FORM 10-K
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
(Mark One)
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 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 Agreement of Limited Partnership)
Delaware 47-0719051
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
Suite 400, 1004 Farnam Street, Omaha, NE 68102
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including
area code: (402) 444-1630
Securities Registered Pursuant to Section 12(b) of the Act:
None
Securities Registered Pursuant to Section 12(g) of the Act:
Beneficial Unit Certificates representing assigned limited partnership
interests in the Registrant ("BUCs").
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
Indicate by check mark if disclosure of delinquent filers pursuant to
Item 405 of Regulation S-K (Section 229.405 of the chapter) is not contained
herein, and will not be contained, to the best of the registrant's knowledge,
in definitive proxy or information statements incorporated by reference in
Part III of this Form 10-K or any amendment to this Form 10-K. [X]
The Beneficial Unit Certificates representing assigned limited
partnership interests in the Registrant (the "BUCs") are not currently traded
in any market. Therefore, there is no market price or average bid and asked
price for the BUCs within the 60 days prior to the date of this filing.
DOCUMENTS INCORPORATED BY REFERENCE
None
<PAGE> - i -
TABLE OF CONTENTS
Page
PART I
Item 1. Business 1
Item 2. Properties 2
Item 3. Legal Proceedings 3
Item 4. Submission of Matters to a Vote of Security Holders. 3
PART II
Item 5. Market for Registrant's Common Equity and Related Stockholder
Matters 4
Item 6. Selected Financial Data 5
Item 7. Management's Discussion and Analysis of Financial Condition
and Results of Operations 5
Item 7A. Quantitative and Qualitative Disclosures About Market Risk 11
Item 8. Financial Statements and Supplementary Data 12
Item 9. Changes in and Disagreements With Accountants on Accounting
and Financial Disclosure 12
PART III
Item 10. Directors and Executive Officers of Registrant 13
Item 11. Executive Compensation 15
Item 12. Security Ownership of Certain Beneficial Owners and Management 15
Item 13. Certain Relationships and Related Transactions 15
PART IV
Item 14. Exhibits, Financial Statement Schedules and Reports on Form 8-K 16
SIGNATURES 31
<PAGE> - ii -
PART I
Item 1. Business. America First PREP Fund 2 Pension Series Limited
Partnership (the "Registrant" or the "Partnership") was formed on February
2,1988, under the Delaware Revised Uniform Limited Partnership Act to invest
principally in federally-insured first mortgages on multifamily residential
properties, including retirement living centers, and in securities
collateralized by first mortgages on multifamily residential properties. The
Registrant also invests in Preferred Real Estate Participations ("PREPs") in
the form of limited partnership interests in the limited partnerships which
own the financed properties. The Registrant's business objectives are to
provide investors: (i) safety and preservation of capital; (ii) regular cash
distributions; and, (iii) a potential for an enhanced yield from
participations in the net cash flow and net capital appreciation from the
financed properties received under the terms of the PREPs.
A total of 905,974 Beneficial Unit Certificates (BUCs) were sold at $20
per BUC for total capital contributions of $16,697,101 after the payment of
certain organization and offering costs.
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
America First Capital Associates Limited Partnership Six ("AFCA"), the general
partner of the Partnership, was acquired by AFM, (ii) the limited partner
interest in AFCA 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 December 31, 1998, the
holders of 10,455 BUCs elected to continue their current investment in the
Partnership through the retention of their BUCs.
Through December 31, 1998, the Registrant had 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 projects 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) 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 Ashwood Apartments. In addition, the Partnership sold its GNMA
Certificate which was collateralized by Owings Chase Apartments. The
Partnership no longer holds PREPs in two properties. Collectively, the
remaining GNMA Certificate and the three remaining PREPs are referred to
herein as the "Permanent Investments". A description of the Permanent
Investments held by the Registrant at December 31, 1998, (and the properties
financed thereby) appears in Notes 5 and 6 to the Notes to Financial
Statements filed in response to Item 8 hereof. In addition, the Registrant
held various Single-Family Certificates at December 31, 1998.
The remaining GNMA Certificate and the Single-Family Certificates provide
the Registrant with monthly payments of principal and interest which are
guaranteed either by GNMA or FNMA. The PREPs are intended to provide the
Registrant with a base return plus a participation in the net cash flow and
net capital appreciation of the underlying real estate properties. Therefore,
the return to the Registrant depends, in part, on the economic performance of
the real estate financed by the PREPs.
While principal of and interest on the GNMA Certificates and
Single-Family Certificates is guaranteed by the United States government, the
amount of cash distributions received by the Registrant from the PREPs is a
function of the net rental revenues generated by the properties financed by
the Registrant. Net rental revenues from a multifamily apartment complex
<PAGE> - 1 -
depend on the rental and occupancy rates of the property and on the level of
operating expenses. Occupancy rates and rents are directly affected by the
supply of, and demand for, apartments in the market areas in which a property
is located. This, in turn, is affected by several factors such as local or
national economic conditions, the amount of new apartment construction and
interest rates on single-family mortgage loans. In addition, factors such as
government regulation (such as zoning laws), inflation, real estate and other
taxes, labor problems and natural disasters can affect the economic operations
of a property.
In each city in which the properties financed by the Registrant are
located, such properties compete with a substantial number of other apartment
complexes. Apartment complexes also compete with single-family housing that
is either owned or leased by potential tenants. The principal method of
competition is to offer competitive rental rates. Such properties also
compete by emphasizing property location, condition and property amenities.
The Registrant believes that each of the properties is in compliance in
all material respects with federal, state and local regulations regarding
hazardous waste and other environmental matters and the Registrant is not
aware of any environmental contamination at any of such properties that would
require any material capital expenditure by the Registrant for the remediation
thereof.
The Registrant is engaged solely in the business of providing financing
for the acquisition and improvement of real estate. Accordingly, the
presentation of information about industry segments is not applicable and
would not be material to an understanding of the Registrant's business taken
as a whole.
The Registrant has no employees. Certain services are provided to the
Registrant by employees of America First Companies L.L.C. which is an
affiliate of the general partner of the Registrant, and the Registrant
reimburses America First Companies L.L.C. for such services at cost. The
Registrant is not charged and does not reimburse for the services performed by
managers and officers of America First Companies L.L.C.
Item 2. Properties. The Registrant does not directly own or lease any
physical properties. The Registrant has invested in the Permanent Investments
described in Item 1. By virtue of its interest in the PREPs, the Partnership
indirectly owns the properties it has financed through its Permanent
Investments. Descriptions of the multifamily housing projects collateralizing
the Permanent Investments held by the Registrant as of December 31, 1998, are
described in the following table:
<TABLE>
<CAPTION>
Average
Number Square Feet Federal
Property Name Location of Units Per Unit Tax Basis
- - -------------------------- ---------------------- -------- ----------- ---------------
<S> <C> <C> <C> <C>
Broadmoor Court Colorado Springs, CO 47 391 $ 1,785,888
Laurel Park Apartments Riverdale, GA 387 855 6,972,287
Owings Chase Apartments Pikesville, MD 234 960 7,753,633
-------- ---------------
668 $ 16,511,808
======== ===============
</TABLE>
Depreciation is taken on each property on a straight-line basis over the
estimated useful lives of the components of the properties ranging from five
to 40 years.
<PAGE> - 2 -
The average annual occupancy rate and average effective rental rate per unit
for each of the properties for each of the last five years are listed in the
following table:
<TABLE>
<CAPTION>
1998 1997 1996 1995 1994
---------- ---------- ---------- ---------- ----------
<S> <C> <C> <C> <C> <C>
BROADMOOR COURT
Average Occupancy Rate 93% 93% 96% 99% 98%
Average Effective Annual Rental Per Unit $22,105 $21,108 $21,400 $21,289 $20,540
LAUREL PARK APARTMENTS
Average Occupancy Rate 97% 96% 97% 95% 85%
Average Effective Annual Rental Per Unit $6,134 $5,434 $5,293 $4,867 $4,217
OWINGS CHASE APARTMENTS
Average Occupancy Rate 98% 94% 96% 95% 91%
Average Effective Annual Rental Per Unit $7,166 $6,820 $6,792 $6,580 $6,302
</TABLE>
In the opinion of the Partnership's management, each of the properties is
adequately covered by insurance. For additional information concerning the
properties, see "Management's Discussion and Analysis of Financial Condition
and Results of Operations" and Note 6 to the Registrant's Financial
Statements. A discussion of general competitive conditions to which these
properties is included in Item 1 hereof.
Item 3. Legal Proceedings. There are no material pending legal
proceedings to which the Registrant is a party or to which any of its property
is subject.
Item 4. Submission of Matters to a Vote of Security Holders. No matter
was submitted during the fourth quarter of 1998 to a vote of the Registrant's
security holders.
<PAGE> - 3 -
PART II
Item 5. Market for Registrant's Common Equity and Related Stockholder
Matters.
