UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-QSB
(Mark One)
[X] QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended March 31, 2003
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 FOR THE TRANSITION PERIOD FROM ______TO______.
Commission File No. 0-16856
RESOURCES ACCRUED MORTGAGE INVESTORS 2, L.P.
----------------------------------------------------
(Exact name of small business issuer as specified in its charter)
DELAWARE 13-3368726
--------------------------------- -------------------
(State or other jurisdiction (I.R.S. Employer
of incorporation or organization) Identification No.)
1175 W. MOANA LANE, SUITE 200
RENO, NEVADA 89509
----------------------------- ----------
(Address of principal (Zip code)
executive offices)
Issuer's telephone number: (775) 825-3355
-------------------------
Transitional small business disclosure format: YES ___ NO _X_
PART I - FINANCIAL INFORMATION
ITEM 1 - FINANCIAL STATEMENTS
RESOURCES ACCRUED MORTGAGE INVESTORS 2, L.P.
BALANCE SHEETS
MARCH 31, DECEMBER 31,
2003 2002
------------ ------------
(UNAUDITED)
ASSETS
Real estate, net............................ $15,986,992 $ -
Investment in mortgage loan................. - 15,979,355
Cash and cash equivalents................... 2,751,840 2,182,922
Tenant receivables, net..................... 261,808 -
Capital improvements........................ - 29,864
----------- -----------
Total assets............................. $19,000,640 $18,192,141
=========== ===========
LIABILITIES AND PARTNERS' EQUITY
Liabilities
Accounts payable and accrued expenses.... $ 69,994 $ 52,181
Rent prepaid............................. 13,787 -
Tenant deposits.......................... 71,639 -
----------- -----------
Total liabilities........................... $ 155,420 $ 52,181
----------- -----------
Commitments and contingencies
Partners' equity
Limited partners' equity (187,919 units
issued and outstanding)................ $18,374,125 $17,686,497
General partners' equity................. 471,095 453,463
----------- -----------
Total partners' equity...................... 18,845,220 18,139,960
----------- -----------
Total liabilities and partners' equity........ $19,000,640 $18,192,141
=========== ===========
The accompanying Notes to the Financial Statements are an integral part of
these statements.
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RESOURCES ACCRUED MORTGAGE INVESTORS 2, L.P.
STATEMENTS OF INCOME (UNAUDITED)
FOR THE THREE MONTHS ENDED
--------------------------
MARCH 31, March 31,
2003 2002
------------ ------------
Revenues
Rental income.................................... $ 239,697 $ -
Interest income on mortgage loan................. 643,330 433,897
Interest and other income........................ 8,941 3,544
----------- -----------
Total revenues................................ 891,968 437,441
Costs and expenses
Operating expenses............................... 73,182 -
General and administrative....................... 63,401 64,944
Depreciation and amortization.................... 35,743 -
Property management fees......................... 14,382 -
----------- -----------
Total costs and expenses...................... 186,708 64,944
----------- -----------
Net income....................................... $ 705,260 $ 372,497
=========== ===========
Net income attributable to:
Limited partners................................. $ 687,628 $ 363,185
General partners................................. 17,632 9,312
----------- -----------
$ 705,260 $ 372,497
=========== ===========
Net income per unit of limited partnership
interest (187,919 units outstanding)............. $ 3.66 $ 1.93
The accompanying Notes to the Financial Statements are an integral part of
these statements.
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RESOURCES ACCRUED MORTGAGE INVESTORS 2, L.P.
STATEMENT OF PARTNERS' EQUITY
Limited General Total
Partners' Partners' Partners'
Equity Equity Equity
----------- ----------- -----------
Balance - January 1, 2003 $17,686,497 $ 453,463 $18,139,960
Net Income 687,628 17,632 705,260
----------- ----------- -----------
Balance - March 31, 2003 $18,374,125 $ 471,095 $18,845,220
=========== =========== ===========
The accompanying Notes to the Financial Statements are an integral part of
these statements.
-4-
RESOURCES ACCRUED MORTGAGE INVESTORS 2, L.P.
STATEMENTS OF CASH FLOWS (UNAUDITED)
FOR THE THREE MONTHS ENDED
--------------------------
MARCH 31, March 31,
2003 2002
------------ ------------
Cash flows from operating activities
Net income......................................... $ 705,260 $ 372,497
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation and amortization................. 35,743 -
Increase in receivables, net.................. (261,808) -
Increase (decrease) in accounts payable and
accrued expenses............................ 103,239 (41,210)
----------- -----------
Net cash provided by operating activities...... 582,434 331,287
----------- -----------
Cash flows from financing activities
Payment for deed in lieu of foreclosure.......... (13,516) -
----------- -----------
Cash used in financing activities ............. (13,516) -
----------- -----------
Net increase in cash and cash equivalents.......... 568,918 331,287
Cash and cash equivalents, beginning of period..... 2,182,922 754,136
----------- -----------
Cash and cash equivalents, end of period........... $ 2,751,840 $ 1,085,423
=========== ===========
Supplemental disclosure of non-cash investing activity:
Mortgage loan converted through foreclosure into real estate.
The accompanying Notes to the Financial Statements are an integral part of
these statements.
