FORM 10-Q
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
X Quarterly report pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934
For the quarterly period ended JuneSeptember 30, 1998 or
Transition report pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934
For the transition period from to
Commission File Number: 1-13991
AMERICA FIRST MORTGAGE INVESTMENTS, INC.
(Exact name of registrant as specified in its charter)
Maryland 13-3974868
(State or other jurisdiction (IRS 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's telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to
such filing requirements for the past 90 days.
YES X NO
-i-
Part I. Financial Information
Item 1. Financial Statements
AMERICA FIRST MORTGAGE INVESTMENTS, INC.
CONSOLIDATED AND COMBINED BALANCE SHEETS
JuneSept. 30, 1998
Company Dec. 31, 1997
(Unaudited) Predecessor
--------------- ---------------
Investment in Mortgage Securities (Note 3) $ 152,880,839200,258,537 $ 33,506,388
Investment in Corporate Securities (Note 4) 4,664,303 -
Cash and temporary cash investments,equivalents, at cost
which approximates market value 13,930,000 10,521,4937,734,969 10,426,181
Accrued interest receivable 952,1661,488,521 272,264
Real estate held for sale 26,162,471 -
Real estate - 3,973,776
Other investments 296,183 2,355,923(Note 5) 351,663 1,080,320
Investment evaluation fees, net - 564,404
Goodwill, 7,405,309net 7,411,174 -
Other assets 904,997 3,245,7451,668,571 1,708,440
--------------- ---------------
$ 202,531,965223,577,738 $ 54,439,99347,557,997
=============== ===============
Liabilities
Reverse repurchaseRepurchase agreements (Note 6) $ 99,117,208147,587,842 $ -
Accrued interest payable 341,6411,029,611 -
Accounts payable 744,602 876,098355,713 794,102
Dividends or distributions payable 2,407,2972,507,048 511,069
Mortgage notes payable 25,265,597 6,800,000
--------------- ---------------
127,876,345 8,187,167151,480,214 1,305,171
--------------- ---------------
Minority interest in Pension Fund 271,285(Note 1) 246,846 -
Stockholders' Equity and Partners Capital
Stockholders' Equity
Common stock, $.01 par value; 10,000,000 shares authorized
9,035,084 issued and outstanding 90,351 -
Additional paid in capital 76,018,25576,018,256 -
Retained earnings (1,165,790)(2,712,288) -
Available for sale securities:
Unrealized gain (loss) (558,481)(1,545,641) -
Partners Capital
General Partner - 100
Unit Holders - 45,682,774
Net unrealized holding gains (losses) - 569,952
--------------- ---------------
Stockholders' equity --------------- ---------------
$ 74,384,335 $(Partners Capital for 1997) 71,850,678 46,252,826
--------------- ---------------
$ 202,531,965223,577,738 $ 54,439,99347,557,997
=============== ===============
The accompanying notes are an integral part of the consolidated and combined financial statements.
- 1 -
AMERICA FIRST MORTGAGE INVESTMENTS, INC.
CONSOLIDATED AND COMBINED STATEMENTS OF INCOME
(UNAUDITED)
For the For the
Quarter Ended Quarter Ended
JuneSept. 30, 1998 JuneSept. 30, 1997
Company Predecessor
--------------- ---------------
Mortgage Securities income $ 1,398,1413,028,621 $ 674,522658,814
Corporate Securities income 41,852 -
Interest income on temporary cash investments 184,622 147,269150,555 152,289
--------------- ---------------
Total interest income 1,582,763 821,7913,221,028 811,103
Interest expense on borrowed funds 437,4902,035,282 -
--------------- ---------------
Net interest income 1,145,273 821,7911,185,746 811,103
--------------- ---------------
Rental income on real estate held for sale 1,390,631 -
Rental income - 640,650
Income from other investments 61,408 158,322223,426 164,542
Gain on sale of investment 414,710241 -
--------------- ---------------
1,866,749 798,972223,667 164,542
--------------- ---------------
Real estate operating expenses on real estate
held for sale 772,399 -
Real estate operating expenses - 347,399
General and administrative expenses 540,392 294,549
Depreciation - 75,627
Interest expense on mortgage loans 466,201 217,624
--------------- ---------------
1,778,992 935,199
--------------- ---------------532,741 278,529
Minority interest (7,977)10,124 -
-------------- ---------------
542,865 278,529
--------------- ---------------
Net income $ 1,241,007866,548 $ 685,564697,116
=============== ===============
Net income allocated to:
General Partner $ 6,7055,951
BUC Holders 678,859691,165
---------------
$ 685,564
===============697,116
==============
Net income, basic and fully diluted, per share $ 0.140.10 $ N/A
=============== ===============
Net income, basic and fully diluted, per unit $ N/A $ 0.12
=============== ===============
Weighted average number of shares outstanding 9,035,084 N/A
Weighted average number of units outstanding N/A 5,775,797
The accompanying notes are an integral part of the consolidated and combined financial statements.
- 2 -
AMERICA FIRST MORTGAGE INVESTMENTS, INC.
CONSOLIDATED AND COMBINED STATEMENTS OF INCOME
(UNAUDITED)
For the SixNine Months Ended JuneSeptember 30, 1998 For the SixNine
Predecessor Company Months Ended
Through Apr.April 9 From Apr.April 10 Total JuneSept. 30, 1997
--------------- --------------- --------------- ---------------
Mortgage Securities income $ 613,793 $ 1,398,1414,426,762 $ 2,011,9345,040,555 $ 1,365,8422,024,656
Corporate Securities income - 41,852 41,852
Interest income on temporary cash investments 148,799 184,622 333,421 266,836335,177 483,976 419,125
--------------- --------------- --------------- ---------------
Total interest income 762,592 1,582,763 2,345,355 1,632,6784,803,791 5,566,383 2,443,781
Interest expense on borrowed funds - 437,490 437,4902,472,772 2,472,772 -
--------------- --------------- --------------- ---------------
Net interest income 762,592 1,145,273 1,907,865 1,632,6782,331,019 3,093,611 2,443,781
--------------- --------------- --------------- ---------------
Rental income on real estate held for sale 397,519 1,390,631 1,788,150 -
Rental income - - - 1,268,366
Income from other investments 145,167 61,408 206,575 390,555436,865 582,032 555,097
Gain on sale of investmentinvestments - 414,710 414,710414,951 414,951 -
--------------- --------------- --------------- ---------------
542,686 1,866,749 2,409,435 1,658,921145,167 851,816 996,983 555,097
--------------- --------------- --------------- ---------------
Real estate operating expenses on real estate
held for sale 189,689 772,399 962,088 -
Real estate operating expenses - - - 693,962
General and administrative expenses 421,293 540,392 961,685 535,250
Depreciation 47,259 - 47,259 151,255
Interest expense on mortgage loans 160,571 466,201 626,772 423,149
--------------- --------------- --------------- ---------------
818,812 1,778,992 2,597,804 1,803,616
--------------- --------------- --------------- ---------------1,073,133 1,494,426 813,779
Minority interest - (7,977) (7,977)2,147 2,147 -
--------------- --------------- --------------- ---------------
818,812 1,771,015 2,589,827 1,803,616421,293 1,075,280 1,496,573 813,779
--------------- --------------- --------------- ---------------
Net income $ 486,466 $ 1,241,0072,107,555 $ 1,727,4732,594,021 $ 1,487,9832,185,099
=============== =============== =============== ===============
Net income allocated to:
General Partner $ 3,931 $ 13,48719,438
BUC Holders 482,535 1,474,4962,165,661
--------------- ---------------
$ 486,466 $ 1,487,9832,185,099
=============== ===============
Net income, basic and fully diluted, per share $ N/A $ 0.140.23 $ N/A
=============== =============== ===============
Net income, basic and fully diluted, per unit $ 0.08 $ N/A $ 0.260.38
=============== =============== ===============
Weighted average number of shares outstanding N/A 9,035,084 N/A
Weighted average number of units outstanding 5,775,797 N/A 5,775,797
The accompanying notes are an integral part of the consolidated and combined financial statements.
