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: 0-17582
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, 1998 Dec. 31, 1997
-------------- --------------
<S> <C> <C>
Assets
Cash and temporary cash investments, at cost which
approximates market value $ 473,154 $ 2,577,493
Investment in mortgage-backed securities (Note 5) 6,704,175 7,359,399
Investment in preferred real estate participations (PREPs),
net of valuation allowance (Note 6) - -
Interest receivable 50,845 55,977
Other assets 28,747 32,016
-------------- --------------
$ 7,256,921 $ 10,024,885
============== ==============
Liabilities and Partners' Capital
Liabilities
Accounts payable (Note 7) $ 62,310 $ 142,959
Distribution payable (Note 4) 93,251 97,003
-------------- --------------
155,561 239,962
-------------- --------------
Partners' Capital
General Partner 100 100
Beneficial Unit Certificate Holders
($7.84 per BUC in 1998 and $10.80 in 1997) 7,101,260 9,784,823
-------------- --------------
7,101,360 9,784,923
-------------- --------------
$ 7,256,921 $ 10,024,885
============== ==============
</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, 1998 Sept. 30, 1997 Sept. 30, 1998 Sept. 30, 1997
--------------- --------------- --------------- ---------------
<S> <C> <C> <C> <C>
Income
Mortgage-backed securities income $ 124,555 $ 139,052 $ 386,363 $ 424,589
Equity in earnings of property partnerships 17,698 12,791 33,206 59,852
Interest income on temporary cash investments 33,879 35,317 102,130 103,058
--------------- --------------- --------------- ---------------
176,132 187,160 521,699 587,499
Expenses
General and administrative expenses (Note 7) 55,520 120,526 302,210 218,942
--------------- --------------- --------------- ---------------
Net income $ 120,612 $ 66,634 $ 219,489 $ 368,557
=============== =============== =============== ===============
Net income allocated to:
General Partner $ 23,007 $ 2,958 $ 28,778 $ 8,987
BUC Holders 97,605 63,676 190,711 359,570
--------------- --------------- --------------- ---------------
$ 120,612 $ 66,634 $ 219,489 $ 368,557
=============== =============== =============== ===============
Net income, basic and diluted, per BUC $ .11 $ .07 $ .21 $ .40
=============== =============== =============== ===============
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, 1998
(UNAUDITED)
<TABLE>
<CAPTION>
Beneficial Unit
General Certificate
Partner Holders Total
-------------- ---------------- ---------------
<S> <C> <C> <C>
Partners' Capital (excluding net unrealized holding gains(losses))
Balance at December 31, 1997 $ 100 $ 9,772,081 $ 9,772,181
Net income 28,778 190,711 219,489
Cash distributions paid or accrued (Note 4) (28,778) (2,849,029) (2,877,807)
-------------- ---------------- ---------------
100 7,113,763 7,113,863
-------------- ---------------- ---------------
Net unrealized holding gains (losses)
Balance at December 31, 1997 - 12,742 12,742
Net change - (25,245) (25,245)
-------------- ---------------- ---------------
- (12,503) (12,503)
-------------- ---------------- ---------------
Balance at September 30, 1998 $ 100 $ 7,101,260 $ 7,101,360
============== ================ ===============
</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, 1998 Sept. 30, 1997
--------------- ---------------
<S> <C> <C>
Cash flows from operating activities
Net income $ 219,489 $ 368,557
Adjustments to reconcile net income to net cash
from operating activities
Equity in earnings of property partnerships (33,206) (59,852)
Amortization of discount on mortgage-backed securities (11,189) (6,495)
Decrease in interest receivable 5,132 4,073
Decrease in other assets 3,269 15,883
Decrease in accounts payable (80,649) (8,571)
--------------- ---------------
Net cash provided by operating activities 102,846 313,595
--------------- ---------------
Cash flows from investing activities
Mortgage principal payments received 641,168 1,024,700
Distributions received from PREPs 33,206 59,852
--------------- ---------------
Net cash provided by investing activities 674,374 1,084,552
--------------- ---------------
Cash flow used in financing activity
Distributions paid (2,881,559) (902,498)
--------------- ---------------
Net increase (decrease) in cash and temporary cash investments (2,104,339) 495,649
Cash and temporary cash investments at beginning of period 2,577,493 2,072,577
--------------- ---------------
Cash and temporary cash investments at end of period $ 473,154 $ 2,568,226
=============== ===============
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, 1998
(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).
