FORM 10-Q
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
X Quarterly report pursuant to Section 13 or 15(d) of the Securities Exchange
Act of 1934
For the quarterly period ended September 30, 1997 or
Transition report pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934
For the transition period from to
Commission File Number: 1-10022
AMERICA FIRST PREP FUND 2 LIMITED PARTNERSHIP
(Exact name of registrant as specified in its charter)
Delaware 47-0717849
(State or other jurisdiction (IRS Employer
of incorporation or organization) Identification No.)
Suite 400, 1004 Farnam Street, Omaha, Nebraska 68102
(Address of principal executive offices) (Zip Code)
(402) 444-1630
(Registrant's telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to
such filing requirements for the past 90 days.
YES X NO
<PAGE> - i -
Part I. Financial Information
Item 1. Financial Statements
AMERICA FIRST PREP FUND 2 LIMITED PARTNERSHIP
BALANCE SHEETS
(UNAUDITED)
<TABLE>
<CAPTION>
Sept. 30, 1997 Dec. 31, 1996
--------------- ---------------
<S> <C> <C>
Assets
Cash and temporary cash investments, at cost which
approximates market value $ 2,306,281 $ 914,518
Investment in mortgage-backed securities (Note 5) 14,200,926 16,466,489
Investment in preferred real estate participations (PREPs),
net of valuation allowance (Note 6) - -
Interest receivable 92,361 100,198
Other assets 44,459 76,377
--------------- ---------------
$ 16,644,027 $ 17,557,582
=============== ===============
Liabilities and Partners' Capital
Liabilities
Accounts payable (Note 7) $ 64,707 $ 77,744
Distribution payable (Note 4) 174,492 181,574
--------------- ---------------
239,199 259,318
--------------- ---------------
Partners' Capital
General Partner 100 100
Beneficial Unit Certificate Holders
($10.29 per BUC in 1997 and $10.85 in 1996) 16,404,728 17,298,164
--------------- ---------------
16,404,828 17,298,264
--------------- ---------------
$ 16,644,027 $ 17,557,582
=============== ===============
</TABLE>
AMERICA FIRST PREP FUND 2 LIMITED PARTNERSHIP
STATEMENTS OF INCOME
(UNAUDITED)
<TABLE>
<CAPTION>
For the For the For the Nine For the Nine
Quarter Ended Quarter Ended Months Ended Months Ended
Sept. 30, 1997 Sept. 30, 1996 Sept. 30, 1997 Sept. 30, 1996
--------------- --------------- --------------- ---------------
<S> <C> <C> <C> <C>
Income
Mortgage-backed securities income $ 250,494 $ 302,693 $ 765,119 $ 934,597
Equity in earnings (losses) of property partnerships 33,807 (65,928) 138,815 47,000
Interest income on temporary cash investments 32,673 6,742 94,255 17,816
Gain on sale of mortgage-backed securities - - - 3,157
--------------- --------------- --------------- ---------------
316,974 243,507 998,189 1,002,570
Expenses
General and administrative expenses (Note 7) 241,803 78,599 429,334 241,795
--------------- --------------- --------------- ---------------
Net income $ 75,171 $ 164,908 $ 568,855 $ 760,775
=============== =============== =============== ===============
Net income allocated to:
General Partner $ 5,259 $ 5,539 $ 15,986 $ 16,856
BUC Holders 69,912 159,369 552,869 743,919
--------------- --------------- --------------- ---------------
$ 75,171 $ 164,908 $ 568,855 $ 760,775
=============== =============== =============== ===============
Net income per BUC $ .05 $ .10 $ .35 $ .47
=============== =============== =============== ===============
Weighted average number of BUCs outstanding 1,593,604 1,593,604 1,593,604 1,596,382
=============== =============== =============== ===============
The accompanying notes are an integral part of the financial statements.