- 3 -
AMERICA FIRST MORTGAGE INVESTMENTS, INC.
CONSOLIDATED AND COMBINED STATEMENTS OF STOCKHOLDERS' EQUITY
AND PARTNERS' CAPITAL
FOR THE SIXNINE MONTHS ENDED JUNESEPTEMBER 30, 1998
(UNAUDITED)
Partners' Capital
-----------------------------------------------------------------------------------
Exchangeable Net Unrealized
General Unit Holders Holding
Partner # of Units Amount Gains (Losses) Total
--------------- --------------- --------------- --------------- ---------------
Balance at December 31, 1997 $ 100 5,775,797 $ 45,682,774 $ 569,952 $ 46,252,826
Net income 3,931 - 482,535 - 486,466
Cash distributions paid or accrued (3,931) - (1,530,009) - (1,533,940)
Change in net unrealized holding gains - - - (21,235) (21,235)
Issuance of stock of the Company in exchange
for Units of the Predecessor (100) (5,775,797) (44,635,300) (548,717) (45,184,117)
--------------- --------------- --------------- --------------- ---------------
Balance at April 10, 1998 (unaudited) $ - - $ - $ - $ -
=============== =============== =============== =============== ===============
Stockholders' Equity
---------------------------------------------------------------------------------
Net
Unrealized
Common Stock Paid-in Retained Holding
# of Shares Amount Capital Earnings Gains (Losses) Total
------------ ------------ ------------ ------------ ------------ ------------
Balance at 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 29,949,41229,949,413 - - 29,981,09929,981,100
Change in classification of Mortgage
Securities from held-to maturityheld-to-maturity to
available-for-sale - - - - (704,828) (704,828)
Issuance of stock options - - 942,390 - - 942,390
Net income - - - 1,241,0072,107,555 - 1,241,007
Change in net unrealized holding gains
since the Merger - - - - 146,347 146,3472,107,555
Dividends paid or accrued - - - (2,406,797)(4,819,843) (4,819,843)
Change in net unrealized gains (losses)
on investments - (2,406,797)- - - (840,813) (840,813)
------------ ------------ ------------ ------------ ------------ ------------
Balance at JuneSept. 30, 1998 (unaudited) 9,035,084 $ 90,351 $76,018,255 $(1,165,790) $ (558,481) $74,384,335$76,018,256 $(2,712,288) $(1,545,641) $71,850,678
============ ============ ============ ============ ============ ============
The accompanying notes are an integral part of the consolidated and combined financial statements.
- 4 -
AMERICA FIRST MORTGAGE INVESTMENTS, INC.
CONSOLIDATED AND COMBINED STATEMENTS CASH FLOW
(UNAUDITED)
For the SixNine Months Ended JuneSeptember 30, 1998 For the SixNine
Months Ended
Predecessor Company JuneSept. 30, 1997
Through Apr.April 9 From Apr.April 10 Total Predecessor
--------------- --------------- --------------- ---------------
Cash flows from operating activities
Net income $ 486,466 $ 1,241,0072,107,555 $ 1,727,4732,594,021 $ 1,487,9832,185,099
Adjustments to reconcile net income to
net cash from operating activities:
Gain on sale of investmentinvestments - (414,710) (414,710)(414,951) (414,951) -
Equity in earnings of operating partnerships (138,561) - (138,561) (230,156)
Amortization and Depreciation 45,300 101,987 147,287 145,996(1,959) (111,894) (113,853) (9,564)
Decrease (increase) in interest receivable 8,302 (545,660) (537,358) 17,950
Increase(1,082,014) (1,073,712) 28,697
Decrease (increase) in other investments 42,869 (61,154) (18,285) (683,271)
Decrease (increase) in other assets (786,123) (110,515) (896,638) (197,797)(723,268) 1,076,062 352,794 (435,305)
Increase (decrease) in accounts payable 569,508 (1,684,858) (1,115,350) (72,653)565,608 (1,716,885) (1,151,277) (26,647)
Increase in accrued interest payable - 341,641 341,6411,029,611 1,029,611 -
--------------- --------------- --------------- ---------------
Net cash provided by operating activities 184,892 (1,071,108) (886,216) 1,151,323378,018 826,329 1,204,347 1,059,009
--------------- --------------- --------------- ---------------
Cash flows from investing activities
Net cash from Merger - 5,070,552 5,070,5524,820,481 4,820,481 -
Purchases of mortgage securities - (102,631,993) (102,631,993)(170,976,856) (170,976,856) -
Purchases of corporate securities - (4,662,500) (4,662,500) -
Principal payments on mortgage securities 867,630 2,650,449 3,518,079 1,911,33121,895,194 22,762,824 2,884,757
Proceeds from sale of other investments - 1,290,000 1,290,000 2,100,000
Distributions received from PEPs 181,430 - 181,430 277,894
Investment in real estate - - - (7,656)
--------------- --------------- --------------- --------------
Net cash provided by (used in) investing activities 1,049,060 (93,620,992) (92,571,932) 4,281,569867,630 (147,633,681) (146,766,051) 4,984,757
--------------- --------------- --------------- --------------
Cash flows from financing activities
Net borrowings from reverse repurchase agreements - 99,117,208 99,117,208 -
Principal payments on mortgage loans - 60,000 60,000147,587,842 147,587,842 -
Dividends and distributions paid (1,535,007) (775,546) (2,310,553) (3,073,924)(3,182,343) (4,717,350) (4,606,086)
--------------- --------------- --------------- --------------
Net cash used inprovided by (used in) financing activities (1,535,007) 98,401,662 96,866,655 (3,073,924)144,405,499 142,870,492 (4,606,086)
--------------- --------------- --------------- --------------
Net increase (decrease) in cash and cash equivalents (301,055) 3,709,562 3,408,507 2,358,968(289,359) (2,401,853) (2,691,212) 1,437,680
Cash and temporary cash investments at beginning
of period 10,521,493 10,220,438 10,521,493 9,001,66610,426,181 10,136,822 10,426,181 8,817,327
--------------- ----------------------------- --------------- --------------
Cash and temporary cash investments at end of period $ 10,220,4380,136,822 $ 13,930,0007,734,969 $ 13,930,0007,734,969 $ 11,360,63410,255,007
=============== =============== =============== ==============
Supplemental disclosure of cash flow information:
Cash paid during the period for interest $ 160,571- $ 562,0501,005,671 $ 722,6211,005,671 $ 423,149-
=============== =============== =============== ==============
The accompanying notes are an integral part of the consolidated and combined financial statements.
