FORM 10-Q
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
X Quarterly report pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934
For the quarterly period ended September 30, 1998March 31, 1999 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
Sept. 30, 1998
CompanyMarch 31, 1999
(Unaudited) Dec. 31, 1997
(Unaudited) Predecessor1998
--------------- ---------------
Assets
Investment in Mortgage Securitiesmortgage securities (Note 3) $ 200,258,537341,540,726 $ 33,506,388241,895,462
Investment in Corporate Securitiescorporate securities (Note 4) 4,664,303 -5,158,436 4,673,127
Investment in preferred stock 2,063,214 1,153,800
Cash and cash equivalents, at cost
which approximates market value 7,734,969 10,426,18111,205,366 6,045,956
Accrued interest receivable 1,488,521 272,2642,303,054 1,540,576
Other investments (Note 5) 351,663 1,080,320
Investment evaluation fees, net - 564,4041,150,486 1,197,341
Goodwill, net 7,411,174 -7,461,506 7,361,338
Other assets 1,668,571 1,708,440514,806 801,302
--------------- ---------------
$ 223,577,738371,397,594 $ 47,557,997264,668,902
=============== ===============
Liabilities
Repurchase agreements (Note 6) $ 147,587,842297,073,067 $ -190,250,084
Accrued interest payable 1,029,611 -839,284 795,785
Accounts payable 355,713 794,102465,020 212,085
Dividends or distributions payable 2,507,048 511,0692,417,269 2,413,803
--------------- ---------------
151,480,214 1,305,171300,794,640 193,671,757
--------------- ---------------
Minority interest in Pension Fund (Note 1) 246,846 -31,017 64,388
Stockholders' Equity and Partners Capital
Stockholders' Equity
Common stock, $.01 par value; 10,000,000 shares authorized
9,035,0849,055,142 issued and outstanding 90,351 -90,551 90,551
Additional paid in capital 76,018,256 -76,203,009 76,203,009
Retained earnings (2,712,288) -
Available for sale securities:
Unrealized gain (loss) (1,545,641) -
Partners Capital
General Partner - 100
Unit Holders - 45,682,774
Net unrealized holding gains (losses) - 569,952(5,466,446) (4,302,981)
Accumulated other comprehensive income (255,177) (1,057,822)
--------------- ---------------
Stockholders' equity (Partners Capital for 1997) 71,850,678 46,252,82670,571,937 70,932,757
--------------- ---------------
$ 223,577,738371,397,594 $ 47,557,997264,668,902
=============== ===============
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)
Company and
Company Predecessor
For the Three For the QuarterThree
Months Ended QuarterMonths Ended
Sept. 30,March 31, 1999 March 31, 1998
Sept. 30, 1997
Company Predecessor
-------------------------------- ---------------
Mortgage Securitiessecurities income $ 3,028,6214,564,789 $ 658,814613,793
Corporate Securitiessecurities income 41,852130,899 -
Interest income on temporary cash investments 150,555 152,289131,385 148,799
--------------- ---------------
Total interest income 3,221,028 811,1034,827,073 762,592
Interest expense on borrowed funds 2,035,2823,143,155 -
--------------- ---------------
Net interest income 1,185,746 811,1031,683,918 762,592
--------------- ---------------
Income from other investments 223,426 164,542
Gain186,697 145,167
Loss on sale of investment 241investments (1,534) -
--------------- ---------------
223,667 164,542185,163 145,167
--------------- ---------------
General and administrative expenses 532,741 278,529616,193 421,293
Minority interest 10,124490 -
-------------- --------------- 542,865 278,529---------------
616,683 421,293
--------------- ---------------
Net income $ 866,5481,252,398 $ 697,116486,466
=============== ===============
Net income allocated to:
General Partner $ 5,951
BUC Holders 691,165
---------------
$ 697,116
==============
Net income, basic and fully diluted, per share $ 0.10 $.14 N/A
=============== ===============
Net income, basic and fully diluted, per unit $ N/A $ 0.12.08
=============== ===============
Weighted average number of shares outstanding 9,035,0849,055,142 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 STATEMENTSSTATEMENT OF INCOMESTOCKHOLDERS' EQUITY
FOR THE THREE MONTHS ENDED MARCH 31, 1999
(UNAUDITED)
For the Nine Months Ended September 30, 1998 For the Nine
Predecessor Company Months Ended
Through April 9 From April 10Stockholders' Equity
---------------------------------------------------------------------------------
Accumulated
Other
Common Stock Paid-in Retained Comprehensive
# of Shares Amount Capital Earnings Income Total
Sept. 30, 1997