(a) Market Information. The BUCs are subject to various
restrictions on transfers which are designed to prevent the Registrant
from being treated as a publicly traded partnership for federal income
tax purposes. Accordingly, the BUCs do not trade on any exchange or in
the over-the-counter market. The following sets forth certain
information regarding privately-negotiated sales of BUCs with respect to
each bi-monthly period from January 1, 1997 through December 31, 1998
which has been compiled and published by a third-party source which
compiles and disseminates such information in the regular course of its
business. Firms supplying trade price information to the third party
source are instructed to provide information only on transactions where
third-party investors acquired BUCs from or through such firms. Due to
commissions and mark-ups, sellers of BUCs may have received less than the
amounts paid for BUCs as shown below. None of the following data has
been verified by the Registrant. If no information is given for a
particular period, it indicates that no trades were reported for that
period.
<TABLE>
<CAPTION>
Sale Prices
Period High Low
------------------------------------ ------- -------
<S> <C> <C>
January 1, 1997 to March 31, 1997 $ 8.10 $10.55
April 1, 1997 to June 30, 1997 * *
July 1, 1997 to September 30, 1997 * *
October 1, 1997 to December 31, 1997 * *
January 1, 1998 to March 31, 1998 * *
April 1, 1998 to June 30, 1998 * *
July 1, 1998 to September 30, 1998 * *
October 1, 1998 to December 31, 1998 * *
*No trades reported for this period.
</TABLE>
(b) Investors. The approximate number of BUC Holders on December
31, 1998, was 21.
(c) Distributions. Cash distributions are being made on a monthly
basis. Total cash distributions paid or accrued to BUC Holders during
the fiscal years ended December 31, 1998 and December 31, 1997 equaled
$6,176,056 and $1,179,037, respectively. The cash distributions paid per
BUC during the fiscal years ended December 31, 1998, and December 31,
1997 were as follows:
<TABLE>
<CAPTION>
Per BUC
Year Ended Year Ended
December 31, 1998 December 31, 1997
----------------- -----------------
<S> <C> <C>
Income $ .2933 $ .4173
Return of Capital 6.5237 .8841
----------------- -----------------
Total $ 6.8170 $ 1.3014
================= =================
</TABLE>
See Item 7, Management's Discussion and Analysis of Financial Condition
and Results of Operations, for information regarding the sources of funds used
for cash distributions and for a discussion of factors, if any, which may
adversely affect the Registrant's ability to make cash distributions at the
same rate in 1999 and thereafter.
<PAGE> - 4 -
Item 6. Selected Financial Data. Set forth below is selected financial
data for the Partnership. The information set forth below should be read in
conjunction with the Financial Statements and Notes thereto filed in response
to Item 8 hereof.
<TABLE>
<CAPTION>
For the For the For the For the For the
Year Ended Year Ended Year Ended Year Ended Year Ended
Dec. 31, 1998 Dec. 31, 1997 Dec. 31, 1996 Dec. 31, 1995 Dec. 31, 1994
------------- ------------- ------------- ------------- -------------
<S> <C> <C> <C> <C> <C>
Operating Data:
Mortgage-backed securities income $ 501,439 $ 560,584 $ 660,229 $ 723,177 $ 557,576
Equity in earnings of property partnerships 33,206 59,852 20,381 62,475 76,322
Interest income on temporary cash investments 108,718 138,649 94,739 84,722 78,415
Gain on sale of mortgage backed securities 11,656 - - - -
Gain on sale of PREP - - 226,587 - -
General and administrative expenses (343,544) (369,132) (172,499) (171,190) (148,214)
------------- ------------- ------------- ------------- -------------
Net income $ 311,475 $ 389,953 $ 829,437 $ 699,184 $ 564,099
============= ============= ============= ============= =============
Net income, basic and diluted, per
Beneficial Unit Certificate (BUC) $ .29 $ .42 $ .90 $ .76 $ .61
============= ============= ============= ============= =============
Cash distributions paid or accrued per BUC $ 6.8170 $ 1.3014 $ 1.3668 $ 1.4318 $ 1.4898
============= ============= ============= ============= =============
Balance Sheet Data:
Investment in mortgage-backed securities $ 3,409,301 $ 7,359,399 $ 8,506,853 $ 9,361,640 $ 10,202,877
============= ============= ============= ============= =============
Total assets $ 4,084,388 $ 10,024,885 $ 10,690,796 $ 11,288,968 $ 11,879,769
============= ============= ============= ============= =============
Total liabilities $ 118,054 $ 239,962 $ 156,346 $ 271,833 $ 274,147
============= ============= ============= ============= =============
Total partners' capital $ 3,966,334 $ 9,784,923 $ 10,534,450 $ 11,017,135 $ 11,605,622
============= ============= ============= ============= =============
</TABLE>
Item 7. 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 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. The Partnership has been repaid by GNMA on the GNMA
Certificates collateralized by the Villages at Moonraker, Laurel Park
Apartments and Ashwood Apartments. In addition, in December, 1998, the
Partnership sold its GNMA Certificate collateralized by Owings Chase
Apartments. The Partnership has sold or otherwise disposed of its PREPs in
two properties. Collectively, the remaining GNMA Certificate and the three
remaining PREPs are referred to as the Permanent Investments. In addition,
the Partnership held various Single-Family Certificates at December 31, 1998.
<PAGE> - 5 -
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 December 31, 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 387 377 97%
Owings Chase Apartments Pikesville, MD 234 224 96%
--------- ---------- -----------
668 646 96%
========= ========== ===========
</TABLE>
Distributions
Cash distributions paid or accrued per Beneficial Unit Certificate (BUC) were
as follows:
<TABLE>
<CAPTION>
For the For the For the
Year Ended Year Ended Year Ended
Dec. 31, 1998 Dec. 31, 1997 Dec. 31, 1996
-------------- -------------- --------------
<S> <C> <C> <C>
Regular monthly distributions
Income $ .2933 $ .4173 $ .9017
Return of capital .9069 .8841 .4651
------------- ------------- --------------
$ 1.2002 $ 1.3014 $ 1.3668
============= ============= ==============
Special distributions
Return of capital $ 5.6168 $ - $ -
============= ============== ==============
Total Distributions
Income $ .2933 $ .4173 $ .9017
Return of capital 6.5237 .8841 .4651
------------- ------------- --------------
$ 6.8170 $ 1.3014 $ 1.3668
============== ============== ==============
Total Distributions
Paid out of cash flow (including mortgage principal payments) $ 4.7655 $ 1.3014 $ 1.3668
Withdrawn from reserves 2.0515 - -
------------- -------------- --------------
$ 6.8170 $ 1.3014 $ 1.3668
============== ============== ==============
</TABLE>
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 $1,858,636 of undistributed mortgage
principal payments was withdrawn from reserves. The total amount held in
reserves at December 31, 1998, was $2,363,694, of which $1,799,443 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.
<PAGE> - 6 -
Asset Quality
The Partnership continues to receive monthly principal and interest payments
on its remaining GNMA Certificate 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. 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 net realizable value of
the properties is determined based on the discounted estimated future cash
flows from the properties, including estimated sales proceeds. The
calculation of discounted estimated future cash flows includes certain
variables such as the assumed inflation rates for rents and expenses,
capitalization rates and discount rates. These variables are supplied to
management by an independent real estate firm and are based on local market
conditions for each property. In certain cases, additional factors such as
the replacement value of the property or comparable sales of similar
properties are also taken into consideration. (See footnotes 2C and 2D to the
financial statements for further discussion.)
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 indicated any commitment to provide
this support. Accordingly, it has not reduced its investment in the PREPs
below zero to recognize its allocated share of the property partnerships'
losses.
Broadmoor Court
Broadmoor Court, a senior assisted-living center located in Colorado Springs,
Colorado, had an average occupancy rate of 93% during 1998 and 1997. The
mortgage loan on this property is current and the Partnership anticipates that
property cash flow will be sufficient to pay debt service in 1999. In
addition to principal and interest payments received during 1998 on the GNMA
Certificate collateralized by this property, the Partnership recorded $31,883
in equity distributions from the partnership which owns the property.
Laurel Park Apartments
Laurel Park Apartments, located in Riverdale, Georgia, had an average
occupancy rate of 97% during 1998 compared to 96% during 1997. At December
31, 1998 the Partnership's investment in this property consists only of a PREP
since the Partnership has already been repaid by GNMA on its GNMA
Certificate. Laurel Park Apartments has been current on its mortgage
obligations since a Loan Modification Agreement (LMA) was effected in August
1996. The Partnership did not receive any equity distributions on its PREP
during 1998. It is anticipated that Laurel Park Apartments will continue to
generate cash flow sufficient to meet its mortgage obligations under the terms
of the LMA during 1999.