-5-
RESOURCES ACCRUED MORTGAGE INVESTORS 2, L.P.
NOTES TO FINANCIAL STATEMENTS
NOTE 1 - INTERIM FINANCIAL INFORMATION
The accompanying financial statements, footnotes and discussions should
be read in conjunction with the financial statements, related footnotes and
discussions contained in the Resources Accrued Mortgage Investors 2 L.P. (the
"Partnership") Annual Report on Form 10-KSB for the year ended December 31,
2002. The financial information contained herein is unaudited. In the opinion
of management, all adjustments necessary for a fair presentation of such
financial information have been included. All adjustments are of a normal
recurring nature. The balance sheet at December 31, 2002 was derived from
audited financial statements at such date.
The results of operations for the three months ended March 31, 2003 and
2002 are not necessarily indicative of the results to be expected for the full
year.
NOTE 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Investment in mortgage loan
The Partnership originally invested in zero coupon senior and junior
mortgage loans on properties owned or acquired by limited partnerships
originally sponsored by affiliates of Integrated Resources, Inc., an entity
that filed for bankruptcy protection in 1994. These loans generally contained
provisions whereby the Partnership may have been entitled to additional
interest represented by participation in the appreciation of the underlying
property. On March 3, 2003, the Partnership acquired the deed to the property
(the "Sierra Property") underlying its last remaining mortgage loan (the
"Sierra Loan") in lieu of foreclosure on the Sierra Loan.
The Partnership accounted for its investments in mortgage loans under the
following methods:
Investment Method
Mortgage loans representing transactions in which the Partnership was
considered to have substantially the same risks and potential rewards as the
borrower were accounted for as investments in real estate rather than as loans.
Although the transactions were structured as loans, due to the terms of the
zero coupon mortgage, it was not readily determinable at inception that the
borrower would continue to maintain a minimum investment in the property.
Under the method of accounting, the Partnership recognized as revenue the
lesser of the amount of interest as contractually provided for in the mortgage
loan, or its pro rata share of the actual cash flow from operations of the
underlying property inclusive of depreciation and interest expense on any
senior indebtedness.
Interest Method
Under this method of accounting, the Partnership recognized revenue as
interest income over the term of the mortgage loan so as to produce a constant
periodic rate of return. Interest income was not recognized as revenue during
periods where there were concerns about the ultimate realization of the
interest or loan principal.
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Property
Property is stated at cost, less accumulated depreciation. Since
acquisition, property has been depreciated principally on a straight line basis
over the estimated service lives as follows:
Land improvements ........... 5 years
Buildings ................... 30 years
Building improvements ....... 5-30 years
The Partnership evaluates the carrying value of its long-lived assets for
impairment at least annually or whenever events or changes in circumstances
indicate that the carrying value of the assets may not be recoverable from
related future undiscounted cash flows. Indicators which could trigger an
impairment review include legal and regulatory factors, market conditions and
operational performance. Any resulting impairment loss, measured as the
difference between the carrying amount and the fair value of the assets, could
have a material adverse impact on the Partnership's financial condition and
results of operations.
Allowance for Loan Losses
Prior to the Partnership's acquisition of the Sierra Property, an
allowance for loan losses was established based upon a periodic review
of each of the mortgage loans in the Partnership's portfolio. In performing
this review, management considered the estimated net realizable value of the
mortgage loan or collateral as well as other factors, such as the current
occupancy, the amount and status of any senior debt, the prospects for the
property and the economic situation in the region where the property is
located. Because this determination of net realizable value was based upon
projections of future economic events which were inherently subjective, the
amounts ultimately realized at disposition may have differed materially from
the carrying value at each year end.
The allowance was inherently subjective and was based upon management's
best estimate of current conditions and assumptions about expected future
conditions.
Cash and Cash Equivalents
For the purpose of the statements of cash flows, the Partnership
considers all short-term investments which have original maturities of three
months or less to be cash equivalents. Substantially all of the Partnership's
cash and cash equivalents are held at one financial institution.
Fair Value of Financial Instruments
The fair value of financial instruments is determined by reference to
market data and other valuation techniques as appropriate. The Partnership's
financial instruments included cash and cash equivalents during the first
quarters of 2003 and 2002, while the first quarter of 2002 also included an
investment in mortgage loan. Unless otherwise disclosed, the fair value of
financial instruments approximates their recorded value.
Net Income Per Unit of Limited Partnership Interest
Net income per unit of limited partnership interest is computed based
upon the number of units outstanding (187,919) during the year.
-7-
Income Taxes
No provisions have been made for federal, state and local income taxes,
since they are the personal responsibility of the partners.
The income tax returns of the Partnership are subject to examination by
federal, state and local taxing authorities. Such examinations could result
in adjustments to Partnership income, which changes could affect the tax
liability of the individual partners.
Estimates
The preparation of financial statements in conformity with accounting
principles generally accepted in the United States of America requires
management to make estimates and assumptions that affect the reported amount
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.
