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 March 31, 1999 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 -
AMERICA FIRST PREP FUND 2 PENSION SERIES LIMITED PARTNERSHIP
BALANCE SHEETS
(UNAUDITED)
<TABLE>
<CAPTION>
March 31, 1999 Dec. 31, 1998
-------------- --------------
<S> <C> <C>
Assets
Cash and temporary cash investments, at cost which
approximates market value $ 1,039,253 $ 530,880
Investment in mortgage-backed securities (Note 5) - 3,409,301
Investment in preferred real estate participations (PREPs),
net of valuation allowance (Note 6) - -
Interest receivable 4,845 35,796
Other assets 7,677 108,411
-------------- --------------
$ 1,051,775 $ 4,084,388
============== ==============
Liabilities and Partners' Capital
Liabilities
Accounts payable (Note 7) $ 46,464 $ 62,506
Distribution payable (Note 4) 35,324 55,548
-------------- --------------
81,788 118,054
-------------- --------------
Partners' Capital
General Partner 100 100
Beneficial Unit Certificate Holders
($1.07 per BUC in 1999 and $4.38 in 1998) 969,887 3,966,234
-------------- --------------
969,987 3,966,334
-------------- --------------
$ 1,051,775 $ 4,084,388
============== ==============
</TABLE>
AMERICA FIRST PREP FUND 2 PENSION SERIES LIMITED PARTNERSHIP
STATEMENTS OF INCOME AND COMPREHENSIVE INCOME
(UNAUDITED)
<TABLE>
<CAPTION>
For the Three For the Three
Months Ended Months Ended
Mar. 31, 1999 Mar. 31, 1998
-------------- --------------
<S> <C> <C>
Income
Mortgage-backed securities income $ 17,322 $ 132,500
Equity in earnings of property partnerships 20,081 15,508
Interest income on temporary cash investments 12,001 34,800
Gain on sale of mortgage-backed securities 90,198 -
-------------- ---------------
139,602 182,808
Expenses
General and administrative expenses (Note 7) 67,443 188,973
-------------- ---------------
Net income (loss) 72,159 (6,165)
Other comprehensive income:
Unrealized holding losses on securities
Unrealized holding losses arising during the period (14,309) (25,637)
Plus reclassification adjustment for net gains included in net income (90,198) -
-------------- --------------
Change in net unrealized holding losses (104,507) (25,637)
-------------- --------------
Comprehensive income $ (32,348) $ (31,802)
============== ==============
Net income (loss) allocated to:
General Partner $ 29,639 $ 2,885
BUC Holders 42,520 (9,050)
-------------- --------------
$ 72,159 $ (6,165)
============== ==============
Net income (loss), basic and diluted, per BUC $ .05 $ (.01)
============== ==============
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 THREE MONTHS ENDED MARCH 31, 1999
(UNAUDITED)
<TABLE>
<CAPTION>
Beneficial Unit
General Certificate
Partner Holders Total
-------------- ---------------- ---------------
<S> <C> <C> <C>
Partner's Capital (excluding accumulated other comprehensive income)
Balance at December 31, 1998 $ 100 $ 3,861,727 $ 3,861,827
Net income 29,639 42,520 72,159
Cash distributions paid or accrued (Note 4) (29,639) (2,934,360) (2,963,999)
-------------- ---------------- ---------------
100 969,887 969,987
Accumulated Other Comprehensive Income -------------- ---------------- ---------------
Balance at December 31, 1998 - 104,507 104,507
Net change - (104,507) (104,507)
-------------- ---------------- ---------------
- - -
-------------- ---------------- ---------------
Balance at March 31, 1999 $ 100 $ 969,887 $ 969,987
============== ================ ===============
</TABLE>
AMERICA FIRST PREP FUND 2 PENSION SERIES LIMITED PARTNERSHIP
STATEMENTS OF CASH FLOWS
(UNAUDITED)
<TABLE>
<CAPTION>
For the Three For the Three
Months Ended Months Ended
Mar. 31, 1999 Mar. 31, 1998
--------------- ---------------
<S> <C> <C>
Cash flows from operating activities
Net income (loss) $ 72,159 $ (6,165)
Adjustments to reconcile net income (loss) to net cash
provided by operating activities
Equity in earnings of property partnerships (20,081) (15,508)
Gain on sale of mortgage-backed securities (90,198) -