Owings Chase Apartments
Owings Chase Apartments, located in Pikesville, Maryland, had an average
occupancy rate of 98% during 1998, compared to 94% during 1997. Cash flow
from the operations of the property was sufficient to fully service debt on
the mortgage loan in 1998. The mortgage loan was current (under the modified
terms of the mortgage) at December 31, 1998, and the Partnership anticipates
that the property cash flow will continue to be sufficient to pay debt service
in 1999. In addition to principal and interest payments received during 1998
on the GNMA Certificate collateralized by this property, the Partnership
recorded $1,323 in equity distributions from the partnership which owns the
property. In December, 1998, the Partnership sold its GNMA Certificate
collateralized by this property; therefore, the Partnership will no longer
receive principal and interest payments on such GNMA Certificate. The
Partnership earned interest income on such GNMA Certificate of $206,259 and
$214,091 in 1998 and 1997, respectively.
<PAGE> - 7 -
Results of Operations
The tables below compare the results of operations for each year shown.
<TABLE>
<CAPTION>
For the For the For the
Year Ended Year Ended Year Ended
Dec. 31, 1998 Dec. 31, 1997 Dec. 31, 1996
--------------- --------------- ---------------
<S> <C> <C> <C>
Mortgage-backed securities income $ 501,439 $ 560,584 $ 660,229
Equity in earnings of property partnerships 33,206 59,852 20,381
Interest income on temporary cash investments 108,718 138,649 94,739
Gain on sale of mortgage backed securities 11,656 - -
Gain on sale of PREP - - 226,587
--------------- --------------- ---------------
655,019 759,085 1,001,936
General and administrative expenses 343,544 369,132 172,499
--------------- --------------- ---------------
Net income $ 311,475 $ 389,953 $ 829,437
=============== =============== ===============
</TABLE>
<TABLE>
<CAPTION>
Increase Increase
(Decrease) (Decrease)
From 1997 From 1996
--------------- ---------------
<S> <C> <C>
Mortgage-backed securities income $ (59,145) $ (99,645)
Equity in earnings of property partnerships (26,646) 39,471
Interest income on temporary cash investments (29,931) 43,910
Gain on sale of mortgage backed securities 11,656 -
Gain on sale of PREP - (226,587)
--------------- ---------------
(104,066) (242,851)
General and administrative expenses (25,588) 196,633
--------------- ---------------
Net income $ (78,478) $ (439,484)
=============== ===============
</TABLE>
Mortgage-backed securities income decreased $59,145 from 1997 to 1998 due to
the continued amortization of the principal balances of the Partnership's
other mortgage-backed securities. Mortgage-backed securities income decreased
$99,645 from 1996 to 1997. Approximately $51,700 of such decrease was due to
the redemption of the GNMA Certificate related to Ashwood Apartments in
January, 1997. The remaining decrease of approximately $47,900 was due to the
continued amortization of the principal balances of the Partnership's other
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. 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 partnership decreased $26,646 from 1997 to
1998. Approximately $19,700 of such decrease was due to a decrease in cash
flow received from Owings Chase Apartments in 1998 compared to 1997. The
remaining decrease of approximately $6,900 was due to a decrease in cash flow
received from Broadmoor Court in 1998 compared to 1997.
Equity in earnings of property partnerships increased $39,471 from 1996 to
1997 due primarily to recording a loss of approximately $48,000 for Laurel
Park Apartments during 1996. Excluding such loss, equity in earnings of
property partnerships decreased approximately $8,500 from 1996 to 1997.
Approximately $19,900 of such decrease is attributable to the sale of the
Partnership's PREP in Ashwood Apartments in December 1996. The decrease of
$19,900 from Ashwood Apartments, together with a decrease of approximately
<PAGE> - 8 -
$9,600 in cash flow received from Broadmoor Court, was partially offset by
approximately $21,000 in cash flow received from Owings Chase Apartments
during 1997. No distributions were received from Owings Chase Apartments
during 1996.
The decrease in interest income on temporary cash investments of $29,931 was
primarily attributable to a decrease in cash reserves resulting from a special
distribution of approximately $2 million made in September, 1998. The
increase in interest income on temporary cash investments of $43,910 from 1996
to 1997 was 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.
The Partnership recorded a gain of $11,656 in 1998 due to the December, 1998,
sale of the GNMA collateralized by Owings Chase Apartments. Due to this sale,
the Partnership will no longer receive interest payments on such GNMA. The
Partnership recorded a gain of $226,587 in 1996 due to the sale of the
Partnership's limited partnership interest in the operating partnership which
owns Ashwood Apartments. Due to this sale, the Partnership no longer receives
equity distributions from Ashwood Apartments.
General and administrative expenses decreased $25,588 from 1997 to 1998. This
decrease is due primarily to: (i) a decrease of approximately $52,000 in
transaction costs incurred in conjunction with the merger described in Note 1
to the financial statements; (ii) a decrease of approximately $19,000 in
administrative fees paid to AFCA due to such merger partially offset by (iii)
an increase in salaries expense of approximately $45,000. General and
administrative expenses increased $196,633 from 1996 to 1997. This increase
was due primarily to transaction costs of approximately $163,500 incurred in
conjunction with the merger described in Note 1 to the financial statements
and an increase in salaries expense.
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 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
<PAGE> - 9 -
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
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
<PAGE> - 10 -
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
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.
Forward Looking Statements
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 7A. Quantitative and Qualitative Disclosures About Market Risk.
At December 31, 1998, the Partnership held interest sensitive assets that
consisted primarily of fixed-rate mortgage-backed securities and, at that
time, was subject to certain risks associated with changes in interest rates.
The table below presents the principal amounts and related interest rates by
year of maturity for the Partnership's investment portfolio as of December 31,
1998:
<TABLE>
<CAPTION>
Security Interest Rate Maturity Fair Value
- - -------------------------------- ------------- ------------- ------------
<S> <C> <C> <C>
GNMA Certificates:
Pools of single-family mortgages 6.03%(1) 2008 $ 586,760
Pools of single-family mortgages 7.58%(1) 2008 481,428
Pools of single-family mortgages 8.74%(1) 2016/2018 1,024,105
Broadmoor Court 9.25% 2029 585,753
FNMA Certificate:
Pools of single-family mortgages 5.52%(1) 2000 731,255
(1) Represents yield to the partnership.
</TABLE>
None of the Partnership's assets were held for trading purposes. The
Partnership had no fixed-rate or adjustable-rate liabilities.
The value of the Partnership's interest bearing assets fluctuate with changes
in interest rates. In general, the value of these assets will decrease as
interest rates rise and increase as interest rates fall. Accordingly, the
proceeds realized by the Partnership from a sale of these assets will be
affected by the interest rate market at the time of the sale.
<PAGE> - 11-
An additional risk relating to investments in mortgage-backed securities is
the risk that the principal amount of the underlying mortgages will be repaid
prior to maturity. Such prepayments result when the homeowner sells his home
or decides to either retire or refinance his existing mortgage loan. In
addition, defaults and foreclosures have the same effect as a prepayment in
that no future interest payments are earned on the mortgage. Prepayments
usually can be expected to increase when mortgage interest rates decrease
significantly and decrease when mortgage interest rates increase, although
such effects are not entirely predictable. Prepayment experience also may be
affected by the conditions in the housing and financial markets, general
economic conditions and the relative interest rates on fixed-rate and
adjustable-rate mortgage loans. Prepayments are the primary feature of
mortgage-backed securities that distinguishes them from other types of bonds.
As the underlying mortgages are prepaid, the amount of interest income earned
by the holder of the mortgage-backed security will decrease. During a time of
falling interest rates, the holder of a mortgage-backed security may have to
reinvest principal payments received from prepaid mortgages at a lower
interest rate than is earned on the original mortgage-backed security. As a
general matter, the Partnership is required to distribute principal and
interest payments received on its investments, except for amounts held in its
reserve. Therefore, the Partnership generally does not reinvest principal
payments on its mortgage-backed securities. As a result, a prepayment usually
results in a permanent reduction in the Partnership's interest earning assets.
Another potential negative impact of prepayments results when the holder of a
mortgage-backed security has paid more than par for the mortgage-backed
security. This premium is amortized against earnings over the life of the
security. Prepayments increase in the rate of premium amortization, which
reduces the earnings of the holder. The Partnership does not face this risk
since it has acquired all of its mortgage-backed securities at or below par.
During the first quarter of fiscal 1999, the Partnership sold all of its
mortgage-backed securities and, accordingly, is no longer subject to the
interest and prepayment risks described above.
As the table incorporates only those exposures that exist as of December 31,
1998, it does not consider those exposures or positions which could arise
after that date. Moreover, because firm commitments are not presented in the
table above, the information presented therein has limited predictive value.
As a result, the Partnership's ultimate realized gain or loss with respect to
interest rate fluctuations will depend on the exposures that arise during the
period and market interest rates.
Item 8. Financial Statements and Supplementary Data. The Financial
Statements and supporting schedules of the Registrant are set forth in Item 14
hereof and are incorporated herein by reference.
Item 9. Changes in and Disagreements With Accountants on Accounting and
Financial Disclosure. There were no disagreements with the Registrant's
independent accountants on accounting principles and practices or financial
disclosure during the fiscal years ended December 31, 1998 and 1997.