</TABLE>
<PAGE> - 1 -
AMERICA FIRST PREP FUND 2 LIMITED PARTNERSHIP
STATEMENT OF PARTNERS' CAPITAL
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1997
(UNAUDITED)
<TABLE>
<CAPTION>
Beneficial Unit
Certificate Holders
General
Partner # of BUCs Amount Total
--------------- --------------- --------------- ---------------
<S> <C> <C> <C> <C>
Partners' Capital (excluding net unrealized
holding losses)
Balance at December 31, 1996 $ 100 1,593,604 $ 17,498,652 $ 17,498,752
Net income 15,986 - 552,869 568,855
Cash distributions paid or accrued (Note 4) (15,986) - (1,582,606) (1,598,592)
--------------- --------------- --------------- ---------------
100 1,593,604 16,468,915 16,469,015
--------------- --------------- --------------- ---------------
Net unrealized holding losses
Balance at December 31, 1996 - - (200,488) (200,488)
Net change - - 136,301 136,301
--------------- --------------- --------------- ---------------
- - (64,187) (64,187)
--------------- --------------- --------------- ---------------
Balance at September 30, 1997 $ 100 1,593,604 $ 16,404,728 $ 16,404,828
=============== =============== =============== ===============
</TABLE>
AMERICA FIRST PREP FUND 2 LIMITED PARTNERSHIP
STATEMENTS OF CASH FLOWS
(UNAUDITED)
<TABLE>
<CAPTION>
For the Nine For the Nine
Months Ended Months Ended
Sept. 30, 1997 Sept. 30, 1996
--------------- ---------------
<S> <C> <C>
Cash flows from operating activities
Net income $ 568,855 $ 760,775
Adjustments to reconcile net income to
net cash provided by operating activities
Equity in earnings of property partnerships (138,815) (47,000)
Gain on sale of mortgage-backed securities - (3,157)
Amortization of discount on mortgage-backed securities (8,706) (12,714)
Decrease in interest receivable 7,837 6,672
Decrease in other assets 31,918 5,786
Decrease in accounts payable (13,037) (6,988)
--------------- ---------------
Net cash provided by operating activities 448,052 703,374
--------------- ---------------
Cash flows from investing activities
Mortgage principal payments received 2,410,570 752,498
Sale of mortgage-backed securities - 318,848
Distributions received from PREPs 138,815 173,918
Investment in PREPs - (126,918)
--------------- ---------------
Net cash provided by investing activities 2,549,385 1,118,346
--------------- ---------------
Cash flows from financing activities
Distributions paid (1,605,674) (1,885,160)
Purchase of units - (69,692)
--------------- ---------------
Net cash used in financing activities (1,605,674) (1,954,852)
--------------- ---------------
Net increase (decrease) in cash and temporary cash investments 1,391,763 (133,132)
Cash and temporary cash investments at beginning of period 914,518 568,340
--------------- ---------------
Cash and temporary cash investments at end of period $ 2,306,281 $ 435,208
=============== ===============
</TABLE>
The accompanying notes are an integral part of the financial statements.
<PAGE> - 2 -
AMERICA FIRST PREP FUND 2 LIMITED PARTNERSHIP
NOTES TO FINANCIAL STATEMENTS
SEPTEMBER 30, 1997
(UNAUDITED)
1. Organization
America First PREP Fund 2 Limited Partnership (the Partnership) was formed on
May 28, 1987, 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 March 25,
1988, and will continue in existence until December 31, 2017, unless
terminated earlier under the provisions of the Partnership Agreement. The
General Partner of the Partnership is America First Capital Associates Limited
Partnership Six (AFCA 6).
2. Summary of Significant Accounting Policies
A) Financial Statement Presentation
The financial statements of the Partnership are prepared without audit
on the accrual basis of accounting in accordance with generally accepted
accounting principles. The financial statements should be read in
conjunction with the financial statements and notes thereto included in
the Partnership's Annual Report on Form 10-K for the year ended December
31, 1996. In the opinion of management, all normal and recurring
adjustments necessary to present fairly the financial position at
September 30, 1997, and results of operations for all periods presented
have been made.
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the
financial statements and the reported amounts of revenues and expenses
during the reporting period. Actual results could differ from those
estimates.
B) Investment in Mortgage-Backed Securities
Investment securities are classified as held-to-maturity,
available-for-sale, or trading. Investments classified as
held-to-maturity are carried at amortized cost. Investments classified as
available-for-sale are reported at fair value with any unrealized gains or
losses excluded from earnings and reflected as a separate component of
partners' capital. Subsequent increases and decreases in the net
unrealized gain/loss on the available-for-sale securities are reflected as
adjustments to the carrying value of the portfolio and adjustments to the
component of partners' capital. The Partnership does not have investment
securities classified as trading.