Amortization of discount on mortgage-backed securities (1,264) (3,363)
Decrease in interest receivable 30,951 1,390
Decrease in other assets 100,734 2,661
Increase (decrease) in accounts payable (16,042) 100,877
--------------- ---------------
Net cash provided by operating activities 76,259 79,892
--------------- --------------
Cash flows from investing activities
Mortgage principal payments received 87,356 186,226
Distributions received from PREPs 20,081 15,508
Proceeds from sale of mortgage-backed securities 3,308,900 -
--------------- ---------------
Net cash provided by investing activities 3,416,337 201,734
--------------- ---------------
Cash flow used in financing activity
Distributions paid (2,984,223) (289,729)
--------------- ---------------
Net increase (decrease) in cash and temporary cash investments 508,373 (8,103)
Cash and temporary cash investments at beginning of period 530,880 2,577,493
--------------- ---------------
Cash and temporary cash investments at end of period $ 1,039,253 $ 2,569,390
=============== ===============
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
MARCH 31, 1999
(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. As of March 31, 1999, the holders of 10,455 BUCs elected
to continue their current investment in the Partnership through the retention
of their BUCs.
Management is in the process of liquidating the remaining assets of the
Partnership and will distribute the net proceeds and dissolve the Partnership
in accordance with the provisions of the Partnership agreement.
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, 1998. In the opinion of management, all normal and recurring
adjustments necessary to present fairly the financial position at March
31, 1999, and results of operations for all periods presented have been
made.
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the
financial statements and the reported amounts of revenues and expenses
during the reporting period. Actual results could differ from those
estimates.
B) Investment in 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 in other comprehensive income.
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 in comprehensive income. The Partnership does
not have investment securities classified as trading.
<PAGE> - 3 -
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 only 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 net realizable 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 net realizable 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) New Accounting Pronouncement
On January 1, 1999, the Partnership adopted Statement of Position 98-5,
"Reporting on the Costs of Start-Up Activities" (SOP 98-5). SOP 98-5
requires costs of start-up activities and organization costs to be expensed
as incurred. The adoption of SOP 98-5 did not have an impact on the
Partnership's financial statements.
3. Partnership Reserve Account
The Partnership maintains a reserve account which consisted of cash and
temporary cash investments of $1,039,253 at March 31, 1999.
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.
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
At March 31, 1999, the Partnership did not hold any investments in
mortgage-backed securities since the Partnership sold its entire portfolio of
mortgage-backed securities on January 25, 1999.
<PAGE> - 4 -
AMERICA FIRST PREP FUND 2 PENSION SERIES LIMITED PARTNERSHIP
NOTES TO FINANCIAL STATEMENTS
MARCH 31, 1999
(UNAUDITED)
Reconciliation of the carrying amount of the mortgage-backed securities is as
follows:
<TABLE>
<S> <C>
Balance at December 31, 1998 $ 3,409,301
Additions
Amortization of discount on mortgage-backed securities 1,264
Realized gain on sale of securities 90,198
Deductions
Mortgage principal payments received (87,356)
Change in net unrealized holding gains (losses) on
available-for-sale securities (104,507)
Sale of securities (3,308,900)
---------------
Balance at March 31, 1999 $ -
===============
</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.