--------------- --------------- --------------- --------------------------- ------------ ------------ ------------ ------------ ------------
Mortgage Securities income
Balance at December 31, 1998 9,055,142 $ 613,793 $ 4,426,762 $ 5,040,555 $ 2,024,656
Corporate Securities90,551 $76,203,009 $(4,302,981) $(1,057,822) $70,932,757
Comprehensive income:
Net income - 41,852 41,852
Interest- - 1,252,398 - 1,252,398
Net unrealized holding gains arising
during the period - - - - 802,645 802,645
------------ ------------ ------------ ------------ ------------ ------------
Comprehensive income on temporary cash investments 148,799 335,177 483,976 419,125
--------------- --------------- --------------- ---------------
Total interest income 762,592 4,803,791 5,566,383 2,443,781
Interest expense on borrowed funds - 2,472,772 2,472,772 - --------------- --------------- --------------- ---------------
Net interest income 762,592 2,331,019 3,093,611 2,443,781
--------------- --------------- --------------- ---------------
Income from other investments 145,167 436,865 582,032 555,097
Gain on sale of investments - 414,951 414,9511,252,398 802,645 2,055,043
Dividends paid or accrued - --------------- --------------- --------------- ---------------
145,167 851,816 996,983 555,097
--------------- --------------- --------------- ---------------
General and administrative expenses 421,293 1,073,133 1,494,426 813,779
Minority interest - 2,147 2,147 - --------------- --------------- --------------- ---------------
421,293 1,075,280 1,496,573 813,779
--------------- --------------- --------------- ---------------
Net income(2,415,863) (2,415,863)
------------ ------------ ------------ ------------ ------------ ------------
Balance at March 31, 1999 9,055,142 $ 486,46690,551 $76,203,009 $ 2,107,555(5,466,446) $ 2,594,021 $ 2,185,099
=============== =============== =============== ===============
Net income allocated to:
General Partner $ 3,931 $ 19,438
BUC Holders 482,535 2,165,661
--------------- ---------------
$ 486,466 $ 2,185,099
=============== ===============
Net income, basic and fully diluted, per share $ N/A $ 0.23 $ N/A
=============== =============== ===============
Net income, basic and fully diluted, per unit $ 0.08 $ N/A $ 0.38
=============== =============== ===============
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(255,177) $70,571,937
============ ============ ============ ============ ============ ============
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 NINE MONTHS ENDED SEPTEMBER 30, 1998CASH FLOWS
(UNAUDITED)
Partners' Capital
-----------------------------------------------------------------------------------
Exchangeable Net Unrealized
General Unit Holders Holding
Partner # of Units Amount Gains (Losses) Total
--------------- --------------- ---------------Company and
Company Predecessor
For the Three For the Three
Months Ended Months Ended
March 31, 1999 March 31, 1998
--------------- ---------------
Balance at December 31, 1997 $ 100 5,775,797 $ 45,682,774 $ 569,952 $ 46,252,826Cash flows from operating activities
Net income 3,931$ 1,252,398 $ 486,466
Net cash provided by (used in)
operating activities:
Loss on sale of investments 1,534 -
482,535Minority interest 490 -
486,466Amortization 221,617 (1,959)
Decrease (increase) in interest receivable (762,478) 8,302
Decrease in other assets 298,779 6,241
Increase in accounts payable 252,935 565,608
Increase in accrued interest payable 43,499 -
---------------- ---------------
Net cash provided by operating activities 1,308,774 1,064,658
---------------- ---------------
Cash flows from investing activities
Principal payments on mortgage securities 25,533,537 867,630
Purchases of mortgage securities (124,778,490) -
Purchases of corporate securities (476,250) -
Purchases of preferred stock (850,333) -
Decrease in other investments 46,855 42,869
Merger transaction costs paid - (729,509)
---------------- ---------------
Net cash provided by (used in) investing activities (100,524,681) 180,990
---------------- ---------------
Cash flows from financing activities
Net borrowings from repurchase agreements 106,822,983 -
Dividends and distributions paid or accrued (3,931) - (1,530,009) - (1,533,940)
Change(2,447,666) (1,535,007)
---------------- ---------------
Net cash provided by (used in) financing activities 104,375,317 (1,535,007)
---------------- ---------------
Net increase (decrease) in net unrealized holding gains - - - (21,235) (21,235)
Issuancecash and cash equivalents 5,159,410 (289,359)
