FORM 10-K================================================================================
UNITED STATES SECURITIES AND EXCHANGE COMMISSION
WASHINGTON,Washington, D.C. 20549
X Annual report pursuant to Section--------------
FORM 10-K
|X| ANNUAL REPORT PURSUANT TO SECTION 13 orOR 15(d) of the Securities
Exchange Act ofOF THE
SECURITIES EXCHANGE ACT OF 1934
For the year ended December 31, 2000 or
Transition report pursuant to Section2001
OR
|_| TRANSITION REPORT PURSUANT TO SECTION 13 orOR 15(d)
of the Securities
Exchange Act ofOF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from ______________ to ______________
Commission File Number: 1-13991
AMERICA FIRST MORTGAGE INVESTMENTS, INC.
(Exact name of registrant as specified in its charter)
--------------
Maryland 13-3974868
(State or other jurisdiction (IRSof (I.R.S. Employer
of
incorporation or organization) Identification No.)
399 Park Avenue, 36th Floor, New York, New York 10022
(Address of principal executive offices) (Zip Code)
(212) 935-8760
(Registrant'sRegistrant's telephone number, including area code)code: (212) 935-8760
--------------
Securities Registered Pursuantregistered pursuant to Section 12(b) of the Act:
Title of Each Class Name of Each Exchange on whichWhich Registered
---------------------------- ------------------------------------
Common Stock, $.01$0.01 par value New York Stock Exchange
Securities Registered Pursuantregistered pursuant to Section 12(g) of the Act: None
-i-
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|X| No ___|_|
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K (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|_|
As of March 22, 2002, the aggregate market value of the voting common
stock held by non-affiliates of the Registrant on March 19, 2001,22, 2002, based on the
final salesclosing price per share as
reported in The Wall Street Journalof the Company's common stock on March 20, 2001,the New York Stock Exchange
was $59,135,629.$326,833,927.
The number of shares of the Registrant's common stock outstanding on March
19, 2001,22, 2002, was 8,692,825.35,823,601.
DOCUMENTS INCORPORATED BY REFERENCE
DefinitivePortions of the Registrant's proxy statement relating tofor the Company's 20012002 Annual Meeting of
Stockholders scheduled to be filed hereafter (incorporatedheld on May 23, 2002 are incorporated by reference
into Part III hereof).
- ii -of this Annual Report on Form 10-K.
================================================================================
TABLE OF CONTENTS
Page
PART I
Item 1. Business. . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
PART I
Item 1. Business........................................................................................ 2
Item 2. Properties...................................................................................... 12
Item 3. Legal Proceedings............................................................................... 12
Item 4. Submission of Matters to a Vote of Security Holders............................................. 12
Item 4A. Executive Officers of the Company............................................................... 12
PART II
Item 5. Market for Registrant's Common Equity and Related Stockholder Matters........................... 14
Item 6. Selected Financial Data......................................................................... 15
Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations........... 16
Item 7A. Quantitative and Qualitative Disclosures About Market Risk...................................... 22
Item 8. Financial Statements and Supplementary Data..................................................... 26
Item 9. Changes in and Disagreements With Accountants on Accounting and Financial Disclosure............ 45
PART III
Item 10. Directors and Executive Officers of the Registrant.............................................. 45
Item 11. Executive Compensation.......................................................................... 45
Item 12. Security Ownership of Certain Beneficial Owners and Management.................................. 45
Item 13. Certain Relationships and Related Transactions.................................................. 45
PART IV
Item 14. Exhibits, Financial Statement Schedules and Reports on Form 8-K.................................. 45
SIGNATURES..................................................................................................... 47
1
Item 2. Properties. . . . . . . . . . . . . . . . . . . . . . . . . . . . . 10
Item 3. Legal Proceedings . . . . . . . . . . . . . . . . . . . . . . . . . 10
Item 4. Submission of Matters to a Vote of Security Holders . . . . . . . . 10
PART II
Item 5. Market for Registrant's Common Equity and
Related Stockholder Matters . . . . . . . . . . . . . . . . . . . . 12
Item 6. Selected Financial Data . . . . . . . . . . . . . . . . . . . . . . 12
Item 7. Management's Discussion and Analysis of Financial Condition and
Results of Operations . . . . . . . . . . . . . . . . . . . . . . . 14
Item 7A. Quantitative and Qualitative Disclosures About Market Risk. . . . . 17
Item 8. Financial Statements and Supplementary Data . . . . . . . . . . . . 21
Item 9. Changes in and Disagreements With Accountants on Accounting and
Financial Disclosure. . . . . . . . . . . . . . . . . . . . . . . . 40
PART III
Item 10. Directors and Executive Officers of the Registrant . . . . . . . . 40
Item 11. Executive Compensation . . . . . . . . . . . . . . . . . . . . . . 40
Item 12. Security Ownership of Certain Beneficial Owners and Management . . 40
Item 13. Certain Relationships and Related Transactions . . . . . . . . . . 40
PART IV
Item 14. Exhibits, Financial Statement Schedules and Reports on Form 8-K. . 40
SIGNATURES . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 44
- iii -
PART I
Item 1. Business.
THE COMPANY
America First Mortgage Investments, Inc. (the "Company") is primarily
engaged in the business of investing in high-grade adjustable rate mortgage-backed
securities.securities ("MBS"). The Company's investment portfolio consists primarily of MBS
guaranteed as to principal and interest by an agency of the U.S. Government,
such as, Ginnie Mae, Fannie Mae or Freddie Mac (collectively referred to as
"Agency Securities"), and, to a lesser extent, high quality MBS, rated in one of
the two highest rating categories by at least one nationally recognized rating
agency, which include, Moody's Investors Services, Inc., Standard & Poor's
Corporation or Fitch, Inc. (collectively the "Rating Agencies"). The Company's
investment strategy also provides for the acquisition of multifamily housing
properties, REITsecurities in real estate investment trust securities and high-yield
corporate debt and equity securities. Its principleThe Company's principal business objective
is to generate net income for distribution to its stockholders resulting from
the spread between the interest and other income it earns on its investments and
itsthe cost of financing.financing such investments.
As of December 31, 2001, the Company held total assets on its balance
sheet valued at approximately $2.07 billion, of which approximately 97%
consisted of Agency MBS, other high quality MBS and cash. The Company's businessCompany also held
interests in corporate and investment strategypartnership entities that owned six apartment
properties, containing a total of 1,473 rental units. Four of these apartment
properties are located in Georgia, one is discussedlocated in more detail
below.North Carolina and one is
located in Nebraska. In addition, the Company held publicly-traded equity and
debt securities valued at approximately $10.4 million.
The Company has elected to be taxed as a real estate investment trust
(a
"REIT"("REIT"). One for federal income tax purposes. Pursuant to the current federal tax
regulations, one of the requirements of maintaining its status as a REIT is that
the Company must distribute at least 90% (which was decreased from 95% (90% effective
January 1, 2001) of its annual taxable net income to its stockholders, subject
to certain adjustments. For additional information, one should refer to the information
undersee "Certain Federal Income
Tax Considerations,Considerations." below.
The Company was incorporated in Maryland on July 24, 1997, and began its
business operations on April 10, 1998, when the Company consummated a merger
transaction (the "Merger""1998 Merger") with America First Participating/Preferred
Equity Mortgage Fund Limited Partnership ("PREP Fund 1" or the "Predecessor"),
America First PREP Fund 2 Limited Partnership ("PREP Fund 2") and America First
PREP Fund 2 Pension Series Limited Partnership ("Pension Fund") (collectively
referred to as the "PREP Funds"). As a result of the 1998 Merger, PREP Fund 1
and PREP Fund 2 were merged directly into the Company and Pension Fund became a
partnership subsidiary of the Company. In December 1999, Pension Fund was
liquidated and dissolved, in December, 1999, and, as a result, the Company acquired approximately
99% of the assets of Pension Fund. The remaining assets, consisting solely of
cash, were distributed to the remaining holders of Pension Fund BUCs. Thesecurities who elected to
remain in place following the 1998 Merger. As a result of the 1998 Merger, the
Company issued a total of 9,035,084 shares of its common stock to the former
partners of the PREP Fund 1, PREP Fund 2 and Pension Fund.Funds. Upon completion of the 1998 Merger, the Company
began implementing the investment strategy described below.
The Company's investment strategy differs from thatFollowing the completion of the PREP Funds.
The1998 Merger through December 31, 2001 ,
the Company iswas an externally advised and managed REIT. As such, it hasthe Company had
no employees of its
own. The Company has entered into an Advisory Agreement withand relied entirely on America First Mortgage Advisory Corporation
(the "Advisor") to perform all of the duties that are generally performed by
internal management. Pursuant to an agreement between the Company and the
Advisor (the "Advisory Agreement"), the Advisor provided the day-to-day
management of the Company's operations for a fee, which iswas calculated on a
quarterly basis. The Advisor was a subsidiary of America First Companies L.L.C.
("America First"AFC"). UnderFor additional information regarding the Advisor, see Note 3 to the
accompanying financial statements included under Item 8.
On December 12, 2001, the Company's stockholders approved the terms of an
Agreement and Plan of Merger, dated September 24, 2001, among the Company, the
Advisor, AFC and the stockholders of the Advisor (the "Advisor Merger
Agreement",) which provided for the merger of the Advisor into the Company (the
"Advisor Merger"). The Advisor Merger became effective on January 1, 2002. As a
result of the Advisor Merger, the Company became a self-advised REIT and will no
longer be required to pay a fee to the Advisor under the Advisory Agreement, but
rather will directly incur all of the costs of operating the Company.
Accordingly, the employees of the Advisor provides day-to-day management of the Company's
operations. The executive officersbecame employees of the Company are employeesand
the Company assumed the employment contracts of America
Firstthese employees. The Company
also acquired all of the tangible and are officersintangible business assets of the Advisor.
MoreFor additional information relatingregarding the Advisor Merger, see Note 3 to the
Company's management is discussed under "Executive Officers of the Company"accompanying financial statements included in Item 4 below and in the Company's Proxy Statement relating to its 2001 Annual
Meeting of Stockholders.8.
2
BUSINESS AND INVESTMENT STRATEGY
The Company is primarily engaged in the business of investing in
high-grade adjustable rate mortgage-backed securities.MBS, which are secured by pools of adjustable rate
mortgage loans ("ARMs") on single family and multifamily residences. The
Company's investment strategy also provides for the acquisition of multifamily
housing properties, REIT securities and high-yield corporate securities. The
Company is not in the business of originating mortgage loans or providing other
types of financing to the owners of real estate.
During the period from the consummation of the
Merger through December 31, 2000, the Company purchased mortgage securities
with a face value at the time of purchase of approximately $669.2 million
(mortgage securities with a face value of approximately $98.0 million were
purchased during the year ended December 31, 2000).
The Company's investment policy requires that at least 50% of its
investment portfolio consist of mortgage securities or mortgage loansadjustable rate MBS that are either (i) insured or guaranteed as to principal and interest by an agency of the U.S.
government, such as the Government National Mortgage Association ("GNMA"), the
Federal National Mortgage Association ("FNMA") or the Federal Home Loan
Mortgage Corporation ("FHLMC") orAgency
Securitiesor (ii) rated in one of the two highest rating categories by either Standard & Poor's or Moody's.one of
the Rating Agencies. The remainder of the Company's assets may be either: (i)consist of (a)
direct investmentinvestments (mezzanine or equity) in multifamily apartment properties; (ii)properties,
(b) investments in limited partnerships or - 1 -
real estate investment trustsREITs or (iii)(c) other fixed-income
instruments (corporate debt or equity securities or mortgage-backed securities)MBS) that provide increased
call protection relative to the Company's mortgage assets.investment portfolio of MBS. At
December 31, 2000,2001, approximately 79%97% of the Company's assets consisted of mortgage-backed securities insured or guaranteed by GNMA, FNMA or FHLMC
("Agency
Certificates") backed by single-family mortgage loans. RemainingSecurities, high quality "AAA" rated MBS and cash. The Company's remaining
assets, comprising approximately 3% of the Company's assets at that dateDecember 31,
2001, consisted of corporate debt and equity securities, investments in limited
partnerships owning real estate, and non-voting preferred stock of a corporation
owningthat indirectly owns interests in real estate limited partnerships.
The Company intends that at least 50% of its assets be adjustable-rate
mortgage-backed securities ("ARMs") or mortgages. Included within the Company's ARMs portfolioinvestment portfolioof adjustable rate MBS
are hybrid ARMsMBS which are secured by mortgage loans that have an interest rate
that is fixed for an initial period of time, generally three to five years, which then
converts to an adjustable rateand thereafter
convert into ARMs that reprice annually for the balanceremainder of the term of the
loan. Most ARMsadjustable rate and hybrid MBS (upon termination of the fixed rate
period) are indexed to the one-year constant maturity treasury ("CMT") rate with
interest rates that are resetadjust annually. Other ARMsadjustable rate MBS are indexed to
the London Interbank Offered Rate ("LIBOR"), the six-month certificate of
deposit rate, the six-month CMT rate or the 11th District Cost of Funds Index.
ARMsAdjustable rate MBS that are indexed to the CMT are generally subject to a
limitation on the amount of the annual interest rate change. This limit is
usually 1% or 2% per year. Generally, all ARMSARMs have lifetime limits on interest
rate increases over the initial interest rate. In general, such lifetime
interest rate caps do not exceed 600 basis points over the initial interest
rate. FINANCING STRATEGY
The Company intends to finance the acquisition of additional adjustable
rate mortgage-backed securitiesMBS and other assets by borrowing against its portfolio of assets at
short-term borrowing rates and investingreinvesting the proceeds of such borrowings. In
addition, the borrowings and/or equity inCompany may also finance the acquisition of additional assets.assets with
the proceeds from capital market transactions. When fully invested, the
Company plansCompany's policy is to maintain an assets-to-equity ratio of less than 11 to 11:1. TheAs
of December 31, 2001, the Company's assets-to-equity ratio was approximately
7.47 to 10.2:1 as of December 31, 2000.and its debt-to-tangible equity ratio was 9.5x.
The Company's borrowings for mortgage and corporate securities are
financed primarily at short-term borrowing rates through the utilization of
repurchase agreements. A repurchase agreement, although structured as a sale and
repurchase obligation, operates as a financing (i.e., borrowing) under which the
Company effectively pledges its mortgageMBS and corporate debt securities as collateral to secure a
short-term loan with a counterparty which is equal in value to a specified
percentage, generally not more than 97% at inception of the loan, of the market
value of the pledged collateral. Repurchase agreements take the form of a sale
of the pledged collateral to a lender at an agreed upon price in return for such
lender's simultaneous agreement to resell the same securities back to the
borrower at a future date (the(i.e., the maturity of the borrowing) at a higher
price. The price difference is the cost, or interest expense, of borrowing under
these repurchase agreements. The Company will retainretains beneficial ownership of the
pledged collateral, including the right to distributions.distributions, while the counterparty
maintains custody of the collateral securities. At the maturity of a repurchase
agreement, the Company will be required to repay the loan and concurrently will
receive back its pledged collateral from the lender or will rollover such
agreement at the then prevailing financing rate. The repurchase agreements may
require the Company to pledge additional assets to the lender in the event the
market value of any existing pledged collateral declines. To
date,Repayment of principal on
the pledged security will result in a corresponding reduction in the value of
such security. In addition, the pledged collateral may fluctuate in value based
on market changes in interest rates and the instruments credit quality. As of
December 31, 2001, the Company hasdid not hadhave any significant margin calls on its repurchase
agreements that were relatedit was not able to a decreasesatisfy with either cash or additional
pledged collateral.
3
The Company's repurchase agreements generally range from one to 12 months
in the market value of its
collateral.
Repurchase agreements tend to be short-term in nature.duration. Should the providers of the repurchase agreements decide not to
renew them at maturity, the Company mustis required to either refinance these obligations prior to maturity or be in a
position to retire thethese obligations. If, during the term of a repurchase
agreement, a lender should file for bankruptcy, the Company might experience
difficulty recovering its pledged assets and may have an unsecured claim against
the lender's assets.assets for the difference between the amount loaned to the Company
and the fair value of the security pledged by the Company as collateral.
To reduce its exposure, the Company enters into repurchase agreements only
with financially sound institutions whose holding or parent company's long-term
debt rating is single A"A" or better as determined by both Standard and
Poor's and Moody's,at least one of the Rating
Agencies, where applicable. If this minimum criterion is not met, then the Company
will not enter into repurchase agreements with such
counterpartythat lender without the specific
approval of its Board of Directors. In the event an existing counterpartylender is
downgraded below single A,"A," the Company willis required to seek the approval of its Board
approvalof Directors before entering into additional repurchase agreements with - 2 -
such counterparty. In addition, once thethat
lender. The Company is fully invested, it
intendsgenerally seeks to enterdiversify its exposure by entering into
repurchase agreements with at least four separate lenders with a maximum exposure to eachloan
from any lender of no more than three times the Company's shareholders'stockholders' equity.
As of December 31, 2000,2001, the Company had repurchase agreements with 11ten separate
lenders with a maximum exposure (the difference between the amount loaned to any onethe
Company and the fair value of the security pledged by the Company as collateral)
to a single lender of not more than 1.4approximately $22.6 million.
The Company may use derivative transactions and other hedging strategies
to help mitigate its prepayment and interest rate risks if it is determined that
the cost of these transactions is justified by their potential benefit. Through
December 31, 2001, the Company's use of hedge instruments has been limited to a
single hedge transaction in the form of a purchased interest rate cap ("Cap
Agreement"). A Cap Agreement is a contractual agreement whereby the purchaser
pays a fee in exchange for the right to receive payments equal to the principal
(i.e., notional amount) times the difference between a specified interest rate
and a future interest rate during a defined period "active" of time. Management
expects to enter into additional Cap Agreements to hedge against an increase in
interest rates on its anticipated future LIBOR-based repurchase agreements.
However, the extent to which the Company may enter into future hedging
transactions will depend on numerous market conditions, including, but not
limited to, the interest rate environment, management's assessment of the future
changes in interest rates and the market availability and cost of entering into
such hedge transactions.
Each of the Company's shareholders' equity.multifamily apartment properties is financed with a
long-term fixed rate mortgage loans. The borrowers on these mortgage loans are
separate corporations, limited partnerships or limited liability companies in
which the Company holds equity interests. Each of these mortgage loans is made
to the applicable ownership entity on a nonrecourse basis, which means that the
lender's only source of payment in the event of a default is the foreclosure of
the underlying property securing the mortgage loan. As of December 31, 2001, the
aggregate mortgage indebtedness secured by the Company's six multifamily
apartment properties was approximately $48.3 million.
The Company financesalso uses repurchase agreements to finance its investments in
publicly traded limited partnershipscorporate debt securities, and corporatemay generally borrow up to 70% of the market
value. The Company has financed its investments in equity securities through
margin loans from a variety of broker-dealers, and pledges theequity securities
to secure such margin loans; generally borrowing with an assetup to 50% of the market value
of the equity ratio of as much as two to one. The Company anticipates that
borrowings to finance acquisitions of multifamily apartment properties will
typically be non-recourse mortgage instruments.securities.
RISK FACTORS
The results of the Company's operations are affected by various factors,
many of which are beyond the control of the Company. The results of the
Company's operations primarily depend on, among other things, the level of its
net interest income,
generated by the Company's mortgage assets, the market value of its assets and the supply of and demand
for such assets. The Company's net interest income varies primarily as a result
of changes in short-term interest rates, borrowing costs and prepayment rates,
the behavior of which involves various risks and uncertainties as set forth
below. Prepayment rates and interest rates and borrowing costs depend onvary according to the specific type of
asset,investment, conditions in financial markets, competition and other factors, none
of which can be predicted with any certainty. In addition to these factors,
borrowing costs are further affected by the credit worthiness of the borrower.
Since changes in interest rates may significantly affect the Company's
activities, the operating results of the Company depend, in large part, upon the
ability of the Company to effectively manage its interest rate and prepayment
risks while maintaining its status as a REIT. INTEREST RATE RISKS
The Company also has financedrisks
inherent in its other investments, including its debt and equity securities,
interests in multifamily real estate properties and hedging instruments. Because
these investments represented only 1.1% of its total assets at December 31, 2001
the Company's risk relating to these assets is limited, but nonetheless risks
associated with these investment have the
4
potential of causing a material impact of the Company's operating performance.
These risks, the Company's strategies to mitigate the risks and the limitations
of the strategies are discussed in further detail below.
Interest Rate Risks
While management believes that there is no strategy that would completely
insulate the Company from interest rate changes and related prepayments on
investments while achieving targeted profitability, the Company undertakes
certain strategies aimed at mitigating the potential negative effects of
interest rate changes. Among these strategies are: (a) investing predominantly
in adjustable rate and hybrid MBS with less than 36 months to reprice at time of
acquisition; (b) entering into interest rate Cap Agreements on anticipated
borrowings under repurchase agreements and (c) maintaining a portion of the
Company's assets in multifamily real estate investments, which do not strongly
react to changes in interest rates and in some cases may react positively in a
rising interest rate environment. Certain of these strategies and related assets
carry certain inherent risks other than interest rate risk and/or costs. The
Company finances the acquisition of additional mortgage assetsMBS through borrowings under
numerous repurchase agreements. As a result,agreements, which subjects the Company is
exposedto interest rate risk
in relationship to the following principal interestcorresponding assets. Interest rate risks:risks and the
strategies incorporated to address those risks, along with their limitations and
other relevant risks are discussed below.
The cost of the Company's borrowings under its repurchase agreements is
based on the prevailing short-term market rates that adjust over periodsrates. The term of the Company's
repurchase agreements can be from one to 12 months. However,18 months.However, a substantial
majority of the Company's mortgage assetsMBS have either fixed interest rates or interest rates that reset only every 12
months. The Company's policy is to maintain an asset/borrowings repricing gap
(as measured by the average time period to assets repricing, less the average
time period to liability repricing) at less than 18 months. At December 31,
2000,2001, the repricing
gap betweennet of the weighted average months to reprice on the MBS portfolio
less the weighted average months to reprice on the repurchase agreements was
12.6 months, as a significant portion, approximately 49%, of the Company's
assets and obligations was approximately eight
months.
There is no limitation onrepurchase agreements were scheduled to mature in early 2002. This reflects
management's strategy to structure borrowings such that they are refinanced
after year-end in order to avoid the sometimes-volatile year-end LIBOR market
where rates sometimes spike.
The market determines the interest raterates that the Company could have
to pay in order to borrow moneypays on
borrowings (i.e., its reverse repurchase agreements) to finance its mortgage assets.MBS assets,
rendering borrowing costs essentially beyond control of the Company,
controllable only to the extent of the Company's credit standing and competitive
bargaining ability. However, the ability to raise interestlevel of increase in rates on itsthe Company's
interest earning assets is limited, either
because such rates are fixed forlimited. The Company primarily invests in adjustable
rate MBS, which at December 31, 2001 comprised 92.6% of total assets and 99.4%
of total MBS. The amount by which the life of the asset or, in the case of
ARMs, the ability to raise interest ratesadjustable rate MBS can increase is
limited in connection with the rate increase limits on the underlying ARMs on
both an annual basis and over the term of the ARM.lifetime basis. Generally, interest rates on ARMs can change
at either a maximum of 100 or 200 basis points per annum (i.e., an "annual cap")
and only up to 600 basis points from the initial interest rate over the term of
the ARM.ARMs (i.e., a "lifetime cap"), these limitations follow through to the
adjustable rate MBS, which these mortgages collateralize.
The cost of the Company's borrowings is generally LIBOR based on LIBOR while
interest rates on its ARM portfolioadjustable rate MBS are primarily based on one-year CMT rates.
Therefore, any increase in the LIBOR relative to the CMT rates will result in an
increase in the Company's borrowing cost that is not matched by a corresponding
increase in the interest earnings on its ARMadjustable rate MBS portfolio. In any of these cases, increasing short-term interest rates may causeAt
December 31, 2001, the Company's financing costs to increase faster than it is able to increase
interest rates on its ARMs. As a result,one-year LIBOR was 2.44% and the net interest margin earned by
the Company will be reduced or eliminated during such periods. Accordingly,
in a period of increasing interest rates, the Company could experience a
decrease in net interest income or a net loss because the interest rates on
borrowings could adjust faster than the interest rates on the Company's ARMs.
Such a decrease in the Company's net interest income could negatively impact
the level of dividend distributions made by the Company and reduce the market
price of its common stock.one-year CMT was
approximately 2.20%.
In order to mitigate its interest rate risks, the Company intends to
havecontinue to maintain a substantial majority of its mortgage assets consist of ARMsinvested in
adjustable rate and hybrid MBS, rather than fixed - 3 -
rate mortgages. This allowssecurities. These assets
allow the CompanyCompany's interest income to increase its interest income during periods of rising
interest rates. WhileHowever, given the lag in its ability to reset along with the annual and
lifetime interest rate limitations on adjustments to interest rates on its
ARMsadjustable rate MBS portfolio, relative to changes in the interest rates it pays
on its liabilities, and the annual and lifetime limitations on
adjustments tonet interest rates on ARMsincome can be negatively affect earningsaffected over the
short term the ability to makein a rising interest rate adjustmentsenvironment. The ability of adjustable rate
MBS to adjust based on the ARMs does
helpchanges in interest rates helps to mitigate thisinterest rate
risk more effectively over a longer time period.period than over the short term;
however interest rate risk is not eliminated under either time frame. The
Company's policy isoverall declining interest rate environment experienced during 2001 was
extremely favorable to maintain an asset/borrowings repricing gap (as
measured by the average time period to assets repricing, lessCompany, particularly in the average time
period to liability repricing) at less than 18 months. At December 31, 2000,latter part of the year.
In accordance with the Company's leverage ratio equaled 6.88investment guidelines, it may enter into
Cap Agreements to 1 and the repricing gap stood at
approximately eight months. For purposes of this analysis, equity assets,
corporate equity securities and mortgage securities acquired from the PREP
funds held as a hedge against prepayments are excluded from the calculation.
As discussed above, the relationship between LIBOR and the CMT can change over
time. At December 31, 2000, the one-year LIBOR was 6.00% and the one-year CMT
was 5.36%. However, as of December 31, 2000, the averageanticipated future increases in interest raterates
on the Company's CMT based ARMs was 196 basis points overanticipated repurchase agreements. The Company only enters into
interest rate Cap Agreements with financial institutions which have a debt
rating of "A" or better by one of the CMT. Therefore, the
LIBOR index would have to increase by approximately 74 basis points relativeRating Agencies, thereby securing, to the
CMT in ordergreatest extent possible, receipt of payments under the Cap
5
Agreements. In the unlikely event that a counter party is unable to eliminate the positive spread between the yield on
these ARMs andmake
required payments pursuant to a Cap Agreement, the Company's cost of borrowing. During 2000, the largest
differential between the one-year LIBOR and one-year CMT was 134 basis points
and the average differential was 77 basis points.
Lifetime interest rate caps on ARMs could impact the earnings on the Company's
assets. However, based on the assets available in the current market, such an
impact should only occur if the one-month LIBOR rate increased to
approximately 10%. This rate was 6.57% at December 31, 2000. Periodic caps
could also have an impact on the earnings of the Company's assets. At
December 31, 2000, approximately 58% of the Company's adjustable rate
mortgages and 50% of the total assets had a 1% periodic cap. The impact of
periodic caps, if any,loss would be
slight since the weighted average coupon of
these assets equals 7.97% (261 basis points greater than the one-year CMT.)
The Company may attemptlimited to partially offset the potential negative effect of
lifetime and periodic maximum interest rates on its ARMs through the purchase
of interest rate caps on its liabilities. An interest rate cap agreement is a
contractual agreement whereby the Company pays a fee in exchangeany remaining unamortized premium paid for the right
to receive payments equal to the difference between a contractually specified
interest rate and a periodically determined future interest rate times a
specified principal, or notional amount. Such interest rate cap agreements
are subject to the risk that the other party to the agreement will not be able
to perform its obligations. Although the Company would seek to enter interest
rate agreements only with financially sound institutions and to monitorspecific Cap
Agreement. Management monitors the financial strength of such institutionsall of its counter
parties on a periodic basis,regular basis; however, no assurance can be given that the Company
can avoid sucheliminate risks related to third party risks.parties. As of December 31, 20002001, the
Company had not utilized this hedging strategy.one interest rate Cap Agreement with a notional amount of $50.0
million that will be effective if LIBOR exceeds 5.75% during the period from
October 25, 2002 through October 25, 2004. The Company paid $350,000 for the Cap
Agreement, which had a fair value of approximately $513,000 as of December 31,
2001. Cap Agreements are extremely sensitive to changes in interest rates and
are therefore very volatile. Because the Company utilizes Cap Agreements solely
to mitigate interest rate risk, in the form of a liability hedge, changes in the
market value are reflected in other comprehensive income, provided that the
hedge remains effective.