Descriptions of the PREPs held at March 31, 1999, 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 March 31, 1999 $ -
=================
</TABLE>
Reconciliation of the carrying amount of the PREPs is as follows:
<TABLE>
<S> <C>
Balance at December 31, 1998 $ -
Addition
Equity in earnings of property partnerships 20,081
Deduction
Distributions received from PREPs (20,081)
---------------
Balance at March 31, 1999 $ -
===============
</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 the three months
ended March 31, 1999, was $64,500. The reimbursed expenses are presented on a
cash basis and do not reflect accruals made at quarter end.
<PAGE> - 5 -
AMERICA FIRST PREP FUND 2 PENSION SERIES LIMITED PARTNERSHIP
NOTES TO FINANCIAL STATEMENTS
MARCH 31, 1999
(UNAUDITED)
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 $12,255 for the three months ended March 31, 1999.
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 during the three months ended March 31, 1999.
On January 25, 1999, the Partnership sold GNMA Certificates with an aggregate
carrying value of $2,519,832 to America First Mortgage Investments, Inc., the
holder of the majority of BUCs of the Partnership and the general partner of
the general partner of the Partnership. The Partnership's cash proceeds from
the sale were $2,625,050, including accrued interest of $13,510, which
represented the fair market value of the securities. The Partnership
recognized a gain of $91,732 on the sale. Proceeds from the sale were
distributed February 1, 1999.
<PAGE> - 6 -
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations
Liquidity and Capital Resources
The Partnership's primary sources of capital include cash flow from operations
and, through January, 1999, principal payments on its mortgage-backed
securities. The Partnership's primary uses of capital include the payment of
operating expenses.
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. Prior to 1999, the Partnership was repaid by GNMA on the GNMA
Certificates collateralized by the Villages at Moonraker, Laurel Park
Apartments and Ashwood Apartments. In addition, the Partnership sold its GNMA
Certificate collateralized by Owings Chase Apartments to America First
Mortgage Investments, Inc. (AFMI), the holder of the majority of BUCs of the
Partnership and the general partner of the Partnership. Prior to 1999, the
Partnership sold or otherwise disposed of its PREPs in two properties.
During January, 1999, the Partnership sold its remaining GNMA Certificate
to AFMI. During January, 1999, the Partnership also sold to AFMI and a third
party the Single-Family Certificates it held at December 31, 1998. As a
result, at March 31, 1999, the Partnership's only remaining Permanent
Investments consisted of the three remaining PREPs. Management is in the
process of liquidating the remaining assets of the Partnership and will
distribute the net proceeds and dissolve the Partnership in accordance with
the provisions of the Partnership agreement.
The following table shows the occupancy levels of the properties financed by
the Partnership in which the Partnership continues to hold PREPs at March 31,
1999:
<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 42 90%
Laurel Park Apartments Riverdale, GA 387 375 97%
Owings Chase Apartments Pikesville, MD 234 224 96%
--------- ---------- -----------
668 641 96%
========= ========== ===========
</TABLE>
<PAGE> - 7 -
Distributions
Cash distributions paid or accrued per Beneficial Unit Certificate (BUC) were
as follows:
<TABLE>
<CAPTION>
For the Three For the Three
Months Ended Months Ended
Mar. 31, 1999 Mar. 31, 1998
-------------- --------------
<S> <C> <C>
Regular monthly distributions
Income $ .0469 $ -
Return of capital .0689 .3152
-------------- --------------
$ .1158 $ .3152
============== ==============
Special distributions
Return of capital $ 3.1230 -
============== ==============
Total distributions
Income $ .0469 -
Return of capital 3.1919 .3152
-------------- --------------
$ 3.2388 $ .3152
============== ==============
Distributions
Paid out of cash flow (including mortgage principal payments) $ 3.7956 $ .3152
Placed in reserves (.5568) -
-------------- --------------
$ 3.2388 $ .3152
============== ==============
</TABLE>
Prior to the sale of the GNMA Certificate and Single-Family Certificates as
described above, regular monthly distributions to investors consisted
primarily of interest and principal received on such investments. Additional
cash for distributions was received from PREPs and temporary cash
investments. Subsequent to the aforementioned sale, the Partnership's sources
of cash for distributions consist of cash 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 the three months ended March 31,1999, a net amount of $504,416
of undistributed mortgage principal payments was placed in reserves. The
total amount held in reserves at March 31, 1999, was $1,039,253.