On April 10, 1998, the Partnership consummated a merger with AF Merger, L.P.,
a Delaware limited partnership (Merger L.P.), pursuant to an Agreement and
Plan of Merger, dated as of July 29, 1997 (the Merger Agreement), among the
Partnership, Merger L.P., America First Participating/Preferred Equity
Mortgage Fund Limited Partnership, a Delaware limited partnership, America
First PREP Fund 2 Limited Partnership, a Delaware limited partnership, and
America First Mortgage Investments, Inc., a Maryland corporation (AFM). The
Partnership was the surviving limited partnership of the merger with Merger
L.P., but as a result of the merger, (i) the general partner interest in AFCA 6
was acquired by AFM, (ii) the limited partner interest in AFCA 6 was acquired
by a wholly-owned subsidiary of AFM, (iii) a total 883,422 BUCs of the
Partnership were exchanged, at the rate of approximately 1.31 shares per BUC,
for 1,153,552 shares of the common stock of AFM and (iv) AFM became the holder
of such BUCs. Accordingly, the Partnership has become a partnership
subsidiary of AFM. The holders of 11,060 BUCs elected to continue their
current investment in the Partnership through the retention of their BUCs.
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 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.
<PAGE> - 3 -
AMERICA FIRST PREP FUND 2 PENSION SERIES LIMITED PARTNERSHIP
NOTES TO FINANCIAL STATEMENTS
SEPTEMBER 30, 1998
(UNAUDITED)
C) Investment in PREPs
The investment in PREPs consists of interests in limited partnerships
which own properties underlying the mortgage-backed securities and are
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 Investment in PREPs
The allowance for losses on investment 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 PREPs. The allowance
is periodically reviewed and adjustments are made to the allowance when
there are significant changes in the fair value of the properties
underlying the PREPs.
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.
H) 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 the
change in net unrealized holding losses on investments charged or credited
to Partners' Capital. Comprehensive income for the quarter and nine months
ended September 30, 1998, compared to the same periods in 1997 was as
follows:
<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>
Net income $ 120,612 $ 66,634 $ 219,489 $ 368,557
Change in net unrealized holding gains (losses) (8,932) 24,672 (25,245) 46,045
--------------- --------------- --------------- ---------------
Comprehensive income $ 111,680 $ 91,306 $ 194,244 $ 414,602
=============== =============== =============== ===============
</TABLE>
3. Partnership Reserve Account
The Partnership maintains a reserve account which consisted of the following
at September 30, 1998:
<TABLE>
<S> <C>
Cash and temporary cash investments $ 379,236
GNMA Certificates 1,100,908
FNMA Certificates 874,447
---------------
$ 2,354,591
===============
</TABLE>
<PAGE> - 4 -
AMERICA FIRST PREP FUND 2 PENSION SERIES LIMITED PARTNERSHIP
NOTES TO FINANCIAL STATEMENTS
SEPTEMBER 30, 1998
(UNAUDITED)
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.
As a result of the merger described in Note 1, on April 10, 1998, the
Partnership reclassified its securities from held-to-maturity to
available-for-sale. The total amortized cost, gross unrealized holding gains,
gross unrealized holding losses and aggregate fair value of securities
transferred were $4,985,047, $100,123, $282,755 and $4,802,415, respectively.
At September 30, 1998, the total amortized cost, gross unrealized holding
gains, gross unrealized holding losses, and aggregate fair value of
mortgage-backed securities are $6,716,678, $105,413, $117,916, and
$6,704,175 respectively.
Descriptions of the Partnership's mortgage-backed securities at September 30,
1998, 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>
GNMA Certificates:
Broadmoor Court Colorado Springs, CO 47 9.25% 10/15/29 $ 586,535
Owings Chase Apartments Pikesville, MD 234 6.75% 12/15/23 3,025,966
Pools of single-family mortgages 8.74%(1) 2016 to 2018 1,116,319
Pools of single-family mortgages 6.03%(1) 2008 588,806(2)
Pools of single-family mortgages 7.58%(1) 2008 512,102(2)
FNMA Certificates:
Pools of single-family mortgages 5.52%(1) 2000 874,447(2)
---------------
Balance at September 30, 1998 $ 6,704,175
===============
</TABLE>
(1) Represents yield to the Partnership.
(2) Reserve account asset - see Note 3.
<PAGE> - 5 -
AMERICA FIRST PREP FUND 2 PENSION SERIES LIMITED PARTNERSHIP
NOTES TO FINANCIAL STATEMENTS
SEPTEMBER 30, 1998
(UNAUDITED)
Reconciliation of the carrying amount of the mortgage-backed securities is as
follows:
<TABLE>
<S> <C>
Balance at December 31, 1997 $ 7,359,399
Additions
Amortization of discount on mortgage-backed securities 11,189
Change in net unrealized holding gains (losses) 157,387
Deduction
Mortgage principal payments received (641,168)
Net unrealized loss on securities transferred from held-to-maturity to
available-for-sale (182,632)
---------------
Balance at September 30, 1998 $ 6,704,175
===============
</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.