As a part of its hedging strategy, the Company may engage in limited
amounts of the buying andand/or selling of mortgage derivative securities or other
derivative products including interest rate swap agreements, financial futures
contracts and options. Although the Company and its Predecessor havehas not historically used such
instruments, it is not precluded by its operating policies from doing so. In the
future, management anticipates usingmay use such instruments only as hedges to manageagainst interest rate
risk. Management does not anticipate entering into derivatives for speculative
or trading purposes. Any suchuse of derivatives and contemplated derivative
strategies will be selected by
the Advisor and approved byare addressed with the Company's investment committee. While the
Company may hedge certain risks associated with interest rate increases,It should be
noted, that no cost beneficial hedging strategy can completely insulate the
Company completely fromagainst interest rate risks. In addition, there can be no assurance that
any such hedging activities will have the desired impact on the Company's
results of operations or financial condition. Hedging typically involves costs, including
transaction costs, which increase dramatically as the period covered by the
hedge increases and which also increase during periods of rising or volatile
interest rates. Such hedging costs may cause the Company to conclude that a
particular hedging transaction is not appropriate for the Company, thereby
affecting the Company's ability to mitigate interest rate risk. As of December
31, 2000,2001, the Company had not entered into any hedge transactions, other than
the Cap Agreement previously discussed.
Increases in short-term interest rates may cause the Company's financing
costs to increase faster than rates increase on its adjustable rate MBS. As a
result, the Company's net interest spread and net interest margin could decline
during such periods, the severity of which would depend on the asset/liability
structure at the time as well as the magnitude and duration of the interest rate
hedgingincrease. In the case of a sudden and sustained increase in interest rates, the
net interest income could become negative. Accordingly, in such a period, the
Company could incur a net loss from operations. In addition, such an interest
rate environment would decrease the market value of the adjustable rate and
hybrid MBS, to a level that additional collateral could be required to secure
the borrowings under the Company's repurchase agreements. PREPAYMENT RISKSIf such additional
collateral were not available, the lender could liquidate the securities
collateralizing the repurchase agreements, resulting in a loss to the Company.
Further, such a decrease in the Company's net interest income could negatively
impact dividend distributions made by the Company, which, in turn could reduce
the market price of the Company's common stock. The Company could also react to
such a scenario by reducing borrowings and assets, by selling assets or not
replacing MBS reductions due to scheduled amortization and prepayments, thereby
"shrinking the balance sheet." Such an action would likely reduce interest
income, interest expense and net income, the extent of which would be dependent
on the level of reduction in assets and liabilities as well as the amounts
realized on the sale of those assets.
Prepayment Risks
In general, residential borrowers of the borrower under a mortgage loan maysecuring the MBS in
the Company's portfolio could prepay the loansuch mortgage loans at any time
- 4 - without
penalty or premium. Prepayments result when a 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, as was
the case in 2001, 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-ratefixed rate and adjustable-rateadjustable
rate mortgage loans. During 2000,2001, prepayments rates generally slowed dueincreased,
particularly in the last quarter of 2001. During 2001, monthly prepayments
ranged from as low as 15% in the first quarter to an increaseas high as approximately 30%
in mortgage interest rates and a widening of the short-term and
long-term interest rate spread.fourth quarter. This compares to monthly prepayments ranging from
approximately 15% to 20% during 2000.
Prepayments are the primary feature of mortgage-backed securitiesMBS that distinguishes them from
other types of bonds. While a certain percentage of the pool of mortgage loans
underlying a mortgage-backed securityan MBS are expected to prepay during a given period of time, the
actual rate of prepayment can, and often does, vary significantly from the
anticipated rate of prepayment. Accordingly, the Company incurs a risk that its
mortgage assetsMBS will prepay at a more rapid pace than anticipated. The potentialPrepayments
6
generally result in negative impact onresults for the Company, the severity of prepayments is twofold. In the first instance, prepayments reducewhich
depends on, among other things, the amount of unamortized premium on the Company's interest earning assets. In addition, ifprepaid
securities, the Company has paid more than par for a mortgage-backed security,reinvestment lag and the premium is
amortized against earnings over the life of the security. Higher than
expected prepayments lead to an increase in premium amortization, which
reduces the Company's earnings.reinvestment risk.
One way the Company seeks to reduce its exposure to prepayment risk is to
purchase mortgage assetsMBS trading closer to par and thus reduce the Company's earnings
exposure resulting from accelerated amortization of premiums. In the
current marketplace, ARMAdjustable rate
MBS securities are tradingcan trade at 96% to 104% of parsignificantly different prices depending on
seasoning and the interest rate. TheAccording to the Company's current policy, is
to maintain the
average purchase price of the Company's mortgageMBS portfolio atshould be less than 102.5%103.5% of par.the
securities par value. The Company's weighted average purchase price for
the mortgage assets it acquired in 2000 and 1999 were approximately 102.0%
and 101.7%premium as a percentage of par value of
total MBS was 1.99% and 1.54% at December 31, 2001 and 2000, respectively.
Another way the Company seeks to address this risk is to use less leverage in
less advantageous market environments. While this strategy may not maximize
earnings potential in the short term, it should lead tois aimed at obtaining more predictable
earnings with less potential risk to capital.
The Company seeks to minimize prepayment risk through a number of other
means, including structuring a diversified portfolio with a variety of
prepayment characteristics. An additional natural hedge to prepayment risk, is forin
which the Company is engaged to owna relatively small extent, is ownership
interests in entities which own multifamily properties. These assets do not face
prepayment risk and shouldmay, although no assurance can be given, increase in value
in a declining interest rate environment where prepayments would have the
largest negative impact. Another hedge forHowever, general economic conditions in the Company ismarkets in
which these properties are located generally affect the market value and
performance of rental real estate to hold high-yielding corporate securities
with more call protectiona greater extent than ARMs which should gaindo fluctuations in
value when interest rates decline. As ofrates. At December 31, 20002001, 0.5% of assets were comprised of the
Company had investedCompany's indirect investments in corporate
debt and equity securitiesmultifamily rental real estate properties.
Risks Associated with a fair value of $20,906,163 as of that date.
No strategy, however, can completely insulate the Company from prepayment
risks arising from the effects of interest rate changes.
RISKS ASSOCIATED WITH LEVERAGELeverage
The Company's financing strategy is designed to increase the size of its
mortgage investment portfolio by borrowing against a substantial portion of the
market value of its mortgage assets.MBS. If the interest income on the mortgage assetsMBS purchased with
borrowed funds fails to cover the cost of the borrowings, the Company will
experience net interest losses and may experience net losses.losses from operations.
Such losses could be increased substantially as a result of the Company's
substantial leverage.
The ability of the Company to achieve its investment objectives depends on
its ability to borrow money in sufficient amounts and on favorable terms.terms
compared to the assets that the borrowings fund. Currently, all of the Company's
borrowings are collateralized borrowings in the form of repurchase agreements.
The ability of the Company to enter into repurchase agreements in the future
will depend on the market value of the mortgage assetsMBS pledged to secure the specific
borrowings, the availability of financing, and other conditions then applicableexisting in the
lending market.market at that time. The Company may effect additional borrowings
through the use of other types of collateralized borrowings, loan agreements,
lines of credit, dollar-roll agreements and other credit facilities with
institutional lenders or through the issuance of debt securities. The cost of
borrowings under repurchase - 5 -
agreements generally corresponds to LIBOR plus or
minus a margin, although such agreements may not expressly incorporate a LIBOR
index. The cost of
borrowings underCompany may also use other sources of funding which the Company may use maywill generally
bear interest rates that refer or correspond to othera short-term indices,benchmark, such as
prime, plus or minus a margin. Through increases in haircuts (i.e., the
over-collateralizationcollateralization amount required by a lender), decreases in the market value of
the Company's mortgage assets,MBS, increases in interest rate volatility, and changes in the
availability of financing in the market, the Company may not be able to achieve
the degree of leverage it believes to be optimal. As a result, the Company may
be less profitable than it would be otherwise.
RISKS OF DECLINE IN MARKET VALUERisks of Decline in Market Value
The value of interest-bearing obligations such as mortgages and mortgage-backed securitiesMBS may
move inversely with interest rates. Accordingly, in a rising interest rate
environment, the value of such instruments may decline. Because the interest
earned on ARMsadjustable rate MBS may increase as interest rates increase subject to
a delay until each such security's next reset date, the values of these assets
are generally less sensitive to changes in interest rates than are fixed-ratefixed rate
instruments. Therefore, in order to mitigate this risk, the Company intends to
maintain a substantial majority of its mortgage assetsMBS as ARMs.adjustable rate MBS. At December
31, 2000, ARMs2001, adjustable rate MBS constituted approximately 96%92.6% of total assets
and 99.4% of the Company's total mortgage assets.MBS.
A decline in the market value of the Company's mortgageMBS assets may limit the
Company's ability to borrow or result in lenders initiating margin calls (i.e.,
requiring a pledge of cash or additional mortgage assetsMBS to re-establish the ratio of the
amount of the borrowing to the value of the collateral). The Company could be
required to sell mortgage assetssome of its MBS under adverse market conditions in order to
maintain liquidity. If these sales were made at prices lower than the amortized
cost (i.e., the carrying value) of the mortgage assets,securities, the Company would experienceincur
losses. A default by the
7
Company under its collateralized borrowings could also result in a liquidation
of the collateral, and a resulting loss of the difference between the value of
the collateral and the amount borrowed.
Additionally, in the event ofAlso, to a bankruptcy of the Company, certain repurchase
agreements may qualify for special treatment under the Bankruptcy Code, the
effect of which is, among other things, to allow the creditors under such
agreements to avoid the automatic stay provisions of the Bankruptcy Code and
to liquidate the collateral under such agreements without delay. To thelesser extent, the Company is compelledhas investments in "high-yield"
corporate debt securities. While these securities offer more call protection
than adjustable rate MBS and generally increase in market value when interest
rates decline, they also carry significantly greater credit risk, which greatly
impacts their market value. Any deterioration in the credit assessment of the
debtor will generally reduce the value of these securities, as can a general
decline within the debtor's industry. Management performs detailed analysis on
the Company's corporate debt securities on a regular basis in order to liquidate mortgage assets qualifyingdetermine
the course of action it considers appropriate.
As of December 31, 2001, the Company's had investments in corporate debt
securities carried at $9.8 million, which had gross unrealized losses of
approximately $3.4 million that were not reflected in the Company's results of
operations (i.e., income statement) or statement of financial condition (i.e.,
balance sheet) at December 31, 2001. Investments in RCN Corporation ("RCN"),
which were designated as Qualified REIT Real Estate Assets to repay borrowings,available-for-sale and carried at its estimated fair
value, and Level 3 Communications ("Level 3"), which were designated as
held-to-maturity, accounted for approximately $2.1 million, and $6.6 million,
respectively, for an aggregate of $8.7 million, or 89% of total invested in
corporate debt securities. During 2001, the Company may be
unablerecognized gross losses of
approximately $3.6 million, on its investments in corporate debt securities, of
which approximately $3.3 million was attributable to comply with the REIT provisionsRCN debt securities.
Losses recognized on the RCN securities during 2001 were comprised of, (a) a
$2.5 million impairment charge made against the investment for an
other-than-temporary decline in the market value and (b) losses of $885,000
realized on sales and redemptions .
The Company's investment in debt securities of Level 3, which is
designated as held-to-maturity, had a carrying value of approximately $6.6
million and unrecognized losses of $3.2 million . As of December 31, 2001,
management's position was that the decline in the market value of the Internal Revenue Code
regarding assets and sources of income requirements, ultimately jeopardizingLevel 3
debt securities was temporary. However, the Company's status as a REIT.
The valueinvestment in Level 3 debt
securities, or any of the Company's other investments in debt securities, could
result in future losses recognized, if management's assessment of the decline in
value were to adversely change, whereby the decline in market value is
considered other-than-temporary, or if management were to decide to sell such
asdebt security at a time when the carrying value was below the market value. For
additional information on the Company's corporate debt andsecurities, see Note 5 to
the accompanying financial statements included in Item 8.
As with corporate debt securities, the Company's investments in equity
securities carry significantly greater credit risk than investments in Agency
Securities and high quality MBS. Management monitors the Company's equity
portfolio to determine appropriate investment strategy and to identify any
impairment that is also subjectother-than-temporary. If the market value of an equity
security were to fluctuation due to changesdecline below the cost of such security and a determination
were made that such decline was other-than-temporary, a charge would be made
against earnings and the carrying value reduced by such amount of decline that
is considered other-than-temporary. During 2001, the Company realized gains of
$1.2 million and losses of $588,000 on sales of equity securities. At December
31, 2001, the Company had investments in interest
ratesequity securities with an aggregate
carrying value of $4.1 million, which included unrealized gains of $710,000 and
many other factors.
CREDIT RISKS ASSOCIATED WITH INVESTMENTSno unrealized losses.
Credit Risks Associated with Investments
The holder of a mortgage or mortgage-backed securityMBS assumes a risk that the borrowers may
default on their obligations to make full and timely payments of principal and
interest. The Company seeks to mitigate this risk of credit lossrisk by requiring that at
least 50% of its investment portfolio consist of mortgage loans or mortgage securitiesadjustable rate MBS that are
either (i) insured or
guaranteed as to principal and interest by an agency of the U.S. government,
such as GNMA, FNMA or FHLMC,Agency Securities or (ii) rated in one of the two highest rating
categories by either Standard and Poor's or Moody's.one of the Rating Agencies. The remainder of the Company's assets
may be either (i)(a) direct investment (mezzanine or equity) in multifamily
apartment properties; (ii)(b) investments in limited partnerships or real estate investment trusts;REITs; or (iii)(c)
other fixed-income instruments (corporate debt or equity securities or mortgage-backed securities)MBS) that
provide increased call protection relative to the Company's mortgage assetsMBS through
diversification. Currently, other fixed-income instruments in which the Company
has invested are below investment grade in quality. These other
belowBelow investment grade
fixed-income instruments constituted 3%0.5% of the Company's total assets as of
December 31, 2000.2001. As of December 31, 2000,2001, approximately 79%83% of the Company's
assets consisted of mortgage-backed
securities insuredAgency Securities, approximately 10% consisted of high
quality MBS rated "AAA" or guaranteed by"AA" and approximately 5% consisted of cash and cash
equivalents; combined these assets comprised approximately 97% of the U.S. government or an agency thereof.
- 6 -
RISKS OF ASSET CONCENTRATIONCompany's
total assets.
Risks of Asset Concentration
Although the Company seeks geographic diversification of the properties
underlying its mortgage assets, itMBS, the Company does not set specific limitations on the
aggregate percentage of underlying properties which may be located in any one
geographical area. Consequently, properties underlying such mortgage assetsthe Company's MBS may be
located in the same or a
8
limited number of geographical regions. Adverse changes in the economic
conditions of the geographic regions in which the properties securing mortgage assets are concentratedMBS held
by the Company would likely would have an adverse effect on real estate values,
interest rates, and prepayment rates and increase the risk of default by the
obligors on the underlying mortgage loans. Accordingly, the Company's results of
operations could be adversely affected.
TheInvestment Company is not aware of any such geographic concentrations which could
adversely affect the Company's results of operations.
INVESTMENT COMPANY ACTAct
The Company at all times intends to conduct its business so as to not
become regulated as an investment company under the Investment Company Act of
1940.1940 (the "Investment Company Act"). If the Company were to become regulated as
an investment company, then, among other things, the Company's ability to use
leverage would be substantially reduced. The Investment Company Act exempts
entities that are "primarily engaged in the business of purchasing or otherwise
acquiring mortgages and other liens on and interests in real estate" (i.e.,
"Qualifying Interests"). Under the current interpretation of the staff of the
SEC,Securities and Exchange Commission, in order to qualify for this exemption, the
Company must maintain at least 55% of its assets directly in Qualifying
Interests. In addition, unless certain mortgage
securitiesMBS represent an undivided interest in
the entire pool backing such mortgage securitiesMBS (i.e., "whole pool" mortgage securities)MBS), such mortgage
securitiesMBS may be
treated as securities separate from the underlying mortgage loan, thus, may not
be considered Qualifying Interests for purposes of the 55% exemption
requirement. Accordingly, the Company monitors its compliance with this
requirement in order to maintain its exempt status. As of December 31, 2000,2001, the
Company determined that it iswas in and has maintained compliance with this
requirement.
CERTAIN FEDERAL INCOME TAX CONSIDERATIONS
The following discussion summarizes certain federal income tax
considerations to the Company and its stockholders. This discussion is based on
existing federal income tax law, which is subject to change, possibly
retroactively. This discussion does not address all aspects of federal income
taxation that may be relevant to a particular stockholder in light of itseach
personal investment circumstances or to certain types of investors subject to
special treatment under the federal income tax laws (including financial
institutions, insurance companies, broker-dealersbroker dealers and, except to the extent
discussed below, tax-exempt entities and foreign taxpayers) and it does not
discuss any aspects of state, local or foreign tax law. This discussion assumes
that stockholders will hold their common stock as a "capital asset" (generally,
property held
for investment)investmentheld-for-investment) under the Internal Revenue Code of 1986,
as amended (the "Code"). Stockholders are advised to consult their tax advisors
as to the specific tax consequences to them of purchasing, holding and disposing
of the common stock of the Company, including the application and effect of
federal, state, local and foreign income and other tax laws.
GENERALGeneral
The Company has elected to become subject to tax as a REIT, for federal
income tax purposes, commencing with the taxable year endingended December 31, 1998.
Management currently expects that the Company will continue to operate in a
manner that will permit the Company to maintain its qualifications as a REIT.
This treatment will permit the Company to deduct dividend distributions to its
stockholders for federal income tax purposes, thus effectively eliminating the
"double taxation" that generally results when a corporation earns income and
distributes that income to its stockholders. There can be no assurance that the
Company will continue to qualify as a REIT in any particular taxable year, given
the highly complex nature of the rules governing REITs, the ongoing importance
of factual determinations and the possibility of future changes in the law
and/or the circumstances of the Company. If the Company failed to qualify as a
REIT in any particular year, it would be subject to federal income tax as a
regular, domestic corporation, and its stockholders would be subject to tax in
the same manner as stockholders of such corporation. In this event, the Company
could be subject to potentially substantial income tax liability in respect of
each taxable year that it fails to qualify as a REIT, and the - 7 -
amount of earnings
and cash available for distribution to its stockholders (which distributions
would not be required to be made) could be significantly reduced or eliminated. The following
is a brief summary of certain technical requirements that the Company must meet
on an ongoing basis in order to qualify, and remain qualified, as a REIT under
the Code.
STOCK OWNERSHIP TESTS
TheStock Ownership Tests
Other than the first taxable year for which the Company elected to be
taxed as a REIT, the capital stock of the Company must be held by at least 100
persons during at least 335 days of each taxable year (or proportionate part of
a short taxable year) and no more than 50% of the value of such capital stock
may be owned, directly or indirectly, by five or fewer individuals at all timesany time
during the last half of theeach taxable year. Under the Code, most tax-exempt
entities including employee benefit trusts and charitable trusts (but excluding
trusts described in 401(a) and exempt under 501(a)) are generally treated as
individuals for these purposes. These stock ownership requirements must be
9
satisfied by the Company each taxable year. The Company must solicit information
from certain of its shareholders to verify ownership levels and its Articles of
Incorporation provide restrictions regarding the transfer of the Company's
shares in order to aid in meeting the stock ownership requirements. If the
Company were to fail either of the stock ownership tests, it would generally be
disqualified from REIT status, unless, in the case of the "five or fewer"
requirement, the recently enacted "good faith" exemption is available.
ASSET TESTSCompany complies with the requirements for ascertaining its
share ownership and does not know or have reason to know that it failed such
requirement.
Asset Tests
The Company must generally meet the following asset tests (the "REIT Asset
Tests") at the close of each calendar quarter of each taxable year: (a) at least
75% of the value of the Company's total assets must consist of Qualified REIT Real
Estate Assets,"real estate
assets" within the meaning of Section 856(c)(5)(B) of the Code, government
securities, cash, and cash items (the "75% Asset Test"); and (b) the value of
securities held by the Company but not taken into
account for purposes ofqualifying under the 75% Asset Test must not
exceed (i) 5% of the value of the Company's total assets in the case of
securities of any one non-government issuer, and (ii) 10% of the outstanding votingsecurities (by
vote or value) of any one issuer, other than "qualified REIT subsidiaries,"
"taxable REIT subsidiaries," and, in the case of the 10% value test, certain
"straight debt" securities; and (c) no more than 20% of the value of the
Company's assets may consist of securities of any such issuer.one or more "taxable REIT
subsidiaries."
The Company does not expect that the value of any non-qualifying security
of any one entity would ever exceed 5% of the Company's total assets, and the
Company does not expect to own more than 10% of any one issuer's voting
securities.securities (by vote or value). The Company intends to monitor closely the
purchase, holding and disposition of its assets in order to comply with the REIT
Asset Tests. In particular, the Company intends to limit and diversify its
ownership of any assets not qualifying as Qualified REIT Real Estate Assetsunder the 75% Asset Test to less than 25%
of the value of the Company's assets and to less than 5%, by value, of any
single issuer. If it is anticipated that these limits would be exceeded, the
Company intends to take appropriate measures, including the disposition of
non-qualifying assets, to avoid exceeding such limits.
GROSS INCOME TESTSlimits and if such limits are
exceeded, the Company will take such appropriate measures as are necessary to
avoid being disqualified from REIT status.
Gross Income Tests
The Company must generally meet the following gross income tests (the
"REIT Gross Income Tests") for each taxable year: (a) at least 75% of the
Company's gross income must be derived from certain specified real estate
sources including interest income from mortgages on and gain from the
disposition of Qualified REIT Real
Estate Assets"real estate assets" or "qualified temporary investment income"
(i.e., income derived from "new capital" within one year of the receipt of such
capital) (the "75% Gross Income Test") and; (b) at least 95% of the Company's gross
income for each taxable year must be derived from sourcesthe same items of income qualifyingthat
qualify for the 75% Gross Income Test plus dividends or interest from dividends, interest, and gains from the sale of
stock or other securities (including certain interest rate swap and cap
agreements, options, futures and forward contracts entered into to hedge
variable rate debt incurred to acquire Qualified REIT Real Estate Assets) not
held for sale in the ordinary course of businessany source
(the "95% Gross Income Test"Test."). Thus, the 95% Gross Income Test requires income
to be derived from sources which, while passive, have less of a connection with
real estate activities than those sources mandated for the 75% Gross Income
Test. In addition, income qualifying for the 95% Gross Income Test (but not the
75% Gross Income Test) includes income from all hedges that reduce the interest
rate risk of REIT liabilities. Thus, any payment to a REIT under an interest
rate swap or cap agreement option, futures contract, forward rate agreement, or
any similar financial instrument entered into by the Company to hedge its
indebtedness incurred or to be incurred (and any gain from the sale or other
disposition of those instruments) are treated as qualifying income for purposes
of the 95% Gross Income Test.
The Company intends to maintain its REIT status by carefully monitoring
its income, including income from liability hedging transactionsassets and sales of
mortgage assets, to comply with the REIT Gross Income Tests. In particular,
the Company will treat income generated by its interest rate caps and other
liability hedging instruments, if any, as non-qualifying income for purposes
of the 95% Gross Income Tests unless it receives advice from counsel that such
income constitutes qualifying income for purposes of such test.related income. Under certain circumstances, for example, (i) the
sale of a substantial amount of mortgage
assetsMBS to repay borrowings in the event that other
credit is unavailable or (ii) an unanticipated decrease in the qualifying income
of the Company which may result in the non-qualifying income exceeding 5% of
gross income, the Company
- 8 - may be unable to comply with certain of the REIT Gross
Income Tests. See "Taxation of the Company" below for a discussion of the tax
consequences of failure to comply with the REIT Provisionsprovisions of the Code.
DISTRIBUTION REQUIREMENTDistribution Requirement
The Company must generally distribute to its stockholders an amount equal
to at least a certain percentage of the Company's REIT taxable income before
deductions of dividends paid and excluding net capital gain. Such percentage was
95% through December 31, 2000. As a result of the REIT Modification Act which
was effective January 1, 2001, the distribution requirement was changed from 95%
to 90%.
TAXATION OF THE COMPANY10
Taxation of the Company
In any year in which the Company qualifies as a REIT, the Company will
generally not be subject to federal income tax on that portion of its REIT
taxable income or capital gain which is distributed to its stockholders. The
Company will, however, be subject to federal income tax at normal corporate
income tax rates upon any undistributed taxable income or capital gain.
Notwithstanding its qualification as a REIT, the Company may also be subject to
tax in certain other circumstances. If the Company fails to satisfy either the
75% or the 95% Gross Income Test, but nonetheless maintains its qualification as
a REIT because certain other requirements are met, it will generally be subject
to a 100% tax on the greater of the amount by which 90% or 75% of the gross income of
the Company failsexceeds the gross income of the Company qualifying for either the
75% or the 95% Gross Income Test, respectively, multiplied by net
income and divided by gross income.a fraction
intended to reflect the Company's profitability. The Company will also be
subject to a tax of 100% on net income derived from any "prohibited transaction,"transaction"
(generally income from property held for sale in the ordinary course of a trade
or business) and if the Company has (i) net income from the sale or other
disposition of "foreclosure property" which is held primarily for sale to
customers in the ordinary course of business or (ii) other non-qualifying income
from foreclosure property, it will be subject to federal income tax on such
income at the highest corporate income tax rate. In addition, if the Company
fails to distribute during each calendar year at least the sum of (i) 85% of its
REIT ordinary income for such year and (ii) 95% of its REIT capital gain net
income for such year, the Company would be subject to a 4% federal excise tax on
the excess of such required distribution over the amounts actually distributed
during the taxable year, plus any undistributed amount of ordinary and capital
gain net income from the preceding taxable year. The Company may also be subject
to the corporate alternative minimum tax, as well as other taxes in certain
situations not presently contemplated. If the Company fails to qualify as a REIT
in any taxable year, and certain relief provisions of the Code do not apply, the
Company would be subject to federal income tax (including any applicable
alternative minimum tax) on its taxable income at the regular corporate income
tax rates. Distributions to stockholders in any year in which the Company fails
to qualify as a REIT would not be deductible by the Company, nor would they
generally be required to be made under the Code. Further, unless entitled to
relief under certain other provisions of the Code, the Company would also be
disqualified from re-electing REIT status for the four taxable years following
the taxable year in which it became disqualified.
The Company intends to monitor on an ongoing basis its compliance with the
REIT requirements described above. In order to maintain its REIT status, the
Company will be required to limit the types of assets that the Company might
otherwise acquire, or hold certain assets at times when the Company might
otherwise have determined that the sale or other disposition of such assets
would have been more prudent.
TAXATION OF STOCKHOLDERSTaxation of Stockholders
Distributions (including constructive distributions) made to holders of
common stock other than tax-exempt entities (and not designated as capital gain dividends) will generally be
subject to tax as ordinary income to the extent of the Company's current and
accumulated earnings and profits as determined for federal income tax purposes.
If the amount distributed exceeds a stockholder's allocable share of such
earnings and profits, the excess will be treated as a return of capital to the
extent of the stockholder's adjusted basis in the common stock, which will not
be subject to tax, and thereafter as a taxable gain from the sale or exchange of
a capital asset.
Distributions designated by the Company as capital gain dividends will
generally be subject to tax as long-term capital gain to stockholders, to the
extent that the distribution does not exceed the Company's actual net capital
gain for the taxable year. Distributions by the Company, whether - 9 -
characterized
as ordinary income or as capital gain, are not eligible for the corporate
dividends received deduction. In the event that the Company realizes a loss for
the taxable year, stockholders will not be permitted to deduct any share of that
loss.
STATE AND LOCAL TAXESState and Local Taxes
The Company and its stockholders may be subject to state or local taxation
in various jurisdictions, including those in which it or they transact business
or reside. The state and local tax treatment of the Company and its stockholders
may not conform to the federal income tax consequences discussed above.
Consequently, prospective stockholders should consult their own tax advisors
regarding the effect of state and local tax laws on an investment in the common
stock.
11
COMPETITION
The Company believes that its principal competitors in the business of
acquiring and holding mortgage assetsMBS of the typetypes in which it invests are financial
institutions, such as banks, and savings and loans,loan institutions, life insurance
companies, institutional investors such asincluding mutual funds and pension funds and
certainother mortgage REITs. Such investors may not be subject to similar regulatory
constraints (i.e., REIT tax compliance or maintaining 1940 Act
exemption)an exemption under the
Investment Company Act). In addition, many of the other entities purchasing
mortgages and mortgage-backed securitiesMBS have greater financial resources and better access to capital than
the Company. The existence of these competitive entities, as well as the
possibility of additional entities forming in the future, may increase the
competition for the acquisition of mortgages and mortgage-backed
securitiesMBS resulting in higher prices
and lower yields on such assets.
Item 2. Properties.
The Company does not directly own orany material properties nor is it
obligated under any lease anyfor physical properties.
Item 3. Legal Proceedings.
There are no material pending legal proceedings to which the Company is a
party, or, any of its assets are subject.
Item 4. Submission of Matters to a Vote of Security Holders.
No matter was
submitted duringAt the fourth quarterSpecial Meeting of Stockholders on December 12, 2001, present in
person or by proxy were 14,690,687 of 27,034,850 shares of common stock of the
fiscal year ending December 31,
2000,Company entitled to vote at such meeting, to consider and vote upon a voteproposal
to approve the issuance of shares of the Company's security holders.