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 PREPs held by the Partnership 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 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. (See footnote 2C and 2D to the financial
statements for further discussion.)
<PAGE> - 8 -
The Partnership previously reduced each of its PREP investments to zero. As
such, equity in earnings of the property partnerships are recorded only to the
extent distributions are received. The Partnership has no legal obligation to
provide additional cash support to the underlying property partnerships as it
is not the general partner, nor has it reduced its investment in the PREPs
below zero to recognize its allocated share of the property partnerships'
losses.
Results of Operations
The table below compares the results of operations for each period shown.
<TABLE>
<CAPTION>
For the Three For the Three Increase
Months Ended Months Ended (Decrease)
Mar. 31, 1999 Mar. 31, 1998 From 1998
--------------- --------------- ---------------
<S> <C> <C> <C>
Mortgage-backed securities income $ 17,322 $ 132,500 $ (115,178)
Equity in earnings of property partnerships 20,081 15,508 4,573
Interest income on temporary cash investments 12,001 34,800 (22,799)
Gain on the sale of mortgage securities 90,198 - 90,198
--------------- --------------- ---------------
139,602 182,808 (43,206)
General and administrative expenses 67,443 188,973 (121,530)
--------------- --------------- ---------------
Net income (loss) $ 72,159 (6,165) 78,324
=============== =============== ===============
</TABLE>
Mortgage-backed securities income decreased $115,178 for the three months
ended March 31, 1999, compared to the same period in 1998 due to the sales of
the Partnership's mortgage-backed securities on January 25, 1999, and December
23, 1998. Since the Partnership no longer holds any investments in
mortgage-backed securities, it will not receive such income in the future.
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. Prior to the write-down of each investment in PREPs
to zero, equity in earnings of property partnerships also reflects the
Partnership's allocable share of earnings generated by each of the
properties. See footnotes 2C and 6 to the financial statements for further
discussion regarding these investments.
Equity in earnings of property partnerships increased $4,573 for the three
months ended March 31, 1999, compared to the same period in 1998 due to an
increase of $12,974 in cash flow from Owings Chase offset by a decrease of
$8,401 in cash flow received from Broadmoor Court.
Interest income on temporary cash investments decreased $22,799 for the three
months ended March 31, 1999, compared to the same period in 1998 due to a
decrease in the average cash balance as withdrawals were made from reserves in
1998 and distributed to BUC holders.
The Partnership recorded a gain of $90,198 for the three months ended March
31, 1999, in connection with the January 25, 1999, sales of its remaining
mortgage-backed securities.
General and administrative expenses decreased $121,530 for the three months
ended March 31, 1999, compared to the same period in 1998. This decrease was
due primarily to transaction costs of approximately $121,600 incurred in 1998
in conjunction with the merger described in Note 1 to the financial statements.
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
<PAGE> - 9 -
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 mid-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
limited to, the obligors on the Partnership's remaining GNMA Certificate 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
<PAGE> - 10 -
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
remaining GNMA Certificate 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.
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.
During the three months ended March 31, 1999, the Partnership sold
all of its mortgage-backed securities and, accordingly, is no longer
subject to material interest and prepayment risks with respect to its
remaining assets.
<PAGE> - 11 -
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 Exchange 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 Exchange 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)).
27. Financial Data Schedule
(b) Reports on Form 8-K
The Registrant filed the following reports on Form 8-K during
the quarter for which this report is filed.
Item Reported Financial Statements Filed Date of Report
2. Acquisition No December 23, 1998
or Disposition
of Assets
2. Acquisition No January 25, 1999
or Disposition
of Assets
<PAGE> - 12 -
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) 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.
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
Date: May 12, 1999
<PAGE> - 13 -
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