<PAGE> - 12 -
PART III
Item 10. Directors and Executive Officers of Registrant. The Registrant
has no directors or officers. Management of the Registrant consists of the
general partner of the Registrant, America First Capital Associates Limited
Partnership Six ("AFCA"), and its general partner, America First Mortgage
Investments, Inc. The following individuals are directors and officers of
America First Mortgage Investments, Inc.:
<TABLE>
<CAPTION>
Name Position Held Position Held Since Board Term Expiration
- - ----------------------- -------------------------- ----------------------- ---------------------
<S> <C> <C> <C>
Michael B. Yanney Chairman of the Board 1998 1999
Stewart Zimmerman President, Chief Executive 1998 2001
Officer and Director
Gary Thompson Chief Financial Officer 1998 N/A
William S. Gorin Executive Vice President 1998 N/A
Ronald A. Freydberg Senior Vice President 1998 N/A
Michael L. Dahir Director 1998 2000
George V. Janzen Director 1998 2001
George H. Krauss Director 1998 1999
Gregor Medinger Director 1998 2000
W. David Scott Director 1998 2001
</TABLE>
Michael B. Yanney, 65, serves as Chairman of the Board of Directors and as a
Director of America First Mortgage Investments, Inc. Mr. Yanney has served as
the Chairman and Chief Executive Officer of America First Companies L.L.C. and
its predecessors ("America First") since 1984. America First is a diversified
financial services firm located in Omaha, Nebraska that manages public
investment funds which have raised over $1.5 billion. From 1977 until the
organization of America First, Mr. Yanney was principally engaged in the
ownership and management of commercial banks. From 1961 to 1977, Mr. Yanney
was employed by Omaha National Bank and Omaha National Corporation (now part
of U.S. Bank, N.A.), where he held various positions, including the position
of Executive Vice President and Treasurer of the holding company. Mr. Yanney
also serves as a member of the boards of directors of Burlington Northern
Santa Fe Corporation, RCN Corporation, Level 3 Communications, Inc., Forest
Oil Corporation, Freedom Communications, Inc., PKS Information Services, Inc.,
Magnum Resources, Inc. and Rio Grande Medical Technologies, Inc.
Stewart Zimmerman, 54, serves as President and Chief Executive Officer and as
a Director of America First Mortgage Investments, Inc. He served as Executive
Vice President of America First Companies L.L.C. since January 1989, during
which time he has served in a number of positions: President and Chief
Operating Officer of America First REIT, Inc.; President of several America
First Mortgage funds including America First Participating/Preferred Equity
Mortgage Fund, America First PREP Fund 2 Limited Partnership, America First
PREP Fund 2 Pension Series Limited Partnership, Capital Source L.P., Capital
Source II L.P.-A, America First Tax Exempt Mortgage Fund Limited Partnership
and America First Tax Exempt Fund 2 Limited Partnership. From September 1986
to September 1988, he served as a Managing Director and Director of Security
Pacific Merchant Bank responsible for Mortgage Trading and Finance. Prior to
that time, he served as First Vice President of E.F. Hutton & Company, Inc.,
where he was responsible for mortgage-backed securities trading and sales
distribution, and Vice President of Lehman Brothers, where he was responsible
for the distribution of mortgage products. From 1968 to 1972, Mr. Zimmerman
was Vice President of Zenith Mortgage Company and Zenith East Inc., a national
mortgage banking and brokerage company specializing in the structuring and
sales of mortgage assets to the institutional financial community.
Gary Thompson, 56, serves as Chief Financial Officer of America First Mortgage
Investments, Inc. He serves as financial vice president of America First
Companies L.L.C. and is responsible for financial accounting and tax reporting
for all America First funds. Prior to 1989, Mr. Thompson was an audit partner
at KPMG Peat Marwick. He is a certified public accountant.
William S. Gorin, 40, serves as Executive Vice President of America First
Mortgage Investments, Inc. From 1989 to 1997 Mr. Gorin held various positions
with PaineWebber Incorporated/Kidder, Peabody & Co. Incorporated, New York,
<PAGE> - 13 -
New York, most recently serving as a First Vice President in the Research
Department. Prior to that position, Mr. Gorin was Senior Vice President in
the Special Products Group. From 1982 to 1988, Mr. Gorin was employed by
Shearson Lehman Hutton, Inc./E.F. Hutton & Company, Inc., New York, New York,
in various positions in corporate finance and direct investments. Mr. Gorin
has an MBA from Stanford University.
Ronald A. Freydberg, 38, serves as Senior Vice President of America First
Mortgage Investments, Inc. From 1995 to 1997 Mr. Freydberg served as a Vice
President of Pentalpha Capital, in Greenwich, Connecticut, where he was a
fixed income quantitative analysis and structuring specialist. In that
capacity he designed a variety of interactive pricing and forecasting models,
including a customized subordinate residential and commercial mortgage-backed
analytical program and an ARM REIT five-year forecasting model. In addition,
he worked with various financial institutions on the acquisition and sale of
residential, commercial and asset-backed securities. From 1988 to 1995, Mr.
Freydberg held various positions with J.P. Morgan & Co. in New York, New
York. From 1994 to 1995, he was with the Global Markets Group. In that
position he was involved in all aspects of commercial mortgage-backed
securitization and sale of distressed commercial real estate; including
structuring, due diligence and marketing. From 1985 to 1988, Mr. Freydberg
was employed by Citicorp in New York, New York.
Michael L. Dahir, 50, serves as a Director of America First Mortgage
Investments, Inc. From 1988 to the present Mr. Dahir has served as President
and Chief Executive Officer of Omaha State Bank. From 1974 to 1988 he held
various positions with Omaha National Bank including Vice President,
investment department head, Senior Vice President and Chief Financial Officer
of FirsTier Holding Company which acquired Omaha National in 1984. Mr. Dahir
is a Director of the College of St. Mary, Omaha, Nebraska and the Jesuit
Partnership, an organizational offshoot of the Jesuit Provincial office in
Milwaukee, Wisconsin.
George V. Janzen, 70, serves as Director of America First Mortgage
Investments, Inc. He has been an independent investment consultant since
1990. From 1993 to 1995, Mr. Janzen served as a director of America First
REIT, Inc. Mr. Janzen served as Fund President of the America First Tax Exempt
Mortgage Fund from 1985 until 1990. From 1966 to 1977, he was president and
chief executive officer of Southwest National Bank of El Paso and its
successor, First City National Bank of El Paso. From 1977 to 1985, Mr. Janzen
was engaged in the management of his personal investments.
George H. Krauss, 57, serves as a Director of America First Mortgage
Investments, Inc. He has been a consultant to America First Companies since
1997. He served from 1983 to 1993 as the presiding partner of, and he is
currently of counsel to Kutak Rock, a national law firm. Mr. Krauss has been
a member of Kutak Rock since 1972 and has extensive experience in the
corporate, merger and acquisition, and regulatory areas of the firm's
practice. In addition to his legal education, Mr. Krauss has a Masters of
Business Administration and is a registered Professional Engineer. Mr. Krauss
has served on the board of directors of numerous companies. He is currently a
member of the board of directors of Gateway 2000, Inc., a computer
manufacturing and distribution company which is listed on the NYSE. He is
also a member of the board of Bay View Capital Corporation which is listed on
the NASDAQ.
Gregor Medinger, 55, serves as a Director of America First Mortgage
Investments, Inc. He is President of BV Capital Markets, New York, New York,
and has been with that company for 14 years. From 1971 to 1980, he worked for
Banque Worms, a French merchant bank, concentrating in cross-border mergers
and acquisitions. From 1969 to 1971, Mr. Medinger worked in the International
Department of Bankers Trust. Mr. Medinger has extensive experience in the
investment banking field. He has worked on a variety of transactions ranging
from initial public offerings of companies from emerging markets to
cross-border leveraged buyouts to dual currency bonds. Gregor Medinger also
headed the tax-exempt financings that BV Capital has done in the last ten
years. Mr. Medinger has a law degree from the University of Vienna.
W. David Scott, 37, serves as Director of America First Mortgage Investments,
Inc. He is President and Chief Executive Officer of Magnum Resources, Inc., a
privately held corporation which focuses on commercial real estate. Mr. Scott
was Vice President and Director of Cornerstone Bank Group from 1991 to 1994
and prior to that was an accountant with Peter Kiewit Sons', Inc. He serves
<PAGE> - 14 -
on the boards of Brownell-Talbot School, Boy Scouts of America and Hastings
College.
Item 11. Executive Compensation. Neither the Registrant nor AFCA has
any directors or officers. None of the directors or executive officers of
America First Mortgage Investments, Inc. (the general partner of AFCA) receive
compensation from the Registrant and AFCA receives no reimbursement from the
Registrant for any portion of their salaries. Remuneration paid by the
Registrant to AFCA pursuant to the terms of its limited partnership agreement
during the year ended December 31, 1998, is described in Note 7 of the Notes
to the Financial Statements filed in response to Item 8 hereof.