Cash and temporary cash investments at beginning
of stockperiod 6,045,956 10,426,181
---------------- ---------------
Cash and temporary cash investments at end of period $ 11,205,366 $ 10,136,822
================ ===============
Supplemental disclosure of cash flow information:
Cash paid during the Company in exchangeperiod for Units of the Predecessor (100) (5,775,797) (44,635,300) (548,717) (45,184,117)
--------------- --------------- --------------- --------------- ---------------
Balance at April 10, 1998 (unaudited)interest $ 3,099,656 $ - - $ - $ - $ -
=============== =============== =============== =============== ===============
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 29,949,413 - - 29,981,100
Change in classification of Mortgage
Securities from held-to-maturity to
available-for-sale - - - - (704,828) (704,828)
Issuance of stock options - - 942,390 - - 942,390
Net income - - - 2,107,555 - 2,107,555
Dividends paid or accrued - - - (4,819,843) (4,819,843)
Change in net unrealized gains (losses)
on investments - - - - (840,813) (840,813)
------------ ------------ ------------ ------------ ------------ ------------
Balance at Sept. 30, 1998 (unaudited) 9,035,084 $ 90,351 $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 Nine Months Ended September 30, 1998 For the Nine
Months Ended
Predecessor Company Sept. 30, 1997
Through April 9 From April 10 Total Predecessor
--------------- --------------- --------------- ---------------
Cash flows from operating activities
Net income $ 486,466 $ 2,107,555 $ 2,594,021 $ 2,185,099
Adjustments to reconcile net income to
net cash from operating activities:
Gain on sale of investments - (414,951) (414,951) -
Amortization (1,959) (111,894) (113,853) (9,564)
Decrease (increase) in interest receivable 8,302 (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 (723,268) 1,076,062 352,794 (435,305)
Increase (decrease) in accounts payable 565,608 (1,716,885) (1,151,277) (26,647)
Increase in accrued interest payable - 1,029,611 1,029,611 -
--------------- --------------- --------------- ---------------
Net cash provided by operating activities 378,018 826,329 1,204,347 1,059,009
--------------- --------------- --------------- ---------------
Cash flows from investing activities
Net cash from Merger - 4,820,481 4,820,481 -
Purchases of mortgage securities - (170,976,856) (170,976,856) -
Purchases of corporate securities - (4,662,500) (4,662,500) -
Principal payments on mortgage securities 867,630 21,895,194 22,762,824 2,884,757
Proceeds from sale of other investments - 1,290,000 1,290,000 2,100,000
--------------- --------------- --------------- --------------
Net cash provided by (used in) investing activities 867,630 (147,633,681) (146,766,051) 4,984,757
--------------- --------------- --------------- --------------
Cash flows from financing activities
Net borrowings from repurchase agreements - 147,587,842 147,587,842 -
Dividends and distributions paid (1,535,007) (3,182,343) (4,717,350) (4,606,086)
--------------- --------------- --------------- --------------
Net cash provided by (used in) financing activities (1,535,007) 144,405,499 142,870,492 (4,606,086)
--------------- --------------- --------------- --------------
Net increase (decrease) in cash and cash equivalents (289,359) (2,401,853) (2,691,212) 1,437,680
Cash and temporary cash investments at beginning
of period 10,426,181 10,136,822 10,426,181 8,817,327
--------------- -------------- --------------- --------------
Cash and temporary cash investments at end of period $ 0,136,822 $ 7,734,969 $ 7,734,969 $ 10,255,007
=============== =============== =============== ==============
Supplemental disclosure of cash flow information:
Cash paid during the period for interest $ - $ 1,005,671 $ 1,005,671 $ -
=============== =============== =============== ==============
The accompanying notes are an integral part of the consolidated and combined financial statements.
- 5 -
AMERICA FIRST MORTGAGE INVESTMENTS, INC.
NOTES TO FINANCIAL STATEMENTS
SEPTEMBER 30, 1998MARCH 31, 1999
(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;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 preexistingpre-existing 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,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
Partnershipspartnerships 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 98%99%
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.
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.