- 10 -stock pursuant to, and the
other transactions contemplated by the Advisor Merger Agreement. The Advisor
Merger proposal was approved with votes cast as follows:
Shares Voted Percent
------------ ---------
For: 14,125,100 96.15%
Against: 340,283 2.32%
Abstain: 225,304 1.53%
Item 4A Executive Officers of the Company.
TheWhile the Company had no direct employees prior to consummation of the
Advisor Merger, effective January 1, 2001, officers of the Advisor performed
duties generally performed by an internal management team. Upon consummation of
the Advisor continued in their roles for the Company, but became direct
employees of the Company. Company's executive officers are as follows:
Name Position Held Position Held Since
- ----------------------- -------------------------- -------------------
Name Position Held
- ---- -------------
Stewart Zimmerman President and Chief 1998 Executive Officer
Gary Thompson Chief Financial Officer 1998
and Treasurer
William S. Gorin Executive Vice President, Chief Financial
Officer and Treasurer
Ronald A. Freydberg Executive Vice President and Secretary
Teresa D. Covello Senior Vice President/Controller
Stewart Zimmerman, 57, has served as President and Chief Executive officer
since 1997. Prior to that time, he was Executive Vice President 1998
and Secretary
Ronald A. Freydberg Senior Vice President 1998
Stewart Zimmerman, 56, serves as president and chief executive officer of the
Company. He served as executive vice president of America First
Companies L.L.C. sinceL.L.C from January 1989, during which time he has served inheld a number of
positions: presidentPresident and chief operating officerChief Operating Officer of America First REIT, Inc.;
president and
President of several America First Mortgagemortgage funds including America First
Participating/Preferred Equity Mortgage Fund, America First PREP Fund 2, Limited Partnership, America
First PREP Fund 2II 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 directorManaging Director and directorDirector
of Security Pacific Merchant Bank responsible for Mortgage Trading and Finance.
Prior to that time, he served as first viceFirst Vice president of E.F. Hutton & Company,
Inc., where he was responsible for mortgage-backed securitiesMBS trading and sales distribution, and vice presidentVice
President of Lehman Brothers, where he was responsible for the distribution of
mortgage products. From 1968 to 1972, Mr. Zimmerman was vice presidentVice President of Zenith
Mortgage Company and Zenith East
12
Inc., a national mortgage banking and brokerage company specializing in the
structuring and sales of mortgage assetsMBS to the institutional financial community.
Gary Thompson, 58, serves as chief financial officer and treasurer of the
Company. 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, 42,43, serves as executive vice presidentExecutive Vice President, Chief Financial
Officer and secretaryTreasurer. He served as Executive Vice President since 1997 and was
appointed Executive Vice President, Chief Financial Officer and Treasurer in
2001. From 1998 to 2001, Mr. Gorin served as Executive Vice President and
Secretary of the Company. From 1989 to 1997, Mr. Gorin held various positions
with PaineWebber Incorporated/Kidder, Peabody & Co. Incorporated, New York, New
York, most recently serving as a first vice president in the Research
Department. Prior to that position, Mr. Gorin was senior vice presidentSenior 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.
Ronald A. Freydberg, 40,41, serves as senior vice presidentExecutive Vice President of and
Secretary, which he was appointed to in 2001. From 1998 to 2001, he served as
Senior Vice President of the Company. From 1995 to 1997, Mr. Freydberg served as
a vice presidentVice 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.
- 11 -Teresa D. Covello, 37, serves as Senior Vice President and Controller.
From May 2000 up to joining the Company in October 2001, Ms. Covello was a
self-employed financial consultant, concentrating in investment banking within
the financial services sector. From 1990 to 2000, she held progressive positions
(1997 to 2000 as Vice President; 1993 to 1996 as Assistant Vice President; 1990
to 1992 Officer and Assistant Controller) and was the Director of Financial
Reporting for JSB Financial, Inc. Ms. Covello's key responsibilities included
SEC reporting, implementing accounting standards, establishing policies and
procedures, managing asset/liability and interest rate risk policy and
reporting, and investor and regulatory communications. She was a member of the
strategic planning team. Ms. Covello began her career in public accounting in
1987 with KPMG Peat Marwick (now KPMG LLP), participating in and supervising
financial statement audits, compliance examinations, initial public offerings
and debt offerings. She is a Certified Public Accountant and has a Bachelors of
Science degree from Hofstra University in Public Accounting.
13
PART II
Item 5. Market for Registrant's Common Equity and Related Stockholder Matters.
(a) Market Information.Information The Company's common stock began trading on the New
York Stock Exchange on April 10, 1998, under the symbol "MFA." As of March 22,
2002, the last sales price for the Company's common stock on the New York Stock
Exchange was $9.46. The following table sets forth the high and low sale prices
per share for the Company's shares of common stock for the twelve12 months ending December 31,
2001 and 2000.
2001 Sale Prices 2000 and 1999.
2000 1999
Sale Prices Sale Prices
----------------------- ----------------------
High Low High Low
1st Quarter $ 5-13/16 $ 4-1/2 $ 5-26/32 $ 4-1/4
2nd Quarter $ 5-5/8 $ 4-1/2 $ 5-3/8 $ 4
3rd Quarter $ 5-15/16 $ 4-15/16 $ 5-1/8 $ 4-10/32
4th Quarter $ 5-3/4 $ 4-3/4 $ 5-3/8 $ 4-1/4
Sale Prices
-------------------- ---------------------
Quarter Ended High Low High Low
- ------------------ -------- -------- -------- ---------
March 31 $7.500 $5.063 $5.813 $4.500
June 30 $8.250 $6.750 $5.625 $4.500
September 30 $8.850 $7.250 $5.938 $4.938
December 31 $9.400 $7.650 $5.750 $4.750
(b) Investors.Investors
The approximate number of record holders of the Company's common stockholdersstock as
of March 26,
2001,22, 2002 was 5,700.469; the total number of beneficial owners was
approximately 7,371.
(c) Dividends.Dividends
The Company currently pays cash dividends on a quarterly basis. Total cash
dividends declared by the Company to common stockholderssstockholders during the fiscal years ended
December 31, 2001 and 2000, were approximately $17,048,000 ($0.845 per share)
and 1999, were $5,428,230$5,428,000 ($0.59 per share), respectively. In general, consistent with the
Company's underlying operational strategy, the Company's dividends will for the
most part be characterized as ordinary income to its stockholders for federal
tax purposes. However, a portion of the Company's dividends may be characterized
as capital gains or return of capital. All of the Company's dividends for 2001
were characterized as ordinary income and $6,174,870 ($0.67approximately $0.02 of the Company's
dividends for the year ended December 31, 2000 were characterized as capital
gains. (See Note 11 to the financial statements, included in Item 8, for
additional dividend information.)
The Company elected to be treated as a REIT for federal income tax
purposes beginning with its 1998 taxable year and, as such, has distributed and
anticipates distributing annually at least 90% (95% prior to January 1, 2001) of
its taxable income, subject to certain adjustments. Although the Company may
borrow funds to make distributions; cash for such distributions has generally
been and is expected to continue to be largely generated from the Company's
operations.
The Company declared the following dividends during the years ended
December 31, 2001 and 2000:
Dividend
Declaration Date Record Date Payment Date per share), respectively.Share
- -------------------- ------------------ ----------------- ---------
2001
February 12, 2001 April 16, 2001 April 30, 2001 $ 0.165
April 9, 2001 June 30, 2001 July 16, 2001 0.175
September 19, 2001 October 2, 2001 October 18, 2001 0.225
December 12, 2001 December 28, 2001 January 30, 2002 0.280
2000
March 17, 2000 April 14, 2000 May 17, 2000 $ 0.140
June 14, 2000 June 30, 2000 August 17, 2000 0.140
September 18, 2000 October 16, 2000 November 17, 2000 0.155
December 14, 2000 January 15, 2001 January 30, 2001 0.155
For tax purposes, a portion of each of the dividenddividends declared onon: December
12, 2001 and December 14, 2000, and paid on
January 30, 2001, will bewere treated as a 2001 dividend for shareholders.
Similarly, for tax purposes,stockholders in
the subsequent year. The dividend declared on December 16, 1999 and paid on
February 18, 2000 was treated in its entirety as a 2000 dividend for
shareholders. As part of the Merger transaction, the Company made quarterly
distributions of $.265 per common share ($1.06 per common share per year) in
the first year following the Merger (i.e. through the first quarter of 1999.)
A portion of the distributions received by shareholders in 1999 and 1998
consisted in part of a dividend and in part of a cash merger payment. There
is no commitmentstockholders.
Future dividends will be determined by the Company to distribute amounts in excessCompany's Board of taxable
income beyond the first year of operations. The Company intends to continue
to distribute to its shareholders an amount equal to at least 90% ofDirectors
after considering the Company's taxable income before deductions of dividends paid and excluding net
capital gains in orderavailable cash for distribution, financial
condition, ability to maintain its REIT status.status, and such other factors that may
be deemed relevant. See Item 7, Management's Discussion and Analysis of
Financial Conditions and Results of Operations, for information regarding the
sources of funds used for dividends and for a discussion of factors, if any,
which may adversely affect the Company's ability to pay dividends at the same
levels in 20012002 and thereafter.
14
Item 6. Selected Financial Data.
Set forth below is selected financial data for the Company (for periods
after April 9, 1998) and the Predecessor (for periods up to April 9, 1998). The
information set forth below should be read in conjunction with the consolidated and combined financial
statements and notes to the consolidated
and combined financial statements filed in response to Item 8 hereof.statements.
(1)
Predecesor
Company January (1)
(In Thousands, Except For the Year Ended April 10 to 1 to 1998
per Share Amounts) December 31, December 31, April 9, Total
------------------------------------ ------------ --------- --------
2001 2000 1999 1998
---------- -------- -------- ------------------------
Operating Data:
Interest income on MBS $ 53,387 $ 33,391 $ 24,302 $ 7,627 $ 614 $ 8,241
Corporate debt securities income 1,610 1,336 675 165 -- 165
Dividend income 666 928 331 -- -- --
Interest income on temporary cash
investments 842 645 366 440 149 589
Income from other investments (2) 3,137 3,670 3,013 582 145 727
Net gain (loss) on sale of
investments (438) 456 55 415 -- 415
General and administrative expenses (3) (5,355) (2,457) (2,672) (1,674) (421) (2,095)
Interest expense on borrowed
funds (35,073) (30,103) (18,466) (4,620) -- (4,620)
Other-than-temporary impairment
loss on debts ecurities (2,453) -- -- -- -- --
Costs incurred in acquiring external
advisor (12,539) -- -- -- --
Minority interest -- -- (4) (4) -- (4)
---------- -------- -------- --------- ------- -------
Net income $ 3,784 $ 7,866 $ 7,600 $ 2,931 $ 487 $ 3,418
========== ======== ======== ========= ======= =======
Net income, basic, per share $ 0.25 $ 0.89 $ 0.84 $ 0.32 N/A
========== ======== ======== ========= =======
Net income, diluted, per $ 0.25 $ 0.89 $ 0.84 $ 0.32 N/A
share ========== ======== ======== ========= ======
Net income per exchangeable unit -
basic N/A N/A N/A N/A $ 0.08
========== ======== ======== ======= =======
Net income per exchangeable unit - N/A N/A N/A N/A $ 0.08
diluted, ========== ======== ======== ======= =======
Dividends declared per common share
or cash distributions paid/accrued
per exchangeable unit $ 0.85 $ 0.59 $ 0.67 $ 0.80 $ 0.26 $ 1.06
========== ======== ======== ========= ======= =======
Balance Sheet Data: (At Period End)
MBS $1,926,900 $470,576 $475,720 $ 241,895
Corporate debt securities 9,774 15,666 8,020 4,673
Corporate equity securities 4,088 9,011 3,131 1,154
Total assets 2,068,933 522,490 524,384 264,669
Repurchase agreements 1,845,598 448,583 452,102 190,250
Total stockholders' equity 203,624 69,912 614 70,933
(1) For financial accounting purposes, PREP Fund 1 was considered the sole
predecessor to the Company and, accordingly, the historical operating
results presented in this report as those of the "Predecessor" are those
of PREP Fund 1. Under generally accepted accounting principles, theThe 1998 Merger was accounted for as a purchase by PREP
Fund 1 of 100% of the assigned limited partnership interests (known as
"BUCs") of PREP Fund 2 and approximately 99% of the BUCs of Pension Fund.
As a result of this treatment, the Company, as the successor to PREP Fund
1, recorded all of the assets and liabilities of PREP Fund 1 at their book
value, but was required to record the assets of PREP Fund 2 and Pension
Fund at their fair value as of the date of the Merger.. The amount by which the fair value of the
Company's stock issued to the BUC holders of PREP Fund 2 and Pension Fund
exceeded the fair value of the total net assets of PREP Fund 2 and Pension Fund
was recorded as goodwill by the Company. - 12 -
Company and Predecessor
Company Company As of or for the Year Ended December 31, 1998
-----------------------------------------------
As of or As of or Company and
for the for the Company Predecessor
Year Ended Year Ended From April 10 to Through
Dec. 31, 2000 Dec. 31, 1999 December 31, 1998 April 9, 1998 Total
-------------- -------------- ----------------- -------------- -------------
OPERATING DATA:
Mortgage securities income $ 33,390,494 $ 24,302,401 $ 7,626,742 $ 613,793 $ 8,240,535
Corporate debt securities income 1,335,974 674,747 164,738 - 164,738
Dividend income 928,310 331,233 - - -
Interest income on temporary cash
investments 645,013 365,897 439,889 148,799 588,688
Income from other investments 3,670,199 (1) 3,012,688 (3) 581,716 145,167 726,883
Net gain on sale of investments 456,398 54,994 414,951 - 414,951
General and administrative expenses (2,457,196)(2) (2,672,333) (4) (1,674,114) (421,293) (2,095,407)
Interest expense on borrowed funds (30,103,076) (18,465,529) (4,619,500) - (4,619,500)
Minority interest - (4,218) (3,353) - (3,353)
------------- -------------- -------------- -------------- -------------
Net income $ 7,866,116 $ 7,599,880 $ 2,931,069 $ 486,466 $ 3,417,535
============= ============== ============== ============== =============
Net income, basic, per share $ .89 $ .84 $ 0.32 $ N/A
============= ============== ============== ==============
Net income, fully diluted, per share $ .89 $ .84 $ 0.32 $ N/A
============= ============== ============== ==============
Net income, basic, per exchangeable unit $ N/A $ N/A $ N/A $ 0.08
============= ============== ============== ==============
Net income, fully diluted,
per exchangeable unit $ N/A $ N/A $ N/A $ 0.08
============= ============== ============== ==============
Dividends declared per common share or
cash distributions paid or accrued
per exchangeable unit $ .5900 $ 0.6700 $ 0.7950 $ 0.2649 $ 1.0599
============= ============== ============== ============== =============
BALANCE SHEET DATA:
Investment in mortgage securities $ 470,575,671 $ 475,719,711 $ 241,895,462
Investment in corporate debt securities $ 15,665,727 $ 8,020,026 $ 4,673,127
Investment in corporate equity securities $ 9,010,538 $ 3,130,823 $ 1,153,800
Total assets - Company $ 522,490,312 $ 524,384,473 $ 264,668,902
Repurchase agreements $ 448,583,432 $ 452,101,803 $ 190,250,084
Total stockholders' equity $ 69,911,496 $ 67,614,613 $ 70,932,757
Explanatory Notes:
(1) Includes income of approximately $2,600,000 resulting from the sale of
the underlying real estate of an unconsolidated real estate limited partnership
as described in Note 6 to the consolidated and combined financial
statements.
(2) Includes an incentive fee of approximately $519,000 earned by the
Advisor in connection with the sale described in (1) above.
(3) Includes income of approximately $2,163,000 resulting from the sale of
undivided interests in the net assets of four assisted living centers
as described in Note 6 to the consolidated and combined financial
statements.
(4) Includes an incentive fee of approximately $433,000 earned by the
Advisor in connection with the sale described in (3) above.
- 13 -
Company and
Predecessor Predecessor
As of or As of or
for the for the
Year Ended Year Ended
Dec. 31, 1997 Dec. 31, 1996
------------- -------------
Mortgage securities income $ 2,654,975 $ 3,011,347
Interest income on temporary cash investments
and U.S. government securities 569,624 442,931
Income from other investments 606,582 504,611
General and administrative expenses (1,405,514) (895,961)
------------- -------------
Net income $ 2,425,667 $ 3,062,928
============= =============
Net income, basic, per exchangeable unit $ 0.42 $ 0.52
============= =============
Net income, fully diluted, per exchangeable unit $ 0.42 $ 0.52
============= =============
Net income per passthrough certificate $ - $ 1,201.57
============= =============
Cash distributions paid or accrued per
exchangeable unit $ 1.0596 $ 1.0596
============= =============
Cash distributions paid or accrued per
passthrough certificate $ - $ 2,428.25
============= =============
Investment in mortgage securities $ 33,506,388 $ 37,322,028
============= =============
Total assets - Company $ 1,000 -
============= =============
Total assets - Predecessor $ 54,439,993 $ 60,144,705
============= =============
Total stockholders' equity $ 1,000 -
============= =============
Total partners' capital $ 46,252,826 $ 49,702,829
============= =============
The Company began operations on
April 10, 1998; financial data of the Predecessor prior to 1998 is not
considered meaningful and, therefore, has been omitted.
(2) Includes gains of approximately $2.6 million, $2.6 million and $2.2
million resulting from the sale of the underlying real estate of
unconsolidated real estate limited partnerships for the years ended
December 31, 2001, 2000 and 1999, respectively. (See Note 7 to the
financial statements, included in Item 8.)
(3) Includes an incentive fees of approximately $511,000, $519,000 and
$433,000 earned by the Advisor in connection with the sales described in
(2) above for the years ended December 31, 2001, 2000 and 1999,
respectively.
15
Item 7. Management's Discussion and Analysis of Financial Condition and Results
of Operations.
General
The CompanyGENERAL
America First Mortgage Investments, Inc. was incorporated in Maryland on
July 24, 1997, and1997. The Company began operations on April 10, 1998.
On April 10, 1998 when it merged
with the Company and three partnerships: America First
Participating/Preferred Equity Mortgage Fund Limited Partnership ("Prep Fund
1"), America First Prep Fund 2 Limited Partnership ("Prep Fund 2"), America
First Prep Fund 2 Pension Series Limited Partnership ("Pension Fund"),
consummated a merger transaction whereby their pre-existing net assets and
operations or majority interest in the pre-existing partnership were
contributed to the Company in exchange for 9,035,084 shares of the Company's
common stock. For financial accounting purposes, Prep Fund 1, the largest of
the three Partnerships, was considered the Predecessor entity (the
"Predecessor") and its historical operating results are presented in the
financial statements contained herein. The Merger was accounted for using the
purchase method of accounting in accordance with generally accepted accounting
principles. Prep Fund 1 was deemed to be the acquirer of the other
Partnerships under the purchase method. Accordingly, the Merger resulted, for
financial accounting purposes, in the effective purchase by Prep Fund 1 of all
the Beneficial Unit Certificates ("BUCs") of Prep Fund 2 and approximately 99%
of the BUCs of Pension Fund. (Pension Fund was liquidated and dissolved
during December, 1999.) As the surviving entity for financial accounting
purposes, the assets and liabilities of Prep Fund 1 were recorded by the
Company at their historical cost and the assets and liabilities of Prep Fund 2
and Pension Fund were adjusted to fair value. The excess of the fair value of
stock issued over the fair value of net assets acquired has been recorded as
goodwill in the accompanying balance sheet of the Company.
- 14 -Funds. Concurrent with the 1998 Merger, the Company entered into
anthe Advisory Agreement with America First Mortgage Advisory Corporation (the "Advisor")the Advisor and adopted an investment policy whichthat
significantly differed from that pursued by the predecessor partnerships. ThisPrep Funds.
Prior to the Advisor Merger, the Advisor provided advisory services to the
Company in connection with the conduct of the Company's business activities and
operations. The Company's principal investment strategy includesprovides for leveraged
investing in adjustable rate mortgageand hybrid MBS. In addition, the Company's
investment strategy also provides for the acquisition of multifamily housing
properties, REIT securities and mortgage loans. The Company began
implementing this investment strategy in the second quarter of 1998. During
the period from the consummation of the Merger through December 31, 2000, the
Company purchased mortgage securities with a face value at the time of
purchase of approximately $669.2 million (mortgage securities with a face
value of approximately $98.0 million were purchased during the year ended
December 31, 2000).high-yield corporate securities.
The Company has elected to becomebe subject to tax as a real estate investment
trust ("REIT") under the CodeREIT for federal income
tax purposes beginning with its 1998 taxable year and, as such, the Company has
distributed, and anticipates in the future distributing, annuallyon an annual basis at
least 95% (90% effective90% (95% prior to January 1, 2001) of its annual taxable net income to its
stockholders, subject to certain adjustments. Generally, cash for such
distributions is expected to be largely generated from the Company's operations,
although the Company may borrow funds to make distributions.
SinceThe following discussion should be read in conjunction with the Company's
Financial Statements and Supplementary Data and the notes thereto appearing
elsewhere in this Annual Report on Form 10-K.
ADVISOR MERGER
From the time of the 1998 Merger through December 31, 2001, the Company
was externally managed by the Advisor. The Company had no employees of its own
as an externally managed REIT and relied on the Advisor to conduct its business
operations. As such, the primary components of the Company's general and
administrative expenses were the base advisory and incentive compensation fees
paid to the Advisor.
Due to the increase in the Company's assets and stockholders' equity
during 2001, the Company's Board of Directors determined that it was in the best
interest of the Company that it should become a "self-advised" REIT.
Accordingly, on September 24, 2001, the Company entered into the Advisor Merger
Agreement pursuant to which the Advisor was to be merged with and into the
Company. In December 2001, the Company's stockholders approved the terms of the
Advisor Merger Agreement, which provided for the merger of the Advisor into the
Company effective 12:01 a.m. on January 1, 2002. As a result, the Company became
self-advised and commencing January 1, 2002 and thereafter will directly incur
the cost of all overhead expenses necessary to operate the company and will no
longer have any obligation to pay fees to the Advisor. As a result of the
Advisor Merger, the employees of the Advisor became employees of the Company.
Management of the Company has made dividend and distribution paymentsbelieves that, under current market conditions,
the additional costs incurred in operating the Company on a self-advised basis
will be less than the amount of $0.59, $0.67 and $0.795the fees that would have otherwise been payable
to the Advisor had the Company remained an "externally-advised" REIT. However,
there can be no assurance that the Company will incur lower expenses as a
self-advised REIT. In connection with the Advisor Merger Agreement, the Company
issued 1,287,501 shares of its common stock to the stockholders of the Advisor.
These shares represented approximately 4.5% of the total outstanding shares of
common stock immediately following the Advisor Merger. As a result, earnings per
share for 2000, 1999 and 1998, respectively. Such
amounts include $1.06 per share distributed throughon the first year of
operations (i.e. through the first quarter of 1999) which the Company
committed to distribute to shareholdersCompany's common stock could decrease as parta result of the Advisor
Merger, transaction. A
portioneven though the Company's costs decline as a result of distributions received by shareholders in 1999 and 1998 consisted
in partbecoming
self-advised.
For accounting purposes, the Advisor Merger is not considered the
acquisition of a dividend"business" for purposes of applying Accounting Principles Board
("APB") Opinion No. 16, "Business Combinations" and, in parttherefore, the market value
of a cash merger payment. There is no
commitment by the Company to distribute amountscommon stock issued, valued as of the consummation of the Advisor Merger,
in excess of taxable income
beyond the first year of operations. For tax purposes, a portionfair value of the dividend declared on December 14, 2000, and paid on January 30, 2001, will be
treatednet tangible assets acquired was charged to
operating income rather than capitalized as a 2001 tax eventgoodwill for shareholders. Similarly, for tax purposes,
the dividend declared on December 16, 1999, and paid on February 18, 2000, was
treated in its entirety as a 2000 tax event for shareholders.
The Company's operations for any period may be affected by a number of factors
including the investment assets held, general economic conditions affecting
underlying borrowers and, most significantly, factors which affect the
interest rate market. Interest rates are highly sensitive to many factors,
including governmental monetary and tax policies, domestic and international
economic and political considerations, and other factors beyond the control of
the Company.
The Merger, other related transactions and on-going implementation of the
change in investment strategy will materially impact the Company's future
operations as compared to those of the Predecessor. Accordingly, the
currently reported financial information is not necessarily indicative of the
Company's future operating results or financial condition.
Liquidity and Capital Resources
The Company's principal sources of capital consist of borrowings under
repurchase agreements, principal payments received on its portfolio of
mortgage securities and cash provided by operations. Principal uses of cash
include the acquisition of investment securities, the payment of operating
expenses and the payment of dividends to shareholders.
During the year ended December
31, 2001.
RESULTS OF OPERATIONS
Year Ended December 31, 2001, Compared to Year Ended December 31, 2000
In comparing the results of operations for 2001 with 2000, the 2001
results are marked by two significant charges and a substantial growth in assets
funded by leveraging of the additional equity capital raised during the year.
Specifically, the Company incurred an expense of approximately $12.5 million, of
which approximately $11.3 million was non-cash, as a one-time cost in connection
with the Advisor Merger. In addition, the Company incurred
16
a charge of approximately $2.5 million taken against the corporate debt
securities portfolio for an other-than-temporary impairment against an
investment in corporate debt securities.
Total interest and dividend income increased by approximately $20.2
million, or 55.7%, to approximately $56.5 million compared to approximately
$36.3 million earned in 2000. The 2001 increase is directly attributable to the
growth in assets as a result of the investing, on a leveraged basis, the
proceeds from the sale of approximately 18.3 million shares of the Company's
common stock. The Company's "core assets" which consist of MBS, generated
approximately $53.4 million of income, reflecting approximately $20.0 million,
or 59.9%, increase from approximately $33.4 million for 2000. The increase in
MBS income reflects the growth in the Company's MBS portfolio of approximately
$1.456 billion, or 309.5%, from approximately $470.6 million as of December 31,
2000 to $1.927 billion as of December 31, 2001.
Lifetime interest rate caps on adjustable rate MBS could limit earnings on
the Company's assets. At December 31, 2001, approximately 19.9% of the Company's
adjustable rate MBS (18.5% of the total assets) had a 1% periodic (generally one
year) cap (annual limit for rate changes on the underlying mortgages) with the
remainder having a 2% annual cap. Management believes that the impact of
periodic caps on the operating results for 2002, if any, would be slight, given
that the weighted average coupon on these assets was 7.12% at December 31, 2001,
492 basis points greater than the one year CMT.
Income recognized on short-term investments in cash and cash equivalents
increased by $197,000, as funds generated through the sale of the Company's
common shares remain in interest earning cash investments until fully invested.
Further, significant growth in investments will, in general, due to the
reinvestment lag, result in an increase in temporary cash investments. Income
from corporate debt securities increased $274,000; however losses on sales of
such securities and losses recognized for other-than-temporary impairment on one
of the Company's corporate debt investments far exceeded the growth in income.
Slightly offsetting increases in interest income was a decrease in dividend
income on equity securities of $262,000 reflecting sales of equity securities.
The yield on the equity security portfolio decreased to 8.6% for 2001 from 15.0%
in 2000.
The Company's interest expense increased by approximately $5.0 million, or
16.5%, for the year ended December 31, 2001. The average borrowings under
repurchase agreements increased by approximately $434.7 million, or 96.5% from
approximately $450.3 million during 2000 to approximately $885.0 million during
2001, while the average cost of borrowings decreased from 6.68% to 3.96% for the
years ended December 31, 2000 and 2001, respectively.
Net interest and dividend income increased by approximately $15.2 million,
or 245.8%, from approximately $6.2 million to approximately $21.4 million for
the years ended December 31, 2000 and 2001, respectively. The Company's net
interest margin improved by 102 basis points to 2.24% for 2001 from 1.22% for
2000. Overall, the significant increase in the Company's net interest income can
be attributed to the significant balance sheet growth and the increase in the
interest rate spread and net interest margin during 2001. During 2001, interest
rates generally declined, resulting in an expansion (i.e., increase) in interest
rate spreads and margins. Should interest rates increase, as management expects
to occur during 2002, the Company's interest rate spread and net interest margin
would compress (i.e., decline,); the amount and timing of such compression will
be driven by, among other factors, the interest rate environment and thus cannot
be predicted with any uncertainty.
Income and gains from other investments decreased approximately $1.4
million, to $2.7 million for 2001, from $4.1 million for 2000. This decrease
reflects a decline in the performance and resulting net operating income
available for distribution to the Company on its real estate investments. As of
December 31, 2001, the Company had indirect interests in six multi-family
properties consisting of a total of 1,473 rental units, through investments in
four limited partnerships and one corporation as a preferred stockholder. These
investments, which had a net carrying value of $9,360,000 at December 31, 2001,
comprised less than 1% of the Company's total assets. During both 2001 and 2000,
the Company acquired mortgagerecognized gains of $2.6 million related to sales of real estate
properties through the Company's non-consolidated real estate investments.