Recently Issued Accounting Standards
In April 2002, the FASB issued SFAS No. 145, "Rescission of FASB
Statements No. 4, 44, and 64, Amendment of FASB Statement No. 13 and Technical
Corrections," which updates, clarifies and simplifies existing accounting
pronouncements. In part, this statement rescinds SFAS No. 4, "Reporting Gains
and Losses from Extinguishment of Debt." FASB No. 145 will be effective for
fiscal years beginning after May 15, 2002. Upon adoption, enterprises must
reclassify prior period items that do not meet the extraordinary item
classification criteria in APB Opinion No. 30. This statement had no effect on
the Partnership's financial statements.
In July 2002, the FASB issued SFAS No. 146, "Accounting for Costs
Associated with Exit or Disposal Activities." SFAS No. 146 requires companies
to recognize costs associated with exit or disposal activities when they are
incurred rather than at the date of a commitment to an exit or disposal plan.
Examples of costs covered by the standard include lease termination costs and
certain employee severance costs that are associated with a restructuring,
discontinued operation, plant closing or other exit or disposal activity. SFAS
No. 146 is effective prospectively for exit and disposal activities initiated
after December 31, 2002, with earlier adoption encouraged. This statement had
no effect on the Partnership's financial statements.
In November 2002, the FASB issued Interpretation No. 45, Guarantors'
Accounting and Disclosure Requirements for Guarantees, Including Indirect
Guarantees of Indebtedness of Others. The Interpretation elaborates on the
disclosures to be made by a guarantor in its financial statements about its
obligations under certain guarantees that it has issued. It also clarifies
that a guarantor is required to recognize, at the inception of a guarantee, a
liability for the fair value of the obligation undertaken in issuing the
guarantee. This Interpretation does not prescribe a specific approach for
subsequently measuring the guarantor's recognized liability over the term of
the related guarantee. The disclosure provisions of this Interpretation are
effective for the Partnership's December 31, 2002 financial statements. The
initial recognition and initial measurement provisions of this Interpretation
are applicable on a prospective basis to guarantees issued or modified after
December 31, 2002. This Interpretation had no effect on the Partnership's
financial statements.
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In January 2003, the FASB issued Interpretation No. 46, Consolidation of
Variable Interest Entities. This Interpretation clarifies the application of
existing accounting pronouncements to certain entities in which equity
investors do not have the characteristics of a controlling financial interest
or do not have sufficient equity at risk for the entity to finance its
activities without additional subordinated financial support from other
parties. The provisions of the Interpretation will be immediately effective
for all variable interests in variable interest entities created after January
31, 2003, and the Partnership will need to apply its provisions to any existing
variable interests in variable interest entities by no later than December 31,
2004. The Partnership does not expect that this Interpretation will have an
impact on the its financial statements.
In April 2003, the FASB issued SFAS No. 149, "Amendment of SFAS No. 133 on
Derivative Instruments and Hedging Activities." This statement amends and
clarifies financial accounting and reporting for derivative instruments,
including certain derivative instruments embedded in other contracts
(collectively referred to as derivatives) and for hedging activities under SFAS
No. 133, "Accounting for Derivative Instruments and Hedging Activities." The
changes in this statement improve financial reporting by requiring that
contracts with comparable characteristics be accounted for similarly. In
particular, this statement (1) clarifies under what circumstances a contract
with an initial net investment meets the characteristic of a derivative
discussed in SFAS No. 133, (2) clarifies when a derivative contains a financing
component, (3) amends the definition of an underlying to conform it to language
used in FASB Interpretation No. 45, and (4) amends certain other existing
pronouncements. Those changes will result in more consistent reporting of
contracts as either derivatives or hybrid instruments. This statement is
effective for contracts entered into or modified after June 30, 2003, and for
hedging relationships designated after June 30, 2003. The guidance should be
applied prospectively. The provisions of this statement that relate to SFAS
No. 133 implementation issues that have been effective for fiscal quarters that
began prior to June 15, 2003, should continue to be applied in accordance with
their respective effective dates. In addition, certain provisions relating to
forward purchases or sales of when-issued securities or other securities that
do not yet exist, should be applied to existing contracts as well as new
contracts entered into after June 30, 2003. The Partnership does not expect
that this statement will have an impact on the Partnership's financial
statements.
NOTE 3. CONFLICTS OF INTEREST AND TRANSACTIONS WITH RELATED PARTIES
Effective January 1, 2002, Maxum LLC, a Nevada limited liability company
("Maxum" or "the General Partner") acquired the associate and general
partnership interests of the Partnership previously held by Presidio AGP Corp.
("Presidio") and RAM Funding, Inc. ("RAM Funding"), respectively, pursuant to
the General and Limited Partner Interest Assignment Agreement (the "Assignment
Agreement"), dated as of October 10, 2001, between the General Partner, Western
Real Estate Investments, LLC, a Nevada limited liability company and an
affiliate of the General Partner ("Western"), RAM Funding and Presidio AGP as
well as Presidio Capital Investment Company LLC, Presidio Partnership II Corp.
and Bighorn Associates LLC, each of which is affiliated with RAM Funding and
Presidio AGP Corp. and was a limited partner of the Registrant prior to January
1, 2002 (the "Former LPs"). Also pursuant to the Assignment Agreement, as of
January 1, 2002, Western purchased all of the units of limited partnership
interest in the Partnership ("Units") owned by the Former LPs ("Former LP
Units"). However, the Former LPs reserved their rights to the
-9-
proceeds from the settlement of a class action litigation which was
subsequently settled. Also during 2002, affiliates of Maxum acquired 10,389
Units on the open market and another affiliate of Maxum acquired 9,703 Units
via a tender offer. Accordingly, as of March 31, 2003, affiliates of Maxum
owned 77,831 Units, which represented 41.4% of the issued and outstanding Units
of the Partnership. Another affiliate of Maxum commenced a tender offer on
February 18, 2003 to acquire 12,000 Units, which was to expire on April 23,
2003. On April 22, 2003, this offer was extended to expire on May 21, 2003,
unless extended again and was also modified to increase the number of Units
offered for purchase to 15,000.