2. Summary of Significant Accounting Policies
A) Method of Accounting
The accompanying 1999 consolidated financial statements include the
accounts of the Company and its subsidiaries, Pension Fund and America
First Capital Associates Limited Partnership Six (the general partner of
Pension Fund). All significant intercompany transactions and accounts have
been eliminated in consolidation. In addition, as more fully discussed in
Note 5, the Company has an investment in a corporation and investments in
four real estate limited partnerships, none of which are controlled by the
Company. 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 accompanying 1998 consolidated and combined financial statements
include the consolidated accounts of the Company from April 10, 1998,
through September
30,December 31, 1998, and the combined accounts of the Company, 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 the 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
September 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.
- 5 -
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 Securitiesmortgage securities and
Corporate Securitiescorporate securities (collectively referred to as Invesment Securities)investment securities)
as either held-to-maturity, available-for-sale or trading. Although the
Company generally intends to hold most of its mortgage securities until
maturity, it may, from time to time, sell any of its mortgage securities
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 Securitiesmortgage 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 Securitiesmortgage 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 its Mortgage Securities as part of its overall management of its
balance sheet. Accordingly, to maintain flexibility, the Company currently
classifies all of its Mortgage Securities as available-for-sale.
Certain Mortgage Securities classified as available-for-sale on the
September 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 Securitiessecurities 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.in other comprehensive income. Corporate Securitiessecurities are
classified as held-to-maturity and are carried at amortized cost.
Unrealized losses on Mortgage Securitiesmortgage 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 Securitymortgage 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,mortgage securities, including
an other-than-temporary deterioration of the credit quality of the
underlying mortgages and /orand/or the credit protection available to the
related mortgage pool.
Gains or losses on the sale of Investment Securitiesinvestment securities are based on the
specific identification method.
Interest income is accrued based on the outstanding principal amount of
the Investment Securitiesinvestment securities and their contractual terms. Premiums and
discounts associated with the purchase of the Investment Securitiesinvestment 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 investment
portfolio of Mortgage Securities and mortgage loans by requiring that at eastleast 70% of its Mortgage Securitiesinvestment portfolio
consist of Mortgage
Securitiesmortgage 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,Government National Mortgage Association
(GNMA), Federal National Mortgage Association (FNMA), or Freddie Mac,Federal Home Loan
Mortgage Corporation (FHLMC), (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. The remainder of the Company's
assets may be either: (i) mortgage assets rated at least investment grade
or considered to be of equivalent credit quality by the Advisor with
approval from the Company's investment committee; (ii) direct investment
(mezzanine or equity) in multifamily projects collateralizing mortgage
loans owned by the Company; (iii) investments in limited partnerships,
real estate investment trusts or closed-end funds owning a portfolio of
mortgage assets; or (iv) other fixed income instruments (corporate or
government) that provide increased call protection relative to the Company's
mortgage securities. Corporate debt that is rated below investment grade
will be limited to less than 5% of the Company's total assets. As of
September 30, 1998,March 31, 1999, approximately 93% of the Company's Mortgage Investmentsinvestment portfolio
consisted only of Mortgage Securitiesmortgage securities insured or guaranteed by the U.S.
government.
The Company monitors the delinquencies and losses on the mortgage 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 after considering expected recoveries under insurancegovernment 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.an agency thereof. At September 30, 1998,March 31, 1999, management determined
no allowance for credit losses was necessary.
- 7 -
E) Other Investments
Other investments consist of: (i) non-voting preferred stock of (i)a
corporation owning interests in real estate limited partnerships,
(ii) investments in limited partnerships owning real estate,
(iii) direct investments in multifamily projects collateralizing mortgage
loans owned by the Company, (ii)
investments in limited partnerships owningand (iv) other real estate (PEPs) and (iii)
non-voting preferred stock of a corporation owning interests in real
estate limited partnerships.investments.
- 6 -
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 during which such options were
issued was less than the exercise price, 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 and, as a result, basic and fully diluted net income per
share are the same for such period.the three months ended March 31, 1999. With regard
to the Predecessor, no options were issued. As such, basic and diluted net
income per Unit of the Predecessor were the same for all periods presentedthe three months ended
March 31, 1998, as no dilutive equivalent units existed.