Item 12. Security Ownership of Certain Beneficial Owners and
Management.
(a) America First Mortgage Investments, Inc., 399 Park
Avenue, 36th Floor, New York, New York 10022, owns 895,519 Units representing
approximately 98.85% of the outstanding BUCs. No other person is known by the
Registrant to own beneficially more than 5% of the BUCs.
(b) No director or officer of America First Mortgage Investments, Inc.
owns any BUCs. The general partner of AFCA, America First Mortgage
Investments, Inc., owns approximately 98.85% of the outstanding BUCs as
described above.
(c) There are no arrangements known to the Registrant, the operation of
which may at any subsequent date result in a change in control of the
Registrant.
Item 13. Certain Relationships and Related Transactions. The general
partner of the Registrant is AFCA and the sole general partner of AFCA is
America First Mortgage Investments, Inc.
Except as described herein, the Registrant is not a party to any
transaction or proposed transaction with AFCA, America First Mortgage
Investments, Inc., or with any person who is (i) a director or executive
officer of America First Mortgage Investments Inc., or any general partner of
AFCA; (ii) a nominee for election as a director of America First Mortgage
Investments Inc.; (iii) an owner of more than 5% of the BUCs; or, (iv) a
member of the immediate family of any of the foregoing persons.
During 1998, the Registrant paid or reimbursed AFCA or America First
Companies L.L.C. $180,294 for certain costs and expenses incurred in
connection with the operation of the Registrant, including legal and
accounting fees and investor communication costs, such as printing and mailing
charges. See Note 7 to Notes to Financial Statements filed in response to
Item 8 hereof for a description of these costs and expenses.
Prior to the merger, AFCA was entitled to an annual administrative fee
equal to .35% of the Partnership's outstanding investments which was paid by
the Partnership to the extent such amounts were not paid by property owners.
AFCA earned $5,952 in such administrative fees prior to the merger during
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 is a
principal owner of America First. The property management agreements provide
that the manager is entitled to receive a management fee equal to a stated
percentage of the gross revenues generated by the property under management.
Management fees payable range from 3.5% to 4% of gross revenues. 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 $48,252 in 1998.
The general partner of the property partnership which owns Owings Chase
Apartments is principally owned by an employee of America First. Other
affiliates of America First also own nominal interests 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> - 15 -
On December 23, 1998, the Partnership sold its GNMA Certificate
collateralized by Owings Chase Apartments to America First Mortgage
Investments, Inc., the holder of a majority of BUCs of the Partnership. The
Partnership received proceeds of $3,119,830 from the sale and recognized a
gain of $11,656 from the sale. Proceeds from the sale were distributed on
December 31, 1998.
PART IV
Item 14. Exhibits, Financial Statement Schedules and Reports on Form
8-K. (a) The following documents are filed as part of this report:
1. Financial Statements. The following financial statements are
included in response to Item 8 of this report:
Independent Accountants' Report.
Balance Sheets of the Registrant as of December 31, 1998 and
December 31, 1997
Statements of Income and Comprehensive Income of the Registrant
for the years ended December 31, 1998, December 31, 1997 and
December 31, 1996
Statements of Partners' Capital of the Registrant for the years
ended December 31, 1998, December 31, 1997 and December 31, 1996
Statements of Cash Flows of the Registrant for the years ended
December 31, 1998, December 31, 1997 and December 31, 1996
Notes to Financial Statements of the Registrant.
2. Financial Statement Schedules. The information required to be
set forth in the financial statement schedules is shown in the Notes to
Financial Statements filed in response to Item 8 hereof.
3. Exhibits. The following exhibits were filed as required by
Item 14(c) of this report. Exhibit numbers refer to the paragraph numbers
under Item 601 of Regulation S-K:
2. 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 For 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)).
3. Articles of Incorporation and Bylaws of America First
Fiduciary Corporation Number Sixteen (incorporated herein by
reference to Form S-11 Registration Statement filed April 13,
1987, with the Securities and Exchange Commission by America
First Investment Funds (Commission File No. 33-13407)).
4(a). Agreement of Limited Partnership dated May 25, 1988
(incorporated herein by reference to Form 10-K dated December 31,
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 Exchangeable Unit (incorporated
by reference to Form S-11 Registration Statement filed April 13,
1987, with the Securities and Exchange Commission by America First
Investment Funds (Commission File No. 33-13407)).
24. Power of Attorney.
(b) Form 8-K
The Registrant did not file any reports on Form 8-K during the
fourth quarter of the year for which this report is filed.
<PAGE> - 16 -
INDEPENDENT ACCOUNTANTS' REPORT
To the Partners
America First PREP Fund 2 Pension Series Limited Partnership:
In our opinion, the financial statements listed in the index appearing under
Item 14(a)(1) and (2) on page 14, present fairly, in all material respects,
the financial position of America First Prep Fund 2 Pension Series Limited
Partnership (the "Partnership") at December 31, 1998 and 1997 and the results
of its operations and its cash flows for each of the three years in the period
ended December 31, 1998 in conformity with generally accepted accounting
principles. These financial statements are the responsibility of the
Partnership's management; our responsibility is to express an opinion on these
financial statements based on our audits. We conducted our audits of these
financial statements in accordance with generally accepted auditing standards
which require that we plan and perform the audit to obtain reasonable
assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements, assessing
the accounting principles used and significant estimates made by management,
and evaluating the overall financial statement presentation. We believe that
our audits provide a reasonable basis for the opinion expressed above.
New York, New York
March 4,1999 /s/PricewaterhouseCoopers LLP
<PAGE> - 17 -
AMERICA FIRST PREP FUND 2 PENSION SERIES LIMITED PARTNERSHIP
BALANCE SHEETS
<TABLE>
<CAPTION>
Dec. 31, 1998 Dec. 31, 1997
-------------- --------------
<S> <C> <C>
Assets
Cash and temporary cash investments, at cost which
approximates market value $ 530,880 $ 2,577,493
Investment in mortgage-backed securities (Note 5) 3,409,301 7,359,399
Investment in preferred real estate participations (PREPs),
net of valuation allowance (Note 6) - -
Interest receivable 35,796 55,977
Other assets 108,411 32,016
-------------- --------------
$ 4,084,388 $ 10,024,885
============== ==============
Liabilities and Partners' Capital
Liabilities
Accounts payable (Note 7) $ 62,506 $ 142,959
Distribution payable (Note 4) 55,548 97,003
-------------- --------------
118,054 239,962
-------------- --------------
Partners' Capital
General Partner 100 100
Beneficial Unit Certificate Holders
($4.38 per BUC in 1998 and $10.80 in 1997) 3,966,234 9,784,823
-------------- --------------
3,966,334 9,784,923
-------------- --------------
$ 4,084,388 $ 10,024,885
============== ==============
</TABLE>
The accompanying notes are an integral part of these financial statements.
<PAGE> - 18 -
AMERICA FIRST PREP FUND 2 PENSION SERIES LIMITED PARTNERSHIP
STATEMENTS OF INCOME AND COMPREHENSIVE INCOME
<TABLE>
<CAPTION>
For the For the For the
Year Ended Year Ended Year Ended
Dec. 31, 1998 Dec. 31, 1997 Dec. 31, 1996
-------------- -------------- --------------
<S> <C> <C> <C>
Income
Mortgage-backed securities income (Note 5) $ 501,439 $ 560,584 $ 660,229
Equity in earnings of property partnerships (Note 6) 33,206 59,852 20,381
Interest income on temporary cash investments 108,718 138,649 94,739
Gain on sale of mortgage backed securities 11,656 - -
Gain on sale of PREP - - 226,587
-------------- -------------- --------------
655,019 759,085 1,001,936
Expenses
General and administrative expenses (Note 7) 343,544 369,132 172,499
-------------- -------------- --------------
Net income 311,475 389,953 829,437
Other comprehensive income:
Unrealized holding gains (losses) on securities
Unrealized holding gains (losses) arising
during the year 103,421 51,466 (61,328)
Plus reclassification adjustment for net gains
included in net income (11,656) - -
--------------- -------------- -------------
Change in net unrealized holding gains (losses) 91,765 51,466 (61,328)
--------------- -------------- -------------
Comprehensive income $ 403,240 $ 441,419 $ 768,109
=============== ============== =============
Net income allocated to:
General Partner $ 45,773 $ 11,909 $ 12,508
BUC Holders 265,702 378,044 816,929
-------------- -------------- --------------
$ 311,475 $ 389,953 $ 829,437
============== ============== ==============
Net income, basic and diluted, per BUC $ .29 $ .42 $ .90
============== ============== ==============
The accompanying notes are an integral part of the financial statements.