Descriptions of the PREPs at September 30, 1998, 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, 1998 $ -
=================
</TABLE>
Reconciliation of the carrying amount of the PREPs is as follows:
<TABLE>
<S> <C>
Balance at December 31, 1997 $ -
Addition
Equity in earnings of property partnerships 33,206
Deduction
Distributions received from PREPs (33,206)
---------------
Balance at September 30, 1998 $ -
===============
</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 or an affiliate during
1998 was $145,817 ($44,159 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.
<PAGE> - 6 -
AMERICA FIRST PREP FUND 2 PENSION SERIES LIMITED PARTNERSHIP
NOTES TO FINANCIAL STATEMENTS
SEPTEMBER 30, 1998
(UNAUDITED)
Prior to the Merger, AFCA 6 was 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
1998, AFCA 6 earned administrative fees of $5,952 (none for the quarter ended
September 30, 1998), all of which was paid by the Partnership.
A property management subsidiary of America First Companies L.L.C. (America
First) has been retained by the property partnerships which own Laurel Park
Apartments and Owings Chase Apartments to provide management services for these
properties. A director of the general partner of AFCA 6 is a principal owner
of America First. 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 $36,060 in
1998 ($12,305 for the quarter ended September 30, 1998).
The general partner of the property partnership that owns Owings Chase
Apartments is principally owned by an employee of America First. Other
affiliates of America First also own nominal interest in such 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 1998.
<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. At September 30, 1998, the Partnership continued to hold two GNMA
Certificates and three PREPs (referred to as the Permanent Investments) in
addition to various Single-Family Certificates.
The following table shows the occupancy levels of the properties financed by
the Partnership, in which the Partnership continues to hold an equity
interest, at September 30, 1998.
<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 45 96%
Laurel Park Apartments Riverdale, GA 387 375 97%
Owings Chase Apartments Pikesville, MD 234 231 99%
--------- ---------- -----------
668 651 97%
========= ========== ===========
</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, 1998 Sept. 30, 1997
-------------- --------------
<S> <C> <C>
Regular monthly distributions
Income $ .2105 $ .3969
Return of Capital .7266 .5852
-------------- --------------
$ .9371 $ .9821
============== ==============
Special Distributions
Return of Capital $ 2.2076 -
============== ==============
Total Distributions
Income $ .2105 $ .3969
Return of Capital 2.9342 .5852
-------------- --------------
$ 3.1447 $ .9821
============== ==============
Distributions
Paid out of cash flow (including mortgage principal payments) $ .9182 $ .9821
Paid out of reserves 2.2265 -
-------------- --------------
$ 3.1447 $ .9821
============== ==============
</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 1998, a net amount of $2,017,150 of undistributed mortgage
principal payments was withdrawn from reserves (a net amount of $1,971,397 was
withdrawn from reserves for the quarter ended September 30, 1998). The total
amount held in reserves at September 30, 1998, was $2,354,591 of which
$1,975,355 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.
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., an affiliate 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 be resolved without significant operational difficulties.
However, there can be no assurance that testing will discover all potential
Year 2000 problems or that it will not reveal unanticipated material problems
with the America First IT systems that will need to be resolved.
Non-IT systems include embedded circuitry such as microcontrollers found in
telephone equipment, security and alarm systems, copiers, fax machines, mail
room equipment, heating and air conditioning systems and other infrastructure
systems that are used by America First in connection with the operation of the
Partnership's business. America First 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
<PAGE> - 9 -
limited to, the obligors on the Partnership's GNMA Certificates and
Single-Family Certificates, the Partnership's transfer and paying agent and
the financial institutions with which the Partnership maintains accounts.
America First has received initial assurances from certain of these third
parties that their ability to perform their obligations to the Partnership are
not expected to be materially adversely affected by the Year 2000 problem.
America First will continue to request updated information from these material
third parties in order to assess their Year 2000 readiness. If a material
third party vendor is unable to provide assurance to America First that it is,
or will be, ready for Year 2000, America First intends to seek an alternative
vendor to the extent practical.
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 GNMA Certificate and Single-Family Certificates
encounters a serious and unexpected Year 2000 issue, it may be unable to make
a timely payment of principal and 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 transfers 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 GNMA
Certificates and Single-Family Certificates, who may experience Year 2000
problems. The Partnership has no specific contingency plans for dealing with
Year 2000 problems experienced with these third parties.