G) Comprehensive Income
Statement of Financial Accounting Standards No. 130, Reporting"Reporting
Comprehensive IncomeIncome" requires the Company and the Predecessor to display
and report comprehensive income, which includes all changes in
Stockholders' Equity or PartnersPartners' 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 includesand the Predecessor include net
income and the change in net unrealized holding gains (losses) on
investments charged or credited to
Stockholders' Equity.investments. 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 ninethree months ended September 30,March 31,
1999, and March 31, 1998 and 1997 was as follows:
For the Quarter Ended Sept. 30,March 31, 1999 March 31, 1998 1997
Company Predecessor
(Unaudited) (Unaudited)
--------------- ---------------
Net income $ 866,5481,252,398 $ 697,116486,466
Change in net unrealized holding gains (losses) (987,160) 198,157802,645 (21,235)
--------------- ---------------
Comprehensive income $ (120,612)2,055,043 $ 895,273
=============== ===============
For the Nine Months Ended Sept. 30,
1998
Predecessor Company 1997
Through April 9 From April 10 Total Predecessor
(Unaudited) (Unaudited) (Unaudited) (Unaudited)
--------------- --------------- --------------- ---------------
Net income $ 486,466 $ 2,107,555 $ 2,594,021 $ 1,487,983
Change in net unrealized holding gains (losses) (21,335) (840,813) (862,148) (8,306)
--------------- --------------- --------------- ---------------
Comprehensive income $ 465,131 $ 1,266,742 $ 1,731,873 $ 1,479,677
=============== ===============465,231
=============== ===============
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 did not make a provision for
income taxes since its Beneficial Unit Certificate (BUC) Holders were
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 presenttable presents the Company's Mortgage Securitiesmortgage securities as of September
30, 1998March 31,
1999, and the Predecessor's Mortgage Securities as of December 31, 1997.
The Mortgage Securities classified as available-for-sale are carried at their
fair value and the Mortgage Securities classified as held-to-maturity are
carried at their amortized cost:1998.
As of September 30, 1998 - Company (unaudited)
Available-for-Sale
------------------
Amortized cost $ 201,804,178
Net unrealized losses (1,545,641)
------------------
Fair value $ 200,258,537
==================
March 31, 1999
(Unaudited) December 31, 1997 - Predecessor
Available-for-Sale Held-to-Maturity Total
------------------ ---------------- ---------------1998
----------------- -----------------
Amortized costGNMA Certificates $ 18,884,19457,545,490 $ 14,052,24259,452,502
FNMA Certificates 247,993,099 159,686,597
FHLMC Certificates 18,912,401 22,756,363
Commercial mortgage securities 17,089,736 -
----------------- -----------------
$ 32,936,436
Gross unrealized gains 606,486 658,816 1,265,302
Gross unrealized losses (36,534) - (36,534)
------------------ ---------------- ---------------
Fair value341,540,726 $ 19,454,146 $ 14,711,058 $ 34,165,204
================== ================ ===============241,895,462
================= =================
Certain - 7 -
At March 31, 1999, mortgage securities classified as available-for-sale on the September 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 September 30, 1998, Mortgage Securities consisted of pools of adjustable-rate
Mortgage Securitiesmortgage securities with a carrying value of $151,122,983
- 9 -
which were acquired since the Merger Date$296,988,745, and fixed-rate
Mortgage Securitiesmortgage securities with a carrying value of $42,431,379.$44,551,981. At September 30,December 31,
1998, Mortgage
Securitiesmortgage securities consisted of pools of adjustable-rate mortgage
securities with a carrying value of $194,542,316 and fixed-rate mortgage
securities with a carrying value of $47,353,146.
The 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 Federal National Mortgage Association (FNMA) Certificates are backed by
first mortgage loans on pools of single-family properties. 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 Federal Home Loan Mortgage Corporation (FHLMC) Certificates are backed by
first mortgage loans on pools of single-family properties. 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.
The commercial mortgage securities are rated AA or A by Standard and Poor's.
At March 31, 1999, and December 31, 1997, Mortgage Securities consisted1998, all mortgage securities were
classified as available-for-sale and as such are carried at their fair value.
The following table presents the amortized cost, gross unrealized gains, gross
unrealized losses and fair value of GNMA Certificatesmortgage securities March 31, 1999 and
FNMA
Certificates.December 31, 1998 respectively:
March 31, 1999
(Unaudited) Dec. 31, 1998
------------------ ------------------
Amortized cost $ 340,939,341 $ 242,142,861
Gross unrealized gains 2,039,686 1,177,638
Gross unrealized losses (1,438,301) (1,425,037)
------------------ ------------------
Fair value $ 341,540,726 $ 241,895,462
================== ==================
As of September 30, 1998,March 31, 1999, the Company had no commitments to purchase Mortgage
Securities.three mortgage
securities with a current face value totaling approximately $31.2 million.