On March 3, 2003, the Partnership acquired the deed to the Sierra Property
which formerly secured the Sierra Loan, the Partnership's last remaining
mortgage loan. An affiliate of the General Partner controls the property next
to the Sierra Property. The General Partner, with its affiliate, is
considering options to create synergy if possible to improve the financial
viability of the Sierra Property and the affiliate's property. An entity
affiliated with the General Partner began leasing space at the Sierra Property
in March 1992 and currently leases approximately 5,100 square feet of retail
space at the Property at a monthly rent of approximately $4,400.
The General Partner oversees the management of the Sierra Property.
During the Partnership's fiscal quarter ended March 31, 2003, the Partnership's
General Partner received $14,382 for such management services. Also, pursuant
to the Partnership Agreement, the general partner is entitled to receive 2.5%
of the Partnership's income, loss, capital and distributions (2.45% to the
managing general partner and .05% to the associate general partner) including
without limitation the Partnership's cash flow from operations and disposition
proceeds. Accordingly, for the quarter ended March 31, 2003, the General
Partner was allocated $17,632 of income.
No distributions were made for the fiscal quarter ended March 31, 2003.
NOTE 4 - INVESTMENTS IN MORTGAGE LOAN AND ALLOWANCE FOR LOAN LOSSES
The Partnership had no outstanding mortgage loans on March 31, 2003
because on March 3, 2003, the Partnership acquired the deed to the Sierra
Property, commonly known as Sierra Marketplace, a shopping center located in
Reno, Nevada, in lieu of foreclosing on the Sierra Loan, its last remaining
mortgage loan. The Sierra Loan had been secured by the Sierra Property.
The Partnership invested in zero-coupon, nonrecourse senior and junior
mortgage loans. Collection of the amounts due on the Partnership's mortgage
loans was solely dependent upon the sale or refinancing of the underlying
properties at amounts sufficient to satisfy the Partnership's mortgage notes
after payment of the senior mortgage notes owned by unaffiliated third parties.
The Partnership's mortgage note on the Sierra Loan contained a provision
which required the borrower to provide current appraisals based upon certain
conditions or in some cases upon request.
-10-
While there are risks inherent in a zero-coupon nonrecourse senior or
junior mortgage loan portfolio, the above described provisions were intended to
provide some mitigation of these risks. However, in the event a borrower was
required to make a payment under such loan provisions, there was no assurance
that the borrower would be able to make such payments.
The Sierra Loan was a $6,500,000 first mortgage loan to High Cash
Partners, L.P. ("High Cash") secured by the Sierra Property. Interest on the
Loan accrued at the rate of 11.22% per annum with no payments due until
maturity on February 28, 2001 (see below).
During the first quarter of 1997, High Cash wrote the property down to
what its management believed to be its estimated fair market value of
$15,875,000. Management of the Partnership performed its own evaluation at
that time and determined that this amount was a fair estimate of the property
value. The outstanding balance of the loan at December 31, 1996 was
approximately $15,979,000 and it was unlikely that any additional interest
accrued on the Sierra Loan would ultimately be recovered from the value of the
underlying Sierra Property. Consequently, as of January 1, 1997 the
Partnership ceased accruing interest on the Sierra Loan.
On June 13, 1997, the general partners of High Cash, who were formerly
affiliated with the former general partners of the Partnership, sold their
general partner interest to Pembroke HCP LLC and Pembroke AGP Corp.,
unaffiliated third parties.
In December 2000, the Partnership and High Cash agreed on an extension to
the loan effective as of January 31, 2001 (the "Sierra Loan Modification
Agreement") as follows:
1. To extend the term of the loan until February 28, 2003.
2. The borrower placed in escrow a deed as well as documents necessary to
convey the Sierra Property, which documents would be released to the
Partnership on the earlier (A) of March 1, 2003, (B) at such time as a
third-party purchaser was identified to acquire the Sierra Property or
(C) at any time after March 1, 2002 if the Partnership deemed it
necessary to protect its economic interest. At March 31, 2002, the
Partnership had not deemed it necessary to protect its economic
interests and, therefore, the deed and documents remained in escrow.
3. The borrower would pay to the Partnership, to be applied towards the
Sierra Loan, all cash flow generated from the Sierra Property in
excess of $100,000 per year.
4. The borrower would have an appraisal prepared on the Sierra Property
to determine if an excess payment was due and, if such a payment was
due, to make such payment. On March 27, 2001, the Partnership received
an appraisal from the borrower which valued the Sierra Property at
$20,000,000. As a result, based on current information then available
to the Partnership, no excess payment was required.