The Company reported a net loss of $457,000 on the sale of corporate debt
and equity investments during 2001, comprised of; gross gains of approximately
$1.2 million on corporate equity securities and $81,000 on corporate debt
securities and corporate equity securities for
$121.0 million. Financing for these acquisitions was provided primarily
through the utilizationMBS. These gains were more than offset by gross losses of
repurchase agreements, supplemented by cash flow
from operations of $9.0 million. The Company also received principal payments
of $106approximately $1.2 million on its mortgagecorporate debt securities during 2000 and had proceedslosses of $6.6 million from$588,000
on the sale of mortgage securities, corporate equity securities
and corporate debt securities. In addition, the Company received proceeds of
$2.6 million from the sale of the underlying real estate of an unconsolidated
real estate limited partnership. Such proceeds were reinvested in the real
estate limited partnership and utilized to acquire another multifamily housing
property. Other uses of funds in 2000 consisted of dividend payments of $5.3
million and $1.5 million for the acquisition of 283,621 shares of its own
common stock pursuantThis compares to a stock repurchase program as described below.
The Company's borrowings under repurchase agreements totaled $448.6 million at
December 31, 2000, and had a weighted average borrowing ratenet gain of 6.60% as of
such date. At December 31, 2000, the repurchase agreements had balances of
between $0.3 million and $55.9 million. These arrangements have original
terms to maturity ranging from one month to twelve months and annual interest
- 15 -
rates based on LIBOR. To date, the Company has not had any significant margin
calls on its repurchase agreements that were related to a decrease in the
value of its collateral.
In connection with the Company's 400,000 share repurchase program, the Company
purchased and retired 293,621 shares$456,000
recognized during the year ended December 31, 2000 resulting from the sale of
corporate debt, equity and mortgage backed securities.
During 2001, the Company recognized an other-than-temporary impairment
loss of approximately $2.5 million on its investment in RCN debt securities. At
December 31, 2001, the Company held RCN debt securities, which
17
were carried at an aggregatetheir estimated fair value of approximately $2.1 million. In
addition to the RCN debt securities, the corporate debt portfolio included other
debt securities designated as held-to-maturity that were carried at their
amortized cost of $1,511,613. Since implementingapproximately $7.6 million, and had estimated gross unrealized
losses of approximately $3.4 million. The investment in Level 3 accounted for
approximately $3.1 million of the stock repurchase
program during$3.4 million unrealized loss.
Management diligently monitors each debt and equity security investment,
in order to identify asset/credit quality issues on a timely basis. This enables
management to assess and, if necessary, change its position with regard to a
particular debt or equity security. Future other-than-temporary impairment
charges against investments, including the fourth quarterdebt securities of 1999, throughLevel 3, may be
recognized as a result of such assessments, the timing and amount of which would
be based on the facts and circumstances at the time. In general, the Company's
loss exposure due to credit issues related to debt and equity securities is
limited, given that these investments comprised less than 1% of the Company's
assets at December 31, 2000,2001.
General and administrative expenses for the Company has purchasedfor the year ended
December 31, 2001, increased approximately $2.9 million as compared to 2000.
Such increase is primarily attributable to higher base management and retired 378,221 shares atincentive
compensation fees earned by the Advisor resulting from an aggregateincrease in the
Company's stockholders' equity and an increase in income generated by the
Company.
The Company incurred costs in acquiring the Advisor of approximately $12.5
million, of which $11.3 million was a non-cash equity issuance, representing the
fair value of the Company's common stock issued in the Advisor Merger. The
Company and the Advisor merged effective 12:01a.m. on January 1, 2002. As a
result, the Company became self-advised and commencing January 1, 2002 and,
thereafter, will directly incur the cost of $1,923,821.
The Company may raise additional equity dependent upon market conditions and
other factors.
The Company believes it has adequate financial resourcesall overhead necessary to meet its
obligations as they come due and fund dividends as well as to actively pursue
its investment policy and share repurchase program.
Results of Operationsoperate
the Company.
Year Ended December 31, 2000, Compared to Year Ended December 31, 1999
During the year ended December 31, 2000, total interest income earned by
the Company increased $10.6 million, (41%)or 41%, compared to total interest income
earned in 1999. This increase is primarily attributable to a 33% growth in the
Company's average interest earning assets from $382 million to $507 million for
the years ended December 31, 1999 and 2000, respectively. Also contributing to
the increase was a 6.4% growth in the yield on the Company's interest earning
assets from 6.72% per annum in 1999 to 7.15% per annum in 2000.
The Company's interest expense increased $11.6 million, (63%)or 63%, for the
year ended December 31, 2000 compared to 1999 due to a 40% increase in the
average repurchase agreement balance from $321 million in 1999 to $450 million
in 2000, as well as an increase in the average interest cost from 5.75% per annum
in 1999
to 6.68% per annum in 2000. The Company had outstanding borrowings of $449 million at
December 31, 2000 compared to $452 million at December 31, 1999.
The Company's net interest rate margin was 1.22% for the year ended December
31, 2000 compared to 1.89% for the year ended December 31, 1999. As a result of
the narrowing of such margin, net interest and dividend income decreased $1.0
million, (14%)or 14%, from $7.2 million to $6.2 million for the years ended December
31, 1999 and 2000, respectively.
Income from other investments increased from $3.0 million to $3.7 million
for the years ended December 31, 2000 and 1999, respectively. Included in such
income for the year ended December 31, 2000 is a gain of approximately $2.6
million which resulted from the sale of the underlying real estate of an
unconsolidated real estate limited partnership. Included in such income for the
year ended December 31, 1999 is approximately $2.2 million attributable to a
gain recognized by a non-consolidated subsidiary's sale of its undivided
interests in the net assets of four assisted living centers. Excluding such
sales, income from other investments increased $0.3 million$225,000 due to higher income
generated by the Company's investments in unconsolidated real estate limited
partnerships.
During the year ended December 31, 2000, the Company realized a net gain
of $0.5 million$456,000 on the sale of investments compared to a net gain of $0.1 million$55,000 during
the year ended December 31, 1999. Such gains resulted from the sale of corporate
debt and equity securities and the sale and/or payoff of several pools of fixed-rate mortgage securities.fixed
rate MBS.
General and administrative expenses of the Company decreased $0.2 million (8%)$215,000, or
8%, for the year ended December 31, 2000 compared to the same period of 1999. Approximately
$0.1 million$100,000 of such decrease is due to expenses incurred in 1999 by a consolidated
subsidiarywhichsubsidiary, which was liquidated in December 1999. The remaining $0.1 millionremainder of the
decrease is primarily attributable to net decreases in various general and
administrative expenses, including various servicing fees, filing fees and
printing costs.
Year Ended18
CRITICAL ACCOUNTING POLICIES
Management has the obligation to insure that its policies and
methodologies are in accordance with generally accepted accounting principles.
During 2001 management reviewed and evaluated its critical accounting policies
and believes them to be appropriate.
The Company's financial statements include the accounts of the Company and
all majority owned and controlled subsidiaries. The preparation of financial
statements in accordance with generally accepted accounting principles requires
management to makes estimates and assumptions in certain circumstances that
affect amounts reported in the accompanying consolidated financial statements.
In preparing these financial statements, management has made its best estimates
and judgements of certain amounts included in the financial statements, giving
due consideration to materiality. The Company does not believe that there is a
great likelihood that materially different amounts would be reported related to
accounting policies described below. However, application of these accounting
policies involves the exercise of judgement and use of assumptions as to future
uncertainties and, as a result, actual results could differ from these
estimates.
The Company's accounting policies are described in Note 2 to the Company's
financial statements, included in Item 8. Management believes the more
significant of these to be as follows:
Revenue Recognition
The most significant source of the Company's revenue is derived from its
investments in MBS. The Company reflects income using the effective yield
method, which recognizes periodic income over the expected term of the
investment on a constant yield basis, as adjusted for actual prepayment
activity.Management believes the Company's revenue recognition policies are
appropriate to reflect the substance of the underlying transactions.
Other-than-temporary impairment of investments
The Company's accounting policies require that management review its
investment portfolio for potential "other-than-temporary" declines in vale on an
investment-by-investment basis. The majority of the Company's investments are in
MBS which are agency sponsored or credit enhanced and which management considers
it unlikely that these securities, because of their nature, will experience
substantial declines in value that are due to other-than-temporary market
fluctuations. For the companies other non-real estate investments, management
assesses on a quarterly basis significant declines in value which may be
considered other than temporary and, if necessary, recognizes and accounting
charge to write-down the carrying value of such investments. In making this
assessment, management takes into consideration a wide range of objective and
subjective information including but not limited to the following: the magnitude
and duration of historical decline in market prices, credit rating activity,
assessments of liquidity and public filings and statements made by the issuer.
Actual losses, if any, could ultimately differ from these estimates.
Impairment of Long-Lived Assets
Real estate investments held directly or through joint ventures represent
"long-lived" assets for accounting purposes. The Company periodically reviews
long-lived assets to be held and used in operations for impairment in value
whenever any events or changes in circumstances indicate that the carrying
amount of the assets may not be recoverable. In management's opinion, based on
this analysis, real estate assets and investments in joint ventures are
considered to be held for investment and are not carried at amounts in excess of
their estimated recoverable amounts.
Income Taxes
The Company's financial results generally do no reflect provisions for
current or deferred income taxes. Management believes that the Company has and
intends to continue to operate in a manner that will continue to allow it to be
taxed as a real estate investment trust and as a result does not expect to pay
substantial corporate level taxes. Many of these requirements, however, are
highly technical and complex. If the Company were to fail to meet these
requirements, the Company would be subject to Federal income tax.
New Accounting Pronouncements
In June 1998, the Financial Accounting Standards Board ("FASB") issued
Financial Accounting Standards ("FAS") No. 133, "Accounting for Derivative
Instruments and Hedging Activities" ("FAS 133"). Certain provisions of FAS 133
were amended by Financial Accounting Standards No. 138, "Accounting for Certain
Derivative Instruments and Certain Hedging Activities" ("FAS 138") in June,
2000. These statements provide new accounting and reporting standards for the
use of derivative instruments. Prior the adoption of FAS 133, the Company did
not engage in hedging activities as defined in FAS 133 and FAS 138, although it
was not precluded from doing so, for
19
the purposes of managing interest rate risk. As of January 1, 2001, the Company
had no outstanding derivative hedging instruments nor any imbedded derivatives
requiring bifurcation and separate accounting under FAS 133, as amended.
Accordingly, there was no cumulative effect upon adoption of FAS 133, as
amended, on January 1, 2001. Subsequent to the adoption of FAS 133, as amended,
the Company has applied the provisions of FAS 133, as amended.
In September, 2000, the FASB issued FAS No. 140, "Accounting for Transfers
and Servicing of Financial Assets and Extinguishments of Liabilities" ("FAS
140"). This statement is applicable for transfers of assets and extinguishments
of liabilities occurring after March 31, 2001. The Company adopted the
provisions of this statement as required for all transactions entered into on or
after April 1, 2001. The adoption of FAS 140 did not have a significant impact
on the Company.
In July, 2001, the FASB issued FAS No. 141, "Business Combinations" and
FAS No. 142, "Goodwill and Other Intangible Assets" ("FAS 142") which provide
guidance on how entities are to account for business combinations and for the
goodwill and other intangible assets that arise from those combinations or are
acquired otherwise. These standards became effective for the Company on January
1, 2002.
FAS 142 requires that goodwill no longer be amortized, but instead be
tested for impairment at least annually. As of the date of adoption, the Company
had unamortized goodwill in the amount of approximately $7,189,000. Amortization
expense related to such goodwill was approximately $200,000 for the years ended
December 31, 1999, Compared2001 and 2000 and $187,000 for the year ended December 31, 19899.
The Company's adoption of FAS 142 effective January 1, 2002, did not have a
material effect on the Company.
In October, 2001, the FASB issued FAS No. 144, "Accounting for the
Impairment or Disposal of Long-Lived Assets" ("FAS 144"). FAS 144 provides new
guidance on the recognition of impairment losses on long-lived assets to 1998be held
and used or to be disposed of, and also broadens the definition of what
constitutes a discontinued operation and how the results of a discontinued
operation are to be measured and presented. The provisions of FAS 144 are
effective for the Company on January 1, 2002. The adoption of FAS 144 did not
have a significant impact on the Company.
Liquidity and Capital Resources
The Company's principal sources of liquidity consist of borrowings under
repurchase agreements, principal payments received on its portfolio of MBS, cash
flows generated by operations and proceeds from capital market transactions. The
Company's principal uses of cash include purchases of MBS and, to a lesser
extent, may include investments in corporate debt and equity securities and
hedge instruments; payments for operating expenses; and the payment of dividends
on the Company's common stock.
Repurchase agreements provided an additional $1.397 billion to finance
asset growth during 2001, this increase in leverage was facilitated by the
increase in the Company's capital as a result of the public stock offerings
completed in 2001. At December 31, 2001, borrowings under repurchase agreements
were $1.846 billion, compared to $448.6 million at December 31, 2000. At
December 31, 2001, repurchase agreements had a weighted average borrowing rate
of 2.91%, on loan balances of between $209,000 and $109.5 million. These
agreements generally have original terms to maturity ranging from one month to
12 months and interest rates that are typically based off of LIBOR. To date, the
Company has not had any margin calls on its repurchase agreements that it was
unable to satisfy with either cash or additional pledged collateral.
During the year ended December 31, 1999, total interest income earned by the
- 16 -
Company increased $16.7 million compared to total interest income earned by2001, the Company completed two public
offerings, as detailed below, of its common stock, in which it issued
approximately 18.3 million shares, and its Predecessor in 1998. This increase is attributable to the
growth in the Company's interest-earning assets pursuant to its investment
strategy. In addition, the yield on the Company's interest earning assets
increased 11.3% from 6.04% per annum in 1998 to 6.72% per annum in 1999.raised net proceeds of approximately
$126.8 million. The Company's interest expense increased $13.82001 equity offerings were as follows:
(1)
Price Per Gross Offering
Settlement Date Number of Shares Share Proceeds Expenses Net Proceeds
- ----------------- ----------------- -------------- -------------- ----------------- -----------------
June 27, 2001 10,335,214 (2) $ 7.00 $72.3 million $5.2 million $67.1 million (3)
Nov. 7, 2001 8,000,000 $ 8.00 $64.0 million $4.3 million $59.7 million (3)
(1) Include commissions, discounts and other offering expenses.
(2) Includes the full exercise of the underwriters' option to purchase up to
1,335,214 additional shares to cover over-allotments for the year ended
December 31, 1999 comparedJune 27, 2001
offering.
(3) Net proceeds were fully utilized to 1998 primarily due to an increase in funds
borrowed to finance the Company's asset growth. The Company had outstanding
borrowings of $452 million at December 31, 1999 compared to $190 million at
December 31, 1998. The Company's interest cost averaged 5.75% per annum in
1999 compared to 4.86% per annum in 1998.
The Company's interestacquire additional adjustable rate margin was 1.89% for the year ended December 31,
1999 compared to 2.33% for the year ended December 31, 1998.
Income from other investments increased $2.3 millionMBS
on a leveraged basis during the year ended December 31, 1999, compared2001.
On September 25, 2001, the Company filed a registration statement with the
Securities and Exchange Commission ("SEC") relating to $300 million of its
common stock and preferred stock that the Company may offer
20
from time to time for cash in a variety of transactions, including underwritten
public offerings (the "Shelf Registration"). The common stock offering completed
by the Company in November utilized a portion of the securities registered under
this registration. As of December 31, 2001, the Company had $236 million of
securities remaining on the Shelf Registration.
To the extent the Company raises additional equity capital from future
sales of common and/or preferred stock thispursuant to the Shelf Registration,
the Company anticipates using the net proceeds primarily to acquire additional
adjustable rate MBS. Management may also consider additional interests in
multifamily apartment properties and other investments consistent with its
operating policies. There can be no assurance, however, that the Company will be
able to raise additional equity capital at any particular time or on any
particular terms.
On January 18, 2002, the Company issued 7,475,000 shares of its common
stock, generating net proceeds of approximately $58.2 million in a public
offering. These shares were issued at $8.25 per share, generating gross offering
proceeds, before expenses, of approximately $61.7 million. The net proceeds were
fully invested and will be fully leveraged to acquire additional MBS during the
first quarter of 2002. Following the completion of the January 2002 equity
offering, the Company had approximately $174.3 million remaining on the Shelf
Registration.
During 2001, principal payments on MBS, generated cash of approximately
$293.6 million and operations provided a net of approximately $21.7 million in
cash. In addition, the Company also received proceeds of $15.1 million from the
sale of investments in corporate debt and equity securities during 2001.
As part of its core investing activities, during 2001, the Company
acquired $1.753 billion of MBS. Other uses of funds during the year ended
December 31, 1998.
Approximately $2.22001, included $10.7 million for dividend payments on the Company's
common stock.
In order to reduce interest rate risk exposure on a portion of suchthe
Company's LIBOR-based repurchase agreements, the Company entered into an
interest rate Cap Agreement, costing $350,000. (See "Quantitative and
Qualitative Disclosures About Market Risk"). Additional purchases of Cap
Agreements are expected during 2002, which will generate cash if interest rates
increase is attributable tobeyond the sale by a
non-consolidated subsidiary of its undivided interestsrate specified in the net assetsindividual agreement. In addition, the
Company invested $392,000 in corporate equity securities during 2001.
The Company's restricted cash balance represents cash held on deposit with
certain counterparties (i.e., lenders) to satisfy margin calls on repurchase
agreements. The margin calls result from the decline in the value of four assisted living centers. The remaining decrease of approximately $0.1
million isthe MBS
securing repurchase agreements, generally due to aprincipal reduction in the amount of income generated on the
Company's investments in real estate limited partnerships. During the year
endedMBS
from scheduled amortization and prepayments. At December 31, 1999,2001, the Company
realizedhad approximately 49% of its repurchase agreements scheduled to roll (i.e., is
contractually mature and payable to the counterparty) within the first three
months of 2002, as reflected in the $39.0 million increase, comparing restricted
cash as of December 31, 2001 to December 31, 2000. At the time a gain of $0.1 million on the
sale of investments whereasrepurchase
agreement rolls counterparty), the Company realized a gain of $0.4 million duringwill apply the comparable period in 1998. The majorityrestricted cash
against the repurchase agreement, thereby reducing the borrowing.
Through December 31, 2001, the primary components of the gain realized in 1998 was
due to the payoff of a participating loan acquired by the Company in the
Merger.
General and administrative expenses of the Company in 1999 increased $0.6
million as compared to that of the Company and the Predecessor in 1998.
Approximately $0.4 million of such increase is attributable to non-recurring
incentive compensation earned by the Company's Advisor as a result of the sale
by a non-consolidated subsidiary of its undivided interests in the net assets
of four assisted living centers as described in Note 6 to the Company's
consolidated and combined financial statements. The remaining increase of
approximately $0.2 million was due to: (i) an increase of $0.3 million in
incentive compensation earned by the Advisor due to the improved financial
results of the Company, and (ii) an increase of $0.2 million in base
management fees earned by the Advisor primarily due to the Company operating a
full year in 1999 compared to operating approximately nine months in 1998
offset by (iii) a decrease of $0.3 million in other general
and administrative expenses primarily attributablewere the base advisory and incentive fees paid to
the differenceAdvisor. Effective January 1, 2002, the Company became a self-advised REIT,
and thereafter will directly incur all cost associated with conducting the
Company's business. Management bbelieves that, under current market conditions,
the additional costs incurred in scopeoperating MFA on a self-advised basis will be
less than the amount of the fees that would be payable to the Advisor had the
Company remained an "externally-advised" REIT. However, there can be no
assurance that the Company's expenses will actually be lower as a self-advised
REIT.
The Company believes it has adequate financial resources to meet its
obligations as they come due and to fund committed dividends as well as to
actively pursue its investment policies.
INFLATION
Virtually all of the Company's operationsassets and liabilities are financial in
1999 comparednature. As a result, interest rates and other factors drive our performance far
more than does inflation. Changes in interest rates do not necessarily correlate
with inflation rates and changes in inflation rates. Our financial statements
are prepared in accordance with Generally Accepted Accounting Principles and our
dividends are based upon our net income as calculated for tax purposes; in each
case, our activities and balance sheet are measured with reference to historical
cost or fair market value without considering inflation.
OTHER MATTERS
The Company at all times intends to conduct its business so as to not
become regulated as an investment company under the Investment Act. If the
Company were to become regulated as an investment company, then,
21
among other things, the Company's ability to use leverage would be substantially
reduced. The Investment Act exempts entities that are "primarily engaged in the
business of purchasing or otherwise acquiring "Qualifying Interests. Under the
current interpretation of the staff of the SEC, in order to qualify for this
exemption, the Company must maintain at least 55% of its assets directly in
Qualifying Interests. In addition, unless certain securitiesMBS represent an
undivided interest in the entire pool backing such MBS (i.e., "whole pool" MBS),
such MBS may be treated as securities separate from the underlying mortgage loan
and, Predecessorthus, may not be considered Qualifying Interests for purposes of the 55%
exemption requirement. Accordingly, the Company monitors its compliance with
this requirement in 1998.
Forward Looking Statementsorder to maintain its exempt status. As of December 31,
2001, the Company determined that it is in and has maintained compliance with
this requirement.
FORWARD LOOKING STATEMENTS
When used in this Annual Report on Form 10-K, in future SEC filings, or in
press releases or other written or oral communications, the words or phrases
"will likely result",result," "are expected to",to," "will continue",continue," "is anticipated", "estimate",anticipated,"
"estimate," "project" or similar expressions are intended to identify
"forward looking"forward-looking statements" withinfor purposes of Section 27A if the meaningSecurities Act
of 1933, as amended, and Section 21E of the Private Securities Litigation ReformExchange Act of 1995. The Company cautions that1934, as
amended and as such forward lookingmay involve know and unknown risks, uncertainties and
assumptions.
These forward-looking statements speak only as ofare subject to various risks and
uncertainties, including, but not limited to, those relating to: increases in
the date made and that various factors including regional
and national economic conditions,prepayment rates on the mortgage loans securing the Company's MBS; changes
in levels of marketshort-term interest rates, creditrates; the Company's ability to use borrowings to finance
its assets; risks associated with investing in real estate, including changes in
business conditions and otherthe general economy; changes in government regulations
affecting the Company's business; and the Company's ability to maintain its
qualification as a REIT for federal income tax purposes. These risks,
of lendinguncertainties and investment activities, and
competitive and regulatory factors could affectcause the Company's financial
performance and could cause actual results for future periods to differ
materially from those anticipated or projected.
Theprojected in any forward-looking statements it makes.
All forward-looking statements speak only as the date they are made and
the Company does not undertake, and specifically disclaims, any obligation to
update any forward-looking statementsstatement to reflect events or circumstances after
the date of such statements. Readers are cautioned that the Company's actual
results could differ materially from those set forth in such forward-looking
statements.
Item 7A. Quantitative and Qualitative Disclosures About Market Risk.
The Company seeks to manage the interest rate, market value, liquidity,
prepayment and credit risks inherent in all financial institutions in a prudent
manner designed to insure the longevity of the Company while, at the same time,
seeking to provide an opportunity to shareholdersstockholders to realize attractive total
rates of return through stock ownership of the Company. While the Company does
not seek to avoid risk, it does seek, to the best of its ability, to assume risk
that can be quantified from historical experience, to actively manage such risk,
to earn sufficient compensation to justify the - 17 -
taking of such risks and to
maintain capital levels consistent with the risks it does undertake.
Interest Rate RiskINTEREST RATE RISK
The Company primarily invests in fixed-rate,adjustable rate and hybrid and adjustable-rate
mortgage investments.MBS. The
hybrid investmentshybrid-MBS represent fixed-ratefixed rate coupons for a givenspecified period, generally three
years, and thereafter converts to a variable rate coupons thereafter.coupon. The Company's debt
obligations are generally repurchase agreements of limited duration, which are
periodically refinanced at new market rates.
Most of the Company's adjustable-rateadjustable rate assets are dependent on the one-year
CMT rate and debt obligations are generally dependent on LIBOR. These indexes
generally move in parallel, but there can be no assurance that this will
continue to occur.
The Company's adjustable-rateadjustable rate investment assets and debt obligations reset
aton various different dates for the specific asset or obligation. In general, the
repricing of the Company's debt obligations occurs more quickly than on the
Company'srepricing of assets. Therefore, on average, the Company's cost of funds may rise
or fall more quickly than does its earnings rate on the assets. Further, the
Company's net income may vary somewhat as the yield curve between one-month
interest rates and sixsix-and 12-month interest rate varies.
The following table presents the Company's interest rate risk using the
static gap methodology. The table presents the difference between the carrying
value of the Company's interest rate sensitive assets and twelve monthliabilities at
December 31, 2001, based on the earlier of term to repricing or the term to
repayment of the asset or liability, scheduled principal amortization is not
reflected in the table. Further, the adjustable rate MBS can be prepaid before
22
contractual amortization and/or maturity, which is also not reflected in the
table. The table does not include assets and liabilities that are not interest
rates varies.rate sensitive.
As of December 31, 2000,2001, the Company's investment assets and debt
obligations will prospectively reprice based on the following time frames:
Assets Debt Obligations
------------------------ ------------------------
Amount PercentAs of Amount Percent ofDecember 31, 2001
------------------------------------------------------------------------------
Two
Less than Three One Year Years to Beyond
Three Months to to Two Year Three
Months One Year Years Three Years Total
Total
Investments Investments(In Thousands) --------- ----------- --------- -------- ----------- ------- ---------------------
Investment type/rate reset dates
Fixed-Rate Investments $ 44.3 9% $ - -
Interest Earning Assets:
Adjustable Rate Investments/Obligations:
Less than 3 months 73.4 15% 448.6 100%
Greater than 3 months and less than 1 year 324.7 65% - MBS $ 281,498 $ 521,375 $ 522,344 $590,163 -- $1,915,380
Fixed-Rate - Greater than 1 year and less than 2 years - - - -
Greater than 2 years and less than 3 years 52.9 11% - -
Greater than 3 years and less than 4 years - - - -
Greater than 4 years and less than 5 years - - - -MBS -- -- -- -- 11,520 11,520
Debt Securities -- -- -- -- 9,774 9,774
Equity Securities 4,088 -- -- -- -- 4,088
--------- ----------- --------- -------- ------- ------ ------ -----
451.0 91% 448.6 100%----------
Total interest-earning
assets 285,586 521,375 522,344 590,163 21,294 1,940,762
Interest Bearing Liabilities:
Repurchase agreements 912,361 933,237 -- -- -- 1,845,598
--------- ----------- --------- -------- ------- ------ ------ ---------------
Total interest-bearing
liabilities 912,361 933,237 -- -- -- 1,845,598
Interest sensitivity gap $(626,775) $ 495.3 100%(411,862) $ 448.6 100%
======= ====== ====== =====
Weighted average roll date
of adjustable-rate
investments/obligations 9 months 1 month522,344 $590,163 $21,294 $ 95,164
Cumulative interest
sensitivity gap $(626,775) $(1,038,637) $(516,293) $ 73,870 $95,164
Market Value RiskThe difference between assets and liabilities repricing or maturing in a
given period is one approximate measure of interest rate sensitivity. When more
assets than liabilities reprice during a period, the gap is considered positive
and it is anticipated that earnings will increase as interest rates rise and
earnings will decrease as interest rates decline. When more liabilities reprice
than assets during a given period, as is the case with respect to the Company
for periods less than one year, the gap is considered negative. With a negative
gap it is anticipated that income will decline as interest rates increase and
income will increase as interest rates decline. The static gap analysis does not
reflect the constraints on the repricing of adjustable rate MBS in a given
period resulting from periodic and life time cap features on these securities,
nor the behavior of various indexes applicable to the Company's assets and
liabilities.
To a limited extent, the Company uses interest rate Cap Agreements as part
of its interest rate risk management. The notional amounts of these instruments
are not reflected in the Company's balance sheet. The Cap Agreements that hedge
against increases in interest rates on the Company's LIBOR-based repurchase
agreements are not considered in the static gap analysis, as they do not effect
the timing of the repricing of the instruments they hedge, but rather to the
extent of the notional amount, cap the limit on the amount of interest rate
change that can occur relative to the applicable of the hedged liability.
MARKET VALUE RISK
Substantially all of the Company's investments are designated as
"available-for-sale" assets. As such, they are reflected at their estimated fair
value, (i.e. market value) with the adjustment todifference between amortized cost and fair value reflected as part ofin
accumulated other comprehensive income, which isa component of stockholders' equity.
(See Note 13 to the accompanying financial s statements included in the equity section of the Company's
balance sheet. (See Note 2 to the Company's consolidated financial
statements.Item 8.) The
market value of the Company's MBS assets can fluctuate primarily due to changes in
interest rates and other factors.
Liquidity Riskfactors; however, given that these securities are
guaranteed by an agency of the U. S. Government, such fluctuations are generally
not based on the underlying credit worthiness. To a lesser extent, the Company
designates certain corporate debt securities as held-to-maturity. These debt
securities, which are generally carried at amortized cost, comprised less than
1% of the Company's total assets at December 31, 2001 and are not considered
"core" investments of the Company. However, any investment which suffers an
impairment that is deemed to be other-than-temporary, whether designated as
available-for-sale or held-to-maturity, will have its cost basis reduced and a
corresponding charge made against earnings for the portion of the impairment
that is identified as other-than-temporary. (See "Risk Factors - Risks of
Decline in Market Value")
LIQUIDITY RISK
The primary liquidity risk of the Company arises from financing
long-maturity mortgage assets with short-term debt.debt in the form of repurchase agreements.