</TABLE>
<PAGE> - 19 -
AMERICA FIRST PREP FUND 2 PENSION SERIES LIMITED PARTNERSHIP
STATEMENT OF PARTNERS' CAPITAL
FROM DECEMBER 31, 1995, TO DECEMBER 31, 1998
<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, 1995 $ 100 $ 10,994,431 $ 10,994,531
Net income 12,508 816,929 829,437
Cash distributions paid or accrued (Note 4) (12,508) (1,238,286) (1,250,794)
-------------- ---------------- ---------------
Balance at December 31, 1996 100 10,573,074 10,573,174
Net income 11,909 378,044 389,953
Cash distributions paid or accrued (Note 4) (11,909) (1,179,037) (1,190,946)
-------------- ---------------- ---------------
Balance at December 31, 1997 100 9,772,081 9,772,181
Net income 45,773 265,702 311,475
Cash distributions paid or accrued (Note 4) (45,773) (6,176,056) (6,221,829)
-------------- ---------------- ---------------
100 3,861,727 3,861,827
Accumulated Other Comprehensive Income
Balance at December 31, 1995 - 22,604 22,604
Other comprehensive income - (61,328) (61,328)
-------------- ---------------- ---------------
Balance at December 31, 1996 - (38,724) (38,724)
Other comprehensive income - 51,466 51,466
-------------- ---------------- ---------------
Balance at December 31, 1997 - 12,742 12,742
Other comprehensive income - 91,765 91,765
-------------- ---------------- ---------------
- 104,507 104,507
-------------- ---------------- ---------------
Balance at December 31, 1998 $ 100 $ 3,966,234 $ 3,966,334
============== ================ ===============
The accompanying notes are an integral part of the financial statements.
</TABLE>
<PAGE> - 20 -
AMERICA FIRST PREP FUND 2 PENSION SERIES LIMITED PARTNERSHIP
STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
For the For the For the
Year Ended Year Ended Year Ended
Dec. 31, 1998 Dec. 31, 1997 Dec. 31, 1996
--------------- --------------- ---------------
<S> <C> <C> <C>
Cash flows from operating activities
Net income $ 311,475 $ 389,953 $ 829,437
Adjustments to reconcile net income to net cash
provided by operating activities
Equity in earnings of property partnerships (33,206) (59,852) (20,381)
Amortization of discount on mortgage-backed securities (14,759) (9,764) (9,912)
Gain on sale of mortgage backed securities (11,656) - -
Gain on sale of PREP - - (226,587)
Decrease in interest receivable 20,181 4,584 3,893
(Increase) decrease in other assets (76,395) 18,789 (1,430)
Increase (decrease) in accounts payable (80,453) 88,558 (4,275)
--------------- --------------- ---------------
Net cash provided by operating activities 115,187 432,268 570,745
--------------- --------------- ---------------
Cash flows from investing activities
Mortgage principal payments received 948,448 1,208,684 803,371
Sale of mortgage backed securities 3,119,830 - -
Distributions received from PREPs 33,206 59,852 68,377
Proceeds from sale of PREP - - 226,587
Investment in PREPs - - (47,996)
--------------- --------------- ---------------
Net cash provided by investing activities 4,101,484 1,268,536 1,050,339
--------------- --------------- ---------------
Cash flow used in financing activity
Distributions paid (6,263,284) (1,195,888) (1,362,006)
--------------- --------------- ---------------
Net increase (decrease) in cash and temporary cash investments (2,046,613) 504,916 259,078
Cash and temporary cash investments at beginning of year 2,577,493 2,072,577 1,813,499
--------------- --------------- ---------------
Cash and temporary cash investments at end of year $ 530,880 $ 2,577,493 $ 2,072,577
=============== =============== ===============
The accompanying notes are an integral part of the financial statements.
</TABLE>
<PAGE> - 21 -
AMERICA FIRST PREP FUND 2 PENSION SERIES LIMITED PARTNERSHIP
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1998
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 December 31, 1998, the holders of 10,455 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 on the accrual
basis of accounting in accordance with generally accepted accounting
principles.
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 other comprehensive income. 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 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
<PAGE> - 22 -
AMERICA FIRST PREP FUND 2 PENSION SERIES LIMITED PARTNERSHIP
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1998
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 management's best estimate of the net realizable value of such
properties; however, the ultimate realized values may vary from these
estimates. The net realizable value of the properties is determined based
on the discounted estimated future cash flows from the properties,
including estimated sales proceeds. The calculation of estimated future
cash flows includes certain variables such as the assumed inflation rates
for rents and expenses, capitalization rates and discount rates. These
variables are supplied to management by an independent real estate firm and
are based on local market conditions for each property. In certain cases,
additional factors such as the replacement value of the property or
comparable sales of similar properties are also taken into consideration.
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.
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. The tax
basis of the Partnership's assets and liabilities exceeded the reported
amounts by $1,333,148 and $1,546,606 at December 31, 1998, and
December 31, 1997, respectively.
F) Cash and Temporary Cash Investments
Cash and temporary cash investments consist of cash-on-hand and highly
liquid investments 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 years presented.
H) Comprehensive Income
In 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 gains (losses) on investments. The adoption of SFAS 130 had no
impact on total Partners' Capital.
I) Segment Reporting
In 1998, the partnership adopted Statement of Financial Accounting
Standards No. 131, "Disclosures about Segments of an Enterprise and
Related Information" (SFAS 131). SFAS 131 requires that a public business
enterprise report financial and descriptive information about its
reportable operating segments. The adoption of SFAS 131 did not have an
impact on the financial reporting of the Partnership as it is engaged
solely in the business of providing financing for the acquisition and
improvement of real estate.
J) New Accounting Pronouncements
In June, 1998, the Financial Accounting Standards Board issued Statement
of Financial Accounting Standards No. 133, "Accounting for Derivative
Instruments and Hedging Activities" (SFAS 133). The statement provides new
accounting and reporting standards for the use of derivative instruments.
Adoption of this statement is required by the Partnership effective
January 1, 2000. Management believes that the impact of such adoption
will be not material to the financial statements.
In April 1998, the Accounting Standards Executive Committee issued
Statement of Position 98-5, "Reporting on the Costs of Start-Up Activities"
(SOP 98-5). This statement requires costs of start-up activities and
organization costs to be expensed as incurred. Adoption of this statement
is required by the Partnership effective January 1, 1999. Management
intends to adopt the statement as required in fiscal 1999. Management
believes that the impact of such adoption will not have an impact to the
financial statements.
<PAGE> - 23 -
AMERICA FIRST PREP FUND 2 PENSION SERIES LIMITED PARTNERSHIP
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1998
3. Partnership Reserve Account
The Partnership maintains a reserve account which consisted of the following
at December 31, 1998:
<TABLE>
<S> <C>
Cash and temporary cash investments $ 564,251
GNMA Certificates 1,068,188
FNMA Certificates 731,255
---------------
$ 2,363,694
===============
</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. Income and expenses are allocated
to each BUC Holder on a monthly basis based on the number of BUCs held by each
Holder as of the last day of the month for which such allocation is to be
made.
Net Operating Income during each distribution period will be distributed 99%
to the BUC Holders and 1% to AFCA 6 until the BUC Holders, as a class, receive
distributions of Net Operating Income equal to a cumulative noncompounded
annual return of 9% on their Adjusted Capital Contributions. Thereafter,
remaining Net Operating Income during such distribution period will be
distributed 90% to the BUC Holders and 10% to AFCA 6 until BUC Holders, as a
class, receive distributions of Net Operating Income equal to a cumulative
noncompounded annual return of 11% on their Adjusted Capital Contributions.
Thereafter, remaining Net Operating Income during such distribution period
will be distributed 95% to BUC Holders and 5% to AFCA 6.
Net Capital Transaction Proceeds will be distributed 100% to the BUC Holders
until the BUC Holders, as a class, have received distributions from all
sources in an amount equal to $20 per BUC. Thereafter, Net Capital
Transaction Proceeds will be distributed 99% to the BUC Holders and 1% to AFCA
6 until BUC Holders, as a class, have received distributions from all sources
in an amount equal to $20 per BUC plus an amount equal to a cumulative
noncompounded annual return of 9% on their Adjusted Capital Contributions.
Thereafter, any remaining Net Capital Transaction Proceeds will be distributed
90% to BUC Holders and 10% to AFCA 6 until BUC Holders, as a class, have
received distributions from all sources in an amount equal to $20 per BUC plus
an amount equal to a cumulative noncompounded annual return of 11% on their
Adjusted Capital Contributions. Thereafter any remaining Net Capital
Transactions Proceeds will be distributed 95% to BUC Holders and 5% to AFCA 6.
Proceeds from a Capital Transaction which result in the liquidation of the
Partnership for federal income tax purposes will be distributed in the same
manner as distributions from nonliquidating Capital Transactions, subject to
the requirement that the distributions be initially made to the BUC Holders
and AFCA 6 in accordance with their positive capital account balances.
Cash distributions are presently made on a monthly basis but may be made
quarterly or semiannually if AFCA 6 so elects. Cash distributions included in
the financial statements represent the actual cash distributions made during
each year and the cash distributions accrued at the end of each year.