5. The borrower had the right to prepay the Sierra Loan after the initial
maturity date (February 2001) by paying to the Partnership the sum of
the then unpaid principal balance of the Loan together with accrued
interest and other charges due under the Loan and 66% of the value of
the Sierra Property in excess of such amount.
-11-
In addition, beginning on January 1, 2002 the Partnership had
significantly more input over the operation of the Sierra Property including
the selection of the management company, leasing programs and capital
improvements. In this regard, an affiliate of the former general partners of
the Partnership began providing property management services at the Sierra
Property effective March 2001 and, effective February 1, 2002, property
management services were being provided by the General Partner.
During the quarter ended March 31, 2003, the Partnership received
approximately $643,330 in excess cash flow, which was applied against the
outstanding contractual principal balance of the Sierra Loan.
On March 3, 2003, the Partnership acquired the deed to the Sierra Property
from High Cash. The Partnership acquired the Property in lieu of foreclosure
under the terms of the Sierra Loan Modification Agreement.
In an effort to maximize the financial viability of the Sierra Property,
the Partnership intends to remodel and renovate the Property and to attempt to
create synergies between the Sierra Property and the property adjacent to the
Property which is controlled by an affiliate of the General Partner. The
General Partner oversees the management of the Sierra Property. An entity
affiliated with the General Partner began leasing space at the Sierra Property
in March 1992 and currently leases approximately 5,100 square feet of retail
space at the Property at a monthly rent of approximately $4,400.
NOTE 5. REAL ESTATE
The Partnership's real estate is summarized as follows:
March 31, 2003 December 31, 2002
-------------- -----------------
Land........................... $ 3,198,574 $ -
Building and improvements...... 12,824,161 -
-------------- -----------------
16,022,735 -
Accumulated depreciation....... (35,743) -
-------------- -----------------
$15,986,992 $ -
============== =================
The land, buildings and improvements that constitute the Partnership's
fixed assets were acquired from High Cash in lieu of foreclosure on a mortgage
note receivable to the Partnership from High Cash, which was collateralized by
such fixed assets.
-12-
A summary of mortgage activity is as follows:
Three Months Ended Year Ended
March 31, 2003 December 31, 2002
--------------------------------------- ------------------------------------
Investment Interest Investment Interest
Method Method Total Method Method Total
---------- ----------- ----------- ---------- ----------- -----------
Opening balance $ - $15,979,355 $15,979,355 $ - $15,979,355 $15,979,355
Recovery of loan losses - - - - - -
Deed in lieu of foreclosure - (15,979,355) (15,979,355) - - -
---------- ----------- ----------- ---------- ----------- -----------
Ending balance $ - $ - $ - $ - $15,979,355 $15,979,355
========== =========== =========== ========== =========== ===========
Information with regard to the partnership's mortgage loan is as follows:
Mortgage Mortgage
Interest Compound Loan Maturity Amount Placement
Description Rate % Period Type Date Date Advanced Fees
- ----------- -------- -------- ---- ------ -------- ---------- ---------
Shopping Center
Sierra Marketplace
Reno, Nevada 11.220 Monthly 1st 2/10/89 3/01/03 $6,500,000 $ 385,757
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Interest Recognized Carrying Value Contractual Balance
----------------------- -------------------------- --------------------------
March 31, 2002 and Reserves/ March 31, December 31, March 31, December 31,
2003 Prior Write-offs Proceeds 2003 2002 2003 2002
--------- ----------- ---------- -------- ----------- ------------ ---------- ------------
Shopping Center
Sierra Marketplace
Reno, Nevada $ 643,330 $10,377,518 $ - $ - $ - $15,979,355 $ - $27,356,117
========= =========== ========== ======== =========== =========== =========== ===========
-14-
ITEM 2 - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
The matters discussed in this Form 10-QSB contain certain forward-looking
statements and involve risks and uncertainties. Resources Accrued Mortgage
Investors 2, L.P., (the "Partnership") could be affected by declining economic
conditions as a result of various factors that affect the real estate business
including the financial condition of tenants, competition, and increased
operating costs, including insurance costs). These risks and uncertainties are
detailed in the disclosure contained in this Form 10-QSB and the other filings
with the Securities and Exchange Commission made by the Partnership from time
to time. The discussion of the Partnership's liquidity, capital resources and
results of operations, including forward-looking statements pertaining to such
matters, does not take into account the effects of any changes to the
Partnership's operations. Accordingly, actual results could differ materially
from those projected in the forward-looking statements as a result of a number
of factors, including those identified herein.
This item should be read in conjunction with the financial statements and
other items contained elsewhere in the report.
Recent Events
On March 3, 2003, the Partnership acquired the deed to the property
commonly known as Sierra Marketplace, a community shopping center located at
South Virginia Street and East Moana Lane in Reno, Nevada (the "Property"),
from High Cash Partners, L.P., a Delaware limited partnership ("High Cash").