The Company had no long-term debt at - 18 -
December 31, 2000.2001. Although the
23
interest rate adjustments of these assets and liabilities are matched within the
Company's operating policies, maturities are not matched.
The Company's assets which are pledged to secure short-term borrowings are
high-quality, liquid assets. As a result, the Company has not had difficulty
rolling over (i.e., renewing) its short-term debt as it matures. Still,However, the
Company cannot give assurances that it will always be able to roll over its
short-term debt. At December 31, 2000,2001, the Company had unrestricted cash and cash equivalents
of $8.4$58.5 million available to meet margin calls on short-term debt that could be caused by
asset value declines or changes in lender over-collateralization requirements.
Such unrestricted cash is approximately 2% of short-term debt.
Prepayment Riskrepurchase agreements and for
other corporate purposes.
PREPAYMENT AND REINVESTMENT RISK
As the Company receives repayments of mortgage principal it amortizes intoon its MBS, premiums on
the corresponding securities are amortized and amortization is netted against
interest income, its mortgage premium balances as a reductiondiscounts on MBS are accreted to income and its mortgage
discount balances as an increase to income. Mortgage premium balancesinterest
income reported. Premiums arise when the Company acquires mortgage assetsa MBS at a price in
excess of the principal value of the mortgages or when an asset appreciates and is
marked-to-marketpar value if purchased at a price above par. Mortgage discount balancesthe
original issue. Conversely, discounts arise when the Company acquires mortgage assetsa MBS at a
price below the principal value of the mortgages, or when an asset depreciates and is marked-to-marketpar, if purchased at
a price
below par.original issue. For financial accounting purposes, the premium is amortized
based
onusing the effective yield method, which reflects the effect of prepayments on
amortization of premium and accretion of discounts. Greater than anticipated
prepayments will accelerate the asset at each financial reporting date.amortization of premiums, thereby reducing
interest income.
For tax accounting purposes, the premium is amortized based on the asset
yield at the purchase date. Therefore, if prepayments are higher than anticipated, it is
anticipated that the yieldon a tax basis, amortization of premiums
will differ from those reported for financial accounting purposes will decline and
there will be greater premium amortization under tax accounting requirements
than for financial accounting purposes. At December 31, 2000,2001,
the gross unamortized mortgage premium balances offor adjustable rate assetsMBS for financial accounting
purposes was $7.2$37.5 million (1.4%(2.0% of total assets) and $9.7the adjustable rate MBS ) compared with
$35.4 million for federal tax purposes (1.8% of total assets).purposes.
In general, the Company believes it will be able to reinvest proceeds from
scheduled principal payments and prepayments at acceptable yields; however, no
assurances can be given that, should significant prepayments occur, market
conditions would be such that acceptable investments could be identified and the
proceeds reinvested.
Tabular PresentationTABULAR PRESENTATION
The information presented in the following table, below, projects the impact of
changes in interest rates on 20012002 projected net income and net assets as more fully
discussed below based on
the investments in placethe Company's portfolio on December 31, 2000,2001, and includes
all the Company's interest-rate sensitive assets and liabilities. The Company
acquires interest-rate sensitive assets and funds them with interest-rate
sensitive liabilities. The Company generally plans to retain such assets and the
associated interest rate risk to maturity.
The table below includes information about the possible future repayments and
interest rates of the Company's assets and liabilities and constitutes a
"forward-looking statement." There are manyChange in Percentage Change Percentage Change
Interest Rates in Net Income in Net Assets
-------------- ------------- -------------
+ 2.00% - 18.82% - 14.29%
+ 1.00% - 10.28% - 5.35%
0 0 0
- 1.00% + 11.86% + 8.60%
- 2.00% + 21.58% + 14.06%
Many assumptions used to generate this information and there can be no
assurance that assumed events will occur as assumed or that other events will
not occur that would affect the outcomes.
Furthermore, future sales, acquisitions, calls,outcomes and restructuring could
materially change the Company's interest rate risk profile.therefore constitutes a
forward-looking statement. The table quantifies the potential changes in net
income should interest rates go up or down (shocked)("shocked") by 100 and 200 basis
points, assuming the yield curves of the rate shocks will be parallel to each
other. The cash flows associated with the adjustable rate securitiesassets, which are
entirely comprised of adjustable rate MBS, for each rate shock are calculated
based on a variety of assumptions, including prepayment vectors, repurchase rates,
repurchase haircuts, yield on
reinvestment of prepayment,reinvested prepayments and scheduled amortization and growth in the portfolio.
Assumptions made on the interest rate sensitive liabilities, which are entirely
comprise of repurchase agreements, include anticipated interest rates on
repurchase agreements, collateral requirements as a percent of the repurchase
agreement and amount of borrowing. Furthermore, future sales, acquisitions,
calls, and restructuring could materially change the Company's interest rate
risk profile.
When interest rates are shocked, these prepayment assumptions are further
adjusted based on management's best estimate of the effects of changes on
interest rates or prepayment speeds. For example, under current market
conditions, a 100 basis point decline in interest rates is estimated to result
in a 275%33% increase in the prepayment rate of the ARMadjustable rate MBS portfolio.
The base interest rate scenario assumes interest rates at December 31, 2000.2001.
Actual results could differ significantly from those estimated in the table.
- 19 -
As of December 31, 2000, all interest-rate sensitive liabilities were scheduled
to mature in 2001.
Change in Percentage Change Percentage Change
Interest Rates in Net Income in Net Assets
-------------- ----------------- -----------------
-2% +56.5% +2.6%
-1% +28.6% +0.5%
0 0.0 0.0
1% -11.7% -0.8%
2% -22.5% -1.7%
- 20 -24
Item 8. Financial Statements and Supplementary Data.
Index to Financial Statements
Financial Statements: Page
Report of Independent Accountants........................................22
Consolidated Balance Sheets
Page
Report of Independent Accountants .................................................................................... 26
Financial Statements:
Statements of Financial Condition of the Company as of December 31, 2001 and December 31, 2000........................ 27
Statements of Income of the Company for the years ended December 31, 2001, 2000 and 1999.............................. 28
Statements of Changes in Stockholders' Equity of the Company for the years ended December 31, 2001, 2000 and 1999..... 29
Statements of Cash Flows of the Company for the years ended December 31, 2001, 2000 and 1999.......................... 30
Notes to Financial Statements of Company ............................................................................. 31
2000, and
December 31, 1999........................................................23
Consolidated Statements of Income of the Company for the years
ended December 31, 2000 and 1999 and for the period from April 10, 1998
through December 31, 1998, and Combined Statements of Income of the
Predecessor from January 1, 1998 through April 9, 1998...................24
Consolidated Statements of Stockholders' Equity of the Company for the
years ended December 31, 2000, 1999 and 1998, and Combined Statements of
Partners' Capital of the Predecessor from January 1, 1998 through April 9,
1998.....................................................................25
Consolidated Statements of Cash Flows of the Company for the years ended
December 31, 2000 and 1999, and for the period from April 10, 1998 through
December 31, 1998, and Combined Statements of Cash Flows of the
Predecessor from January 1, 1998 through April 9, 1998 ..................27
Notes to Consolidated and Combined Financial Statements of Company and
the Predecessor..........................................................29
All other schedules are omitted because they are not applicable or the required
information is shown in the consolidated or combinedfinancial statements or notes thereto.
Financial statements of one 95%-owned company, twoand the four real estate
limited partnerships, in which the Company owns 99% limited partnership interestsbetween 50% and two real estate limited partnerships in which the Company owns 50%99% limited
partnership interests have been omitted because the Company's proportionate
share of the income from continuing operations before income taxes is
significantly less than 20% of the Company's respective consolidated amount, and the
investment in, and advances to, each entity on an individual basis and in the
aggregate is less than 20% of consolidated total assets.
- 21 -
Report of Independent Accountants25
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors and Stockholders of
America First Mortgage Investments, Inc.
In our opinion, the accompanying consolidated balance sheetsstatements of financial condition and the
related statements of income, shareholders'changes in stockholders' equity and cash flows
present fairly, in all material respects, the financial position of America
First Mortgage Investments, Inc. and its subsidiaries (the "Company") at December 31, 20002001 and 1999,2000,
and the results of theirits operations and theirits cash flows for each of the yearthree years
in the period ended December 31, 2000 and 1999 and for the period from April 10, 1998
to December 31, 1998, and the results of operations and cash flows of America
First Participating/Preferred Equity Mortgage Fund Limited Partnership and
America First Participating/Preferred Equity Mortgage Fund (the "Fund") for
the period from January 1, 1998 to April 9, 19982001 in conformity with accounting principles
generally accepted in the United States of America. These financial statements
are the responsibility of the Company's management; our responsibility is to
express an opinion on these financial statements based on our audits. We
conducted our audits of these statements in accordance with auditing standards
generally accepted in the United States of America, 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 our opinion.
PricewaterhouseCoopers LLP
New York, New York
JanuaryMarch 12, 2002
26
2001
- 22 -
AMERICA FIRST MORTGAGE INVESTMENTS, INC.
CONSOLIDATED BALANCE SHEETSSTATEMENTS OF FINANCIAL CONDITION
As of As of
Dec.(In Thousands, Except Share and per Share Amounts) At December 31,
-------------------------
2001 2000
Dec. 31, 1999
--------------- -------------------------- ---------
Assets
Investment in mortgageMortgage backed securities (Note 3) $ 470,575,671 $ 475,719,711
Investment in corporate debt securities("MBS") (Note 4) 15,665,727 8,020,026
Investment in corporate equity securities (Note 5) 9,010,538 3,130,823$ 1,926,900 $ 470,576
Cash and cash equivalents Unrestricted 8,400,539 19,895,83358,533 8,401
Restricted 498,875 3,709,577cash 39,499 499
Corporate debt securities (Note 5) 9,774 15,666
Corporate equity securities (Note 6) 4,088 9,011
Accrued interest and dividends receivable 3,433,256 2,855,32112,340 3,433
Other investments (Note 6) 6,540,570 3,220,3467) 9,800 6,977
Interest rate cap agreements (Note 8) 513 --
Goodwill, net 7,388,247 7,587,9487,189 7,388
Other assets 976,889 244,888
--------------- ---------------297 539
----------- ---------
$ 522,490,3122,068,933 $ 524,384,473
=============== ===============522,490
=========== =========
Liabilities
Repurchase agreements (Note 7)9) $ 448,583,4321,845,598 $ 452,101,803448,583
Accrued interest payable 2,038,887 2,778,84211,387 2,039
Dividends payable 7,718 1,406
Accounts payable 550,209 595,805
Dividends or distributions payable 1,406,288 1,293,410
--------------- ---------------
452,578,816 456,769,860
--------------- ---------------606 550
----------- ---------
1,865,309 452,578
----------- ---------
Commitments and contingencies (Note 10) -- --
Stockholders' Equity
Common stock, $.01 par value; 375,000,000 shares
authorizedauthorized; 28,348,601 and 8,692,825 and 8,978,642 issued and
outstanding in 2001 and 2000, and 1999, respectively
86,928 89,786(Note 11) 283 87
Additional paid-in capital 74,362,801 75,831,560212,536 74,363
Accumulated deficit (440,084) (2,877,971)(13,704) (440)
Accumulated other comprehensive income (4,098,149) (5,428,762)
--------------- ---------------
69,911,496 67,614,613
--------------- ---------------(loss) 4,509 (4,098)
----------- ---------
203,624 69,912
----------- ---------
$ 522,490,3122,068,933 $ 524,384,473
=============== ===============522,490
=========== =========
The accompanying notes are an integral part of the consolidated and combined financial statements.
- 23 -27
AMERICA FIRST MORTGAGE INVESTMENTS, INC.
CONSOLIDATED AND COMBINED
STATEMENTS OF INCOME
For the Year Ended December 31,
1998
-----------------------------------------------
Company Company Company Company and
For the For the Predecessor
Year Ended Year Ended From April 10 Through
Dec. 31,-----------------------------------------
2001 2000 Dec. 31, 1999
to Dec. 31, 1998 April 9, 1998 Total
---------------- --------------- --------------- --------------- ------------ ---------- ----------
Mortgage securities(In Thousands, Except Share and Per Share
Amounts)
Interest and Dividend Income:
MBS income $ 33,390,49453,387 $ 24,302,40133,391 $ 7,626,742 $ 613,793 $ 8,240,53524,302
Corporate debt securities income 1,335,974 674,747 164,738 - 164,7381,610 1,336 675
Dividend income 928,310 331,233 - - -666 928 331
Interest income on temporary cash investments 645,013 365,897 439,889 148,799 588,688
---------------- --------------- --------------- --------------- -------------842 645 366
------------ ---------- ----------
Total interest and dividend income 36,299,791 25,674,278 8,231,369 762,592 8,993,96156,505 36,300 25,674
------------ ---------- ----------
Interest expense on borrowed funds 30,103,076 18,465,529 4,619,500 - 4,619,500
---------------- --------------- --------------- ---------------35,073 30,103 18,466
------------ ---------- ----------
Net interest and dividend income 6,196,715 7,208,749 3,611,869 762,592 4,374,461
---------------- --------------- --------------- ---------------21,432 6,197 7,208
------------ ---------- ----------
Other Income (Loss):
Income from other investments 3,670,199 3,012,688 581,716 145,167 726,8833,137 3,670 3,013
Net gain (loss) on sale of investments 456,398 54,994 414,951 - 414,951
---------------- --------------- --------------- ---------------(438) 456 55
Other-than-temporary impairment of corporate
debt securities (Note 5) (2,453) -- --
------------ 4,126,597 3,067,682 996,667 145,167 1,141,834
---------------- --------------- --------------- ------------------------- ----------
Total other income 246 4,126 3,068
------------ ---------- ----------
Operating and Other Expenses:
Costs incurred in acquiring external advisor
(Note 3) 12,539 -- --
General and administrative expenses 2,457,196 2,672,333 1,674,114 421,293 2,095,4075,355 2,457 2,672
Minority interest in consolidated
partnership (Note 1) - 4,218 3,353 - 3,353
---------------- --------------- --------------- ----------------- -- 4
------------ 2,457,196 2,676,551 1,677,467 421,293 2,098,760
---------------- --------------- --------------- ------------------------- ----------
17,894 2,457 2,676
------------ ---------- ----------
Net income $ 7,866,1163,784 $ 7,599,8807,866 $ 2,931,069 $ 486,466 $ 3,417,535
================ =============== =============== =============== =============7,600
============ ========== ==========
Income and Cash Dividends Per Share:
Net income basic, per share - basic $ .890.25 $ .840.89 $ 0.32 N/A
================ =============== =============== ===============0.84
Weighted average shares outstanding - basic 15,228,975 8,869,456 9,046,467
Net income fully diluted, per share - diluted $ .890.25 $ .840.89 $ 0.32 N/A
================ =============== =============== ===============
Net income, basic, per unit N/A $ 0.08
=============== ===============
Net income, fully diluted, per unit N/A $ 0.08
=============== ===============
Net income allocated to:
General Partner $ 3,931
BUC Holders 482,535
---------------
$ 486,466
===============0.84
Weighted average number of shares outstanding basic 8,869,456- diluted 15,330,119 8,886,667 9,046,467 9,043,172 N/A
Weighted average number of shares outstanding,
fully diluted 8,852,245 9,046,467 9,043,172
Weighted average number of units outstanding,
basic and fully diluted N/A N/A N/A 5,775,797
The accompanying notes are an integral part of the consolidated and combined financial statements.
- 24 -
AMERICA FIRST MORTGAGE INVESTMENTS, INC.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
Stockholders' Equity - Company
---------------------------------------------------------------------------------
Accumulated
Treasury Other
Common Stock Paid-in Stock Accumulated Comprehensive
# of Shares Amount Capital At Cost Deficit Income Total
------------ ------------ ------------ ---------- ----------- ------------- --------
Balance at November 11, 1997 (date of
capitalization) and
December 31, 1997 90,621 $ 906 $ 94 $ - $ - $ - $ 1,000
Effects of Merger:
Issuance of stock of the Company
in exchange for Units of
the Predecessor 5,775,797 57,758 45,126,359 - - - 45,184,117
Issuance of stock of the Company in
exchange for Units of Prep Fund 2
and Pension Fund 3,168,666 31,687 29,949,413 - - - 29,981,100
Issuance of stock options - - 942,390 - - - 942,390
Comprehensive income:
Net income - - - - 2,931,069 - 2,931,069
Other comprehensive income:
Change in classification of mortgage
securities from held-to-maturity to
available-for-sale - - - - - (704,828) (704,828)
Net unrealized holding losses
arising during the period - - - - - (352,994) (352,994)
------------ ------------ ------------ ----------- ------------- ------------ ------------
Comprehensive income - - - - 2,931,069 (1,057,822) 1,873,247
Dividends paid or accrued - - - - (7,234,050) - (7,234,050)
Common stock issued 20,058 200 184,753 - - - 184,953
------------ ------------ ------------ ------------ ------------- ------------ -----------
Balance at December 31, 1998 9,055,142 90,551 76,203,009 - (4,302,981) (1,057,822) 70,932,757
Comprehensive income:
Net income - - - - 7,599,880 - 7,599,880
Other comprehensive income:
Net unrealized holding losses
arising during the period - - - - - (4,370,940) (4,370,940)
------------ ------------ ------------ ------------- ------------ ------------ -----------
Comprehensive income - - - - 7,599,880 (4,370,940) 3,228,940
Dividends paid or accrued - - - - (6,174,870) - (6,174,870)
Common stock issued 8,100 81 39,913 - - - 39,994
Purchase of shares for treasury - - - (412,208) - - (412,208)
Retirement of treasury stock (84,600) (846) (411,362) 412,208 - - -
------------ ------------ ------------ ------------- ------------ ------------ -----------
Balance at December 31, 1999 8,978,642 89,786 75,831,560 - (2,877,971) (5,428,762) 67,614,613
Comprehensive income:
Net income - - - - 7,866,116 - 7,866,116
Other comprehensive income:
Net unrealized holding losses
arising during the period - - - - - 1,330,613 1,330,613
------------ ------------ ------------ ------------- ------------ ------------ -----------
Comprehensive income - - - - 7,866,116 1,330,613 9,196,729
Dividends paid or accrued - - - - (5,428,229) - (5,428,229)
Common stock issued 7,804 78 39,918 - - - 39,996
Purchase of shares for treasury - - - (1,511,613) - - (1,511,613)
Retirement of treasury stock (293,621) (2,936) (1,508,677) 1,511,613 - - -
------------ ------------ ------------ ------------- ------------ ------------ -----------
Balance at December 31, 2000 8,692,825 $ 86,928 $74,362,801 $ - $ (440,084) $(4,098,149)$69,911,496
============ ============ ============ ============= ============ ============ ===========
The accompanying notes are an integral part of the consolidated and combined financial statements.
- 25 -
AMERICA FIRST MORTGAGE INVESTMENTS, INC.
COMBINED STATEMENTS OF PARTNERS' CAPITAL
Partners' Capital - Predecessor
---------------------------------------------------
Exchangeable Unit
Holders
-------------------------
General
Partner # of Units Amount Total
-------- ---------- ------------ ------------
Balance at December 31, 1997 $ 100 5,775,797 $ 45,682,774 $ 45,682,874
Net income 3,931 - 482,535 486,466
Cash distributions paid or accrued (3,931) - (1,530,009) (1,533,940)
-------- ------------ ------------ -----------
Balance at April 10, 1998 100 5,775,797 44,635,300 44,635,400
-------- ------------ ------------ -----------
Accumulated other comprehensive income
Balance at December 31, 1997 - - 569,952 569,952
Other comprehensive income - - (21,235) (21,235)
-------- ------------ ------------ ------------
Balance at April 10, 1998 - - 548,717 548,717
-------- ------------ ------------ ------------
Issuance of stock of the Company in
exchange for Units of the Predecessor (100) (5,775,797) (45,184,017) (45,184,117)
-------- ------------ ------------ -------------
Total Partners' Capital-Predecessor
at April 10, 1998 $ - - $ - $ -
======== ============ ============ ==============
The accompanying notes are an integral part of the consolidated and combined
financial statements.
- 26 -28
AMERICA FIRST MORTGAGE INVESTMENTS, INC.
CONSOLIDATED AND COMBINED STATEMENTS OF CASH FLOWSCHANGES IN STOCKHOLDERS' EQUITY
For the Year Ended December 31,
1998
-----------------------------------------------
Company Company Company Company and
Predecessor
For the For the
Year Ended Year Ended From April 10 Through
Dec. 31,-----------------------------------
2001 2000 Dec. 31, 1999
to Dec. 31, 1998 April 9, 1998 Total
--------------- -------------- ----------------- --------------- ------------------- -------- --------
(In Thousands, Except Share and per Share Amounts)
Common Stock (Par value: $.01)
Balance at beginning of year $ 87 $ 90 $ 91
Retirement of treasury shares -- (3) (1)
Issuance of 1,287,501 shares in connection with
acquiring external advisor (Note 3) 13 -- --
Issuance of common shares, net of offering expenses 183 -- --
--------- -------- --------
Balance at end of year 283 87 90
--------- -------- --------
Additional Paid-in Capital
Balance at beginning of year 74,363 75,831 76,203
Issuance of common shares to directors (6,811, 7,804 and
8,100, respectively) 50 40 40
Retirement of treasury stock -- (1,508) (412)
Exercise of common stock options 128 -- --
Stock options revaluation adjustment 142 -- --
Issuance of 1,287,501 common shares in connection
with acquiring external advisor 11,253 -- --
Issuance of common shares, net of offering expenses 126,600 -- --
--------- -------- --------
Balance end of year 212,536 74,363 75,831
--------- -------- --------
Common Stock Held in Treasury, at Cost
Balance at beginning of year -- -- --
Common stock reacquired, at cost -- (1,512) (412)
Common stock retired -- 1,512 412
--------- -------- --------
Balance at end of year -- -- --
--------- -------- --------
Accumulated Deficit
Balance at beginning of year (440) (2,878) (4,303)
Net income 3,784 7,866 7,600
Cash dividends declared (17,048) (5,428) (6,175)
--------- -------- --------
Balance at end of year (13,704) (440) (2,878)
--------- -------- --------
Accumulated Other Comprehensive Income (Loss)
Balance at beginning of year (4,098) (5,429) (1,058)
Unrealized gain (loss) during year, net 8,444 1,331 (4,371)
Unrealized gain on interest rate cap agreement 163 -- --
--------- -------- --------
Balance at end of year 4,509 (4,098) (5,429)
--------- -------- --------
Total Stockholders' Equity $ 203,624 $ 69,912 $ 67,614
========= ======== ========
The accompanying notes are an integral part of the financial statements.
29
AMERICA FIRST MORTGAGE INVESTMENTS, INC.
STATEMENTS OF CASH FLOWS
Year Ended December 31,
-------------------------------------
(In Thousands) 2001 2000 1999
----------- --------- ---------
Cash flows from operating activitiesFlows From Operating Activities:
Net income $ 7,866,1163,784 $ 7,599,8807,866 $ 2,931,069 $ 486,466 $ 3,417,5357,600
Adjustments to reconcile net income
to net cash provided by operating activities:
Net (gain) loss on sale of investment securities/
other investments 438 (456) (55)
Other-than-temporary impairment recognized on
corporate debt securities 2,453 -- --
Net gain on sale of other investments (3,021,831) (54,994) (414,951) - (414,951)(2,574) (2,565) (2,163)
Minority interest in consolidated partnership - 4,218 3,353 - 3,353
Other - 44,701 - - --- -- 4
Amortization of premium (discount) 1,484,917 1,004,430 161,800 (1,959) 159,841on investments 5,355 1,485 1,005
Amortization of goodwill 199,701 187,005 146,584 - 146,584
Other amortization 207,616 233,200 - - -
Changes200 199 187
Non-cash expense incurred in assets and liabilities:
Decrease (increase)acquiring external
advisor 11,266 -- --
Increase in interest receivable (577,935) (1,301,925) (1,134,069) 8,302 (1,125,767)(8,907) (578) (1,302)
Decrease (increase) in other assets (451,393) 329,448 (252,473) 6,241 (246,232)and other 251 (243) 607
Increase (decrease) in accounts payable (45,596) 233,719 (1,860,513) 565,608 (1,294,905)56 (46) 234
Increase (decrease) in accrued interest payable (739,955) 1,983,057 795,785 - 795,785
------------- ------------- -------------- ---------------9,348 (740) 1,983
----------- --------- ---------
Net cash provided by operating activities 4,921,640 10,262,739 376,585 1,064,658 1,441,243
------------- ------------- -------------- ---------------21,670 4,922 8,100
----------- --------- ---------
Cash flows from investing activitiesFlows From Investing Activities:
Principal payments on mortgage securities 105,990,927 113,346,110 46,682,908 867,630 47,550,538MBS 293,619 105,991 113,346
Proceeds from sale of corporate equity securities 1,168,761 1,127,500 - - -6,705 1,169 1,128
Proceeds from sale of corporate debt securities 372,500 - - - -2,516 373 --
Proceeds from sale of mortgage securities 5,018,677 - - - -MBS 5,544 5,019 --
Proceeds from sale of other investments 2,565,433 - 1,290,000 - 1,290,000
Net cash from Merger - - 4,820,481 - 4,820,48119 2,565 --
Purchases of mortgage securities (106,413,464) (352,732,908) (236,107,915) - (236,107,915)MBS (1,753,323) (106,414) (352,733)
Purchases of corporate debt securities (7,718,750) (3,307,750) (4,662,500) - (4,662,500)-- (7,719) (3,308)
Purchases of corporate equity securities (6,942,511) (3,091,997) (1,081,773) - (1,081,773)(392) (6,943) (3,092)
Purchase of interest rate cap agreement (350) -- --
Decrease (increase) in other investments, (3,320,224) (2,149,060) (58,567) 42,869 (15,698)
Merger transaction costs paid - - - (729,509) (729,509)
------------- ------------- -------------- --------------- ------------excluding
gains (66) (3,320) 14
----------- --------- ---------
Net cash providedused by (used in) investing activities (9,278,651) (246,808,105) (189,117,366) 180,990 (188,936,376)
------------- ------------- -------------- ---------------(1,445,728) (9,279) (244,645)
----------- --------- ---------
Cash flows from financing activitiesFlows From Financing Activities:
Net borrowings from (payments on)(repayment of) repurchase
agreements (3,518,371) 261,851,719 190,250,084 - 190,250,0841,397,015 (3,518) 261,852
Net proceeds from common stock offering 126,783 -- --
Decrease (increase) in restricted cash 3,210,702 (3,709,577) - - -(39,000) 3,211 (3,710)
Stock purchased for retirement (1,511,613) (412,208) - - --- (1,512) (412)
Dividends and distributions paid (5,319,001) (7,334,691) (5,600,169) (1,535,007) (7,135,176)
------------- ------------- -------------- --------------- ------------(10,736) (5,319) (7,335)
Proceeds from exercise of stock options 128 -- --
----------- --------- ---------
Net cash provided by (used in) financing activities (7,138,283) 250,395,243 184,649,915 (1,535,007) 183,114,908
------------- ------------- -------------- --------------- ------------1,474,190 (7,138) 250,395
----------- --------- ---------
Net increase (decrease) in unrestricted cash and cash equivalents (11,495,294) 13,849,877 (4,090,866) (289,359) (4,380,225)
Unrestricted cash50,132 (11,495) 13,850
Cash and cash equivalents at beginning of period 19,895,833 6,045,956 10,136,822 10,426,181 10,426,181
------------- ------------- --------------- --------------- ------------
Unrestricted cash8,401 19,896 6,046
----------- --------- ---------
Cash and cash equivalents at at end of period $ 8,400,53958,533 $ 19,895,8338,401 $ 6,045,956 $ 10,136,822 $ 6,045,956
============= ============= =============== =============== =============19,896
=========== ========= =========
Supplemental disclosure of cash flow information:Disclosure Of Cash Flow Information:
Cash paid during the period for interest $ 30,843,03125,726 $ 16,482,47230,843 $ 3,823,715 $ - $ 3,823,71516,482
The accompanying notes are an integral part of the consolidated and combined financial statements.
- 27 -
Supplemental disclosure on non-cash investing activities:
The following assets and liabilities were assumed by the Company in
conjunction with the Merger and issuance of common stock (see Note 1):
From April 10 Through
to Dec. 31, 1998 April 9, 1998 Total
----------------- --------------- ------------
Mortgage securities $ 20,420,336 $ - $ 20,420,336
Accrued interest receivable 142,545 - 142,545
Other investments 175,369 - 175,369
Accounts payable 712,888 - 712,888
Distributions payable 265,545 - 265,545
The Company recorded goodwill of $7,507,902 in 1998 as a result of the
Merger. The Company recorded $413,615 of additional goodwill in 1999 due to
the resolution of contingencies associated with the Merger.
During 2000, 1999 and 1998, the Company issued 7,804, 8,100 and 7,440
shares, respectively, of common stock to its non-employee directors in
partial payment of the annual retainer paid by the Company to such
directors for the respective year. The Company also issued 12,618 shares
of common stock in 1998 to unit holders of Pension Fund who exchanged their
units of Pension Fund for shares of the Company subsequent to April 10, 1998.