C) Investment in PREPs
The investment in PREPs consists of interests in limited partnerships
which own properties underlying the mortgage-backed securities and is
accounted for using the equity method. When an investment in a PREP has
been reduced to zero, earnings are recorded to the extent that
distributions are received. PREPs are not insured or guaranteed. The
value of these investments is a function of the value of the real estate
underlying the PREPs.
D) Allowance for Losses on Investments in PREPs
The allowance for losses on investments in PREPs is a valuation reserve
which has been established at a level that management feels is adequate to
absorb potential losses on investments in PREPs. The allowance is based
on the fair value of the properties underlying the PEPs. The allowance is
periodically reviewed and adjustments are made to the allowance when there
are significant changes in the fair value of the properties underlying the
PREPs.
<PAGE> - 3 -
AMERICA FIRST PREP FUND 2 LIMITED PARTNERSHIP
NOTES TO FINANCIAL STATEMENTS
SEPTEMBER 30, 1997
(UNAUDITED)
E) Income Taxes
No provision has been made for income taxes since Beneficial Unit
Certificate (BUC) Holders are required to report their share of the
Partnership's income for federal and state income tax purposes.
F) Temporary Cash Investments
Temporary cash investments are invested in short-term debt securities
purchased with an original maturity of three months or less.
G) Net Income Per BUC
Net income per BUC has been calculated based on the weighted average
number of BUCs outstanding during each period presented.
3. Partnership Reserve Account
The Partnership maintains a reserve account which consists of the following
at September 30, 1997:
<TABLE>
<S> <C>
Cash and temporary cash investments $ 2,176,743
GNMA Certificates 2,641,153
FNMA Certificates 2,863,993
---------------
$ 7,681,889
===============
The reserve account was established to maintain working capital for the
Partnership and is available to supplement distributions to investors and for
any contingencies related to the ownership of the investments and the
operation of the Partnership. See Note 5 regarding the investment in
mortgage-backed securities.
The General Partner previously announced the Partnership's intent to utilize a
portion of the reserve account to purchase up to a total of 125,000 BUCs of
the Partnership in open-market transactions. On June 17, 1997, the General
Partner decided the Partnership should cease acquiring BUCs. Through June 17,
1997, 90,300 BUCs had been acquired at a total cost of $1,046,948 (none during
1997).
4. Partnership Income, Expenses and Cash Distributions
The Partnership Agreement contains provisions for distributing the cash
available for distribution and for the allocation of income and expenses for
tax purposes among AFCA 6 and BUC Holders.
Cash distributions included in the financial statements represent the actual
cash distributions made during each period, and the cash distributions accrued
at the end of each period.
5. Investment in Mortgage-Backed Securities
The mortgage-backed securities held by the Partnership represent Government
National Mortgage Association (GNMA) Certificates and Federal National
Mortgage Association (FNMA) Certificates. The GNMA Certificates are backed by
first mortgage loans on multifamily housing properties and pools of
single-family properties. The FNMA Certificates are backed by pools of
single-family properties. The GNMA Certificates are debt securities issued by
a private mortgage lender and are guaranteed by GNMA as to the full and timely
payment of principal and interest on the underlying loans. The FNMA
Certificates are debt securities issued by FNMA and are guaranteed as to the
full and timely payment of principal and interest on the underlying loans.
At September 30, 1997, the total amortized cost, gross unrealized holding losses,
and aggregate fair value of available-for-sale securities are $5,569,333,
$64,187, $5,505,146, respectively. The total amortized cost, gross
unrealized holding gains, gross unrealized holding losses, and aggregate fair
value of held-to-maturity securities are $8,695,780, $222,775, $490,385 and
$8,428,170, respectively.