5. Investment in Mortgage-Backed Securities
The mortgage-backed securities held by the Partnership represent Government
National Mortgage Association (GNMA) Certificates and Federal National
<PAGE> - 24 -
AMERICA FIRST PREP FUND 2 PENSION SERIES LIMITED PARTNERSHIP
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1998
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 market value of securities
transferred were $4,985,047, $100,123, $282,755 and $4,802,415, respectively.
At December 31, 1998, the total amortized cost, gross unrealized holding
gains, gross unrealized holding losses, and aggregate fair market value of
mortgage-backed securities are $3,304,794, $106,116, $1,609, and $3,409,301
respectively.
At December 31, 1997, the total amortized cost, gross unrealized holding
gains, gross unrealized holding losses, and aggregate fair value of
available-for-sale securities were $2,250,591, $25,888, $13,146 and
$2,263,333, respectively. The total amortized cost, gross unrealized holding
gains, gross unrealized holding losses, and aggregate fair value of
held-to-maturity securities were $5,096,066, $162,270, $283,727 and
$4,974,609, respectively.
<PAGE> - 25 -
AMERICA FIRST PREP FUND 2 PENSION SERIES LIMITED PARTNERSHIP
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1998
Descriptions of the Partnership's mortgage-backed securities held during the
year ended December 31, 1998, are as follows:
<TABLE>
<CAPTION>
Income
Number Interest Maturity Carrying Earned
Type of Security and Name Location of Units Rate Date Amount in 1998
- - ---------------------------------- -------------------- -------- -------- ------------- ------------- -------------
<S> <C> <C> <C> <C> <C> <C>
GNMA Certificates:
Broadmoor Court Colorado Springs, CO 47 9.25% 10/15/29 $ 585,753 $ 53,378
Owings Chase Apartments Pikesville, MD 234 6.75% 12/15/23 - (1) 206,529
Pools of single-family mortgages 8.74%(2) 2016/2018 1,024,105 111,442
Pools of single-family mortgages 6.03%(2) 2008 586,760(3) 37,704
Pools of single-family mortgages 7.58%(2) 2008 481,428(3) 50,394
FNMA Certificates:
Pools of single-family mortgages 5.52%(2) 2000 731,255(3) 41,992
------------- -------------
Balance at December 31, 1998 $ 3,409,301 $ 501,439
============= =============
</TABLE>
(1) GNMA Certificate was sold in December, 1998 - see Note 7.
(2) Represents yield to the Partnership.
(3) Reserve account asset - see Note 3.
Reconciliation of the carrying amount of the mortgage-backed securities is as
follows:
<TABLE>
<CAPTION>
For the For the For the
Year Ended Year Ended Year Ended
Dec. 31, 1998 Dec. 31, 1997 Dec. 31, 1996
--------------- --------------- ---------------
<S> <C> <C> <C>
Balance at beginning of year $ 7,359,399 $ 8,506,853 $ 9,361,640
Additions
Amortization of discount on mortgage-backed securities 14,759 9,764 9,912
Change in net unrealized holding gains (losses) on
available-for-sale securities 91,765 51,466 (61,328)
Deduction
Mortgage principal payments received(1) (4,056,622) (1,208,684) (803,371)
--------------- --------------- ---------------
Balance at end of year $ 3,409,301 $ 7,359,399 $ 8,506,853
=============== =============== ===============
</TABLE>
(1) The 1998 amount includes proceeds (net of a $11,656 gain) of $3,108,174
received from the sale of the GNMA Certificate related to Owings Chase
Apartments (see Note 7). The 1997 amount includes proceeds of $556,444
received from GNMA due to the redemption of the GNMA Certificate related to
Ashwood Apartments.
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.
<PAGE> - 26 -
AMERICA FIRST PREP FUND 2 PENSION SERIES LIMITED PARTNERSHIP
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1998
Descriptions of the PREPs held at December 31, 1998, are as
follows:
<TABLE>
<CAPTION>
Equity in
Earnings
Carrying of Property
Name Location Partnership Name Amount Partnerships
- - ----------------------- -------------------- ----------------------------------------- ------------- ------------
<S> <C> <C> <C> <C>
Broadmoor Court Colorado Springs, CO Stazier Associates Colorado Springs, Ltd. $ 53,547 $ 31,883
Owings Chase Apartments Pikesville, MD Owings Chase Limited Partnership 150,000 1,323
Laurel Park Apartments Riverdale, GA Gold Key Venture - -
------------- ------------
203,547 $ 33,206
Less valuation allowance (203,547) ============
-------------
Balance at December 31, 1998 $ -
=============
</TABLE>
Reconciliation of the carrying amount of the PREPs is as follows:
<TABLE>
<CAPTION>
For the For the For the
Year Ended Year Ended Year Ended
Dec. 31, 1998 Dec. 31, 1997 Dec. 31, 1996
--------------- --------------- ---------------
<S> <C> <C> <C>
Balance at beginning of year $ 203,547 $ 203,547 $ 203,547
Additions
Equity in earnings of property partnerships 33,206 59,852 20,381
Investment in PREPs - - 47,996
Deductions
Distributions received from PREPs (33,206) (59,852) (68,377)
--------------- --------------- ---------------
Balance at end of year $ 203,547 $ 203,547 $ 203,547
=============== =============== ===============
</TABLE>
The following summarizes the activity in the valuation allowance:
<TABLE>
<CAPTION>
For the For the For the
Year Ended Year Ended Year Ended
Dec. 31, 1998 Dec. 31, 1997 Dec. 31, 1996
--------------- --------------- ---------------
<S> <C> <C> <C>
Balance at beginning and end of year $ 203,547 $ 203,547 $ 203,547
============== =============== ==============
</TABLE>
<PAGE> - 27 -
AMERICA FIRST PREP FUND 2 PENSION SERIES LIMITED PARTNERSHIP
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1998
<TABLE>
<CAPTION>
1998 1997 1996
--------------- --------------- ---------------
<S> <C> <C> <C>
Combined condensed financial information for the PREPs is as follows:
Assets
Real estate $ 16,347,866 $ 17,098,929 $ 17,830,781
Restricted deposits and funded reserves 603,387 932,486 977,821
Other assets 1,663,732 1,132,493 1,191,345
--------------- --------------- ---------------
$ 18,614,985 $ 19,163,908 $ 19,999,947
=============== =============== ===============
Liabilities and Partners' Capital
Liabilities
Mortgage notes payable $ 19,831,717 $ 20,225,761 $ 20,459,706
Other liabilities 3,611,413 1,223,695 1,653,940
Partners' Capital (Deficit)
General Partners (5,259,751) (2,717,154) (2,545,305)
Limited Partners
America First Mortgage Investments, Inc. 341,523 341,523 341,523
America First PREP Fund 2 Pension Series Limited Partnership 203,547 203,547 203,547
Other (113,464) (113,464) (113,464)
--------------- --------------- ---------------
$ 18,614,985 $ 19,163,908 $ 19,999,947
=============== =============== ===============
Rental income $ 5,089,637 $ 5,090,195 $ 5,550,385
=============== =============== ===============
Combined results of operations $ (336,387) $ (462,217) $ (469,952)
=============== =============== ===============
Equity in earnings of property partnerships
(as calculated pursuant to the Limited Partnership Agreements) $ 33,206 $ 59,852 $ 20,381
=============== =============== ===============
</TABLE>
Although the property partnerships generated net losses as shown in the above
table, because the Partnership previously reduced each of its PREP investments
to zero, equity in earnings 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 indicated any commitment to provide this support.
Accordingly, it has not reduced its investment in the PREPs below zero to
recognize its allocated share of the property partnerships' losses.
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 are shown below. The
reimbursed expenses are presented on a cash basis and do not reflect accruals
made at each year end.
<TABLE>
<CAPTION>
1998 1997 1996
--------------- --------------- ---------------
<S> <C> <C> <C>
Reimbursable salaries and benefits $ 152,678 $ 105,087 $ 83,883
Professional fees and expenses 23,382 18,421 16,755
Consulting and travel expense 9,420 5,339 5,648
Investor services and custodial fees 9,049 8,521 10,038
Insurance 6,651 3,791 4,434
Other expenses 6,196 7,742 5,782
Registration fees 3,870 2,554 1,238
Report preparation and distribution 3,530 9,549 8,319
Telephone 1,764 1,878 1,395
Merger costs (36,246) 163,476 -
--------------- --------------- ---------------
$ 180,294 $ 326,358 $ 137,492
=============== =============== ===============
</TABLE>
<PAGE> - 28 -
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. The
administrative fee earned by AFCA 6 was $5,952 in 1998 (prior to the merger),
$24,649 in 1997 and $27,621 in 1996. Of these amounts, $5,952 in 1998,
$24,649 in 1997 and $25,303 in 1996 was paid by the Partnership and the
remainder was paid by property owners.
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 $48,252, $42,673, and $40,261 in 1998, 1997 and 1996
respectively.
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, 1997 or 1996.