The aggregate value of such common stock issued was $39,918 in 2000, $39,994
in 1999 and $184,953 in 1998.
- 28 -30
AMERICA FIRST MORTGAGE INVESTMENTS, INC.
NOTES TO CONSOLIDATED AND COMBINEDTHE FINANCIAL STATEMENTS
DECEMBER 31, 2000
1. Organization
America First Mortgage Investments, Inc. (the Company)"Company") was incorporated
in Maryland on July 24, 1997 and began operations on April 10, 1998.
On April 10, 1998, (the Merger Date) the Company and three partnerships:partnerships; America First
Participating/Preferred Equity Mortgage Fund Limited Partnership (Prep("Prep Fund
1)1"), America First Prep Fund 2 Limited Partnership (Prep("Prep Fund 2)2"), and America
First Prep Fund 2 Pension Series Limited Partnership (Pension Fund)("Pension Fund"),
consummated a merger transaction whereby theirthe pre-existing net assets and
operations orof Prep Fund 1 and Prep Fund 2 and a majority interest in the pre-existing partnershipPension
Fund were contributed to the Company in exchange for 9,035,084 shares of the
Company's common stock. For financial accounting purposes, Prep Fund 1, the largest of
the three partnerships, was considered the Predecessor entitystock (the Predecessor) and its historical operating results are presented in the
financial statements contained herein."1998 Merger"). The 1998 Merger was accounted for
using the purchase method of accounting in accordance with generally accepted
accounting principles. Prep Fund 1 was deemed to be the acquirer of the other
partnershipsPrep Fund 2
and Pension Fund under the purchase method. Accordingly, the 1998 Merger
resulted, for financial accounting purposes, in the effective purchase by Prep
Fund 1 of all the Beneficial Unit Certificates (BUCs)("BUCs") of Prep Fund 2 and
approximately 99% of the BUCs of Pension Fund. In December 1999, Pension Fund
was liquidated and dissolved during
December, 1999, and, as a result, the Company directly acquired
approximately 99% of the assets of Pension Fund. The remaining assets,
consisting solely of cash, were distributed to the remaining holders of Pension Fund BUCs.BUCs
who elected to remain in place following the 1998 Merger. As the surviving
entity for financial accounting purposes, the assets and liabilities of Prep
Fund 1 were recorded by the Company at their historical cost and the assets and
liabilities of Prep Fund 2 and Pension Fund were adjusted to fair value. The
excess of the fair value of the common stock issued over the fair value of net
assets acquired has beenwas recorded as goodwill ingoodwill.
From the accompanying balance
sheet.
Thetime of its inception, the Company has entered into an advisory agreement withwas externally managed by
America First Mortgage Advisory Corporation (the Advisor) which provides advisor services in
connection with"Advisor"), pursuant to an
advisory agreement between the parties (the "Advisory Agreement"). As an
externally managed company, Tthe Company had no employees of its own and relied
on the Advisor to conduct its business and operations.
Pursuant to consummation of the Company's business activities.stockholder approved merger between the
Company and the Advisor (the "Internalization Transaction" or "Advisor Merger"),
the Company and the Advisor merged effective 12:01AM on January 1, 2002. As a
result, the Company became self-advised and commencing January 1, 2002 and
thereafter will directly incur the cost of all overhead necessary to operate the
Company. For accounting purposes, the Advisor Merger is not considered the
acquisition of a "business" for purposes of applying Accounting Principles Board
("APB") Opinion No. 16, "Business Combinations" and, therefore, the market value
of the common stock issued, valued as of the consummation of the Advisor Merger,
in excess of the fair value of the net tangible assets acquired was charged to
operating income rather than capitalized as goodwill for the year ended December
31, 2001. (See Note 3)
2. Summary of Significant Accounting Policies
A) Method(a) Basis of AccountingPresentation
The accompanying 2000 consolidated and combined financial statements
include the consolidated accounts of the Company from April 10, 1998
through December 31, 2000, and the combined accounts of the Company,
Prep Fund 1 and America First Participating/Preferred Equity Mortgage
Fund (the managing general partner of Prep Fund 1) (together referred
to as the Predecessor) for periods prior to the Merger. The2001 financial statements are prepared on the accrual
basis of accounting in accordance with generally accepted accounting principles
utilized in the United States.
The consolidated financial statements through December 31, 1999, include
the accounts of the Company and its subsidiaries, Pension Fund and Pension
Fund's general partner, America First Capital Associates Limited Partnership Six
(AFCA 6)("AFCA 6"). Pension Fund and AFCA 6 were liquidated and dissolved under the
terms of their respective partnership agreements duringin December 1999. All
significant intercompany transactions and accounts have been eliminated in
consolidation. As more fully discussed in Note 7, the Company also has an investment in a corporation and investments
in fourindirect
real estate limited partnerships,investments, none of which are controlled by the Company.Company, as, (i) a
preferred stockholder of a corporation, which owns two multi-family rental
properties, and (ii) a limited partner in four real estate limited partnerships.
These investments are accounted for under the equity method. Neither the
corporation nor the real estate limited partnerships are consolidated for income
tax purposes.
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.
- 29 -
B) Cash and Cash Equivalents
Cash and cash equivalents include cash on hand and highly liquid
investments with original maturities of three months or less. The
carrying amount of cash equivalents approximates their fair value.
Restricted cash represents amounts held with certain lending
institutions with which the Company has repurchase agreements.
Such amounts may be used to make principal and interest payments
on the related repurchase agreements.
C) Mortgage Securities,(b) MBS, Corporate Debt Securities and Corporate Equity Securities
Statement of Financial Accounting Standards ("FAS") No. 115, "Accounting
for Certain Investments in Debt and Equity Securities" (SFAS 115)("SFAS 115"), requires
the Company to classify itsthat investments in mortgage securities corporate debt securities and corporate equity securities (collectively
referred to as investment securities)be designated as either held-to-maturity,
available-for-sale or trading.
Althoughtrading at the Company generally intends to hold mosttime of its mortgage
securities until maturity, it may, from time to time, sell any of its
mortgage securitiesacquisition. Securities that are
designated as part of its overall management of its business.
In order to be prepared to respond to potential future opportunities in
the market, to sell mortgage securities in order to optimize the
portfolio's total return and to retain its ability to respond to economic
conditions that require the Company to sell assets in order to maintain an
appropriate level of liquidity, the Company has classified all its mortgage
securities as available-for-sale. Likewise, the Company has classified all
its corporate equity securities investments as available-for-sale.
Mortgage securities and corporate equity securities classifiedheld-to-maturity are carried at their amortized cost. Securities
designated as available-for-sale are reportedcarried at fair value with
31
AMERICA FIRST MORTGAGE INVESTMENTS, INC.
NOTES TO THE FINANCIAL STATEMENTS
unrealized gains and losses excluded from earnings and reported in other
comprehensive income.
Although the Company generally intends to hold most of its MBS until
maturity, it may, from time to time, sell any of its MBS as part of its overall
management of its business. The available-for-sale designation provides the
flexibility to sell its MBS in order to appropriately act on potential future
market opportunities, changes in economic conditions and ensure future
liquidity.
All of the Company's investments in corporate equity securities are
classified as available-for-sale.
Corporate debt securities are classified as either held-to-maturity or
available-for-sale depending upon management's intent and are
carried at amortized cost.
Unrealizedability to hold such
securities to maturity.
Other-than-temporary losses on investment securities, that are considered
other-than-temporary,whether designated
as available-for-sale or held-to-maturity, as measured by the amount of decline
in fair value attributable to factors other than temporary,other-than-temporary, are recognizedcharged against
income resulting in income andan adjustment of the cost basis of the investment security is adjusted.such securities.
Other-than-temporary unrealized losses are determined based on management's assessment of
various factors affecting the security. The following are among, but not all,
the factors considered in determining whether and to what extent an
other-than-temporary impairment exists(i) the expected cash flow from the
investment
securities, includinginvestments; (ii) whether an other-than-temporary deterioration of the credit
quality of the underlying mortgages, and/debtor, or the company in which equity
investments are held; (iii) the credit protection available to the related
mortgage pool.pool for MBS; (iv) any other market information available, including
analysts assessments and statements, public statements and filings made by the
debtor, counterparty or other relevant party issuing or otherwise securing the
particular security; (v) management's internal analysis of the security
considering all known relevant information at the time of assessment; and (vi)
the magnitude and duration of historical decline in market prices Because
management's assessments are based on factual information as well as subjective
information available at the time of assessment, the determination as to whether
an other-than-temporary decline exists and, if so, the amount considered
impaired is also subjective and, therefore, constitutes material estimates, that
are susceptible to a significant change. (See Note 5)
Gains or losses on the sale of investment securities are based on the
specific identification method.
The Company's adjustable rate assets are comprised primarily of MBS that
are comprised of adjustable rate MBS issued through Ginnie Mae, Fannie Mae or
Freddie Mac. Included in these adjustable rate MBS are hybrid MBS that have a
fixed interest rate for an initial period, generally three-to-five years, then
convert to an adjustable rate for their remaining term to maturity.
Interest income is accrued based on the outstanding principal amount of
the investment securities and their contractual terms. Premiums and discounts
associated with the purchase of the investment securities are amortized into
interest income over the lives of the securities using the effective yield
method, based on, among other things, anticipated estimated
prepayments. Such calculations are periodically adjusted for actual prepayment activity.
D)(c) Cash and Cash Equivalents
Cash and cash equivalents include cash on hand and highly liquid
investments with original maturities of three months or less. The carrying
amount of cash equivalents approximates their fair value.
(d) Restricted Cash
Restricted cash represents amounts held with certain lending institutions
with which the Company has repurchase agreements. Such amounts may be used to
make principal and interest payments on the related repurchase agreements.
(e) Credit Risk
The Company limits its exposure to credit losses on its investment
portfolio by requiring that at least 66% (through December 31, 2000)50% of its investment portfolio consist of
mortgage securities or mortgage loansMBS that are either (i) insured or guaranteed as to principal andor interest by an agency of the U.S.
government,Government, such as the Government National Mortgage
Association (GNMA), the Federal National Mortgage Association (FNMA), or the
Federal Home Loan Mortgage Corporation (FHLMC) or (ii) rated in one of the
two highest rating categories by either Standard & Poor's or Moody's.Ginnie Mae, Fannie Mae and Freddie Mac ("Agency MBS"). The
remainder of the Company's assets may be either: (i) direct investment
(mezzanine or equity)investments in multifamily
apartment properties; (ii) investments in limited partnerships, or real estate
investment trusts (each a "REIT") or a preferred stock of a real estate related
corporation or (iii) other fixed-income instruments, (corporatesuch as corporate debt
or equity securities, or mortgage
backed securities) that provide increased call protection relative to the Company's mortgage assets.MBS
portfolio. Corporate debt and equity securities of any
single below-investment-grade issuerthat is below investment-grade will be limited to no moreless
than 4%5% of the Company's total assets. As of December 31, 2000Adjustable rate Agency MBS comprised
approximately 80% and 1999, approximately
78% and 79%, respectively, of the Company's total assets - 30 -
consisted of mortgage securities insured or guaranteed by the U.S.
government orat December 31, 2001 and
2000, respectively. The Company did not have an agency thereof. Management determined no allowance for credit losses was necessary at
December 31, 20002001 or 1999.
E)2000.
A decline in the value of any of its debt or equity security investments
that is considered by management to be other-than-temporary results in the
Company reducing the cost basis of the specific securityand recognizing the
write down as a charge against earnings. In monitoring asset quality, management
evaluates its investment
32
AMERICA FIRST MORTGAGE INVESTMENTS, INC.
NOTES TO THE FINANCIAL STATEMENTS
securities portfolios on a regular basis, not less than quarterly, to determine
whether impairment, if any, is considered other-than-temporary. Among the
factors considered are: the market price of the securities over time; the
anticipated performance of the security over the next six to twelve months; the
carrying value compared to the market value. Charges are made and the carrying
value of the security adjusted if management determines that the security's
impairment is considered other-than-temporary. This determination, which to a
significant extent is subjective, is based on the information available at the
time of assessment and considers debtors' financial condition, expectations
about the debtors' future performance and other pertinent market information
available. Further, if management were to decide to sell any security,
held-for-investment or held for sale, and any unrealized losses at that time the
decision to sell is made would be charged against earnings in the period the
decision to sell is made. However, gains would be deferred until realized.
(f) Other Investments
Other investments consist of certain non-consolidated investments
accounted for under the equity method, including: (i) non-voting preferred stock
of a corporation owning interests in real estate limited partnerships, and (ii)
investments in limited partnerships owning real estate. F) Net Income per Share
Net income per shareThe Company acquired
these investments as part of the 1998 Merger. Certain of the properties
underlying the other investments in the limited partnerships that the Company
received in the 1998 Merger were subsequently exchanged for other properties
through non-taxable exchanges, known for tax purposes as a "Section 1031
exchange".
Certain of the investments have a zero carrying value and, as such,
earnings are recorded only to the extent distributions are received. Such
investments have not been reduced below zero through recognition of allocated
investment losses since the Company has no legal obligation to provide
additional cash support to the underlying property partnerships as it is basednot the
general partner, nor has it indicated any commitment to provide this support. As
of December 31, 2001, the Company had investments in four such limited
partnerships, which had mortgage loans secured by the underlying investment
properties; however, the Company has no liability for the mortgage loans, since
(1) the Company's investment is as a limited partner and (2) the mortgages have
non-recourse provisions, such that they are secured only to the extent of the
collateral which is comprised of the mortgaged property.
(g) Repurchase Agreements
The Company finances the acquisition of its MBS at short-term borrowing
rates through the use of repurchase agreements. Under a repurchase agreement,
the Company sells securities to a lender and agrees to repurchase those
securities in the future for a price that is higher than the original sales
price. The difference between the sale price the Company receives and the
repurchase price the Company pays represents interest paid to the lender.
Although structured as a sale and repurchase obligation, a repurchase agreement
operates as a financing under which the Company effectively pledges its
securities as collateral to secure a short-term loan which is equal in value to
a specified percentage of the market value of the pledged collateral. The
Company retains beneficial ownership of the pledged collateral, including the
right to distributions. At the maturity of a repurchase agreement, the Company
is required to repay the loan and concurrently receives back its pledged
collateral from the lender or, upon mutual consent with the lender, the Company
may renew such agreement at the then prevailing financing rate. The repurchase
agreements may require the Company to pledge additional assets to the lender in
the event the market value of the existing pledged collateral declines. Through
December 31, 2001, the Company did not have any margin calls on its repurchase
agreements that it was not able to satisfy with either cash or additional
pledged collateral.
The Company's repurchase agreements generally range from one month to one
year in duration. Should the weighted average numberproviders of common
shares and common equivalent shares (e.g., stock options), if dilutive,
outstandingthe repurchase agreements decide not
to renew them at maturity, the Company must either refinance elsewhere or be in
a position to satisfy the obligation. If, during the period.term of a repurchase
agreement, a lender should file for bankruptcy, the Company might experience
difficulty recovering its pledged assets and may have an unsecured claim against
the lender's assets. To reduce its exposure, the Company enters into repurchase
agreements only with financially sound institutions whose holding or parent
company's long-term debt rating is "A" or better as determined by two of the
Rating Agencies, where applicable. The Company will not enter into repurchase
agreements with a lender without the specific approval of the Company's Board of
Directors, if the minimum criterion is not met . In the event an existing lender
is downgraded below "A," the Company will seek board approval before entering
into additional repurchase agreements with that lender. The Company generally
aims to diversify its exposure by entering into repurchase agreements with at
least four separate lenders with a maximum loan from any lender of no more than
three times the Company's stockholders' equity. As of December 31, 2001, the
Company had repurchase agreements with ten separate lenders with a maximum net
exposure (the difference between the amount loaned to the Company and the fair
value of the security pledged by the Company as collateral) to a single lender
of approximately $22.6 million. (See Note 9)
33
AMERICA FIRST MORTGAGE INVESTMENTS, INC.
NOTES TO THE FINANCIAL STATEMENTS
(h) Earnings per Common Share ("EPS")
Basic net income per shareEPS is computed by dividing net income available to shareholders by the weighted average
number of shares of common sharesstock outstanding during the period. Diluted net
income per shareEPS is
computed by dividing the diluted net income available
to common shareholders by the weighted average number ofweighted-average common shares and common
equivalent shares outstanding during the period. TheFor the diluted EPS
calculation, the weighted average common shares and common equivalent shares
outstanding include the average number of shares of common stock outstanding
adjusted for the dilutive effect of unexercised stock options using the treasury
stock method. Under the treasury stock method, common equivalent shares are
calculated using the treasury stock method which
assumesassuming that all dilutive common stock equivalents are exercised and
the funds generated by the exerciseproceeds are used to buy back shares of the Company's outstanding common
stock at the average market price during the reported period. As more fully discussedNo common share
equivalents are included in Note 8, options to purchase 520,000 and
300,000 sharesthe computation of common stock were granted on April 6, 1998, and August
13, 1999, respectively. During the year ended December 31, 2000, the
average price of the Company's stock was greater than the exercise price
of the options granted on August 13, 1999. As such, exercise of such
options under the treasury stock method is dilutive. Accordingly, these
dilutive securities were considered in fullyany diluted earnings per share.
For the year ended December 31, 1999, the average price of the Company's
stock was less than the exercise price; therefore exercise of such options
under the treasury stock method would be anti-dilutive. Accordingly, for
the year ended December 31, 1999, these potentially dilutive securities
were not considered in fully diluted earnings per share. With regard to
the options granted on April 6, 1998, the exercise price is greater than
the average stock price during the years ended December 31, 2000, 1999 and
for the period from April 10, 1998 through December 31, 1998; therefore,
exercise of such options under the treasury stock method would be
anti-dilutive. Accordingly, these potentially dilutive securities were not
considered in fully diluted earnings per share.
The following table sets forth the reconciliation of the weighted average
shares outstanding for the calculation of basic earnings per share to the
weighted average shares outstandingamount for
the calculation of fully diluted
earnings per share for eacha period presented:
For the For the For the
Year Ended Year Ended Year Ended
Dec. 31, 2000 Dec. 31, 1999 Dec. 31, 1998
-------------- -------------- -------------
Weighted average shares outstanding for
basic earnings per share 8,869,456 9,046,467 9,043,172
Add effect of assumed shares issued under
treasury stock method for stock options (17,211) - -
Weighted average shares outstanding for -------------- -------------- -------------
fully diluted earnings per share 8,852,245 9,046,467 9,043,172
============== ============== =============
G)in which a net operating loss is reported. (See Notes 11 and 12)
(i) Comprehensive Income
Statement of Financial Accounting Standards No. 130, "Reporting
Comprehensive Income" requires the Company and the Predecessor to display and report comprehensive
income, which includes all changes in Stockholders' Equity or Partners' Capital with the exception of
additional investments by or dividends to shareholders of the Company or additional
investments by or distributions to partners of the Predecessor.stockholders. Comprehensive income for
the Company and the Predecessor includes net income and the change in net unrealized holding gains
(losses) on - 31 -
investments. Comprehensive income for the years ended December 31, 2000,
1999investments and 1998 was as follows:
For the Year Ended December 31, 1998
--------------------------------------------
Company for Company for Company for Company Company and
the Year Ended the Year Ended the Year Ended From April 10 to Predecessor
through
Dec. 31, 2000 Dec. 31, 1999 Dec. 31, 1998 April 9, 1998 Total
--------------- ---------------- ---------------- --------------- -------------
Net income $ 7,866,116 $ 7,599,880 $ 2,931,069 $ 486,466 $ 3,417,535
Change in classification of mortgage
securities from held-to-maturity to
available-for-sale - - (704,828) - (704,828)
Other comprehensive income (loss)
Unrealized holding gains (losses)
Net unrealized holding gains
(losses) arising during the period 1,330,613 (4,370,940) (352,994) (21,235) (374,229)
---------------- -------------- --------------- --------------- --------------
Comprehensive income $ 9,196,729 $ 3,228,940 $ 1,873,247 $ 465,231 $ 2,338,478
================ ============== =============== =============== ===============
H)certain derivative instruments. (See Note 13)
(j) Federal Income Taxes
The Company has elected to be taxed as a real estate investment trust
(REIT)REIT under the provisions of the
Internal Revenue Code of 1986, as amended (the "Code") and the corresponding
provisions of state law. The Company expects to operate in a manner that will
enable it to continue to be taxed as a REIT. As such, no provision for current
or deferred income taxes has been made in the accompanying consolidated financial statements.
Since the Predecessor was a partnership and generally not subject to taxes
directly, it did not make a provision for income taxes. The Predecessor's
Beneficial Unit Certificate (BUC) holders were required to report their
share(k) Adoption of the Predecessor's income for federal and state income tax
purposes.
I) New Accounting PronouncementsStandards
In June 1998, the Financial Accounting Standards Board ("FASB") issued Financial Accounting StandardsFAS
No. 133, "Accounting for Derivative Instruments and Hedging Activities " (FAS 133)Activities" ("FAS
133"). Certain provisions of FAS 133 were amended by Financial Accounting
Standards No. 138, "Accounting for Certain Derivative Instruments and Certain
Hedging Activities" (FAS 138)("FAS 138") in June 2000. These statementsOn January 1, 2001, the date of
adoption of FAS 133 and FAS 138, the Company had no derivative instruments nor
any embedded derivatives that required bifurcation and separate accounting;
thus, there was no cumulative effect of an accounting change upon the adoption
of these statements.
In September 2000, the FASB issued FAS No. 140, "Accounting for Transfers
and Servicing of Financial Assets and Extinguishments of Liabilities" ("FAS
140"). This statement is applicable for transfers of assets and extinguishments
of liabilities occurring after March 31, 2001. The Company adopted the
provisions of this statement as required for all transactions entered into on or
after April 1, 2001. The adoption of FAS 140 did not have a significant impact
on the Company.
(l) New Accounting Pronouncements
In July 2001, the FASB issued FAS No. 141, "Business Combinations" ("FAS
141") and FAS No. 142, "Goodwill and Other Intangible Assets" ("FAS 142") which
provide new accountingguidance on how entities are to account for business combinations and reporting
standards
for the usegoodwill and other intangible assets that arise from those combinations
or are acquired otherwise. FAS 142 requires that goodwill is no longer
amortized, but instead be tested for impairment at least annually. As of derivative instruments. Adoptionthe
date of these
statements is required byadoption, the Company effectivehad unamortized goodwill in the amount of
approximately $7,189,000. Amortization expense related to goodwill was
approximately $200,000, for each of the years ended December 31, 2001 and 2000
and $187,000 for the year ended December 31, 1999. The Company's adoption of FAS
142 on January 1, 2001.
Management intends2002 is not expected to adopt these statements as required in fiscal 2001.
Althoughhave a material effect on the
Company's financial statements.
In October 2001, the FASB issued FAS No. 144, "Accounting for the
Impairment or Disposal of Long-Lived Assets" ("FAS 144"). FAS 144 provides new
guidance on the recognition of impairment losses on long-lived assets to be held
and used or to be disposed of and also broadens the definition of what
constitutes a discontinued operation and how the results of a discontinued
operation are to be measured and presented. The adoption of FAS 144 on January
1, 2002 is not expected to have a significant impact on the Company.
(m) Derivative Financial Instruments - Interest Rate Cap Agreements
Prior to January 1, 2001, the Company and its Predecessor havedid not historically used such
instruments,engage in any speculative
derivative transactions, nor did it engage in hedging activities, as defined by
FAS 133. During the fourth quarter of 2001, the Company entered into an interest
rate cap agreement ("Cap Agreement"), for the purpose of purchasing an interest
rate cap ("Cap"). The Cap is not precluded from doing so. Ina derivative instrument that the future, management
anticipates using such derivative instruments only as hedges to manageCompany is
utilizing for the purpose of managing interest rate risk. ManagementThe Company does not
anticipate entering into derivativesderivative transactions for speculative or trading
purposes.
34
AMERICA FIRST MORTGAGE INVESTMENTS, INC.
NOTES TO THE FINANCIAL STATEMENTS
In accordance with FAS 133, a derivative which is designated as a hedge is
recognized as an asset/liability and measured at fair value. To qualify for
hedge accounting, at inception of the Cap, the Company must anticipate that the
hedge will be highly effective in limiting the Company's cost beyond the Cap
threshold on its matching (on an aggregate basis) anticipated repurchase
agreements during the active period of the Cap. As long as the hedge remains
effective, changes in fair value are included in the accumulated other
comprehensive income portion of January 1,stockholders' equity. Upon the Cap Agreement
active period commencing, the premium paid to enter into the Cap Agreement is
amortized and reflected in interest expense. The periodic amortization of the
premium expense is based on an estimated allocation of the premium, determined
at inception of the hedge, for the monthly components on a fair value basis.
Payments received in connection with the Cap Agreement will be reported a
reduction to interest expense, net of the amortization recognized for the
premium. If it is determined that a Cap Agreement is not effective, the premium
would be reduced and a corresponding charge made to interest expense, for the
ineffective portion of the Cap Agreement. The maximum cost related to the
Company's Caps is limited to the original purchase price of the derivative. In
order to limit credit risk associated with purchased Caps, the Company only
purchases caps from financial institutions rated "A" or better by one of the
Rating Agencies. Income generated by purchased caps, if any, would be presented
as an off-set to interest expense on the hedged liabilities.
In order to continue to qualify for and to apply hedge accounting, Caps
are monitored on a quarterly basis to determine whether they continue to be
effective or, if prior to the trigger date, whether the Cap continues to be
expected to be effective. If during the term of the Cap agreement the Company
determines that a Cap is not effective or that a Cap is not expected to be
effective, the ineffective portion of the Cap will no longer qualify for hedge
accounting and, accordingly subsequent changes in its fair value will be
reflected in earnings. (See Note 8)
(n) Stock Based Compensation
The Company's policy is to apply the intrinsic method of Accounting
Principles Bulletin No. 25 ("APB 25") for its direct employees and independent
directors. Under the intrinsic method, no compensation expense is recorded when
options are issued with an exercise price equal to the market price of the
underlying security. The Company has only granted options with a strike price
equal to the market price at the time of grant.
(o) Reclassifications
Certain prior period amounts have been reclassified to conform to the
current period presentation.
3. Advisor Merger/Related Parties and Other Related Parties
(a) Advisor Fees and Advisor Merger
From the time of the 1998 Merger through December 31, 2001, the Advisor
managed the operations and investments of the Company had no outstanding derivative hedging instruments nor any imbedded
derivatives requiring bifurcation and separate accounting under FAS 133.
Accordingly, thereperformed
administrative services for the Company. Prior to the Advisor Merger (as defined
below), the Advisor was no cumulative effect upon adoptionowned directly and indirectly by certain of FAS 133the
Company's directors and executive officers (see discussion below). For the
services and functions provided to the Company, the Advisor received a monthly
management fee in an amount equal to 1.10% per annum of the first $300 million
of Stockholders' Equity of the Company, plus 0.80% per annum of the portion of
Stockholders' Equity of the Company above $300 million. The Company also paid
the Advisor, as incentive compensation for each calendar quarter, an amount
equal to 20% of the dollar amount by which the annualized Return on Equity for
such quarter exceeded the amount necessary to provide an annualized Return on
Equity equal to the Ten-Year U.S. Treasury Rate plus 1%. For the years ended
December 31, 2001, 2000 and 1999, the Advisor earned a base management fee of
approximately $1,424,000, $740,000 and $762,000, respectively, and incentive
compensation of approximately $2,914,000, $797,054 and $741,000, respectively.
Approximately $511,000, $519,000 and $433,000 of the incentive fee earned in
2001, 2000 and 1999, respectively, was attributable to the gains on sale
described in Note 7.
The Company entered into an Agreement and Plan of Merger, dated September
24, 2001 (the "Advisor Merger Agreement"), with the Advisor, America First
Companies L.L.C. ("AFC") and the stockholders of the Advisor. In December 2001,
the Company's stockholders approved the terms of the Advisor Merger Agreement,
which provided for the merger of the Advisor into the Company effective 12:01
a.m. on January 1, 2002 (the "Advisor Merger"). Pursuant to the Advisor Merger
Agreement, the Company issued 1,287,501 shares of its common stock to the
stockholders of the Advisor effective January 1, 2002. As a result, the Company
became self-advised commencing January 1, 2002 and, thereafter, will directly
incur the cost of all overhead necessary for its operation and administration.
The market value of the common stock issued in the Advisor Merger, valued as of
the consummation of the Advisor Merger in excess of the fair value of the net
tangible assets acquired, was charged to operating income of the Company for the
year ended December 31, 2001.
Certain of the Company's directors and executive officers who were
involved in discussions and negotiations relating to the Advisor Merger had, and
continue to have, interests that would be affected by the Advisor Merger.
35
AMERICA FIRST MORTGAGE INVESTMENTS, INC.
NOTES TO THE FINANCIAL STATEMENTS
At the time of the Advisor Merger, AFC owned 80% of the outstanding capital
stock of the Advisor. At that time, Michael Yanney, the Chairman of the
Company's Board of Directors, and George H. Krauss, one of the Company's
directors, beneficially owned approximately 57% and 17%, respectively, of AFC.