The Partnership acquired the Sierra Property in lieu of foreclosure under the
terms of the Mortgage Loan Modification Agreement between the Partnership and
High Cash which became effective on January 31, 2001 (the "Sierra Loan
Modification Agreement"). Prior to the Partnership's acquisition of the Sierra
Property, the Property secured the last remaining of several zero coupon first
and junior mortgage loans in which the Partnership initially invested the net
proceeds of its 1988 initial public offering (the "Mortgage Loans"). At March
3, 2003, the date when the Partnership acquired the Sierra Property in lieu of
foreclosure, the contractual balance of principal and accrued interest on the
Sierra Loan was $27,455,752 and the Partnership had a carrying value in the
Loan of $15,979,355.
Background
The Partnership originally invested 100% of the non-returned portion of
its 1988 initial public offering in four Mortgage Loans, none of which was
still outstanding at March 31, 2002. In June 1992, the senior mortgage lender
on one of the Partnership's investments, the Promenade Loan, foreclosed on the
property securing its loan and the Partnership lost its entire investment.
During 1999, the Partnership received proceeds in settlement of its loans to
Harborista Associates, L.P. and Twin Oak Plaza Associates. As of December 31,
2002, the Partnership had one remaining investment in a Mortgage Loan (the
"Sierra Loan") issued on February 10, 1989 in the amount of $6,500,000 to High
Cash. The total amount, including fees, allocated to the Sierra Loan from the
gross proceeds of the Partnership's initial public offering was $7,715,134
including payment of a mortgage placement fee of $385,757. Commencing on March
1, 2001, the Partnership began receiving interest payments on the Sierra Loan,
which payments represented 16% of the Partnership's 2002 revenue. On
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March 3, 2003, the Partnership acquired the deed to the Sierra Property, which
secured the Sierra Loan in lieu of foreclosing on the Sierra Loan. The Sierra
Property consists of approximately 233,000 square feet of net
rentable area and occupies 18.67 acres, consisting of two main buildings and
three anchor tenant buildings with surface parking for 1,184 automobiles.
The Sierra Loan bore interest at a rate of 11.22% per annum, compounded
monthly, and was scheduled to mature on February 28, 2001, at which time a
balloon payment of $24,966,653, together with additional interest (as described
below) if any, was due and payable. One of the provisions of the Sierra Loan
stated that if the sum of (i) the principal balance of the Sierra Loan plus all
other then outstanding indebtedness secured by the Sierra Property plus (ii)
all accrued and unpaid interest in excess of 5% per annum of the principal
balance of such mortgage, exceeded 85% of the current appraised value, High
Cash would have been immediately obligated to pay such excess. In the event
that such excess became due, High Cash may not have had sufficient liquidity to
satisfy its obligation to the Partnership. If this were to have occurred, High
Cash could have been forced to sell the Sierra Property or seek other relief,
including protection under the bankruptcy laws.
In 1997, RAM Funding, Inc. the former managing general partner of the
Partnership ("RAM Funding"), prepared a valuation of the Sierra Property and
based on that valuation, no additional amounts were then due. However, as a
result of such valuation, High Cash wrote the Sierra Property down on its books
to what its management believed to be its estimated fair market value of
$15,875,000. RAM Funding performed its own evaluation and determined that this
estimate was a fair representation of the property value at that time. The
balance of the Sierra Loan at December 31, 1996 was approximately $15,979,000
and the then general partners of the Partnership determined that it was
unlikely that any additional interest accrued on the Sierra Loan would
ultimately be recovered from the value of the underlying property.
Consequently, as of January 1, 1997, the Partnership ceased accruing interest
on the Sierra Loan.
High Cash advised the Partnership in 2000 that it believed that the value
of the Sierra Property had increased since the beginning of 1997 and that the
value of the Sierra Loan may have exceeded the value at which the Sierra Loan
was then being carried on the Partnership's financial statements. High Cash
also requested that the Sierra Loan be restructured prior to its maturity
(February 1, 2001). After extensive negotiations, on December 21, 2000, the
Partnership and High Cash agreed to modify the Sierra Loan as follows:
1. The term of the Loan was extended until February 28, 2003.
2. High Cash placed in escrow a deed as well as documents
necessary to convey the Sierra Property, which documents were to be
released to the Partnership on the earlier (A) of March 1, 2003, (B)
at such time as a third-party purchaser was identified to acquire the
Sierra Property or (C) at any time after March 1, 2002 if the
Partnership deemed it necessary to protect its economic interest.
3. High Cash was required to pay to the Partnership to be
applied towards the Sierra Loan all cash flow generated from the
Sierra Property in excess of $100,000 per year.
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4. High Cash was required to have an appraisal prepared on the
Sierra Property to determine if an excess payment, as described above,
was due and, if such a payment was due, to make such payment. On
March 27, 2001, the Partnership received an appraisal from High Cash
which valued the Sierra Property at $20,000,000. As a result, based
on current information available to the Partnership, no excess payment
was required.
5. High Cash had the right to prepay the Sierra Loan by paying to the
Partnership the sum of the then unpaid principal balance of the
Sierra Loan together with accrued interest and other charges due
under the Sierra Loan and 66% of the value of the Sierra Property in
excess of such amount.