<PAGE> - 4 -
AMERICA FIRST PREP FUND 2 LIMITED PARTNERSHIP
NOTES TO FINANCIAL STATEMENTS
SEPTEMBER 30, 1997
(UNAUDITED)
Descriptions of the Partnership's mortgage-backed securities at September 30,
1997, are as follows:
</TABLE>
<TABLE>
<CAPTION>
Number Interest Maturity Carrying
Type of Security and Name Location of Units Rate Date Amount
- ------------------------------- ------------------- ---------- ---------- ------------ ---------------
<S> <C> <C> <C> <C> <C>
Held-to-Maturity
GNMA Certificates:
Broadmoor Court Colorado Springs, CO 47 9.25% 10/15/2029 $ 1,531,211
Owings Chase Apartments Pikesville, MD 234 6.75% 12/15/2023 5,448,712
Pools of single-family mortgages 8.74%(1) 2016 to 2018 1,715,857
--------------
8,695,780
--------------
Available-for-Sale
GNMA Certificates:
Pools of single-family mortgages 6.03%(1) 2008 2,641,153(2)
FNMA Certificates:
Pools of single-family mortgages 5.52%(1) 2000 2,863,993(2)
--------------
5,505,146
--------------
Balance at September 30, 1997 $ 14,200,926
==============
</TABLE>
(1) Represents yield to the Partnership.
(2) Reserve account asset - see Note 3.
Reconciliation of the carrying amount of the mortgage-backed securities is as
follows:
<TABLE>
<S> <C>
Balance at December 31, 1996 $ 16,466,489
Additions
Amortization of discount on mortgage-backed securities 8,706
Change in net unrealized holding losses on available-for-sale securities 136,301
Deduction
Mortgage principal payments received (1) (2,410,570)
---------------
Balance at September 30, 1997 $ 14,200,926
===============
(1) Includes proceeds of $1,470,685 received from GNMA due to the redemption of
the GNMA Certificate related to Ashwood Apartments.
</TABLE>
6. Investment in PREPs
The Partnership's PREPs consist of interests in limited partnerships which own
multifamily properties financed by the Partnership. The limited partnership
agreements originally provided for the payment of a base return on the equity
provided to the limited partnerships and for the payment of additional amounts
out of a portion of the net cash flow or net sale or refinancing proceeds of
the properties subject to various priority payments. Certain of the
agreements have been amended to defer payment of the base return.
<PAGE> - 5 -
AMERICA FIRST PREP FUND 2 LIMITED PARTNERSHIP
NOTES TO FINANCIAL STATEMENTS
SEPTEMBER 30, 1997
(UNAUDITED)
Descriptions of the PREPs at September 30, 1997, are as follows:
<TABLE>
<CAPTION>
Carrying
Name Location Partnership Name Amount
- ---------------------------- ----------------------- ------------------------------------------ ---------------
<S> <C> <C> <C>
Broadmoor Court Colorado Springs, CO Stazier Associates Colorado Springs, Ltd. $ 141,523
Owings Chase Apartments Pikesville, MD Owings Chase Limited Partnership 200,000
Laurel Park Apartments Riverdale, GA Gold Key Venture -
---------------
341,523
Less valuation allowance (341,523)
---------------
Balance at September 30, 1997 $ -
===============
</TABLE>
Reconciliation of the carrying amount of the PREPs is as follows:
<TABLE>
<S> <C>
Balance at December 31, 1996 $ -
Addition
Equity in earnings of property partnerships 138,815
Deduction
Distributions received from PREPs (138,815)
---------------
Balance at September 30, 1997 $ -
===============
</TABLE>
7. Transactions With Related Parties
Substantially all the Partnership's general and administrative expenses are
paid by AFCA 6 or an affiliate and reimbursed by the Partnership. The amount
of such expenses reimbursed to AFCA 6 during 1997 was $424,429 ($212,976 for
the quarter ended September 30, 1997). The reimbursed expenses are presented
on a cash basis and do not reflect adjustments made at quarter end.
AFCA 6 is entitled to an administrative fee of .35% per annum of the
outstanding principal amounts invested in mortgage-backed securities, PREPs,
and temporary cash investments to be paid by the Partnership to the extent
such amount is not paid by property owners. During 1997, AFCA 6 earned
administrative fees of $33,825 ($11,196 for the quarter ended September 30,
1997), all of which was paid by the Partnership.
The general partner of the property partnership which owns Owings Chase
Apartments is principally owned by an employee of an affiliate of AFCA 6.