In March, 2000,addition, Stewart Zimmerman, the FASB issued FASB Interpretation No. 44 ("FIN 44"Company's President and Chief Executive
Officer, and William S. Gorin, the Company's Executive Vice President, Chief
Financial Officer and Treasurer, collectively owned approximately 3% of AFC. At
the time of the Advisor Merger, Messrs. Zimmerman, Gorin and Ronald A.
Freydberg, the Company's Executive Vice President and Secretary, also owned, in
the aggregate, the remaining 20% of the Advisor. Accordingly, the Advisor Merger
resulted in these individuals receiving, in the aggregate, beneficial ownership
of an additional 1,287,501 shares of the Company's common stock valued at
approximately $11.3 million at the time of the Advisor Merger.
Because the Advisor Merger was between affiliated parties and may not be
considered to have been negotiated in a completely arm's-length manner, the
Company's Board of Directors established a special committee of the Board which
consisted of three of the Company's independent directors who had no personal
interest in the Advisor Merger, to direct the negotiations relating to the
Advisor Merger on the Company's behalf and to consider and make recommendations
to the Board relating to the Advisor Merger.
(b) Other Related Party Transactions
America First Properties Management Company L.L.C. (the "Property
Manager"),
"Accounting provides property management services for Certain Transactions Involving Stock Compensation."certain of the multifamily
properties in which the Company has an interest. The Company was required to adopt FIN 44 effective July 1, 2000, with respectProperty Manager also
provided property management services to certain provisions applicableproperties previously which
were acquired in the 1998 Merger. The Property Manager receives a management fee
equal to new awards, exchangesa stated percentage of awardsthe gross revenues generated by the Company's
properties under management, ranging from 3.5% to 4% of gross revenues. The
Property Manager received $432,000, $375,000 and $325,000, respectively, for the
years ended December 31, 2001, 2000 and 1999 for property management services
provided at the Company's properties. It is expected that the Property Manager
will continue to manage the properties in a
business combination, modifications to outstanding awards, and changes in
grantee status that occur on or after that date. FIN 44 addresses practice
issues relatedwhich the Company has an interest
subsequent to the applicationAdvisor Merger. The Property Manager is a wholly owned
subsidiary of Accounting Practice Bulletin Opinion
No. 25, "Accounting for Stock Issued to Employees." The initial adoptionAFC.
Included in the Company's corporate debt securities portfolio are
investments in the corporate debt securities of FIN 44 byRCN Corporation ("RCN"), which
were purchased between February 1999 and August 2000, and Level 3 Corporation
("Level 3"), which were purchased between August 1998 and August 2000. At
December 31, 2001, the Company's investment in (i) the RCN debt securities had a
carrying value of approximately $2.1 million and (ii) the Level 3 debt
securities had a carrying value of approximately $6.6 million and an estimated
fair value of $3.4 million. Mr.Yanney, the Chairman of the Company's Board of
Directors, is currently on the board of directors of both RCN and Level 3. One
of the Company's Directors, W. David Scott, is the son of the Chairman of both
Level 3 and RCN. (See Note 5)
Since 1998, the Company did not havehas held all of the non-voting preferred stock,
representing 95% of the ownership and economic interest, in Retirement Centers
Corporation ("RCC"), an entity formed following the 1998 Merger to hold certain
of the Company's properties. (See Note 7). All of the common stock, representing
5% of the ownership and economic interest, in RCC is held by Mr. Gorin, the
Company's Executive Vice President and Chief Financial Officer and Treasuer. Mr.
Gorin also serves as a material impact on its consolidated
financial position or resultsdirector of operations.
- 32 -
3.RCC.
4. Mortgage Backed Securities
As of December 31, 2001 and 2000, all of the Company's MBS were classified
as available-for-sale, and as such, were carried at their fair value. The
following table presents the carrying value of the Company's mortgage securitiesMBS as of December
31, 2001 and 2000.
2001 2000
and 1999.
As of As of
December 31, 2000 December 31, 1999
----------------- -----------------
FNMA Certificates $ 377,668,990 $ 359,891,164
GNMA Certificates 24,529,046 43,678,897
FHLMC Certificates 8,981,226 13,220,884
Commercial mortgage-backed securities 17,135,031 16,650,544
Private label CMOs 42,261,378 42,278,222
----------------- -----------------
$ 470,575,671 $ 475,719,711
================= =================
---------- --------
(In Thousands)
Fannie Mae Certificates $1,228,095 $377,669
Ginnie Mae Certificates 12,266 24,529
Freddie Mac Certificates 472,908 8,981
Commercial 11,486 17,135
Non-agency AAA 202,145 42,262
---------- --------
$1,926,900 $470,576
========== ========
At December 31, 2001 and 2000, and 1999 mortgage securitiesthe Company's portfolio of MBS consisted of
pools of adjustable-rate mortgage securitiesadjustable rate MBS with carrying values of $450,992,165$1,915,380,000 and
$444,140,267,$450,992,000 respectively and fixed-rate mortgage securitiesfixed rate MBS with carrying values of $19,583,506$11,520,000
and $31,579,444,$19,584,000, respectively.
The Federal National Mortgage Association (FNMA) Certificates36
AMERICA FIRST MORTGAGE INVESTMENTS, INC.
NOTES TO THE FINANCIAL STATEMENTS
Fannie Mae: Fannie Mae MBS are certificates issued by Fannie Mae that are
backed by first mortgage loans on pools of single-family properties.and multifamily mortgage loans. Fannie Mae
guarantees to the registered holders of its certificates that it will distribute
amounts representing scheduled principal and interest on the mortgage loans in
the pool underlying its certificates, whether or not received, and the full
payment amount of any such mortgage loan foreclosed or otherwise finally
liquidated, whether or not the principal amount is actually received. The
FNMA
Certificatesobligations of Fannie Mae under its guarantees are debt securitiessolely those of Fannie Mae
and are not backed by the full faith and credit of the U.S. Government. If
Fannie Mae were unable to satisfy its obligations, distributions to holders of
its certificates would consist solely of payments and other recoveries on the
underlying mortgage loans and, accordingly, monthly distributions to holders of
its certificates would be affected by delinquent payments and defaults on these
mortgage loans.
Ginnie Mae: Ginnie Mae MBS are certificates issued by FNMAa wholly owned
instrumentality of the U.S. Government within the Department of Housing and
Urban Development that are guaranteedbacked mostly by FNMA aspools of single-family mortgage
loans. Ginnie Mae is authorized by the National Housing Act of 1934 to guarantee
the full and timely payment of principal and interest on its certificates which represent
an interest in a pool of mortgages insured by the Federal Housing Administration
or partially guaranteed by the Department of Veterans Affairs and other loans
eligible for inclusion in mortgage pools underlying loans.its certificates. The
National Housing Act of 1934 provides that the full faith and credit of the U.S.
Government National Mortgage Association (GNMA) Certificatesis pledged to the payment of all amounts which may be required to be
paid under any guarantee by Ginnie Mae.
Freddie Mac: Freddie Mac MBS are certificates issued by Freddie Mac that
are backed by firstpools of multifamily mortgage loans. Freddie Mac guarantees to the
holders of its certificates the timely payment of interest and the ultimate
collection of all principal on each holder's pro rata share of the unpaid
balance of the underlying mortgage loans, but does not guarantee the timely
payment of scheduled principal of the underlying mortgage loans. The obligations
of Freddie Mac under its guarantees are solely those of Freddie Mac and are not
backed by the full faith and credit of the U.S. Government. If Freddie Mac were
unable to satisfy its obligations, distributions to holders of its certificates
would consist solely of payments and other recoveries on multifamily residential propertiesthe underlying mortgage
loans and, accordingly, monthly distributions to holders of its certificates
would be affected by delinquent payments and defaults on these mortgage loans.
Commercial: The Company's investments in commercial MBS are comprised of
privately issued certificates that are backed by pools of single-family properties. The GNMA Certificatesand
multi family mortgage loans. Commercial MBS generally consist of certificates
that are debtrated "AA" or "A" by at least one of the Rating Agencies . These
securities issued
by a private mortgage lender and are not guaranteed by GNMA as to the full and
timely paymentU.S. Government or any of principal and interest on the underlying loans.
Federal Home Loan Mortgage Corporation (FHLMC) Certificatesits agencies.
Non-Agency "AAA": Non-Agency "AAA" MBS are privately issued certificates
that are backed by first mortgage loans on pools of single-family properties. The FHLMC
Certificatesand multi family mortgage loans.
Non-Agency "AAA" MBS are debtrated as such by one of the Rating Agencies. "AAA" is
the highest rating given by bond rating agencies and indicates the relative
security of the investment. These securities issued by FHLMC and are not guaranteed by FHLMC
as to the full and timely paymentU.S.
Government or any of principal and interest on the underlying
loans.
The commercial mortgage-backed securities are rated AA or A by Standard and
Poor's.
The private label CMOs (collateralized mortgage obligations) are rated AAA by
Standard and Poor's.
As of December 31, 2000 and 1999, all the mortgage securities were classified
as available-for-sale and as such are carried at their fair value.its agencies.
The following table presents the amortized cost, gross unrealized gains,
gross unrealized losses and fair value of mortgage securitiesMBS as of December 31, 2001 and 2000:
2001 2000
and 1999:
As of As of
December 31, 2000 December 31, 1999
------------------ ------------------
Amortized cost $ 474,638,436 $ 481,176,498
Gross unrealized gains 351,662 461,675
Gross unrealized losses (4,414,427) (5,918,462)
------------------ ------------------
Fair value $ 470,575,671 $ 475,719,711
================== ==================
- 33 -
4.----------- ---------
(In Thousands)
Amortized cost $ 1,923,334 $ 474,638
Gross unrealized gains 8,339 352
Gross unrealized losses (4,773) (4,414)
----------- ---------
Fair value $ 1,926,900 $ 470,576
=========== =========
5. Corporate Debt Securities
The Company's investments in corporate debt securities, which are
comprised of "non-investment grade," "high yield securities," are classified as
either held-to-maturity or available-for-sale. Corporate debt securities, which
are not guaranteed by the U.S Government or any of its agencies, are subject to
substantially greater credit risk than are the Company's core investment
portfolio, which is comprised primarily of Agency MBS. As such, corporate debt
securities are affected by, among other things, changes in the financial
condition of the debtor, general market and economic conditions and market
interest rates.
Prior to September 30, 2001, all corporate debt securities were classified
as held-to-maturity. However, given the deterioration of the credit quality of
the Company's investment in the corporate debt securities issued by RCN
Corporation ("RCN"), management reassessed its held-for-investment position in
this security and determined that, while no decision was made to liquidate the
Company's position in RCN, the original positive intent to hold to RCN
37
AMERICA FIRST MORTGAGE INVESTMENTS, INC.
NOTES TO THE FINANCIAL STATEMENTS
to maturity was no longer present and, accordingly, management transferred the
Company's holdings of RCN debt securities to available-for-sale and reflected
the decline in market value in other comprehensive income.
Throughout the remainder of 2001, management continued to monitor both the
Company's holdings of RCN debt securities and RCN determined, after considering
all available evidence including negative factors affecting RCN's business
sector and specific issuer credit downgrades subsequent to year end 2001, that
it was appropriate to reflect an other-than-temporary impairment charge of
approximately $2.4 million against the Company's investment in its RCN debt
securities.
The following tabletables presents the amortized cost, gross unrealized gains,
gross unrealized losses and fair value of the Company's corporate debt
securities as of December 31, 2001, and December 31, 2000:
2001 2000
and 1999:
As of As of
December 31, 2000 December 31, 1999
----------------- -----------------
Amortized cost $ 15,665,727 $ 8,020,026
Gross unrealized gains 24,900 92,211
Gross unrealized losses (3,795,002) (174,487)
----------------- -----------------
Fair value $ 11,895,625 $ 7,937,750
================= =================
5.-------- --------
(In Thousands)
Held-to-maturity securities:
Amortized cost/carrying value $ 7,627 $ 15,666
Gross unrealized gains -- 25
Gross unrealized losses (3,439) (3,795)
-------- --------
Fair value $ 4,188 $ 11,896
======== ========
Available-for-sale securities:
Amortized cost, as adjusted (1) $ 2,147 $ --
Gross unrealized gains -- --
Gross unrealized losses -- --
-------- --------
Fair value/carrying value $ 2,147 $ --
======== ========
Corporate debt securities -carrying
value:
Held-to-maturity securities $ 7,627 $ 15,666
Available-for-sale securities 2,147 --
-------- --------
$ 9,774 $ 15,666
======== ========
(1) Reflects the impact of a $2,453,000 write down of the cost basis of the RCN
debt securities for other-than-temporary impairment.
6. Corporate Equity Securities
Corporate equity securities are classified as available-for-sale. The
following table presents the cost, gross unrealized gains, gross unrealized
losses and fair value of the Company's corporate equity securities as of
December 31, 2001 and 2000:
2001 2000
and 1999:
As of As of
December 31, 2000 December 31, 1999
------------------ ------------------
Cost $ 9,045,923 $ 3,102,798
Gross unrealized gains 613,843 224,865
Gross unrealized losses (649,228) (196,840)
------------------ -------------------
Fair value $ 9,010,538 $ 3,130,823
================== ==================
6.------ -------
(In Thousands)
Cost $3,378 $ 9,046
Gross unrealized gains 710 614
Gross unrealized losses -- (649)
------ -------
Fair value $4,088 $ 9,011
====== =======
7. Other Investments
Other investments consisted of the following as of December 31, 2001 and
2000:
2001 2000
------ ------
(In Thousands)
Investment in RCC $5,572 $2,977
Investments in and advances to real
estate limited partnerships 4,228 4,000
------ ------
$9,800 $6,977
====== ======
As of December 31, 2001, the Company had investments in four limited
partnerships and an investment as a preferred stockholder in RCC, a taxable
corporation, which had an aggregate of approximately $48.3 million of
non-recourse mortgage loans secured by the underlying investment properties. The
Company has no recourse liability for any of these mortgage loans, since the
mortgages have non-recourse provisions, such that they are secured only to the
extent of the collateral, which is comprised of the mortgaged property.
38
AMERICA FIRST MORTGAGE INVESTMENTS, INC.
NOTES TO THE FINANCIAL STATEMENTS
Income from the Company's other investments was as follows for the years ended
December 31, 2001, 2000 and 1999:
As of As of
December 31, 2000 December 31, 1999
----------------- -----------------
Investment in Retirement Centers(In Thousands) 2001 2000 1999
------ ------ ------
Gains on sale of underlying
properties $2,574 $2,565 $2,163
Equity earnings (loss), net 563 1,105 850
------ ------ ------
$3,137 $3,670 $3,013
====== ====== ======
Retirement Center Corporation $ 2,540,180 $ 2,389,980
Investment in and advances to real estate limited partnerships 4,000,390 830,366
----------------- -----------------
Total $ 6,540,570 $ 3,220,346
================= =================
The Company's investmentCompany owns 100% of the non-voting preferred stock in Retirement Centers Corporation (RCC)RCC, which
represents a 95% ownershipeconomic interest in such taxable corporation. The Company owns
100% of the non-voting preferred stock of RCC. RCC andwas formed as a third party owns 100%separate
taxable corporation to hold certain properties acquired in the 1998 Merger,
primarily retirement/assisted living properties, the operations of which, if
held directly would beincompatible with the Company's maintaining compliance
with the REIT provisions of the common
stock.Code. Such assets have since been sold and the
proceeds reinvested in the properties currently held by RCC. The Company
accounts for its investment in RCC onusing the equity method.
As of December 31, 2001, RCC owned (i) a 128-unit apartment property
located in Omaha, Nebraska, known as the "Greenhouse," which was acquired on
January 12, 2000 and (ii) an 88.3% undivided interest in a 192-unit apartment
property located in Lawrenceville, Georgia, which was acquired on January 18,
2001. The Company also directly acquired the remaining 11.7% undivided interest
in the Georgia property on January 18, 2001. In addition, in December 2000, the
Company loaned Greenhouse Holding LLC (which holds the Greenhouse property),
$437,000 to fund building renovations. This loan, which is non-amortizing and
payable July 31, 2002, is included in the above table in the Company's
investment in RCC at December 31, 2001 and 2000.
At December 31, 2000, RCC owned (i)in addition to the 128-unit apartment
property referenced above, a limited partnership interest in a real estate
limited partnership, which operatesoperated an assisted living center located in Salt
Lake City, Utah, and (ii) a 128-unit apartment property
located in Omaha, Nebraska, which was acquired onUtah. On January 12, 2000. As of
December 31, 1999, RCC's investments consisted of (i) its interest in2, 2001, the real
estate limited partnership, referenced above and (ii) cash which was utilized
to acquireowned the apartment property on January 12, 2000.
RCC previously owned limited partnership interests in five real estate limited
partnerships which operated
assisted living centers. However, during 1999,
four of the real estate limited partnerships werecenter, was liquidated with RCC
- 34 - receiving an undivided interest
in the net assets of each such limited partnership. RCC then sold its undivided interestsinterest in
the net assets of each
suchthis assisted living center. On a consolidated basis, suchSuch sale contributed
approximately $1,730,000$2,063,000 ($2,163,0002,574,000 less ana related incentive fee of
approximately $433,000 (see Note 9),$511,000 reflected in other general and administrative expense) to
the Company's net income for 1999. Also see Note 12
- - Subsequent Events.
Investmentsthe year ended December 31, 2001. The proceeds of
such sale were utilized to acquire the 192-unit apartment property on January
18, 2001 as discussed above.
Real Estate Limited Partnerships
Other investments include investments in and advances made to unconsolidatedcertain real
estate limited partnerships consistin which the Company holds interests. The Company
acquired certain of these investments as part of the 1998 Merger, some of which
were subsequently exchanged for other properties through a non-taxable exchange,
known for tax purposes as a "Section 1031 exchange." The investments in or
advances made to limited partnerships which own
properties. These investments are not insured or guaranteed but rather are
collateralized by the underlying value of the real estate owned by such
limited partnerships. They are accounted for under the equity method
of accounting. Certain of the investments have a zero carrying value and, as
such, earnings are recorded only to the extent distributions are received. Such
investments have not been reduced below zero through recognition of allocated
investment losses since the Company 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.
At8. Interest Rate Cap Agreements
As of December 31, 2000 and 1999,2001, the Company had investmentsone $50.0 million notional amount
interest rate Cap which was purchased as a hedge against increases in four such limited partnerships. On September 26, 2000, oneinterest
rates on $50.0 million of the
partnerships sold its interestanticipated future 30-day term reverse repurchase
agreements. The Cap had an original cost of $350,000 and a fair value of
$513,000 at December 31, 2001, resulting in the underlying real estate. Such sale
contributed approximately $2,100,000 ($2,600,000 gain less an incentive feeother comprehensive income of
approximately $519,000 (see Note 9)), to the Company's net income$163,000 for the year ended December 31, 2000.2001. Under the agreement, the Cap will
be triggered, and the Company would receive monthly payments from its
counterparty, if the 30-day London Interbank Offered Rate ("LIBOR") were to
increase above 5.75% during the period from October 25, 2002 through October 25,
2004, the effective term of the hedge. Interest earned will be determined
monthly during the effective term based on the $50.0 million notional amount and
the amount by which the 30-day LIBOR exceeds 5.75%.
The proceedsCompany only enters into Cap Agreements with financially sound
institutions whose holding or parent company's long-term debt rating is "A" or
better, as determined by two of such salethe Rating Agencies, where applicable. In the
unlikely event of a default by the counterparty, the Company would not receive
payments provided for under the terms of the Cap Agreement and could incur a
loss for the initial cost of entering into the Cap Agreement.
39
AMERICA FIRST MORTGAGE INVESTMENTS, INC.
NOTES TO THE FINANCIAL STATEMENTS
9. Repurchase Agreements
As of December 31, 2001, the Company had outstanding balances of
approximately $1.8 billion under 116 repurchase agreements with a weighted
average borrowing rate of 2.91% and a weighted average remaining maturity of 3.3
months. As of December 31, 2001, all of the Company's borrowings were reinvested in the
limited partnership and utilized to acquire another multifamily housing
property in November 2000.
7. Repurchase Agreementsfixed rate
term repurchase agreements with original maturities that range from three to-12
months. As of December 31, 2000, the Company had outstanding balances of $448,583,432$448.6
million under 55 repurchase agreements with a weighted average borrowing rate of
6.60%
and a weighted average remaining maturity of approximately one month.. As of December 31, 2000, all of the Company's borrowings were fixed-rate term
repurchase agreements with original maturities that range from one to twelve
months. As of December 31, 1999, the Company had outstanding balances of
$452,101,803 under 38 repurchase agreements with a weighted average borrowing
rate of 5.72%2001 and a weighted average maturity of approximately one month.
As of December 31, 2000, and 1999, the repurchase agreements had the
following remaining maturities:
As of As of
December 31, 2000 December 31, 1999
----------------- -----------------
Within 30 days $ 278,497,916 $ 287,416,803
30 to 90 days 170,085,516 164,685,000
------------- -------------
$ 448,583,432 $ 452,101,803
============= =============
2001 2000
---------- --------
(In Thousands)
Within 30 days $ 557,167 $278,498
31 to 60 days 274,599 170,085
61 to 90 days 80,594 --
3 to 6 months 622,608 --
6 to 9 months 272,630 --
9 to 12 months 38,000 --
---------- --------
$1,845,598 $448,583
========== ========
The repurchase agreements are collateralized by the Company's mortgageMBS and
corporate debt securities with a principal balancean aggregate current face value of $466,981,306 at December 31, 2000, andapproximately
$1.9 billion. The Company's repurchase agreements generally bear interest at
rates that are LIBOR-based.
8.LIBOR based.
10. Commitments and Contingencies
Securities purchase commitments
At December 31, 2001, there were commitments to purchase $141.0 million of
Fannie Mae MBS with coupons ranging from 6.77% to 6.98% with purchases prices
ranging from 102.95% to 103.20% of par.
11. Stockholders' Equity
(a) Dividends/Distributions
The Company declared the following distributions during 2001, 2000 and 1999:
Dividend
Declaration Date Record Date Payment Date per Share
- -------------------- ------------------ ----------------- ---------
2001
February 12, 2001 April 16, 2001 April 30, 2001 $0.165
April 9, 2001 June 30, 2001 July 16, 2001 0.175
September 19, 2001 October 2, 2001 October 18, 2001 0.225
December 12, 2001 December 28, 2001 January 30, 2002 0.280
2000
March 17, 2000 April 14, 2000 May 17, 2000 $0.140
June 14, 2000 June 30, 2000 August 17, 2000 0.140
September 18, 2000 October 16, 2000 November 17, 2000 0.155
December 14, 2000 January 15, 2001 January 30, 2001 0.155
1999
March 24, 1999 April 5, 1999 May 17, 1999 $0.265(1)
June 14, 1999 June 30, 1999 August 17, 1999 0.125
September 21, 1999 September 30, 1999 November 17, 1999 0.140
December 16, 1999 January 3, 2000 February 18, 2000 0.140
(1) As part of the 1998 Merger, the Company made quarterly distributions of
$.265 per share of common stock ($1.06 per share per year) in the first year
following the 1998 Merger (i.e., through the first quarter of 1999).
Accordingly, cash distributions paid by the Company in the first quarter of 1999
and in 1998 consisted in part of a dividend and in part of a cash merger
payment.
For tax purposes, a portion of each of the dividends declared on: December
12, 2001 and December 14, 2000, were treated as a dividend for stockholders in
the subsequent year. The dividend declared on December 16, 1999
40
AMERICA FIRST MORTGAGE INVESTMENTS, INC.
NOTES TO THE FINANCIAL STATEMENTS
and paid on February 18, 2000 was treated in its entirety as a 2000 dividend for
stockholders.
In general, consistent with the Company's underlying operational strategy,
the Company's dividends will partgenerally be characterized as ordinary income
to its stockholders for federal tax purposes. However, a portion of the
Company's dividends may be characterized as capital gains or return of capital.
All of the dividends for 2001 and 1999 were characterized as ordinary income and
approximately $0.02 of the Company's dividends for the year ended December 31,
2000 was characterized as capital gains.
(b) Common Stock Offerings
On June 27, 2001, the Company issued 10,335,214 shares of its common stock
at $7.00 per share, raising net proceeds of approximately $67.1 million. On
November 7, 2001, the Company issued 8,000,000 shares of its common stock at
$8.00 per share, raising net proceeds of approximately $59.7 million.
(c) Shelf Registration
On September 25, 2001, the Company filed a registration statement on Form
S-3 with the Securities and Exchange Commission under the Securities Act of
1933, as amended, (the "Act") with respect to an aggregate of $300,000,000 of
common stock and/or preferred stock that may be sold by the Company from time to
time pursuant to Rule 415 under the Act. On October 5, 2001, the Commission
declared the Registration Statement effective. The common stock offering
completed by the Company in November 2001 utilized a portion of the securities
registered under this shelf registration. As of December 31, 2001, the Company
had $236,000,000 remaining under this shelf registration statement. (See Note
17)
(d) Stock Repurchase Plan
On January 12, 2001, the Company's Board of Directors approved the
repurchase of up to 200,000 shares of its common stock; however, the Company did
not repurchase any shares during 2001 pursuant to its share repurchase plan. In
connection with the Company's 400,000 share repurchase program, the Company
purchased 293,621 shares during 2000, at an aggregate cost of $1,512,000 and
84,600 shares at an aggregate cost of $412,000 during 1999. All shares
repurchased were retired. Since implementing the stock repurchase program during
the fourth quarter of 1999, through December 31, 2001, the Company had
repurchased and retired 378,221 shares at an aggregate cost of $1,924,000.
12. EPS Calculation
The following table presents the reconciliation between basic and diluted
shares outstanding used in calculating basic and diluted EPS for the years ended
December 31, 2001, 2000 and 1999:
2001 2000 1999
------ ----- -----
(In Thousands)
Weighted average shares outstanding -basic 15,229 8,869 9,046
Add effect of assumed shares issued under
treasury stock method for stock options 101 17 --
------ ----- -----
Weighted average shares
outstanding - diluted 15,330 8,886 9,046
====== ===== =====
13. Other Comprehensive Income/Accumulated Other Comprehensive Income
Comprehensive income for the years ended December 31, 2001, 2000 and 1999
was as follows:
2001 2000 1999
------- ------ -------
(In Thousands)
Net income $ 3,784 $7,866 $ 7,600
Other comprehensive income:
Net unrealized holding gains (losses) on
investment securities arising during the period 8,444 1,331 (4,371)
Unrealized appreciation on hedge instrument 163 -- --
------- ------ -------
Comprehensive income $12,391 $9,197 $ 3,229
======= ====== =======
41
AMERICA FIRST MORTGAGE INVESTMENTS, INC.
NOTES TO THE FINANCIAL STATEMENTS
Accumulated other comprehensive income at December 31, 2001 and 2000 was
as follows:
2001 2000
------- -------
(In Thousands)
Unrealized gains on available-for-sale:
MBS $ 8,409 $ 352
Corporate equity securities 710 614
Unrealized losses on available for
sale:
MBS (4,773) (4,414)
Equity securities -- (650)
------- -------
Net unrealized gains/(losses) 4,346 (4,098)
Unrealized appreciation on hedge
instrument 163 --
------- -------
Accumulated other comprehensive income $ 4,509 $(4,098)
======= =======
14. 1997 Stock Option Plan - ---------------------and Employment Agreements
(a) 1997 Stock Option Plan
The Company has aCompany's 1997 Stock Option Plan (the Plan) which"1997 Plan") authorizes the
granting of options to purchase an aggregate of up to 1,000,000 shares of the
Company's common stock, but not more than 10% of the total outstanding shares of
the Company's common stock. The Plan authorizes the Board of Directors, or a
committee of the Board of Directors, to grant Incentive Stock Options (ISOs)("ISOs"),
as defined under section 422 of the Internal Revenue Code, Non-Qualified Stock
Options (NQSOs)non-qualified stock options ("NQSOs")
and Dividend Equivalent Rights (DERs)dividend equivalent rights ("DERs") to eligible persons,
other than non-employee directors. Non-employee directors are eligible to
receive grants of NQSOs with DERs pursuant to the provisions of the Plan.persons. The exercise price
for any options granted to eligible persons under the 1997 Plan shall not be
less than the fair market value of the common stock on the day of the grant. The
options expire if not exercised ten years afterfrom the date granted.
- 35 -
On April 6, 1998, 500,000 ISOs were granted to buy common shares at an
exercise price of $9.375 per share (the 1998 Grant). In addition, 20,000
NQSOs were issued at an exercise price of $9.375 per share. On August 13,
1999, 300,000 ISOs were granted to buy common shares at an exercise price of
$4.875 per share (the 1999 Grant). Prior togrant.
Activity in the 1998 Grant, no other options
were outstanding. As of1997 Plan is summarized as follows for the years ended
December 31, 2001, 2000 and 1999, respectively, 525,000 and
325,000 ISOs were vested and exercisable. As of December 31, 2000 and 1999,
20,000 NQSOs were vested and exercisable. As of December 31, 2000, no options
had been exercised.