On December 23, 1998, the Partnership sold its GNMA Certificate
collateralized by Owings Chase Apartments with a carrying value of $3,108,174
to America First Mortgage Investments, Inc., the holder of a 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 $3,119,830
which represented the fair market value of the security. The Partnership
recognized a gain of $11,656 on the sale. Proceeds from the sale were
distributed on December 31, 1998.
8. Fair Value of Financial Instruments
The following methods and assumptions were used by the Partnership in
estimating the fair value of its financial instruments:
Cash and temporary cash investments: Fair value approximates the carrying
value of such assets.
Investment in mortgage-backed securities: Fair values are based on amounts
obtained from an independent pricing source.
<TABLE>
<CAPTION>
At December 31, 1998 At December 31, 1997
----------------------------------- -----------------------------------
Carrying Estimated Carrying Estimated
Amount Fair Value Amount Fair Value
--------------- --------------- --------------- ---------------
<S> <C> <C> <C> <C>
Cash and temporary cash investments $ 530,880 $ 530,880 $ 2,577,493 $ 2,577,493
Investment in mortgage-backed securities $ 3,409,301 $ 3,409,301 $ 7,359,399 $ 7,237,942
</TABLE>
<PAGE> - 29 -
AMERICA FIRST PREP FUND 2 PENSION SERIES LIMITED PARTNERSHIP
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1998
9. Summary of Unaudited Quarterly Results of Operations
<TABLE>
<CAPTION>
First Second Third Fourth
From January 1, 1998, to December 31, 1998 Quarter Quarter Quarter Quarter
--------------- --------------- --------------- ---------------
<S> <C> <C> <C> <C>
Total income $ 182,808 $ 162,759 $ 176,132 $ 133,320
Total expenses (188,973)(1) (57,717) (55,520) (41,334)
--------------- --------------- --------------- ---------------
Net income $ (6,165) $ 105,042 $ 120,612 $ 91,986
=============== =============== =============== ===============
Net income, basic and diluted, per BUC $ (.01) $ .11 $ .11 $ .08
=============== =============== =============== ===============
</TABLE>
<TABLE>
<CAPTION>
First Second Third Fourth
From January 1, 1997, to December 31, 1997 Quarter Quarter Quarter Quarter
--------------- --------------- --------------- ---------------
<S> <C> <C> <C> <C>
Total income $ 202,598 $ 197,751 $ 187,160 $ 171,576
Total expenses (45,790) (52,626) (120,526)(1) (150,190)(1)
--------------- --------------- --------------- ---------------
Net income $ 156,808 $ 145,125 $ 66,634 $ 21,386
=============== =============== =============== ===============
Net income, basic and diluted, per BUC $ .17 $ .16 $ .07 $ .02
=============== =============== =============== ===============
</TABLE>
(1) The Partnership incurred transaction costs in connection with the
merger described in Note 1 of approximately $121,600 during the
first quarter of 1998, and $64,600 and $93,300 during the
third and fourth quarters of 1997, respectively.
10. Subsequent Events
On January 25, 1999, the Partnership sold its four FNMA Certificates with an
aggregate carrying value of $698,869 to a third party. The Partnership
received cash proceeds of $699,907 from the sale, including accrued interest
of $2,572. The Partnership recognized a loss of $1,534 on the sale.
On January 25, 1999, the Partnership also sold all its remaining 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. The Partnership recognized a gain of
$91,732 on the sale.
Proceeds from the transactions described above were distributed to investors
on February 1, 1999.
<PAGE> - 30 -
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
Date: March 29, 1999
<PAGE> - 31 -
Pursuant to the requirements of the Securities and Exchange Act of 1934,
this report has been signed below by the following persons on behalf of the
Registrant and in the capacities and on the dates indicated.
Date: March 29, 1999 By /s/ Michael B. Yanney*
Michael B. Yanney
Chairman of the Board
Date: March 29, 1999 By /s/ Stewart Zimmerman
Stewart Zimmerman
Chief Executive Officer and Director
Date: March 29, 1999 By /s/ Gary Thompson
Gary Thompson
Chief Financial Officer
Date: March 29, 1999 By /s/ Michael L. Dahir*
Michael L. Dahir
Director
Date: March 29, 1999 By /s/ George V. Janzen*
George V. Janzen
Director
Date: March 29, 1999 By /s/ George H. Krauss*
George H. Krauss
Director
Date: March 29, 1999 By /s/ Gregor Medinger*
Gregor Medinger
Director
Date: March 29, 1999 By /s/ W. David Scott*
W. David Scott
Director
* By Stewart Zimmerman, Attorney-in-fact
/s/ Stewart Zimmerman
Stewart Zimmerman
<PAGE> - 32 -
EXHIBIT 24
POWER OF ATTORNEY
<PAGE> - 33 -
POWER OF ATTORNEY
The undersigned hereby appoints Stewart Zimmerman as his agent and
attorney-in-fact for the purpose of executing and filing all reports on Form
10-K relating to the year ending December 31, 1998, and any amendments
thereto, required to be filed with the Securities and Exchange Commission by
America First Mortgage Investments, Inc. and America First PREP Fund 2 Pension
Series Limited Partnership.
IN WITNESS WHEREOF, the undersigned has executed this Power of Attorney as of
the 1st day of February 1999.
/s/ Michael Yanney
Michael Yanney
<PAGE> - 34 -
POWER OF ATTORNEY
The undersigned hereby appoints Stewart Zimmerman as his agent and
attorney-in-fact for the purpose of executing and filing all reports on Form
10-K relating to the year ending December 31, 1998, and any amendments
thereto, required to be filed with the Securities and Exchange Commission by
America First Mortgage Investments, Inc. and America First PREP Fund 2 Pension
Series Limited Partnership.
IN WITNESS WHEREOF, the undersigned has executed this Power of Attorney as of
the 1st day of February 1999.
/s/ Michael L. Dahir
Michael L. Dahir
<PAGE> - 35 -
POWER OF ATTORNEY
The undersigned hereby appoints Stewart Zimmerman as his agent and
attorney-in-fact for the purpose of executing and filing all reports on Form
10-K relating to the year ending December 31, 1998, and any amendments
thereto, required to be filed with the Securities and Exchange Commission by
America First Mortgage Investments, Inc. and America First PREP Fund 2 Pension
Series Limited Partnership.
IN WITNESS WHEREOF, the undersigned has executed this Power of Attorney as of
the 1st day of February 1999.
/s/ George V. Janzen
George V. Janzen
<PAGE> - 36 -
POWER OF ATTORNEY
The undersigned hereby appoints Stewart Zimmerman as his agent and
attorney-in-fact for the purpose of executing and filing all reports on Form
10-K relating to the year ending December 31, 1998, and any amendments
thereto, required to be filed with the Securities and Exchange Commission by
America First Mortgage Investments, Inc. and America First PREP Fund 2 Pension
Series Limited Partnership.
IN WITNESS WHEREOF, the undersigned has executed this Power of Attorney as of
the 1st day of February 1999.
/s/ George H. Krauss
George H. Krauss
<PAGE> - 37 -
POWER OF ATTORNEY
The undersigned hereby appoints Stewart Zimmerman as his agent and
attorney-in-fact for the purpose of executing and filing all reports on Form
10-K relating to the year ending December 31, 1998, and any amendments
thereto, required to be filed with the Securities and Exchange Commission by
America First Mortgage Investments, Inc. and America First PREP Fund 2 Pension
Series Limited Partnership.
IN WITNESS WHEREOF, the undersigned has executed this Power of Attorney as of
the 1st day of February 1999.
/s/ Gregor Medinger
Gregor Medinger
<PAGE> - 38 -
POWER OF ATTORNEY
The undersigned hereby appoints Stewart Zimmerman as his agent and
attorney-in-fact for the purpose of executing and filing all reports on Form
10-K relating to the year ending December 31, 1998, and any amendments
thereto, required to be filed with the Securities and Exchange Commission by
America First Mortgage Investments, Inc. and America First PREP Fund 2 Pension
Series Limited Partnership.
IN WITNESS WHEREOF, the undersigned has executed this Power of Attorney as of
the 1st day of February 1999.
/s/ W. David Scott
W. David Scott
<PAGE> - 39 -
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-END> DEC-31-1998
<CASH> 530,880
<SECURITIES> 3,409,301
<RECEIVABLES> 35,796
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 566,676
<PP&E> 0
<DEPRECIATION> 0
<TOTAL-ASSETS> 4,084,388
<CURRENT-LIABILITIES> 118,054
<BONDS> 0
<COMMON> 0
0
0
<OTHER-SE> 3,966,234
<TOTAL-LIABILITY-AND-EQUITY> 4,084,388
<SALES> 0
<TOTAL-REVENUES> 655,019
<CGS> 0
<TOTAL-COSTS> 0
<OTHER-EXPENSES> 343,544
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> 311,475
<INCOME-TAX> 0
<INCOME-CONTINUING> 311,475
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 311,475
<EPS-PRIMARY> 0
<EPS-DILUTED> 0
</TABLE>