Such employee has a nominal interest in the affiliate. Affiliates of AFCA 6
also own small interests in the general partner. The general partner has a
nominal interest in the property partnership's profits, losses and cash flow
which is subordinate to the interest of the Partnership. The general partner
did not receive cash distributions from the property partnership in 1997.
An affiliate of AFCA 6 has been retained to provide property management
services for Laurel Park Apartments and Owings Chase Apartments. The fees for
services provided represent the lower of (i) costs incurred in providing
management of the property, or (ii) customary fees for such services
determined on a competitive basis and amounted to $67,478 in 1997 ($22,325 for
the quarter ended September 30, 1997).
<PAGE> - 6 -
AMERICA FIRST PREP FUND 2 LIMITED PARTNERSHIP
NOTES TO FINANCIAL STATEMENTS
SEPTEMBER 30, 1997
(UNAUDITED)
8. Proposed Merger
On July 29, 1997, the Partnership announced that it had signed an Agreement
and Plan of Merger, dated as of July 29, 1997 (the Merger Agreement), among
the Partnership, America First Participating Preferred Equity Mortgage Fund
Limited Partnership, a Delaware limited partnership (Prep Fund 1), America
First PREP Fund 2 Pension Series Limited Partnership, a Delaware limited
partnership (Pension Fund and together with the Partnership and Prep Fund 1,
the Funds), America First Mortgage Investments, Inc., a newly formed Maryland
corporation (AFM), and AF Merger, L.P., a newly formed Delaware limited
partnership and a subsidiary of AFM (AFM L.P.), which contemplates a business
combination transaction (the Merger) pursuant to which the Partnership and
Prep Fund 1 will merge with AFM, with AFM surviving such merger, and Pension
Fund will merge with AFM L.P., with the Pension Fund surviving such merger.
The Merger, which is expected to be accomplished on a tax-deferred basis for
investors in the Funds, will not be consummated unless both the Partnership
and Prep Fund 1 participate in the Merger. The participation of Pension Fund
is not a condition to the closing of the Merger with respect to the
Partnership and Prep Fund 1.
As a result of the Merger, (i) the outstanding BUCs of the Partnership (Prep
Fund 2 BUCs) will be converted, at the rate of approximately 1.26 shares of
common stock, par value $0.01 per share, of AFM (the Common Stock), for each
Prep Fund 2 BUC, into 2,012,336 shares of Common Stock, (ii) the outstanding
Exchangeable Units of Prep Fund 1 will be converted, at the rate of 1.00 share
for each Exchangeable Unit, into 5,775,797 shares of Common Stock and (iii)
the outstanding BUCs of Pension Fund (Pension BUCs) will be converted, at the
rate of approximately 1.31 shares for each Pension BUC, into a maximum of
1,183,373 shares of Common Stock. If Pension Fund participates in the Merger,
holders of Pension BUCs will be given the option, in lieu of receiving shares
of Common Stock, to remain as investors in Pension Fund (the Retention
Option). To the extent that holders of Pension BUCs elect the Retention
Option, the aggregate number of shares of Common Stock otherwise issuable to
the such holders in the Merger will be accordingly reduced. In connection
with the organization of AFM, the general partners of the Funds (the General
Partners) were issued 90,621 shares of Common Stock and will not be issued any
additional shares as a result of the Merger.
Upon consummation of the Merger, AFM will become an externally advised
mortgage real estate investment trust owning, directly and indirectly, the
mortgage-backed securities, mortgage loans and other assets, subject to
liabilities, held by the Funds. AFM's business strategy will be to build on
and extend the business plans and investment methods and policies of the Funds
by employing leverage, investing primarily in adjustable-rate mortgage-backed
securities and mortgage loans and varying its investments over time.
Consequently, following the Merger, AFM intends to replace a substantial
portion of the Funds' current portfolio with a portfolio of adjustable-rate
mortgage-backed securities, mortgage loans and other related assets.