In addition, the Partnership obtained significantly more input over the
operation of the Sierra Property including the selection of the management
company, leasing programs and capital improvements. In this regard, an
affiliate of RAM Funding and the former associate general partner of the
Partnership began providing property management services at the Sierra Property
effective March 2001 and, effective January 1, 2002, property management
services are being provided by Maxum LLC, the General Partner of the
Partnership (the "General Partner"). As stated above, on March 3, 2003, the
Partnership acquired the deed to the Sierra Property in accordance with the
provisions of the Sierra Loan Modification Agreement. The General Partner
oversees the management and leasing of the Sierra Property.
Liquidity and Capital Resources
The Partnership's level of liquidity based on cash and cash equivalents
increased by $568,918 to $2,751,840 during the three months ended March 31,
2003 as compared to March 31, 2002. The increase is due to cash provided by
operating activities partially offset by fees related to the transfer of deed
in lieu of foreclosure on the Sierra Property (financing activities). Cash and
cash equivalents are invested in short-term instruments and are expected to be
sufficient to pay administrative expenses during the term of the Partnership.
The Partnership does not anticipate making any distributions of net cash
provided by operating activities in the near future.
On February 18, 2003, Virginia Springs Limited Liability Company
("Virginia Springs"), an affiliate of the General Partner, commenced a tender
offer to purchase 12,000 units of limited partnership interest of the
Partnership ("Units"), representing approximately 6.4% of the total outstanding
Units, for a price of $68 per Unit. The tender offer was set to expire on
April 23, 2003. On April 22, 2003, Virginia Springs extended the tender offer,
which is currently scheduled to expire on May 21, 2003, subject to extension by
Virginia Springs, and increased the number of Units it was offering to purchase
to 15,000.
Real Estate Market
There has been substantial development of retail space in the Reno area
over the past few years especially in close vicinity to the Sierra Property.
Also in the past few years, the Sierra Property has lost two of its original
anchor tenants and has not been able to locate new anchor tenants with similar
lease terms. One of the spaces is currently being leased at a substantially
reduced rental rate. The second space is currently being subleased by the
original lessor at a substantial discount to a tenant until November 30, 2003,
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the date at which the lease expires. The remaining anchor tenant's original
lease expires in August 2008. Management does not currently expect this
tenant to exercise its renewal option at that time. In an effort to maximize
the financial viability of the Sierra Property, the Partnership intends to
remodel and renovate the Property and attempt to create synergies between the
Sierra Property and the property adjacent to the Sierra Property which is
controlled by an affiliate of the General Partner.
Results of Operations
Comparison of operating results for the three month periods ended March 31,
2003 and 2002.
Net income increased by $342,186 for the three month period ended March
31, 2003 as compared to the same period in 2002, due to increases in revenues
offset partially by increases in costs and expenses. Revenues increased by
$454,527 for the three month period ended March 31, 2003 as compared to the
same period in 2002, due to increases in investment interest and revenues from
rents of tenants of the Sierra Property. These rents for the first quarter of
2003 are rent receipts from the ownership and operations of the Sierra Property
for the month of March only. During the first quarter of 2003, the Partnership
received all excess cash flow (as defined in the Sierra Loan Modification
Agreement) for the portion of the quarter prior to its acquisition of the
Sierra Property, plus all rents receivable net of liabilities assumed from
tenants of the Sierra Property in the form of interest payments for the portion
of the quarter after its acquisition of the Sierra Property. Cash receipts
were approximately $405,183 and rents receivable, net of liabilities assumed on
the Sierra Property, were $238,146. During the first quarter of 2002, the
Partnership received all excess cash flow (as defined in the Sierra Loan
Modification Agreement) from the Sierra Property in the form of interest
payments, which totaled approximately $433,897.
Costs and expenses for the three month period ended March 31, 2003, as
compared to the same period in 2002, increased to $177,285 from $64,944, a
difference of $112,341. The increase was due to new expenses related to the
ownership of the Sierra Property.
Critical Accounting Policies
The Partnership's only significant critical accounting policy relates to
the evaluation of the fair value of real estate. The Partnership evaluates the
need for an impairment loss on its real estate assets when indicators of
impairment are present and the undiscounted cash flows are not sufficient to
recover the asset's carrying amount. The impairment loss is measured by
comparing the fair value of the asset to its carrying amount. The evaluation
of the fair value of real estate is an estimate that is susceptible to change
and actual results could differ from those estimates. The sufficiency of
existing liquid assets to meet future liquidity and capital expenditure
requirements is directly related to the level of capital expenditures required
at the property to adequately maintain the physical assets and the other
operating needs of the Partnership. Such assets are currently thought to be
sufficient for any near-term and long-term needs of the Partnership. As of
March 31, 2003, the Partnership made no distributions to the partners.
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Quantitative and Qualitative Disclosures about Market Risk
The Partnership is not subject to market risk as its cash and cash
equivalents are invested in short term money market mutual funds. The
Partnership has no loans outstanding.
ITEM 3 - CONTROLS AND PROCEDURES
Based on his evaluation as of a date within 90 days of the filing date of
this Quarterly Report on Form 10-QSB, the manager of the Partnership's General
Partner (the "Manager") has concluded that the Partnership's disclosure
controls and procedures as defined in Rules 13a-14(c) and 15d-14(c) under the
Securities Exchange Act of 1934, as amended (the "Exchange Act"), are effective
to ensure that information required to be disclosed by the Partnership in
reports that it files or submits under the Exchange Act is recorded, processed,
summarized and reported within the time periods specified in Securities and
Exchange Commission rules and forms.