4. Corporate Securities
Corporate Securitiessecurities are classified as held-to-maturity. At September 30,March 31, 1999,
and December 31, 1998, the total amortized cost, gross unrealized gains and
fair value of the Corporate Securitiescorporate securities were $4,664,303, $51,697$5,158,436, $350,514, and
$4,716,000.$5,508,950 and $4,673,127, $273,123 and $4,946,250, respectively.
5. Other Investments
Other investments consisted of the following:following as of March 31, 1999 and December
31, 1998:
As of As of
Sept. 30, 1998March 31, 1999
(Unaudited) Dec. 31, 1997
Company Predecessor
(Unaudited)
-------------1998
-------------- -------------
Investment in Retirement Centers Corporation $ 351,663320,121 $ -349,076
Investment in and advances to PEPS - 220,320
Investment in participating loans - 860,000real estate limited partnerships 830,365 848,265
------------- -------------
Total $ 351,6631,150,486 $ 1,080,3201,197,341
============= =============
6. Repurchase Agreements - 8 -
The Company's investment in Retirement Centers Corporation (RCC) represents a
95% ownership interest in such corporation. The Company has entered into several repurchase agreementsowns 100% of the
non-voting preferred stock of RCC and a third party owns 100% of the common
stock. RCC owns limited partnership interests in five real estate limited
partnerships which operate assisted living centers. The Company accounts for
its investment in RCC on the equity method.
Investments in and advances to finance Mortgage
Securities purchased sincereal estate limited partnerships consist of
investments in or advances made to four limited partnerships which own the
Merger Date. The repurchase agreementsproperties underlying certain mortgage securities owned by the Company. These
investments are not insured or guaranteed but rather are collateralized by the
Company's Mortgage Securities withvalue of the real estate underlying the real estate owned by such limited
partnerships. They are accounted for under the equity method of accounting.
Certain of the investments have a principal balancezero 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 approximately $156 million and bear interest at rates that are LIBOR based.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.
6. Repurchase Agreements
As of September 30, 1998,March 31, 1999, the Company had outstanding $147,587,842balances of $297,073,067
under 29 repurchase agreements with a weighted average borrowing rate of 5.51%4.9%
and a weighted average remaining maturity of 3.404.6 months. As of September 30, 1998,March 31,
1999, all of the Company's borrowings were fixed-rate term repurchase
agreements with original maturities that range from 3one to 12twelve months. As
of December 31, 1998, the Company had outstanding balances of $190,250,084
under 13 repurchase agreements with a weighted average borrowing rate of
5.04%.
At September 30, 1998,March 31, 1999, the repurchase agreements had the following remaining
maturities:
Within 30 days $ 27,015,000
30 to 90 days 76,306,257
90 days to one year 44,266,585
-------------
$147,587,842
Within 30 days $ 47,110,792
30 to 90 days 87,152,000
90 days to one year 162,810,275
-------------
$ 297,073,067
=============
The repurchase agreements are collateralized by the Company's mortgage
securities with a principal balance of approximately $303.4 million and bear
interest at rates that are LIBOR based.
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,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)
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
periodiceligible to
receive 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. NoPrior to this grant, no other options were outstanding and no
additional options were granted during the quarter
ended September 30, 1998.through March 31, 1999. As of September 30, 1998,March 31, 1999,
no options have been exercised. - 9 -
In addition to options, 500,000 and 20,000 DERs were granted on the ISOs and
NQSOs, respectively, during the quarter ended June 30,1998,30, 1998, based on the
provisions of the Plan. DERs vest on the same basis as the options and
payments are made on vested DERs only. Vested DERs are paid only to the
extent of ordinary income and not on returns 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 1998the three months ended March
31, 1999, the Company recorded a $31,250$16,250 charge
($12,500 for the quarter ended Setember 30, 1998) to stockholders' equity
associiated(included in dividends paid or accrued) associated with the DERs on ISOs and a
$1,250$650 charge ($750 for the quarter
ended September 30, 1998) to earnings associated with DERs on NQSOs. There were no DERs
granted as of March 31, 1998.
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 charge will be
recognized based on the vesting schedule. The charge 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). During the three months ended
March 31, 1999, as part of operations, the Company reflected an earnings
charge of approximately $58,899, representing the value of ISOs/DERs
granted over their vesting period. 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.