Pursuant to the Merger Agreement, each of the Funds shall generally bear their
own expenses in connection with the Merger. However, if the Merger Agreement
is terminated because a Fund (the Terminating Fund) has triggered certain of
the events of termination specified therein and such Terminating Fund has, on
or prior to the date of such termination, received a proposal constituting a
superior Competing Transaction (as such term is defined in the Merger
Agreement) that has not been offered on substantially equivalent terms to any
of the other Funds (each, an Excluded Fund), then each Terminating Fund agrees
to reimburse each Excluded Fund for its share of the out-of-pocket expenses
incurred in connection with the Merger Agreement, plus any expenses incurred
in enforcing the provisions of the obligations thereunder. Furthermore, if
Pension Fund is the Terminating Fund, the Partnership and Prep Fund 1 shall
have the right (i) to continue with the Merger, (ii) to terminate Pension
Fund's obligations under the Merger Agreement and (iii) to be reimbursed by
Pension Fund for its share of such expenses.
<PAGE> - 7 -
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations
Liquidity and Capital Resources
The Partnership originally acquired: (i) five mortgage-backed securities
guaranteed as to principal and interest by the Government National Mortgage
Association (GNMA) collateralized by first mortgage loans on multifamily
housing properties located in four states (the GNMA Certificates); (ii)
various mortgage-backed securities collateralized by pools of single-family
mortgages and guaranteed as to principal and interest by either GNMA or the
Federal National Mortgage Association (FNMA) (the Single-Family Certificates);
and (iii) limited partnership interests (PREPs) in five limited partnerships
which own the multifamily housing properties financed by the GNMA
Certificates. The Partnership has been repaid by GNMA on the GNMA
Certificates collateralized by the Villages at Moonraker, Laurel Park
Apartments and, during January of 1997, Ashwood Apartments. During 1995, the
Partnership withdrew as a limited partner of the operating partnership which
owns the Villages at Moonraker and, therefore, no longer holds its PREP in
this property. During the fourth quarter of 1996, the Partnership sold its
PREP in Ashwood Apartments. The Partnership has retained its PREP in Laurel
Park Apartments. Collectively, the two remaining GNMA Certificates and the
three remaining PREPs are referred to as the Permanent Investments. In
addition, the Partnership held various Single-Family Certificates at September
30, 1997.
The following table shows the occupancy levels of the properties financed by
the Partnership and in which the Partnership continues to hold an equity
interest at September 30, 1997:
<TABLE>
<CAPTION>
Number Percentage
Number of Units of Units
Property Name Location of Units Occupied Occupied
- --------------------------------- ------------------------- ---------- ---------- ----------
<S> <C> <C> <C> <C>
Broadmoor Court Colorado Springs, CO 47 41 87%
Laurel Park Apartments Riverdale, GA 387 368 95%
Owings Chase Apartments Pikesville, MD 234 221 94%
---------- ---------- -----------
668 630 94%
========== ========== ===========
</TABLE>
Distributions
Cash distributions paid or accrued per Beneficial Unit Certificate (BUC) were
as follows:
<TABLE>
<CAPTION>
For the Nine For the Nine
Months Ended Months Ended
Sept. 30, 1997 Sept. 30, 1996
--------------- ---------------
<S> <C> <C>
Regular monthly distributions
Income $ .3469 $ .4660
Return of capital .6462 .5793
--------------- ---------------
$ .9931 $ 1.0453
=============== ===============
Distributions
Paid out of cash flow (including mortgage principal payments) $ .9931 $ 1.0453
=============== ===============
</TABLE>
<PAGE> - 8 -
Regular monthly distributions to investors consist primarily of interest and
principal received on GNMA Certificates and Single-Family Certificates.
Additional cash for distributions is received from PREPs and temporary cash
investments. The Partnership may draw on reserves to pay operating expenses
or to supplement cash distributions to BUC Holders. The Partnership is
permitted to replenish its reserves through the sale or refinancing of
assets. During 1997, a net amount of $1,380,833 of undistributed mortgage
principal payments was placed in reserves (a net amount of $75,968 was
withdrawn from reserves for the quarter ended September 30, 1997). The total
amount held in reserves at September 30, 1997, was $7,681,889 of which
$5,505,146 was invested in Single-Family Certificates.