- 5 -
AMERICA FIRST MORTGAGE INVESTMENTS, INC.
NOTES TO FINANCIAL STATEMENTS
JUNESEPTEMBER 30, 1998
(UNAUDITED)
1. Organization
America First Mortgage Investments, Inc. (the Company) was incorporated in
Maryland on July 24, 1997, but had no operations prior to April 10, 1998. The
Company has entered into an advisory agreement with America First Mortgage
Advisory Company (the Advisor) which provides advisor services in connection
with the conduct of the Company's business activities.
On April 10, 1998, (the Merger Date) 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 preexisting net assets and
operations or majority interest in the preexisting 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 GAAP.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 BUCsBeneficial Unit Certificates (BUCs) of Prep Fund 2 and approximately 98%
of the BUCs of Pension Fund. 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.
2. Summary of Significant Accounting Policies
A) Method of Accounting
The accompanying 1998 consolidated financial statements include the
consolidated accounts of the Company from April 10, 1998 through JuneSeptember
30, 1998, and the combined accounts of Prep Fund 1 and America First
Participating/Preferred Equity Mortgage Fund Limited Partnership (the
managing general partner of Prep Fund 1) (together referred to as the
Predecessor) for periods prior to the Merger. The financial statements
are prepared on the accrual basis of accounting in accordance with
generally accepted accounting principles. In the opinion of management,
all adjustments necessary to present fairly the financial position at
JuneSeptember 30, 1998, and results of operations for all periods presented
have been made. The financial statements should be read in conjunction
with the combined financial statements and notes thereto included in the
Predecessor's Annual Report on Form 10-K for the year ended December 31,
1997.
The consolidated financial statements include the accounts of the Company
and its subsidiary, Pension Fund. In addition, as more fully discussed in
Note 5, the Company had an investment in a corporation which it does not
control and which it accounts for under the equity method. The Corporation
is not consolidated for income tax purposes. All significant
intercompany transactions and accounts have been eliminated in
consolidation.
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the
financial statements and the reported amounts of revenues and expenses
during the reporting period. Actual results could differ from those
estimates.
B) 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.
C) Mortgage Securities and Corporate Securities
- 6 -
Statement of Financial Accounting Standards No. 115, "Accounting for
Certain Investments in Debt and Equity Securities" (SFAS 115), requires
the Company to classify its investments in Mortgage Securities and
Corporate Securities (collectively referred to as Invesment Securities)
as either held-to-maturity, available-for-sale or trading. 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. Although the Company generally intends to hold most
of its Mortgage Securities until maturity, it may, from time to time, sell
any of itits Mortgage Securities as part of its overall management of itits
balance sheet. Accordingly, to maintain flexibility, the Company currently
classifies all of its Mortgage Securities as available-for sale.available-for-sale.
Certain Mortgage Securities classified as available-for-sale on the
JuneSeptember 30, 1998, balance sheet of the Company were classified as
held-to-maturity on the December 31, 1997 balance sheet of the
Predecessor. (See Note 3).
Mortgage Securities which were classified as held-to-maturity were carried
at amortized cost. Mortgage Securities classified as available-for-sale
are reported at fair value, with unrealized gains and losses excluded from
earnings and reported as a separate component of stockholders' equity or
partners' capital.
Corporate Securities are classified as held-to-maturity and are carried at
amortized cost.
Unrealized losses on Mortgage Securities that are considered
other-than-temporary, as measured by the amount of decline in fair value
attributable to factors other than temporary, are recognized in income and
the cost basis of the Mortgage Security is adjusted. Other-than-temporary
unrealized losses are based on management's assessment of various factors
affecting the expected cash flow from the Mortgage Securities, including
an other-than-temporary deterioration of the credit quality of the
underlying mortgages and /or the credit protection available to the
related mortgage pool.
Gains or losses on the sale of MortgageInvestment Securities are based on the
specific identification method.
Interest income is accrued based on the outstanding principal amount of
the MortgageInvestment Securities and their contractual terms. Premiums and
discounts associated with the purchase of the MortgageInvestment 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) Credit Risk
The Company limits its exposure to credit losses on its
portfolio of Mortgage Securities and mortgage loans by requiring that at
leasteast 70% of the Company'sits Mortgage InvestmentSecurities portfolio consist of Mortgage
Securities or mortgage loans that are either (i) insured or guaranteed as
to principal and interest by an agency of the U.S. government, such as
Ginnie Mae, Fannie Mae, or Freddie Mac, (ii) rated in one of the two
highest rating categories by either Standard & Poor's or Moody's, or (iii)
considered to beBe of equivalent credit quality as determined by the
Advisor and approved by the Company's investment committee. As of
JuneSeptember 30, 1998, the Company's Mortgage Investments consisted only of
Mortgage Securities insured or guaranteed by the U.S. government.
The Company monitors the delinquencies and losses on the underlying
mortgages ofmortgage loans
that underlie its Mortgage Securities. An allowance for credit losses
will be made for possible credit losses at a level deemed appropriate by
management.management after considering expected recoveries under insurance or
guarantees. The allowance will be evaluated and adjusted periodically by
management based on the actual and projected timing and amount of
potential credit losses, as well as industry loss experience. At
JuneSeptember 30, 1998, management determined no allowance for credit losses
was necessary. - 7 -
E) Other Investments
Other investments consist of (i) direct investments in multifamily
projects collateralizing mortgage loans owned by the Company, (ii)
investments in limited partnerships owning real estate (PEPs) and (iii)
non-voting preferred stock of a corporation owning interests in real
estate limited partnerships.
F) Net income per Share
Net income per share is based on the weighted average number of common
shares and common equivalent shares (e.g., stock options), if dilutive,
outstanding during the period. Basic net income per share is computed by
dividing net income available to shareholders by the weighted average
number of common shares outstanding during the period. Diluted net
income per share is computed by dividing the diluted net income available
to common shareholders by the weighted average number of common shares and
common equivalent shares outstanding during the period. The common
equivalent shares are calculated using the treasury stock method which
assumes that all dilutive common stock equivalents are exercised and the
funds generated by the exercise are used to buy back outstanding common
stock at the average market price during the reported period.