In addition to the options granted on April 6, 1998, 500,000 and 5,000 DERs
were also granted on the ISOs and NQSOs, respectively, based on the provisions
of the Plan. No DERs were granted on the ISOs granted on August 13, 1999.1999:
2001 2000 1999
-------------------------- -------------------------- -------------------------
Weighted Weighted Weighted
Average Average Average
Exercise Exercise Exercise
Options Price Options Price Options Price
----------- ----------- ----------- ------------ ---------- -----------
Outstanding at beginning of
year: 820,000 $ 6.52 820,000 $ 6.52 520,000 $ 9.38
Granted -- -- -- -- 300,000 4.88
Cancelled -- -- -- -- -- --
Exercised (26,250) 4.88 -- -- -- --
----------- ----------- ----------
Outstanding at end of year 793,750 6.44 820,000 6.52 820,000 6.52
=========== =========== ==========
Options exercisable at end of
year 718,750 6.12 545,000 6.11 345,000 5.85
DERs on the ISOs vest on the same basis as the options.options and DERs on NQSOs
becamebec ome fully vested in April, 1999. Paymentsone year following the date of grant. Dividends are madepaid on
vested DERs only. Vested
DERs are paid only to the extent of ordinary income andincome. DERs are not on returnsentitled to
distributions representing a return of capital. Dividends paid on ISOs are
charged to stockholders' equity when declared and dividends paid on NQSOs are
charged to earnings when declared. For the years ended December 31, 2001, 2000
1999 and 1998,1999, the Company recorded charges of $221,250, $117,500$423,000, $221,000 and $42,500,$118,000,
respectively, to stockholders' equity (included in dividends paid or accrued)
associated with the DERs on ISOs and charges of $3,650, $4,700$4,000, $4,000 and $1,700,$5,000,
respectively, to earnings associated with DERs on NQSOs. All 505,000 DERs
granted in 1998 were outstanding and fully vested at December 31, 2001.
Because the Company was externally managed from the time of its formation
through January 1, 2002, it had no direct employees. The optionsindividuals who
received the ISO grants and related DERs issued were accounted for under the provisions of
SFAS 123, "Accounting for Stock Based Compensation". Because the ISOs were
not issued to officers who are direct employees of the Advisor. The
Company ISOs granted
were accountedwas therefore required to account for under the optionISO grants applying the fair
value method as variable plan grants and a
periodic charge isdescribed under Statement of FAS No. 123 ("FAS 123") resulting
in option related expenses recognized based onover the vesting schedule. The charge for
options which vested immediately withperiod. Management used
the 1998 Grant was included as
capitalized transaction costs in connection with the Merger. Until fixed and
determinable, management estimates the value of the ISOs granted as of each
balance sheet date using a Black-Scholes valuation model as adjusted forto determine the discounted value of dividends not to be received under the unvested DERs. In
the absence of comparable historical market information foroption expense. Because the
Company commenced operations in 1998, management originally utilizedused assumptions consistent
with activity of a comparable peer group of companies including an estimated
option life, a volatility rate, a risk-freerisk free rate and a current dividend yield
for the 1998 and 1999 grants (or 0% if the related DERs are issued). For the
years ended December 31, 2001,
42
AMERICA FIRST MORTGAGE INVESTMENTS, INC.
NOTES TO THE FINANCIAL STATEMENTS
2000 1999 and 1998, as part of operations,1999, the Company reflected earnings chargesexpenses of $113,115, $42,707$129,000, $113,000 and $170,154,$43,000,
respectively, representing the value of ISOs/DERs granted over their vesting
period.
NQSOs were granted wereto the Company's directors as consideration for the
performance of their duties as directors. The Company treated the directors as
employees for purposes of applying FAS 123 and, in accordance with its policy,
accounted for using the intrinsic method and, accordingly,NQSOs under APB 25, as described earlier, with no earnings charge was reflected
sinceexpense
recognized for the NQSOs, as the exercise price at the time of grant was equal
to the fair market value of the common
stock at the date of the grant.
Dividends/Distributions
- -----------------------
The Company declared the following distributions during 2000, 1999 and 1998:
Declaration Date Record Date Payment Date Amount per Share
- ---------------- ----------- ------------ ----------------
During 2000:
March 17, 2000 April 14, 2000 May 17, 2000 $ .140
June 14, 2000 June 30, 2000 August 17, 2000 $ .140
September 18, 2000 October 16, 2000 November 17, 2000 $ .155
December 14, 2000 January 15, 2001 January 30, 2001 $ .155
During 1999:
March 24, 1999 April 5, 1999 May 17, 1999 $ .265 (1)
June 14, 1999 June 30, 1999 August 17, 1999 $ .125
September 21, 1999 September 30, 1999 November 17, 1999 $ .140
December 16, 1999 January 3, 2000 February 18, 2000 $ .140
During 1998:
June 18, 1998 June 30, 1998 August 14, 1998 $ .265 (1)
September 9, 1998 September 30, 1998 November 16, 1998 $ .265 (1)
December 15, 1998 December 31, 1998 February 19, 1999 $ .265 (1)
(1) As part of the Merger transaction, the Company made quarterly distributions of
$.265 per common share ($1.06 per common share per year) in the first year
- 36 -
following the Merger (i.e. through the first quarter of 1999.) Accordingly,
cash distributions paid by the Company in the first quarter of 1999 and in 1998
consisted in part of a dividend and in part of a cash merger payment.
Cash distributions paid or accrued by the Predecessor were $.2649 pr Unit
prior to the Merger in 1998.
For tax purposes, a portion of the dividend declared on December 14, 2000, and
paid onstock.
(b) Employment Agreements
Effective January 30, 2001, will be treated as a 2001 dividend for shareholders.
Similarly, the dividend declared on December 16, 1999, and paid February 18,
2000, was treated in its entirety as a 2000 dividend for shareholders and the
dividend declared on December 15, 1998, and paid February 19, 1999, was
treated as a 1999 dividend for shareholders.
Stock Repurchase Plan
- ---------------------
In connection with the Company's 400,000 share repurchase program,1, 2002, the Company purchasedassumed the employment agreements
with Messrs Zimmerman, Gorin and retired 293,621 shares during theFreydberg that provide for, among other things,
base salaries of $300,000, $200,000 and $200,000 per year, ended December 31, 2000,
atrespectively and a
minimum bonus pool of $265,000 and an aggregate costadditional annual bonus pool of $1,511,613. During the year ended December 31, 1999,0.65% of
additional equity capital that the Company purchased and retired 84,600 share at an aggregate cost of
$412,208. Since implementing the stock repurchase program during the fourth
quarter of 1999, through December 31, 2000, the Company has purchased and
retired 378,221 shares at an aggregate cost of $1,923,821. See Note 12 -
Subsequent Events.
9. Related Party Transactions
The Advisor manages the operations and investments of the Company and performs
administrative services for the Company. In turn, the Advisor receives a
management fee payable monthly in arrears in an amount equal to 1.10% per
annum of the first $300 million of Stockholders' Equity of the Company, plus
.80% per annum of the portion of Stockholders' Equity of the Company above
$300 million. The Company also pays the Advisor, as incentive compensation
for each fiscal quarter, an amount equal to 20% of the dollar amount by which
the annualized Return on Equity for such fiscal quarter exceeds the amount
necessary to provide an annualized Return on Equity equal to the Ten-Year U.S.
Treasury Rate plus 1%. For the years ended December 31, 2000, 1999 and the
period from April 10, 1998 (Merger Date) to December 31, 1998, the Advisor
earned a base management fee of $740,437, $761,646 and $590,875, respectively
and incentive compensation of $797,054, $741,233 and $2,807, respectively.
Approximately $519,000 of the incentive fee earned in 2000 was attributable to
the sale described in Note 6. Approximately $433,000 of the incentive fee
earned in 1999 was attributable to the sale described in Note 6.
America First Properties Management Company L.L.C., (the Manager), provides
property management services for certain of the multifamily properties in
which the Company has an interest. The Manager also provided property
management services to certain properties previously associated with the
Predecessor which were acquired in the Merger. The Manager receives a
management fee equal to a stated percentage of the gross revenues generated by
the properties under management, ranging from 3.5% to 5% of gross revenues.
Such fees paid by the Company for the years ended December 31, 2000, 1999 and
the period from April 10, 1998 through December 31, 1998, amounted to
$374,923, $325,213 and $250,912, respectively. Such fees paid by the three
Partnerships which merged amounted to $83,017 (including $45,527 paid by the
Predecessor) for the period in 1998 prior to the Merger Date.
Prior to the Merger Date, the general partner of the Predecessor (AFCA 3) was
entitled to an administrative fee of .35% per annum of the outstanding amount
of investments of the Predecessor to be paid by the Predecessor to the extent
such amount is not paid by property owners. AFCA 3 earned administrative fees
of $53,617 in 1998 of which $38,659 was paid by the Predecessor and the
remainder was paid by owners of real properties financed by the Predecessor.
Prior to the Merger Date, substantially all of Predecessor's general and
administrative expenses and certain costs capitalized by the Predecessor were
paid by AFCA 3 or an affiliate and reimbursed by the Predecessor. The amounts
of such expenses reimbursed to AFCA 3 or an affiliate were $165,439 in 1998.
The capitalized costs consist of transaction costs incurred in conjunction
with the merger described in Note 1.
- 37 -
10.raises.
15. Fair Value of Financial Instruments
FAS No. 107 "Disclosures about Fair Value of Financial Instruments"
defines the fair value of a financial instrument as the amount at which the
instrument could be exchanged in a current transaction between willing parties.
The relevance and reliability of the estimates of fair values presented are
limited, given the dynamic nature of market conditions, including changes in
interest rates, the real estate market, debtors' financial condition and
numerous other factors over time. The following table presents the carrying
value and estimated fair value of financial instruments at December 31, 2001 and
2000:
2001 2000
-------------------------- ---------------------------
Carrying Estimated Carrying Estimated
Value Fair Value Value Fair Value
----------- ----------- ------------ -----------
(In Thousands)
Financial Assets:
Cash and cash equivalents $ 58,533 $ 58,533 $ 8,401 $ 8,401
Restricted cash 39,499 39,499 499 499
Investment in MBS 1,926,900 1,926,900 470,576 470,576
Investment in corporate debt
securities 9,774 6,335 15,666 11,896
Investment in corporate equity
securities 4,088 4,088 9,011 9,011
Interest rate cap agreement 513 513 -- --
Financial Liabilities:
Repurchase agreements 1,845,598 1,851,133 448,583 448,583
The following methods and assumptions were used by the Company in
estimating the fair value of its financial instruments:
Investments in mortgage securities,MBS, corporate debt securities and corporate equity
securities: Fair values are based on broker quotes or amounts obtained from
independent pricing sources.
Cash and cash equivalents:equivalents and Restricted cash: Fair value approximates the
carrying value of such assets.
Repurchase agreements: Fair value approximatesreflects the present value of the
contractual cash flow (i.e., future value). The discount rate used to present
value the contractual future value was LIBOR at quoted on December 31, 2001 for
the weighted average term to maturity of 3.6 months. At December 31, 2000, the
fair value approximated the carrying value.
Commitments: Commitments to purchase securities are derived by applying
the fees currently charged to enter into similar agreements, taking into account
remaining terms of the agreements and the present credit worthiness of the
counterparties. The commitments existing at December 31, 2001 and 2000, would
have been offered at substantially the same rates and under substantially the
same terms that would have been offered at December 31, 2001 and 2000;
respectively, therefore, the estimated fair value of such
liabilities.
As of December 31, 2000 As of December 31, 1999
------------------------------- --------------------------------
Carrying Estimated Carrying Estimated
Amount Fair Value Amount Fair Value
------------ ------------- ------------- --------------
Investment in mortgage securities $ 470,575,671 $ 470,575,671 $ 475,719,711 $ 475,719,711
Investment in corporate debt securities 15,665,727 11,895,625 8,020,026 7,937,750
Investment in corporate equity securities 9,010,538 9,010,538 3,130,823 3,130,823
Cash and cash equivalents
Unrestricted 8,400,539 8,400,539 19,895,833 19,895,833
Restricted 498,875 498,875 3,709,577 3,709,577
Repurchase agreements 448,583,432 448,583,432 452,101,803 452,101,803
11.the commitments was zero at
those dates and are not included in the table above.
43
AMERICA FIRST MORTGAGE INVESTMENTS, INC.
NOTES TO THE FINANCIAL STATEMENTS
16. Summary of Quarterly Results of Operations (Unaudited)
First Second Third Fourth
From January 1, 2000, to2001 Quarter Ended
-------------------------------------------------
March 31 June 30 September 30 December 31
2000 Quarter Quarter Quarter Quarter
-------------- -------------- -------------- ---------------------- ------- ------------ -----------
Total(In Thousands, Except per Share
Amounts)
Interest and dividend income $ 1,956,2168,897 $ 1,932,9838,956 $16,688 $ 4,292,650 $ 2,141,463
Total21,964
Interest expense 6,536 5,814 10,276 12,447
------- ------- ------- --------
Net interest/dividend income
2,361 3,142 6,412 9,517
Other income (loss) 2,874(1) (180) 105 (2,553)(2)
Operating and other expenses (461,465) (512,495) (994,723)(1) (488,513)
-------------- -------------- -------------- --------------1,167(1) 739 1,430 14,558 (3)
------- ------- ------- --------
Net income 4,068 $ 1,494,7512,223 $ 1,420,4885,087 $ 3,297,927 (1) $ 1,652,950
============== ============== ============== ==============(7,594)
======= ======= ======= ========
Net income per share - basic $ 0.47(1) $ 0.24 $ 0.27 ($ 0.32)
======= ======= ======= ========
Net income per share - diluted $ 0.46(1) $ 0.24 $ 0.27 ($ 0.32)
======= ======= ======= ========
2000 Quarter Ended
-------------------------------------------------
March 31 June 30 September 30 December 31
-------- ------- ------------ -----------
(In Thousands, except per share
amounts)
Interest and dividend income $8,774 $9,086 $9,157 $9,283
Interest expense 6,966 7,627 7,828 7,682
------ ------ ------ ------
Net interest/dividend income
1,808 1,459 1,329 1,601
Other income (loss) 148 474 2,964(4) 540
Operating and other expenses 461 513 995(4) 488
------ ------ ------ ------
Net income $1,495 $1,420 $3,298 $1,653
====== ====== ====== ======
Net income per share - basic and
diluted
per share $ 0.17 $ 0.16 $ 0.37 (1)0.37(4) $ 0.19
============== ============== ============== ==================== ====== ====== ======
First Second Third Fourth
From January 1, 1999, to December 31, 1999 Quarter Quarter Quarter Quarter
-------------- -------------- -------------- --------------
Total income $ 1,869,081 $ 2,146,590 $ 4,223,361 $ 2,037,399
Total expenses (616,193) (628,400) (1,052,855) (2) (374,885)
Minority interest (490) (4,230) 327 175
-------------- -------------- -------------- --------------
Net income $ 1,252,398 $ 1,513,960 $ 3,170,833 (2) $ 1,662,689
============== ============== ============== ==============
Net income, basic and diluted,
per share $ 0.14 $ 0.17 $ 0.35 (2) $ 0.18
============== ============== ============== ==============
Explanatory Notes:
(1) Includes income of approximately $2.1 million (net of the incentive fee of $519,000)
or approximately $0.24 per share related to the sale described in Note 6.
(2) Includes income of approximately $1.7 million (net of the incentive fee of $433,000)
or approximately $0.19 per share related to the sale described in Note 6.
- 38 -
12.(1) Other income includes approximately $2.6 million of gains on sale of a
property; operating and other expenses include an incentive fee of $511,000 paid
to the Advisor related to this gain; on a net basis this gain increased per
share income by approximately $0.24.
(2) Includes an other-than-temporary impairment charge of $2.5 million related
to a debt security, which reduced net income per share by $0.10 per share.
(3) Includes the $12.5 million of costs, of which $11.3 million was a non-cash
equity issuance, incurred to acquire the Advisor, which reduced net income per
share by $0.53 per share.
(4) Other income includes approximately $2.6 million of gains on sale of a
property; operating and other expenses include an incentive fee of $519,000 paid
to the Advisor related to this gain; on a net basis this gain increased per
share income by approximately $0.23.
17. Subsequent Events
Common Stock Offering
On January 12, 2001,15, 2002, the Company's BoardCompany announced that it had priced a public
offering of Directors approved the
repurchase of up to6,500,000 shares, with an additional 200,000975,000 shares to cover
over-allotments, of its common stock.
Onstock at $8.25 per share. The offering was
completed on January 2, 2001,18, 2002, with the limited partnership which owned an assisted living
center located in Salt Lake City, Utah, was liquidated with Retirement Centers
Corporation (RCC) receiving an undivided interest in theissuance of 7,475,000 shares, generating
net assets of such
partnership. RCC then sold its undivided interest in the net assets of such
assisted living center resulting in a gain to RCCproceeds of approximately $2.9$58.1 million. OnThe Company expects to fully invest
the proceeds in accordance with its investment guidelines, on a levered basis,
during the first quarter of 2002. Subsequent to the January 18, 2001, RCC acquired an 88.3% undivided interest and15, 2002 offering,
the Company acquired an 11.7% undivided interest in Lealand Place Apartments,had approximately $174,331,000 remaining on a 192-unit
multifamily housing property located in Lawrenceville, Georgia, for
approximately $13.3 million. The acquisition$300 million shelf
registration that was financed with the proceeds
of a $10.3 million mortgage loan and cash of $3.0 million.
- 39 -declared effective on October 5, 2001. (See Note 11)
44
Item 9. Changes in and Disagreements Withwith Accountants on Accounting and
Financial Disclosure.
There were no changes in, nor any disagreements with the Company's or its
Predecessor's
independent accountants on accounting principles and practices or financial
disclosure, during the fiscal years ended December 31, 2001, 2000 and 1999.
PART III
Item 10. Directors and Executive Officers of Registrant.
The information
about directors required to be furnished pursuant to this Item 10 is
incorporated by reference toInformation regarding the Company's definitivedirectors appears under the heading
"Election of Directors" in the Company's proxy statement forrelating to its 20012002
Annual Meeting of Stockholders to be filed with the Securities and
Exchange Commission pursuant to Regulation 14A within 120 days after December
31, 2000held on May 23, 2002 (the "Proxy
Statement") underand is incorporated herein by reference.
Information regarding the heading "Election of Directors."
Information about theCompany's executive officers of the Company is shownappears under Item
44A of Part I of this filing.
Section 16(a) Beneficial Ownership Reporting Compliance.Annual Report on Form 10-K.
Information regarding compliance with Section 16(a) of the Securities
and Exchange Act of 1934, requiresas amended, appears under the Company's directors and executive officers, and certain persons who own more
than ten percentheading "Compliance with
Section 16(a) of the Company's common stock, to file withExchange Act" in the SecuritiesProxy Statement and Exchange Commission (the "SEC") reports of their ownership of Company
common stock. Officers, directors and greater-than-ten-percent beneficial
owners are requiredis incorporated
herein by SEC regulation to furnish the Company with copies of
all Section 16(a) reports they file. Based solely upon review of the copies
of such reports received by the Company and written representations from each
such person who did not file an annual report with the SEC (Form 5) that no
other reports were required, the Company believes that there was compliance
for the year ended December 31, 2000, with all Section 16(a) filing
requirements applicable to the Company's officers, directors and
greater-than-ten-percent beneficial owners.reference.
Item 11. Executive Compensation.
The information required to be furnished
pursuant to this Item 11Information regarding executive compensation appears under the heading
"Executive Compensation" in the Proxy Statement and is incorporated herein by
reference to the Proxy Statement.reference.
Item 12. Security Ownership of Certain Beneficial Owners and Management.
The information required to be furnished pursuant to this Item 12 is
incorporated by reference totable of beneficial ownership of the Company appears under the heading
"Security Ownership of Certain Beneficial Owners and Management" in the Proxy
Statement under the heading "Voting
Securities and Beneficial Ownership Thereofis incorporated herein by Principal Stockholders,
Directors and Officers" and "Long-Term Incentive Plans and Other Matters."reference.
Item 13. Certain Relationships and Related Transactions.
The information
required to be furnished pursuant to this Item 13 is incorporated by reference
to the Proxy StatementInformation regarding certain relationships and related transactions
appears under the heading "Certain Relationships and Related Transactions."Transactions" in
the Proxy Statement and is incorporated herein by reference.
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. Consolidated and Combined Financial Statements. The consolidated and
combined financial statements of the Company and the
Predecessor, together with the Independent Accountants' Report thereon,
are set forth on pages 2226 through 3944 of this Form 10-K and are
incorporated herein by reference.
2. Financial Statement Schedules. TheFinancial Statement Schedules have
been omitted because they are not applicable or the required information
required to be set forthis shown in the financial statement schedules is included in the Consolidated and Combined
Financial Statementsstatements and/or in the Notesnotes to Consolidated and Combined
Financial Statementsfinancial
statements filed in response to Item 8 hereof.
3. Exhibits.
2.1 Agreement and Plan of Merger by and among the Registrant, America
First Participating/Preferred Equity Mortgage Fund Limited Partnership,
America First Prep Fund 2 Limited Partnership, America First Prep Fund 2
Pension Series Limited Partnership and certain other parties, dated as of
July 29, 1997 (incorporated herein by reference to Exhibit 2.1 of the
Registration Statement on Form S-4 dated February 12, 1998, filed by the
Registrant pursuant to the Securities Act of 1933 (Commission File No.
333-46179)).
- 40 -2.2 Agreement and Plan of Merger by and among the Company, America First
Mortgage Advisory Corporation ("AFMAC") and the shareholders of AFMAC
dated September 24, 2001 (incorporated herein by reference to Exhibit A of
the Preliminary Proxy Statement dated October 9, 2001, filed by the
Registrant pursuant to the Securities Exchange Act of 1934. (Commission
File No. 1-13991)).
45
3.1 Amended and Restated Articles of Incorporation of the RegistrantCompany (incorporated
herein by reference to Form 8-K dated April 10, 1998, filed by the Registrant
pursuant to the Securities Exchange Act of 1934 (Commission File No. 1-13991)).
3.2 Amended and Restated Bylaws of the Registrant (incorporated herein by
reference to Form 8-K dated April 10, 1998, filed by the Registrant pursuant to
the Securities Exchange Act of 1934 (Commission File No. 1-13991)).
4.1 Specimen of Common Stock Certificate of the Company.Company (incorporated herein by
reference to Exhibit 4.1 of the Registration Statement on Form S-4 dated
February 12, 1998, filed by the Registrant pursuant to the Securities Act of
1933 (Commission File No. 333-46179)).
10.1 Advisory Agreement, dated April 9, 1998, by and between
the Company and the Advisor (incorporated herein by
reference to Form 8-K dated April 10, 1998 filed by
the Company pursuant to the Securities Exchange Act of
1934 (Commission File No. 1-13991)).
10.2 Employment Agreement of Stewart Zimmerman (incorporated herein by reference
to Exhibit 10.2 of the Registration Statement on Form S-4 dated February 12,
1998, filed by the Company pursuant to the Securities Act of 1933 (Commission
File No. 333-46179)).
10.310.2 Employment Agreement of William S. Gorin (incorporated herein by reference
to Exhibit 10.3 of the Registration Statement on Form S-4 dated February 12,
1998, filed by the Company pursuant to the Securities Act of 1933 (Commission
File No. 333-46179)).
10.410.3 Employment Agreement of Ronald A. Freydberg (incorporated herein by
reference to Exhibit 10.4 of the Registration Statement on Form S-4 dated
February 12, 1998, filed by the Company pursuant to the Securities Act of 1933
(Commission File No. 333-46179)).
10.510.4 Addendum to Employment Agreement of Stewart Zimmerman (incorporated herein
by reference to Form 10-Q dated March 31, 2000, filed with the Securities and
Exchange Commission pursuant to the Securities Exchange Act of 1934 (Commission
File No. 1-13991)).
10.6 Addendum to Employment Agreement of William S. Gorin (incorporated herein
by reference to Form 10-Q dated March 31, 2000, filed with the Securities and
Exchange Commission pursuant to the Securities Exchange Act of 1934 (Commission
File No. 1-13991)).
10.7 Addendum to Employment Agreement of Ronald A. Freydberg (incorporated
herein by reference to Form 10-Q dated March 31, 2000, filed with the Securities
and Exchange Commission pursuant to the Securities Exchange Act of 1934
(Commission File No. 1-13991)).
10.8 Third Addendum to Employment Agreement of Stewart Zimmerman dated October
15, 2001
10.9 Third Addendum to Employment Agreement of William S. Gorin, dated October
15, 2001
10.10 Third Addendum to Employment Agreement of Ronald A. Freydberg, dated
October 15, 2001
10.11 Amended and Restated 1997 Stock Option Plan of the Company (incorporated
herein by reference to Form 10-K dated December 31, 1999, filed with the
Securities and Exchange Commission pursuant to the Securities Exchange Act of
1934 (Commission File No. 1-13991)).
10.9 Form10.12 Second Amended and Restated 1997 Stock Option Plan of Dividend Reinvestment Planthe Company
(incorporated herein by reference to Appendix C of the Registration Statement on
Form S-410-Q dated February 12, 1998,August 10, 2001, filed
bywith the RegistrantSecurities and Exchange Commission pursuant to the Securities Exchange
Act of 19331934 (Commission File No. 333-46179)1-13991)).
- 41 -
24. Power23 Consent of Attorney
(b)Price waterhouseCoopers LL P
Reports on Form 8-K
The Registrant did not file any reportsfiled the following on Form 8-K during the fourth quarter
of the year for which this report is filed.2001:
Item Reported Financial Statements Filed Date of Report
- 42 -------------- -------------------------- --------------
5. Other Events No December 12, 2001
5. Other Events No November 1, 2001
5. Other Events Yes October 17, 2001
46
EXHIBIT 10.8
SIGNATURES
Pursuant to the requirements of Section 13 or 15 (d) of the Securities
Exchange Act of 1934, the Company has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized.
Date: March 28, 2001 America First
Mortgage Investments, Inc.
Date: March 22, 2002 By /s/ Stewart Zimmerman
------------------------------------
Stewart Zimmerman
Chief Executive Officer
- 43 -Date: March 22, 2002 By /s/ William S. Gorin
------------------------------------
William S. Gorin
Executive Vice President
Chief Financial Officer/Treasuer
(Principal Accounting Officer)
Pursuant to the requirements of the Securities Act of 1934, this report
has been signed below by the following persons on behalf of the Company and in
the capacities and on the dates indicated.
Date: March 28, 200122, 2002 By /s/ Michael B. Yanney*Yanney
------------------------------------
Michael B. Yanney
Chairman of the Board
Date: March 28, 200122, 2002 By /s/ Stewart Zimmerman
------------------------------------
Stewart Zimmerman
Chief Executive Officer and Director
Date: March 28, 200122, 2002 By /s/ Gary Thompson
Gary Thompson
Chief Financial Officer
Date: March 28, 2001 By /s/ Michael L. Dahir*
Michael L. DahirAlan Gosule
------------------------------------
Alan Gosule
Director
Date: March 28, 2001 By /s/ George V. Janzen*
George V. Janzen
Director
Date: March 28, 200122, 2002 By /s/ George H. Krauss*Krauss
------------------------------------
George H. Krauss
Director
Date: March 28, 2001 By /s/ Gregor Medinger*
Gregor Medinger
Director
Date: March 28, 2001 By /s/ W. David Scott*
W. David Scott
Director
* By Stewart Zimmerman, Attorney-in-fact
/s/ Stewart Zimmerman
Stewart Zimmerman
- 44 -
EXHIBIT 24
POWER OF ATTORNEY
- 45 -
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, 2000, and any amendments
thereto, required to be filed with the Securities and Exchange Commission by
America First Mortgage Investments, Inc.
IN WITNESS WHEREOF, the undersigned has executed this Power of Attorney as of
the 1st day of February 2001.
/s/ Michael B. Yanney
Michael B. Yanney
- 46 -
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, 2000, and any amendments
thereto, required to be filed with the Securities and Exchange Commission by
America First Mortgage Investments, Inc.
IN WITNESS WHEREOF, the undersigned has executed this Power of Attorney as of
the 1st day of February 2001.
/s/ Michael L. Dahir
Michael L. Dahir
- 47
-
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, 2000, and any amendments
thereto, required to be filed with the Securities and Exchange Commission by
America First Mortgage Investments, Inc.
IN WITNESS WHEREOF, the undersigned has executed this Power of Attorney as of
the 1st day of February 2001.
/s/ George V. Janzen
George V. Janzen
- 48 -
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, 2000, and any amendments
thereto, required to be filed with the Securities and Exchange Commission by
America First Mortgage Investments, Inc.
IN WITNESS WHEREOF, the undersigned has executed this Power of Attorney as of
the 1st day of February 2001.
/s/ George H. Krauss
George H. Krauss
- 49 -
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, 2000, and any amendments
thereto, required to be filed with the Securities and Exchange Commission by
America First Mortgage Investments, Inc.
IN WITNESS WHEREOF, the undersigned has executed this Power of Attorney as of
the 1st day of February 2001.
/s/ Gregor Medinger
Gregor Medinger
- 50 -
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, 2000, and any amendments
thereto, required to be filed with the Securities and Exchange Commission by
America First Mortgage Investments, Inc.
IN WITNESS WHEREOF, the undersigned has executed this Power of Attorney as of
the 1st day of February 2001.
/s/ W. David Scott
W. David Scott
- 51 -