The Partnership believes that cash provided by operating and investing
activities and, if necessary, withdrawals from the Partnership's reserves will
be adequate to meet its short-term and long-term liquidity requirements,
including the payments of distributions to BUC Holders. Under the terms of
the Partnership Agreement, the Partnership has the authority to enter into
short-term and long-term debt financing arrangements; however, the Partnership
currently does not anticipate entering into such arrangements. The
Partnership is not authorized to issue additional BUCs to meet short-term and
long-term liquidity requirements.
Asset Quality
The Partnership continues to receive monthly principal and interest payments
on its GNMA Certificates and Single-Family Certificates which are fully
guaranteed either by GNMA or FNMA. The obligations of GNMA are backed by the
full faith and credit of the United States government.
PREPs, however, are not insured or guaranteed. The value of these investments
is a function of the value of the real estate underlying the PREPs. It is the
policy of the Partnership to make a periodic review of the real estate
underlying the PREPs in order to establish, when necessary, a valuation
reserve on the investment in PREPs. The allowance for losses on investment in
PREPs is based on the fair value of the properties underlying the PREPs. The
fair value of the properties underlying the PREPs is based on management's
best estimate of the net realizable value of such properties; however, the
ultimate realized values may vary from these estimates. The allowance is
periodically reviewed and adjustments are made to the allowance when there are
significant changes in the estimated net realizable value of the properties
underlying the PREPs. Internal property valuations and reviews performed
during the nine months ended September 30, 1997, indicated that the PREPs
recorded on the balance sheet at September 30, 1997, required no adjustments
to their current carrying amounts.
The overall status of the Partnership's Permanent Investments has remained
relatively constant since June 30, 1997.
Results of Operations
The tables below compare the results of operations for each period shown.
<TABLE>
<CAPTION>
For the For the Increase
Quarter Ended Quarter Ended (Decrease)
Sept. 30, 1997 Sept. 30, 1996 From 1996
--------------- --------------- ---------------
<S> <C> <C> <C>
Mortgage-backed securities income $ 250,494 $ 302,693 $ (52,199)
Equity in earnings (losses) of property partnerships 33,807 (65,928) 99,735
Interest income on temporary cash investments 32,673 6,742 25,931
--------------- --------------- ---------------
316,974 243,507 73,467
General and administrative expenses 241,803 78,599 163,204
-------------- --------------- ---------------
Net income $ 75,171 $ 164,908 $ (89,737)
============== =============== ===============
</TABLE>
<PAGE> - 9 -
<TABLE>
<CAPTION>
For the Nine For the Nine Increase
Months Ended Months Ended (Decrease)
Sept. 30, 1997 Sept. 30, 1996 From 1996
--------------- --------------- ---------------
<S> <C> <C> <C>
Mortgage-backed securities income $ 765,119 $ 934,597 $ (169,478)
Equity in earnings of property partnerships 138,815 47,000 91,815
Interest income on temporary cash investments 94,255 17,816 76,439
Gain on sale of mortgage-backed securities - 3,157 (3,157)
--------------- --------------- ---------------
998,189 1,002,570 (4,381)
General and administrative expenses 429,334 241,795 187,539
-------------- --------------- ---------------
Net income $ 568,855 $ 760,775 $ (191,920)
=============== =============== ===============
</TABLE>
Mortgage-backed securities income decreased for the quarter and nine months
ended September 30, 1997, compared to the same periods in 1996. Approximately
$34,100 of such decrease for the quarter and $102,500 of such decrease for the
nine months was due to the redemption of the GNMA Certificate related to
Ashwood Apartments. The remaining decrease of approximately $18,100 for the
quarter and $67,000 for the nine months was due to continued amortization of
the principal balances of the Partnership's other mortgage-backed securities.
Equity in earnings (losses) of property partnerships is a function of the cash
flow received by the Partnership from its interest in the operating
partnerships which own the properties. Prior to the write-down of each
investment in PREPs to zero, equity in earnings (losses) of property
partnerships also reflects the Partnership's allocable share of earnings
generated by each of the properties. The Partnership recorded a loss of
approximately $126,900 for Laurel Park Apartments for the quarter and nine
months ended September 30, 1996, which reduced the Partnership's investment in
Laurel Park Apartments to zero. Excluding such loss, equity in earnings
(losses) of property partnerships decreased approximately $27,200 and $35,100,
respectively, for the quarter and nine months ended September 30, 1997,
compared to the same periods in 1996. Approximately $6,800 and $45,800 of
such decreases for the quarter and nine months, respectively, is attributable
to the sale of the Partnership's PREP in Ashwood Apartments in December 1996.