As more fully discussed in Note 7, options to purchase 520,000 shares of
common stock were issued during the quarter ended June 30, 1998. Because
the average stock price during the quarter was less than the exercise
price, exercise of such securitiesoptions under the treasury stock method would
be anti-dilutive. Accordingly, these potentially dilutive securities were
not considered in fully diluted earnings per share and, as a result, basic
and fully diluted net income per share are the same for such period. With
regard to the Predecessor, basic and diluted net income per Unit of the
Predecessor were the same for all periods presented as no dilutive
equivalent units existed.
G) 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.
Comprehensive income for the Company includes net income and the change in
net unrealized holding gains on investments charged or credited to
Stockholders' Equity. Comprehensive income for the Predecessor includes
net income and the change in net unrealized holding gains on investments
charged or credited to Partner's Capital. Comprehensive income for the
quarters and sixnine months ended JuneSeptember 30, 1998 and 1997 was as follows:
For the Quarter Ended JuneSept. 30,
1998 1997
Company Predecessor
(Unaudited) (Unaudited)
--------------- ---------------
Net income $ 1,241,007866,548 $ 685,564697,116
Change in net unrealized holding gains (losses) 146,347 (337,972)(987,160) 198,157
--------------- ---------------
Comprehensive income $ 1,387,354(120,612) $ 347,592895,273
=============== ===============
For the SixNine Months Ended JuneSept. 30,
1998
Predecessor Company 1997
Through April 9 From April 10 Total Predecessor
(Unaudited) (Unaudited) (Unaudited) (Unaudited)
--------------- --------------- --------------- ---------------
Net income $ 486,466 $ 1,241,0072,107,555 $ 1,727,4732,594,021 $ 1,487,983
Change in net unrealized holding gains (losses) (21,335) 146,347 125,012(840,813) (862,148) (8,306)
--------------- --------------- --------------- ---------------
Comprehensive income $ 465,131 $ 1,387,3541,266,742 $ 1,852,4851,731,873 $ 1,479,677
=============== =============== =============== ===============
I) Federal Income Taxes
The Company has elected to be taxed as a real estate investment trust - 9 -
(REIT) under the provisions of the Internal Revenue Code and the
corresponding provisions of state law. Accordingly, the Company will not
be subject to federal or state income tax to the extent of its
distributions to stockholders. In order to maintain its status as a REIT,
the Company is required, among other requirements, to distribute at least
95% of its taxable income. As such, no provision for income taxes has
been made in the accompanying consolidated financial statements.
Since the Predecessor was a partnership, it hasdid not mademake a provision for
income taxes since its Beneficial Unit Certificate (BUC) Holders arewere
required to report their share of the Predecessor's income for federal and
state income tax purposes.
J) Reclassifications
Certain prior period amounts have been reclassified to conform with the
current period classification.
K) New Accounting Pronouncement
In June, 1998, the Financial Accounting Standards Board has issued
Financial Accounting Standards No. 133 "Accounting for Derivative
Instruments and Hedging Activities " (FAS 133). This statement provides
new accounting and reporting standards for the use of derivative
instruments. Adoption of this statement is required by the Company
effective January 1, 2000. Management intends to adopt the statement as
required in fiscal 2000. Although the Company and its Predecessor have
not historically used such instruments, it is not precluded from doing
so. Management anticipates using such instruments to manage interest rate
risk. Management believes that the impact of such adoption will not be
material to the financial statements.
3. Mortgage Securities
The following tables present the Company's Mortgage Securities as of JuneSeptember
30, 1998 and the Predecessor's Mortgage Securities as of December 31, 1997.
The Mortgage Securities classified as available-for saleavailable-for-sale are carried at their
fair value and the Mortgage Securities classified as held-to-maturity are
carried at their amortized cost:
As of JuneSeptember 30, 1998 - Company (unaudited)
Available-for-Sale
------------------
Amortized cost $ 153,439,320201,804,178
Net unrealized losses (558,481)(1,545,641)
------------------
Fair value $ 152,880,839200,258,537
==================
December 31, 1997 - Predecessor
Available-for-Sale Held-to-Maturity Total
------------------ ---------------- ---------------
Amortized cost $ 18,884,194 $ 14,052,242 $ 32,936,436
Gross unrealized gains 606,486 658,816 1,265,302
Gross unrealized losses 36,534(36,534) - 36,534(36,534)
------------------ ---------------- ---------------
Fair value $ 19,454,146 $ 14,711,058 $ 34,165,204
================== ================ ===============
Certain securities classified as available-for-sale on the JuneSeptember 30, 1998,
balance sheet of the Company were classified as held-to-maturity on the
December 31, 1997 balance sheet of the Predecessor. Based on the differing
investment objectives of the Company, it was determined that it would be more
appropriate to classify such securities as available-for-sale rather than
held-to-maturity. Accordingly, on the Merger Date, such securities were
transferred from the held-to-maturity classification to the available-for-sale
classification. The total amortized cost, net unrealized holding losses and
the aggregate fair value of the securities transferred were $14,027,386,
$704,828 and $13,322,558, respectively.
At JuneSeptember 30, 1998, Mortgage Securities consisted of pools of
adjustable-rate Mortgage Securities with a carrying value of $101,749,315$151,122,983
- 9 -
which were acquired since the Merger Date and fixed-rate Mortgage Securities
with a carrying value of $51,131,524.$42,431,379. At JuneSeptember 30, 1998, Mortgage
Securities consisted of Government National Mortgage Association (GNMA)
Certificates, Federal National Mortgage Association (FNMA) Certificates, and
Federal Home Loan Mortgage Corporation (FHLMC) Certificates. The GNMA
Certificates are backed by first mortgage loans on multifamily residential
properties and pools of single-family properties. The FNMA Certificates and
FHLMC Certificates are backed by pools of single-family properties. The GNMA
Certificates are debt securities issued by a private mortgage lender and are
guaranteed by GNMA as to the full and timely payment of principal and interest
on the underlying loans. The FNMA Certificates are debt securities issued by
FNMA and are guaranteed by FNMA as to the full and timely payment of principal
and interest on the underlying loans. The FHLMC Certificates are debt
securities issued by FHLMC and are guaranteed by FHLMC as to the full and
timely payment of principal and interest on the underlying loans. At December
31, 1997, Mortgage Securities consisted of GNMA Certificates and FNMA
Certificates.
As of JuneSeptember 30, 1998, the Company had approximately $46.8 million ofno commitments to purchase Mortgage
Securities.
4. Real Estate Held for Sale
Certain real estate assets acquired in connection withCorporate Securities
Corporate Securities are classified as held-to-maturity. At September 30,
1998, the Merger were not
considered consistent with the investment objectivestotal amortized cost, gross unrealized gains and fair value of the
Company. As a
consequence, the Company has classified such assets as held for sale upon
consummation of the MergerCorporate Securities were $4,664,303, $51,697 and is investigating opportunities to sell such
assets. Two of the three rental properties were transferred from the
Predecessor at carryover basis and the remaining property was acquired at fair
value. Based on estimates of net realizable value, as adjusted for costs to
sell, management does not anticipate that such a sale would necessitate an
impairment reserve under SFAS 121 "Accounting for Impairment of Long Lived
Assets". During the period assets are held for sale, no depreciation will be
reflected in the Company's financial statements.$4,716,000.