DividendsDividends/Distributions
- --------------------------------
On September 9, 1998,March 24, 1999, the Company declared a distribution of $.265 per share for
the quarter ending September 30, 1998,ended March 31, 1999, which is to be paid on November 16, 1998,May 17, 1999, to
shareholders of record as of September 30,
1998.April 5, 1999. 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
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 1998,For the three months ended March 31, 1999, the Advisor
earned a base management fee of $386,126 ($204,749 for the quarter ended September 30, 1998). The Advisor
was eligible to receive$189,822 and incentive compensation of
approximately $2,800 in 1998
- 11 -
(none for the quarter ended September 30, 1998).$45,000.
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 Datethree months ended March 31, 1999,
amounted to $142,586 ($72,003 for the quarter ended September 30, 1998)$73,108 and such fees paid by the Predecessor for the period inthree
months ended March 31, 1998, prior to the Merger
Date amounted to $71,125.$45,527.
Prior to the Merger Date, AFCA 3the general partner of the Predecessor (AFCA 3) was
entitled to an administrative fee of .35% per annum of the outstanding amount
of investments of Prep Fund 1the Predecessor to be paid by Prep Fund 1the Predecessor 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$53,617 for the three months ended March 31, 1998 of which $38,659 was paid
by Prep Fund 1the Predecessor and the remainder was paid by property owners.owners of real properties
financed by the Predecessor.
- 10 -
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 amount
of such expenses reimbursed to AFCA 3 or an affiliate was $165,439 for the
three months ended March 31, 1998.
9. Subsequent Events
During April, 1999, the Company acquired three FNMA whole-pool mortgage-backed
certificates with an aggregate remaining principal balance of $31.2 million
(FNMA Certificates). The FNMA Certificates bear interest at rates ranging
from 7.06% to 7.27% per annum. The total purchase price paid for the FNMA
Certificates, including accrued interest, was approximately $32.2 million.
The Company also acquired four private label floating rate securities with an
aggregate remaining principal balance of $43.1 million. The private label
floating rate securities bear interest at rates ranging from 5.71% to 5.89%
per annum. The total purchase price paid for the private label floating rate
securities, including accrued interest, was approximately $43.2 million. The
acquisitions were financed in part with the proceeds of various LIBOR-based
repurchase agreements aggregating $73.8 million and the remainder from cash
reserves of the Company.
10. Pro Forma Financial Statements (Unaudited)
The following summary pro forma information includes the effects of the
Merger. The pro forma operating data for the nine months ended September 30,
1998 and September 30, 1997 are presentedMerger as if the Merger had been completed on January 1, 1998 and 1997, respectively.1998.
Pro Forma Statement of Operations
For the Nine For the NineThree
Months Ended
Months Ended
Sept. 30,March 31, 1998 Sept. 30, 1997
---------------
---------------
Mortgage Securitiessecurities income $ 5,667,004 $ 3,214,364
Corporate Securities income 41,852 -986,379
Interest income on temporary cash investments 616,589 616,438
---------------214,082
---------------
Total interest income 6,325,445 3,830,802
Interest expense on borrowed funds 2,472,772 -
--------------- ---------------
Net interest income 3,852,673 3,830,802
--------------- ---------------
Equity in earnings of property partnerships 649,619 576,125
Rental income 397,519 1,897,467
Interest income on participating loans 6,606 177,639
Gain on sale of1,200,461
Income from other investments 414,951 -
--------------- ---------------
1,468,695 2,651,231
--------------- ---------------
Real estate operating expenses 189,689 1,104,990201,662
General and administrative expenses 2,223,832 1,602,828
Depreciation 47,259 226,882
Interest expense 160,571 565,595
--------------- ---------------
2,621,351 3,500,295
--------------- ---------------
Minority interest (2,147) -
---------------(1) 675,417
---------------
Net income $ 2,697,870 $ 2,981,738
===============726,706
===============
Net income, basic and fully diluted, per share $ 0.30 $ 0.33
===============.08
===============
Weighted average number of shares outstanding 9,035,184 9,035,1849,035,084
(1) Excludes transaction costs incurred by Prep Fund 2 and Pension Fund.
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 periodsperiod indicated, nor does it purport to represent the results of
operations for future periods.
- 1211 -
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), theThe Company was a newly formed real estate investment
trust (REIT) which had noincorporated in Maryland on July 24, 1997, but did not begin
operations of its own.until April 10, 1998.