The remaining decrease of $20,400 for the quarter is due to a decrease in cash
flow received from Broadmoor Court. The decrease of $45,800 from Ashwood
Apartments for the nine months ended September 30, 1997, compared to the same
period in 1996, together with a decrease of approximately $25,600 in cash flow
received from Broadmoor Court, was partially offset by approximately $36,300
in cash flow received from Owings Chase Apartments during the nine months
ended September 30, 1997. No distributions were received from Owings Chase
Apartments during the comparable period of 1996.
The increase in interest on temporary cash investments for the quarter and
nine months ended September 30, 1997, compared to the same periods in 1996 is
primarily attributable to the increase in cash reserves as a result of the
redemption of the GNMA Certificate related to Ashwood Apartments and the sale
of the Partnership's PREP in Ashwood Apartments.
The Partnership recognized a gain on sale of mortgage-backed securities during
the nine months ended September 30, 1996. No such gain was recognized by the
Partnership during the comparable period of 1997.
General and administrative expenses increased for the quarter and nine months
ended September 30, 1997, compared to the same periods in 1996. This increase
is primarily due to transaction costs of approximately $130,400 incurred
during the quarter and $141,500 incurred during the nine months ended
September 30, 1997, in conjunction with the proposed merger described in Note
8 to the financial statements and an increase in salaries expense.
<PAGE> - 10 -
PART II. OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
4(a) Agreement of Limited Partnership dated May 25, 1988
(incorporated herein by reference to Form 10-Q dated
March 31, 1988 filed pursuant to Section 13 or 15(d) of
the Securities Act of 1934 by America First PREP Fund 2
Limited Partnership (Commission File No. 1-10022)).
4(b) Form of Certificate of Beneficial Unit Certificate
(incorporated herein by reference to Form 10-Q dated
March 31, 1988 filed pursuant to Section 13 or 15(d) of
the Securities Act of 1934 by America First PREP Fund 2
Limited Partnership (Commission File No. 1-10022)).
4(c) Agreement and Plan of Merger, dated as of July 29, 1997,
among the Registrant, America First
Participating/Preferred Equity Mortgage Fund Limited
Partnership, America First Prep Fund 2 Pension Series
Limited Partnership and AF Merger, L.P. (incorporated
herein by reference to Form 10-Q dated June 30, 1997 filed
pursuant to Section 13 or 15(d) of the Securities Act of
1934 by America First PREP Fund 2 Limited Partnership
(Commission File No. 1-10022)).
(b) Form 8-K
The registrant did not file a report on Form 8-K during the
quarter for which this report is filed.
<PAGE> - 11 -
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
Dated: November 13, 1997 AMERICA FIRST PREP FUND 2
LIMITED PARTNERSHIP
By America First Capital
Associates Limited
Partnership Six, General
Partner of the Registrant
By America First Companies L.L.C.,
General Partner of America
First Capital Associates
Limited Partnership Six
By /s/ Michael Thesing
Michael Thesing,
Vice President and
Principal Financial
Officer
<PAGE> - 12 -
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-END> SEP-30-1997
<CASH> 2,306,281
<SECURITIES> 14,200,926
<RECEIVABLES> 92,361
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 2,398,642
<PP&E> 0
<DEPRECIATION> 0
<TOTAL-ASSETS> 16,644,027
<CURRENT-LIABILITIES> 239,199
<BONDS> 0
<COMMON> 0
0
0
<OTHER-SE> 16,404,828
<TOTAL-LIABILITY-AND-EQUITY> 16,644,027
<SALES> 0
<TOTAL-REVENUES> 998,189
<CGS> 0
<TOTAL-COSTS> 0
<OTHER-EXPENSES> 429,334
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> 568,855
<INCOME-TAX> 0
<INCOME-CONTINUING> 568,855
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 568,855
<EPS-PRIMARY> 0
<EPS-DILUTED> 0
</TABLE>