5. Other Investments
Other investments consisted of the following:
As of As of
JuneSept. 30, 1998 Dec. 31, 1997
(Unaudited)Company Predecessor
(Unaudited)
------------- -------------
Investment in Retirement Centers Corporation $ 296,183351,663 $ -
Investment in and advances to PEPS - 1,495,923220,320
Investment in participating loans - 860,000
------------- -------------
Total $ 296,183351,663 $ 2,355,9231,080,320
============= =============
6. Reverse Repurchase Agreements
The Company has entered into several reverse repurchase agreements to finance Mortgage
Securities purchased since the Merger Date. The reverse repurchase agreements are
collateralized by the Company's Mortgage Securities with a principal balance
of approximately $104$156 million and bear interest at rates that are LIBOR based.
As of JuneSeptember 30, 1998, the Company had outstanding $99,117,208$147,587,842 of reverse
repurchase agreements with a weighted average borrowing rate of 5.62%5.51% and a
weighted average remaining maturity of 3.553.40 months. As of JuneSeptember 30, 1998,
all of the Company's borrowings were fixed-rate term reverse repurchase agreements
with original maturities that range from 3 to 612 months.
At JuneSeptember 30, 1998, the reverse repurchase agreements had the following remaining
maturities:
Within 30 days $ -27,015,000
30 to 90 days 56,259,33076,306,257
90 days to one year 42,857,87844,266,585
-------------
$ 99,117,208$147,587,842
=============
7. Stockholders' Equity
1997 Stock Option Plan
- ----------------------
The Company has a 1997 Stock Option Plan (the Plan) which authorizes the
granting of options to purchase an aggregate of up to 1,000,000 shares of the - 10 -
outstanding shares, but not more than 10% of the 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) as defined
under section 422 of the Internal Revenue Code, Non-Qualified Stock Options
(NQSOs) and Dividend Equivalent Rights (DERs) to eligible persons, other than
non-employee directors. Non-employee directors are automatically provided
periodic grants of NQSOs with DERs pursuant to the provisions of the Plan.
The exercise price for any options granted to eligible persons, other than
non-employee directors, under the Plan shall not be less than the fair market
value of the common stock on the day of the grant. The exercise price for any
options granted to non-employee directors under the Plan shall be the fair
market value of the common stock on the day of the grant. Twenty-five percent
of the options become exercisable at the time the option is granted.
Thereafter each year, for the next three years, 25% of the total amount of the
options shall cumulatively become exercisable upon the anniversary of the date
of grant. The options expire if not exercised ten years after the date
granted.
During the quarter ended and as of June 30, 1998, there were 500,000 ISOs
granted to buy common shares at an exercise price of $9.375 per share, of
which 125,000 were vested and exercisable. In addition, there were 20,000
NQSOs issued at an exercise price of $9.375 per share, of which 5,000 were
vested and exercisable. No additional options were exercisedgranted during the quarter
ended and asSeptember 30, 1998. As of JuneSeptember 30, 1998.1998, no options have been
exercised.
In addition to options, 125,000500,000 and 5,00020,000 DERs were granted on the ISOs and
NQSOs, respectively, during the quarter ended June 30,1998, based on the
provisions of the Plan. In connection with the options discussed above the
recipients were also granted DERs which vest on the same basis as the options and
payments are made on vested DERs only. Dividends paid on ISOs are charged to
stockholders' equity when declared and dividends paid on NQSOs are charged to
earnings when declared. For the quarter ended June 30, 1998 the Company recorded a $500$31,250 charge
($12,500 for the quarter ended Setember 30, 1998) to earnings associatedstockholders' equity
associiated with the DERs on ISOs and a $12,500$1,250 charge ($750 for the quarter
ended September 30, 1998) to stockholders' equity ofearnings associated with DERs on NQSOs.
The options 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 Company, ISOs granted
were accounted for under the option value method and a periodic changecharge will be
recognized based on the vesting schedule. The changecharge of options which vested
at date of grant were included as capitalized transaction costs in connection
with the Merger. Management estimated the value of the ISOs at the date of
grant to be approximately $1.88 per share using a Black-Scholes valuation
model, as adjusted for the discounted value of dividends not to be received
under the unvested DERs. In the absence of comparable historical market
information for the Company, management utilized assumptions consistent with
activity of a comparable peer group of companies including an estimated option
life of five years, a 25% volatility rate and a risk-free rate of 5.5% and a
dividend yield of 0% (because of the DERs). NQSOs granted were accounted for
using the intrinsic method and, accordingly, no earnings charge was reflected
since the exercise price was equal to the fair market value of the common
stock at the date of the grant.
Dividends
- ---------
On June 18,September 9, 1998, the Company declared a distribution
of $.265 per share for the quarter ending JuneSeptember 30, 1998, which is to be
paid on August 14,November 16, 1998, to shareholders of record as of JuneSeptember 30,
1998. The distribution consists in part of a dividend paid from earnings and
in part of a cash merger payment, representing a return of capital.
8. Related Party Transactions
America First Mortgage Advisory Corporation (the Advisor)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%. During the quarter ended June 30, 1998, the Advisor earned a base management fee
of $181,376.$386,126 ($204,749 for the quarter ended September 30, 1998). The Advisor
was eligible to receive incentive compensation of approximately $8,400$2,800 in 1998
- 11 -
(none for the quarter ended JuneSeptember 30, 1998.1998).
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 4.5% to 5% of gross revenues.
Such fees paid by the Company in 1998 for periods after the Merger Date
amounted to $70,583$142,586 ($72,003 for the quarter ended September 30, 1998) and
such fees paid by the Predecessor for periodsthe period in 1998 prior to the Merger
Date amounted to $71,125.
Prior to the Merger Date, AFCA 3 was entitled to an administrative fee of .35%
per annum of the outstanding amount of investments of Prep Fund 1 to be paid
by Prep Fund 1 to the extent such amount is not paid by property owners. In
1998, AFCA 3 earned administrative fees of $53,617. Of this amount, $38,069
was paid by Prep Fund 1 and the remainder was paid by property owners.
9. Pro Forma Financial Statements (Unaudited)
The following summary pro forma information includes the effects of the
Merger. The pro forma operating data for the sixnine months ended JuneSeptember 30,
1998 and JuneSeptember 30, 1997 are presented as if the Merger had been completed
on January 1, 1998 and 1997, respectively.