All forecasts, estimates or other statements in this report relating to the
Year 2000 readiness of the Partnership and its affiliates are based on
information and assumptions about future events. Such "forward-looking
statements" are subject to various known and unknown risks and uncertainties
that may cause actual events to differ from such statements. Important
factors upon which the Partnership's Year 2000 forward-looking statements are
<PAGE> - 10 -
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.
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, 1998, indicated that the PREPs
recorded on the balance sheet at September 30, 1998, required no adjustments
to their current carrying amounts.
The overall status of the Partnership's Permanent Investments has remained
relatively constant since June 30, 1998.
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-backed securities income $ 124,555 $ 139,052 $ (14,497)
Equity in earnings of property partnerships 17,698 12,791 4,907
Interest income on temporary cash investments 33,879 35,317 (1,438)
--------------- --------------- ---------------
176,132 187,160 (11,028)
General and administrative expenses 55,520 120,526 (65,006)
--------------- --------------- ---------------
Net income $ 120,612 $ 66,634 $ 53,978
=============== =============== ===============
</TABLE>
<TABLE>
<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-backed securities income $ 386,363 $ 424,589 $ (38,226)
Equity in earnings of property partnerships 33,206 59,852 (26,646)
Interest income on temporary cash investments 102,130 103,058 (928)
--------------- --------------- ---------------
521,699 587,499 (65,800)
General and administrative expenses 302,210 218,942 83,268
--------------- --------------- ---------------
Net income $ 219,489 $ 368,557 $ (149,068)
=============== =============== ===============
</TABLE>
<PAGE> - 11 -
Mortgage-backed securities income decreased for the quarter and nine months
ended Septermber 30, 1998, compared to the same periods in 1997 due to the
continued amortization of the principal balances of the Partnership's
mortgage-backed securities.
Equity in earnings 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. The increase in equity in earnings of property
partnerships for the quarter ended September 30, 1998 compared to the same
period in 1997 is due to an increase of approximately $3,600 in cash flow
received from Broadmoor Court and approximately $1,300 in cash flow received
from Owings Chase. The decrease for the nine months ended September 30, 1998,
compared to the same period in 1997 is due to a decrease of approximately
$19,700 and $6,900 in cash flow received from Owings Chase Apartments and
Broadmoor Court, respectively.
Interest income on temporary cash investments remained virtually constant
during both the three- and nine-month periods ended September 30, 1998
compared with the same periods of 1997. However, due to the cash distribution
of $2,020,202 made on September 30, 1998, the amount of interest income earned
on temporary investments in future periods is expected to decline
substantially.
General and administrative expenses decreased for the quarter ended September
30, 1998, compared to the same period in 1997 due to transaction costs of
approximately $64,600 incurred for the quarter ended September 30, 1997 in
conjunction with the merger described in Note 1 to the financial statements
and a decrease of approximately $9,200 in general and administrative expenses
partially offset by an increase of approximately $8,800 in salaries and
related expenses. General and administrative expenses increased for the nine
months ended September 30, 1998, compared to the same period in 1997 due
primarily to an increase of approximately $51,400 in transaction costs as
described above and an increase of approximately $40,200 in salaries and
related expenses which were partially offset by a decrease of $8,300 in other
general and administrative 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> - 12 -
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 Exchange 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> - 13 -
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 PREP FUND 2
PENSION SERIES LIMITED PARTNERSHIP
By America First Capital
Associates Limited
Partnership Six, General
Partner of the Registrant
By America First Mortgage Investments, Inc.,
General Partner of America
First Capital Associates
Limited Partnership Six
By /s/ Stewart Zimmerman
Stewart Zimmerman,
President and Chief Executive Officer
By /s/ Gary Thompson
Gary Thompson
Chief Financial Officer
<PAGE> - 14 -
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-END> SEP-30-1998
<CASH> 473,154
<SECURITIES> 6,704,175
<RECEIVABLES> 50,845
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 523,999
<PP&E> 0
<DEPRECIATION> 0
<TOTAL-ASSETS> 7,256,921
<CURRENT-LIABILITIES> 155,561
<BONDS> 0
<COMMON> 0
0
0
<OTHER-SE> 7,101,360
<TOTAL-LIABILITY-AND-EQUITY> 7,256,921
<SALES> 0
<TOTAL-REVENUES> 521,699
<CGS> 0
<TOTAL-COSTS> 0
<OTHER-EXPENSES> 302,210
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> 219,489
<INCOME-TAX> 0
<INCOME-CONTINUING> 219,489
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 219,489
<EPS-PRIMARY> 0
<EPS-DILUTED> 0
</TABLE>