There were no significant changes in the Partnership's internal controls
or in other factors that could significantly affect these controls subsequent
to the date of the Manager's evaluation and up to the filing date of this
Quarterly Report on Form 10-QSB. There were no significant deficiencies or
material weaknesses, and therefore there were no corrective actions taken.
It should be noted that any system of controls, however well designed and
operated, can provide only reasonable, and not absolute, assurance that the
objectives of the system are met. In addition, the design of any control system
is based in part upon certain assumptions about the likelihood of
future events. Because of these and other inherent limitations of control
systems, there can be no assurance that any design will succeed in achieving
its stated goals under all potential future conditions, regardless of how
remote.
PART II - OTHER INFORMATION
ITEM 6 - EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
99.1 Certification pursuant to Section 302 of the Sarbanes-Oxley Act of
2002.
99.2 Certification pursuant to Section 906 of the Sarbanes-Oxley Act of
2002.
(b) Reports on Form 8-K
The Partnership filed a Current Report on Form 8-K on March 14, 2003 to
disclose its acquisition of the deed to the Sierra Property from High Cash. As
reported in the Form 8-K, the Partnership acquired the Sierra Property in lieu
of foreclosure under the terms of the Sierra Loan Modification Agreement.
Prior to the Partnership's acquisition of the Sierra Property, the Property
secured one of several zero coupon first and junior mortgage loans in which the
Partnership initially invested the net proceeds of its 1988 initial public
offering.
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SIGNATURES
In accordance with the requirements of the Exchange Act, the registrant caused
this report to be signed on its behalf by the undersigned, thereunto duly
authorized.
RESOURCES ACCRUED MORTGAGE INVESTORS 2, L.P.
BY: MAXUM LLC
General Partner
BY: /S/ BEN FARAHI
-------------------
Ben Farahi, Manager
DATE: 05/14/2003
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EXHIBIT 99.1
RESOURCES ACCRUED MORTGAGE INVESTORS 2, L.P.
FORM 10-QSB MARCH 31, 2003
CERTIFICATION PURSUANT TO SECTION 302 OF THE SARBANES-OXLEY ACT OF 2002
I, Ben Farahi, certify that:
1. I have reviewed this quarterly report on Form 10-QSB of Resources
Accrued Mortgage Investors 2, L.P.;
2. Based on my knowledge, this quarterly report does not contain any
untrue statement of a material fact or omit to state a material fact necessary
to make the statements made, in light of the circumstances under which such
statements were made, not misleading with respect to the period covered by
this quarterly report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all material
respects the financial condition, results of operations and cash flows of the
registrant as of, and for, the periods presented in this quarterly report;
4. I am responsible for establishing and maintaining disclosure controls
and procedures (as defined in Exchange Act Rules 13a-14 and 15d-14) for the
registrant and I have:
a) designed such disclosure controls and procedures to ensure that
material information relating to the registrant is made known to
me, particularly during the period in which this quarterly report
is being prepared:
b) evaluated the effectiveness of the registrant's disclosure
controls and procedures as of a date within 90 days prior to the
filing date of this quarterly report (the "Evaluation Date"); and
c) presented in this quarterly report my conclusions about the
effectiveness of the disclosure controls and procedures based on
my evaluation as of the Evaluation Date;
5. I have disclosed, based on my most recent evaluation, to the
registrant's auditors and the audit committee of registrant's board of
directors (or persons performing the equivalent functions):
a) all significant deficiencies in the design or operation of
internal controls which could adversely affect the
registrant's ability to record, process, summarize and report
financial data and have identified for the registrant's auditors
any material weaknesses in internal controls; and
b) any fraud, whether or not material, that involves management or
other employees who have a significant role in the registrant's
internal controls; and
6. I have indicated in this quarterly report whether or not there were
significant changes in internal controls or in other factors that could
significantly affect internal controls subsequent to the date of my most
recent evaluation, including any corrective actions with regard to significant
deficiencies and material weaknesses.
/s/ Ben Farahi
--------------
Ben Farahi
Manager of the General Partner
Date: 5/14/03
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EXHIBIT 99.2
RESOURCES ACCRUED MORTGAGE INVESTORS 2, L.P.
FORM 10-QSB MARCH 31, 2003
CERTIFICATION PURSUANT TO SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002
In connection with the Quarterly Report of Resources Accrued Mortgage
Investors 2, L.P. (the "Partnership") on Form 10-QSB for the fiscal quarter
ended March 31, 2003, as filed with the Securities and Exchange Commission on
the date hereof (the "Report"), the undersigned, in the capacity and on the
date indicated below, hereby certifies pursuant to 18 U.S.C. Section 1350, as
adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that: (1)
the Report fully complies with the requirements of Section 13(a) or 15(d) of
the Securities Exchange Act of 1934; and (2) the information contained in the
Report fairly presents, in all material respects, the financial condition and
results of operations of the Partnership.
Date: May 14, 2003
/s/ BEN FARAHI
--------------
Ben Farahi
Manager of the General Partner
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