Pro Forma
Statement of Operations
For the SixNine For the SixNine
Months Ended Months Ended
JuneSept. 30, 1998 JuneSept. 30, 1997
--------------- ---------------
Mortgage Securities income $ 2,513,8285,667,004 $ 2,166,0043,214,364
Corporate Securities income 41,852 -
Interest income on temporary cash investments 432,155 396,159616,589 616,438
--------------- ---------------
Total interest income 2,945,983 2,562,1636,325,445 3,830,802
Interest expense on borrowed funds 437,4902,472,772 -
--------------- ---------------
Net interest income 2,508,493 2,562,1633,852,673 3,830,802
--------------- ---------------
Equity in earnings of property partnerships 649,619 576,125
Rental income 397,519 1,897,467
Interest income on real estate held for sale 1,788,150 -
Rental income - 1,268,366
Income from other investments 263,070 542,624participating loans 6,606 177,639
Gain on sale of investment 414,710investments 414,951 -
--------------- ---------------
2,465,930 1,810,9901,468,695 2,651,231
--------------- ---------------
Real estate operating expenses on real estate
held for sale 962,088 -
Real estate operating expenses - 693,962189,689 1,104,990
General and administrative expenses 1,637,787 914,3502,223,832 1,602,828
Depreciation 47,259 151,255226,882
Interest expense 626,772 423,149160,571 565,595
--------------- ---------------
3,273,906 2,182,7162,621,351 3,500,295
--------------- ---------------
Minority interest (7,978)(2,147) -
--------------- ---------------
Net income $ 1,708,4952,697,870 $ 2,190,4372,981,738
=============== ===============
Net income, basic and fully diluted, per share $ 0.190.30 $ 0.240.33
=============== ===============
Weighted average number of shares outstanding 9,035,184 9,035,184
The pro forma financial information is not necessarily indicative of what the
consolidated results of operations of the Company would have been as of and
for the periods indicated, nor does it purport to represent the results of
operations for future periods.
10. Subsequent Events
On July 2, 1998, the Company acquired a FNMA whole-pool mortgaged backed
certificate with an aggregate original principal balance of $56,000,649 (the
FNMA Certificate). The FNMA Certificate bears interest at 7.498% per annum.
The total purchase price paid for the FNMA Certificate was approximately $23.1
million, including accrued interest. The acquisition was financed through a
LIBOR-based reverse repurchase agreement.
On July 29, 1998, the Company acquired a FNMA whole-pool mortgaged backed
certificate with an aggregate original principal balance of $33,154,488 (the
FNMA Certificate). The FNMA Certificate bears interest at 5.77% per annum.
The total purchase price paid for the FNMA Certificate was approximately $33.7
million, including accrued interest. The acquisition was financed through a
LIBOR-based reverse repurchase agreement.
On August 6, 1998 and August 10, 1998, the Company purchased with cash two
corporate bonds with a face value of $1 million each for $980,000 and
$990,000, respectively.
- 12 -
Item 2.
AMERICA FIRST MORTGAGE INVESTMENTS, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
General
Prior to the Merger (described in Note 1 to the Company's consolidated
financial statements), the Company was a newly formed real estate investment
trust (REIT) which had no operations of its own.
On April 10, 1998, 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 preexisting net assets and operations or
majority interest in the preexisting 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 GAAP.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 BUCsBeneficial Unit
Certificates (BUCs) of Prep Fund 2 and approximately 98% of the BUCs of
Pension Fund. 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.
Concurrently with the Merger, the Company entered into an Advisory Agreement
with America First Mortgage Advisory Corporation (the "Advisor") and adopted
an investment policy which significantly differed from that pursued by the
predecessor partnerships. This strategy includes leveraged investing in
adjustable rate mortgage 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 JuneSeptember 30, 1998, the
Company purchased sixnine positions in mortgage backed securities for an aggregate
purchase cost of approximately $103 million. Subsequent to June 30, 1998
through August 14, 1998, the Company acquired three additional positions for
an aggregate purchase cost of approximately $58.8$171 million.
The Company intends to elect to qualify as a REIT under the Code beginning
with its 1998 taxable year and, as such, anticipates distributing annually at
least 95% of its taxable income, 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. Further, as part of the Merger transaction, the Company has
committed to make distributions in the first year following the Merger of at
least $1.06 per common share, to be paid in four equal quarterly installments,
which is expected to significantly exceed taxable income. Accordingly, a
portion of distributions received by shareholders in 1998 and 1999 will
consist in part of a dividend paid from earnings and in part of a cash merger
payment, representing non-taxable return of capital. There is no commitment
by the Company to distribute amounts in excess of taxable income beyond the
first year of operations.
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, or the Company's current
level of operations. Accordingly, the currently reported financial
information is not necessarily indicative of the Company's future operating
results or financial condition.
- 13 -
Liquidity and Capital Resources
The Company requires capital to fund its investment strategy and pay its
operating expenses. The Company's capital sources upon consummation of the
Merger include cash flow from operations, borrowings under reverse repurchase
agreements and mortgage loans on the Company's remaining direct real estate
investments, which are currently held for sale.
Since the Merger, , the Company has primarily financed its mortgage investments
through reverse repurchase agreements totalling $147.6 million with aggregatea weighted average
borrowing rate of 5.51% at September 30, 1998. The repurchase agreements have
balances of between $8.6$8.1 million and $28.2 million, respectively.$27 million. These arrangements have
original terms to maturity ranging from one monththree months to sixtwelve months and
annual interest rates based on LIBOR. To date, the Company has not had any
significant margin calls on its repurchase agreements.
The Company believes it has adequate financial resources to meet its
obligations as they come due and fund committed dividends as well as to
actively pursue its new investment policy.
Results of Operations
Three Month Period Ended JuneSeptember 30, 1998 Compared to 1997
During the three months ended JuneSeptember 30, 1998, total interest income
increased $760,972$2,409,925 as compared to total interest income of the Predecessor
for the three months ended JuneSeptember 30, 1997. This increase is a result of
the interest generated by mortgage investments acquired from Prep Fund 2 and
Pension Fund in the Merger as well as the acquisition of additional mortgage
investments during 1998.
Rental income increased $749,981 as compared to that of the Predecessor as a
result of (i) a reclassification of certain assets to investments in real
estate as of the Merger Date and (ii) additional rental income realized from
real estate acquired from Prep Fund 2 and Pension Fund in the Merger.
The Company realized a gain of $385,000 from the sale of a mortgage loan on
May 1, 1998 and a gain of $29,710 on the sale of other investments. The
reduction of $96,914 in income from other investments was primarily due to
this sale.
The increase in the Company's interest expense on borrowed funds during the
three months ended JuneSeptember 30, 1998 compared to that of the Predecessor for
the three months ended JuneSeptember 30, 1997, relates to interest expense on
reverse
repurchase arrangements used to fund additional investments.
Real estate operating expenses and interest expense on mortgage loansIncome from other investments increased $673,577 as compared to that of the Predecessor as a result of (i) a
reclassification of certain assets toincome generated by
other investments in real estate as of the
Merger Date and (ii) additional real estate operating expenses realized from
real estate acquired from Prep Fund 2 and Pension Fund in the Merger.
