 of
such decreases for the quarter and nine months, respectively, is attributable
to the sale of the Partnership's PREP in Ashwood Apartments in December 1996.
The remaining decrease of $7,700 for the quarter is due to a decrease in cash
flow received from Broadmoor Court. The decrease of $17,300 from Ashwood
Apartments for the nine months ended September 30, 1997, compared to the same
period in 1996, together with a decrease of approximately $9,700 in cash flow
received from Broadmoor Court, was partially offset by approximately $21,000
in cash flow received from Owings Chase Apartments during the nine months
ended September 30, 1997. No distributions were received from Owings Chase
Apartments during the comparable period of 1996.
The increase in interest on temporary cash investments for the quarter and
nine months ended September 30, 1997, compared to the same periods in 1996 is
primarily attributable to the increase in cash reserves as a result of the
redemption of the GNMA Certificate related to Ashwood Apartments and the sale
of the Partnership's PREP in Ashwood Apartments.
General and administrative expenses increased for the quarter and nine months
ended September 30, 1997, compared to the same periods in 1996 due primarily
to transaction costs of approximately $64,600 and $70,200, respectively,
incurred during the quarter and nine months ended September 30, 1997, in
conjunction with the proposed merger described in Note 8 to the financial
statements and an increase in salaries expense.
<PAGE> - 10 -
PART II. OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
4(a) Agreement of Limited Partnership dated May 25, 1988
(incorporated herein by reference to Form 10-Q dated
June 30, 1988 filed pursuant to Section 13 or 15(d) of
the Securities Act of 1934 by America First PREP Fund 2
Pension Series Limited Partnership (Commission File No.
0-17582)).
4(b) Form of Certificate of Beneficial Unit Certificate
(incorporated herein by reference to Form 10-Q dated
June 30, 1988 filed pursuant to Section 13 or 15(d) of
the Securities Act of 1934 by America First PREP Fund 2
Pension Series Limited Partnership (Commission File No.
0-17582)).
4(c) Agreement and Plan of Merger, dated as of July 29, 1997,
among the Registrant, America First
Participating/Preferred Equity Mortgage Fund Limited
Partnership, America First Prep Fund 2 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
PREP Fund 2 Pension Series Limited Partnership (Commission
File No. 0-17582)).
(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> - 11 -
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, 1997 AMERICA FIRST PREP FUND 2
PENSION SERIES LIMITED PARTNERSHIP
By America First Capital
Associates Limited
Partnership Six, General
Partner of the Registrant
By America First Companies L.L.C.,
General Partner of America
First Capital Associates
Limited Partnership Six
By /s/ Michael Thesing
Michael Thesing,
Vice President and
Principal Financial
Officer
<PAGE> - 12 -
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-END> SEP-30-1997
<CASH> 2,568,226
<SECURITIES> 7,534,693
<RECEIVABLES> 56,488
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 2,624,714
<PP&E> 0
<DEPRECIATION> 0
<TOTAL-ASSETS> 10,194,329
<CURRENT-LIABILITIES> 144,023
<BONDS> 0
<COMMON> 0
0
0
<OTHER-SE> 10,050,306
<TOTAL-LIABILITY-AND-EQUITY> 10,194,329
<SALES> 0
<TOTAL-REVENUES> 587,499
<CGS> 0
<TOTAL-COSTS> 0
<OTHER-EXPENSES> 218,942
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> 368,557
<INCOME-TAX> 0
<INCOME-CONTINUING> 368,557
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 368,557
<EPS-PRIMARY> 0
<EPS-DILUTED> 0
</TABLE>