No depreciation was recorded for the three months ended June 30, 1998 because
all real estate assets were classified as held for sale.Fund.
General and administrative expenses increased $245,843$254,212 as compared to that of
the Predecessor as a result of (i) the management fee payable to the Advisor
and (ii) the increased scope of operations resulting from the Merger.
SixNine month period ended JuneSeptember 30, 1998 compared to 1997
During the sixnine months ended JuneSeptember 30, 1998, total interest income
increased $712,677$3,122,602 as compared to total interest income of the Predecessor
for the sixnine months ended JuneSeptember 30, 1997. This increase is a result of
the interest generated by mortgage investments acquired from Prep Fund 2 and
Pension Fund in the Merger as well as the acquisition of additional mortgage
investments during 1998.
Rental incomeIncome from other investments increased $519,784 as compared to that of the Predecessor as a result of (i) a reclassification of certain assets toincome generated by
other investments in real
estate as of the Merger Date and (ii) additional rental income realized from
real estate acquired from Prep Fund 2 and Pension Fund in the Merger.Fund.
The Company realized a gain of $385,000 from the sale of a mortgage loan on
May 1, 1998 and a gain of $29,710$29,951 on the sale of other investments. The
reduction of $96,914 in income from other investments was primarily due to
this sale.
The increase in the Company's interest expense on borrowed funds during the
sixnine months ended JuneSeptember 30, 1998 compared to that of the Predecessor for
the sixnine months ended JuneSeptember 30, 1997, relates to interest expense on
reverse repurchase arrangements used to fund additional investments.
Real estate operating expenses and interest expense on mortgage loans
increased $471,749 as compared to that of the Predecessor as a result of (i) a
reclassification of certain assets to investments in real estate as of the
Merger Date and (ii) additional real estate operating expenses realized from
real estate acquired from Prep Fund 2 and Pension Fund in the Merger.
Depreciation decreased $103,996 as compared to that of the Predecessor because
all real estate assets were classified as held for sale as of the Merger Date.
General and administrative expenses increased $426,435$680,647 as compared to that of
the Predecessor as a result of (i) the management fee payable to the Advisor
and (ii) the increased scope of operations resulting from the Merger.Merger and
continuing implementation of the new investment strategy.
Interest Rate Risks
The Company's operating results will depend in part on the difference between
the interest income earned on its interest-earned assets and the interest
expense incurred in connection with its interest-bearing liabilities.
Competition from other providers of investment capital may lead to a lowering
of the interest rate earned on the Company's interest bearing assets which the
Company may not be able to offset by obtaining lower interest costs on its - 14 -
borrowings. Changes in the general level of interest rates prevailing in the
economy can affect the spread between the Company's interest-earning assets
and interest-bearing liabilities. Any significant compression of the spreads
between interest-earning assets and interest-bearing liabilities could have
material adverse effect on the Company. In addition, an increase in interest
rates could, among other things, reduce the value of the Company's
interest-bearing assets and its ability to realize gains from the sale of such
assets, and a decrease in the interest rates could reduce the average life of
the Company's interest earning assets.
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
Company may employ various hedging strategies to limit the effects of changes
in interest rates on its operations, including asset liability matching, which
represents the current strategy, or engaging in active hedging using
derivative instruments including interest rate swaps, caps, floors and other
interest rate exchange contracts. There can be no assurance that the
profitability of the Company or the value of the Company's investment assets
will not be adversely affected during any period as a result of changing
interest rates. In addition, hedging transactions involve certain additional
risks such as counter-party credit risk, legal enforceability of hedging
contracts and the risk that unanticipated and significant changes in interest
will cause a significant loss of basis in the contract. With regard to loss
of basis in a hedging contract, indices upon which contracts are priced may be
more or less variable than the indices upon which the hedged loans are priced,
thereby making the hedge less effective. There can be no assurance that the
Company will be able to adequately protect against the foregoing risks and
that the Company will ultimately realize an economic benefit from any hedging
contract it enters into.
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 Company Act of 1940.
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, 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
Securities represent an undivided interest in the entire pool backing such
Mortgage Securities (i.e. "Whole Pool" Mortgage Securities), such Mortgage
Securities 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 JuneSeptember 30,
1998, the Company calculates that it is in and has maintained compliance with
this requirement.
Year 2000
The Company does not own or operate its own computer system and owns no
business or other equipment. However, the operation of the Company's business
relies on the computer system and other equipment maintained by America First
Companies L.L.C., the principal shareholder of the Company's Advisor ("America
First"). In addition, the Company has business relationships with a number of
third parties whose ability to perform their obligations to the Company depend
on such systems and equipment. Some or all of these systems and equipment may
be affected by the inability of certain computer programs and embedded
circuitry to correctly recognize dates occurring after December 31, 1999.
America First has adopted a plan to deal with this so-called "Year 2000
problem" with respect to its information technology ("IT") systems, non-IT
systems and third party business relationships.
State of Readiness
The IT system maintained by America First consists primarily of personal
computers, most of which are connected by a local area network. All
accounting and other record keeping functions relating to the Company that
are conducted in house by America First are performed on this PC-LAN system.
America First does not own or operate any "mainframe" computer systems. The
PC-LAN system runs software programs that America First believes are
compatible with dates after December 31, 1999. America First has engaged a
- 15 -
third party computer consulting firm to review and test its PC-LAN system to
ensure that it will function correctly after that date and expects that this
process, along with any necessary remediation, will be completed by March 31,
1999. America First believes any Year 2000 problems relating to its IT
systems will resolved without significant operational difficulties. However,
there can be no assurance that testing will discover all potential Year 2000
problems or that it will not reveal unanticipated material problems with the
America First IT systems that will need to be resolved.
Non-IT systems include embedded circuitry such as microcontrollers found in
telephone equipment, security and alarm systems, copiers, fax machines, mail
room equipment, heating and air conditioning systems and other infrastructure
systems that are used by America First in connection with the operation of the
Company's business. America First is reviewing its non-IT systems along
with the providers that service and maintain these systems, with initial
emphasis being placed on those, such as telephone systems, which have been
identified as necessary to America First's ability to conduct the operation of
the Company's business activities. America First expects that any
necessary modification or replacement of such "mission critical" systems will
be accomplished by mid-1999.
The Company has no control over the remediation efforts of third parties with
which it has material business relationships and the failure of certain of
these third parties to successfully remediate their Year 2000 issues could
have a material adverse effect on the Company. Accordingly, America First has
undertaken the process of contacting each such third party to determine the
state of their readiness for Year 2000. Such parties include, but are not
limited to, the obligors on the Company's mortgage securities, the Company's
transfer and paying agent and the financial institutions with which the
Company maintains accounts. America First has received initial assurances
from certain of these third parties that their ability to perform their
obligations to the Company are not expected to be materially adversely
affected by the Year 2000 problem. America First will continue to request
updated information from these material third parties in order to assess their
Year 2000 readiness. If a material third party vendor is unable to provide
assurance to America First that it is, or will be, ready for Year 2000,
America First intends to seek an alternative vendor to the extent practical.
Costs
All of the IT systems and non-IT systems used to conduct the Company's
business operations are owned or leased by America First. The
Company will bear its proportionate share of the costs associated with
surveying the Year 2000 readiness of third parties and with the
identification, remediation and testing of America First's IT and non-IT
systems. However, the Company's share of the costs associated with these
activities is expected to be insignificant. Accordingly, the costs
associated with addressing the Company's Year 2000 issues are not expected to
have a material effect on the Company's results of operations, financial
position or cash flow.
Year 2000 Risks
The Company's Advisor believes that the most reasonably likely worst-case
scenario will be that one or more of the third parties with which it has a
material business relationship will not have successfully dealt with its Year
2000 issues and, as a result, is unable to provide services or otherwise
perform its obligations to the Company. For example, if an obligor on the
Company's mortgage securities encounters a serious and unexpected Year 2000
issue, it may be unable to make a timely payment of principal and interest to
the Company. This, in turn, could cause a delay in dividend payments to
shareholders. In addition, if the Company's transfer and paying agent
experiences Year 2000-related difficulties, it may cause delays in making
dividend payments to shareholders or in the processing of trading of shares.
It is also possible that one or more of the IT and non-IT systems of America
First will not function correctly, and that such problems may make it
difficult to conduct necessary accounting and other record keeping functions
for the Company. However, based on currently available information, the
Company's Advisor does not believe that there will be any protracted systemic
failures of the IT or non-IT systems utilized by America First in connection
with the operation of the Company's business.
Contingency Plans
Because of the progress which America First has made toward achieving Year
2000 readiness, the Company has not made any specific contingency plans
- 16 -
with respect to the IT and non-IT systems of America First. In the event of a
Year 2000 problem with its IT system, America First may be required to
manually perform certain accounting and other record-keeping functions.
America First plans to terminate the Company's relationships with material
third party service providers that are not able to represent to America First
that they will be able to successfully resolve their material Year 2000 issues
in a timely manner. However, the Company will not be able to readily terminate
its relationships with all third parties, such as the obligors on its mortgage
securities, who may experience Year 2000 problems. The
Company has no specific contingency plans for dealing with Year 2000
problems experienced with these third parties.
All forecasts, estimates or other statements in this report relating to the
Year 2000 readiness of the Company and its affiliates are based on
information and assumptions about future events. Such "forward-looking
statements" are subject to various known and unknown risks and uncertainties
that may cause actual events to differ from such statements. Important
factors upon which the Company's Year 2000 forward-looking statements are
based include, but are not limited to, (a) the belief of America First that
the software used in IT systems is already able to correctly read and
interpret dates after December 31, 1999 and will require little or any
remediation; (b) the ability to identify, repair or replace mission critical
non-IT equipment in a timely manner, (c) third parties' remediation of their
internal systems to be Year 2000 ready and their willingness to test their
systems interfaces with those of America First, (d) no third party system
failures causing material disruption of telecommunications, data transmission,
payment networks, government services, utilities or other infrastructure, (e)
no unexpected failures by third parties with which the Company has a
material business relationship and (f) no material undiscovered flaws in
America First's Year 2000 testing process.
Forward Looking Statements
When used in this Form 10-Q, in future SEC filings or in press releases or
other written or oral communications, the words or phrases "will likely
result", "are expected to", "will continue", "is anticipated", "estimate",
"project" or similar expressions are intended to identify "forward looking
statements" within the meaning of the Private Securities Litigation Reform
Act of 1995. The Company cautions that such forward looking statements
speak only as of the date made and that various factors including regional
and national economic conditions, changes in levels of market interest
rates, credit and other risks of lending and investment activities, and
competitive and regulatory factors could affect the Company's financial
performance and could cause actual results for future periods to differ
materially from those anticipated or projected.
The Company does not undertake and specifically disclaims any obligation to
update any forward-looking statements to reflect events or circumstances after
the date of such statements.
Item 3. Quantitative and Qualitative Disclosures About Market Risk.
The requirements of Item 3 of Form 10-Q are not applicable to the Company
prior to its Annual Report on Form 10-K for the year ended December 31, 1998.
- 17 -
PART II. OTHER INFORMATION
Item 5. Other Information.
The proxy for the 1999 annual meeting of shareholders will confer
discretionary authority on the Board of Directors to vote on any matter
proposed by any shareholder for consideration at the meeting if the Company
does not receive written notice of the matter from the proponent on or before
February 6, 1999. Such notice must be submitted in writing and mailed by
certified mail to Stewart Zimmerman, America First Mortgage Investments, Inc.,
399 Park Avenue, New York, New York, 10022.
Item 6. Exhibits and Reports on Form 8-K
(a) 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)).
3.1 Amended and Restated Articles of Incorporation of the
Registrant (incorporated herein by reference from 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 from Form 8-K dated April 10, 1998,
filed by the Registrant pursuant to the Securities Exchange
Act of 1934 (Commission File No. 1-13991)).
3.3 Agreement of Limited Partnership, dated May 25, 1988, of
America First Prep Fund 2 Pension Series Limited
Partnership (incorporated herein by reference to Form
10-K, dated December 31, 1988, filed with the
Securities and Exchange Commission (File No. 33-13407)).
4.1 Specimen of Common Stock Certificate of the 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 Form of Advisory Agreement by and between the Company and
America First Mortgage Advisory Corporation (incorporated
herein by reference to Exhibit 10.1 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)).
10.2 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 Registrant pursuant to the Securities Act of 1933
(Commission File No. 333-46179)).
10.3 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 Registrant pursuant to the Securities Act of 1933
(Commission File No. 333-46179)).
10.4 Employment Agreement of Ronald AA. Freydberg (incorporated
herein by reference to Exhibit 10.4 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)).
10.5 Form of 1997 Stock Option Plan of the Company
(incorporated herein by reference to Exhibit 10.5 of the
Registration Statement on Form S-4 dated February 12, - 18 -
1998, filed by the Registrant pursuant to the Securities
Act of 1933 (Commission File No. 333-46179)).
10.6 Form of Dividend Reinvestment Plan (incorporated herein by
reference to Appendix C 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)).
(b) Reports on Form 8-K
The Registrant filed the following reports on Form 8-K during
the quarter for which this report is filed.
Item Reported Financial Statements Filed Date of Report
2. AcquisitionAcquistion Yes April 10,June 26, 1998
or Disposition
of Assets
2. Acquisition No May 26,Yes July 29, 1998
or Disposition
of Assets
- 19 -
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
Dated: August 14,November 13, 1998 AMERICA FIRST MORTGAGE INVESTMENTS, INC.
By /s/ Gary Thompson
Gary Thompson
Authorized Officer and Chief Financial Officer
- 20 -