On April 10, 1998, the Company and three partnerships;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 preexistingpre-existing net assets and operations or
majority interest in the preexistingpre-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 98%99% (98% on the date of
the Merger and 1% since the Merger) 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.sheet of the Company.
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 September 30, 1998,March 31, 1999, the
Company purchased nine29 positions in mortgage backed securities for an aggregate
purchase cost of approximately $171 million.$297.1 million (16 positions for an aggregate
purchase cost of approximately $64.6 million for the three months ended March
31, 1999).
The Company intendshas elected to electbecome subject to qualifytax as a REITreal estate investment
trust (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. For tax
purposes, the dividend declared on December 15, 1998, and paid on February 19,
1999, will be treated as a 1999 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, orPredecessor. Accordingly, the
Company's current
level of operations. Accordingly, the - 12
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 and borrowings under repurchase
agreements and mortgage loans on the Company's remaining direct real estate
investments, which are currently held for sale.agreements.
Since the Merger, the Company has primarily financed its mortgage investments
through repurchase agreements totalling $147.6totaling $297.1 million with a weighted average
borrowing rate of 5.51%4.9% at September 30, 1998.March 31, 1999. The repurchase agreements have
balances of between $8.1 million$639,000 and $27$48.8 million. These arrangements have
original terms to maturity ranging from three monthsone month to twelve 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 September 30, 1998March 31, 1999 Compared to 19971998
During the three months ended September 30, 1998,March 31, 1999, total interest income for the
Company increased $2,409,925$4.1 million as compared to total interest income of the
Predecessor for the three months ended September 30, 1997.March 31, 1998. This increase is a
result of the interest generated by mortgage investments acquired in the
merger from Prep Fund 2 and Pension Fund in the Merger as well as the
acquisition of additional mortgage investments during 1998.1998 and 1999.
The increase in the Company's interest expense on borrowed funds during the
three months ended September 30, 1998March 31, 1999 compared to that of the Predecessor for
the three months ended September 30, 1997,March 31, 1998, relates to interest expense on
repurchase arrangements used to fund additional investments.
Income from other investments increased as a result of income generated by
other investments acquired from Prep Fund 2 and Pension Fund.
General and administrative expenses for the Company for the three months ended
March 31, 1999 increased $254,212$194,900 as compared to that of the Predecessor for
the three months ended March 31, 1998 as a result of (i) the management fee payable to the Advisor
and (ii) the increased scope of
operations resulting from the Merger.
Nine month period ended September 30, 1998 compared to 1997
During the nine months ended September 30, 1998, total interest income
increased $3,122,602 as compared to total interest income of the Predecessor
for the nine months ended September 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.
Income from other investments increased as a result of income generated by
other investments acquired from Prep Fund 2 and Pension Fund.
The Company realized a gain of $385,000 from the sale of a mortgage loan on
May 1, 1998 and a gain of $29,951 on the sale of other investments.
The increase in the Company's interest expense on borrowed funds during the
nine months ended September 30, 1998 compared to that of the Predecessor for
the nine months ended September 30, 1997, relates to interest expense on
repurchase arrangements used to fund additional investments.
General and administrative expenses increased $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 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 September 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.mid-1999.
America First believes any Year 2000 problems relating to its IT systems will - 13 -
be resolved without significant operational difficulties. However, there can
be no assurance that testing will discover all potential Year 2000 problems or
that it will not reveal unanticipated material problems with the America First
IT systems that will need to be resolved.
Non-IT systems include embedded circuitry such as microcontrollers found in
telephone equipment, security and alarm systems, copiers, fax machines, mail
room equipment, heating and air conditioning systems and other infrastructure
systems that are used by America First in connection with the operation of the
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 - 14 -
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.
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 March 31,
1999, the Company determined that it is in and has maintained compliance with
this requirement.
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 toThere have been no material changes in the Company
prior to its Annual Report on Form 10-K for the year endedCompany's market risk since
December 31, 1998.
- 1715 -
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, dated April 9, 1998, by and between
the Company and America First Mortgage Advisory Corporationthe Advisor (incorporated herein by
reference to Exhibit 10.1 of the Registration
Statement onfrom Form S-48-K dated February 12,April 10, 1998 filed by
the RegistrantCompany pursuant to the Securities Exchange Act of
19331934 (Commission File No. 333-46179)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 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 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 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 onfrom Form S-48-K dated February 12,
- 18 -April 10, 1998, filed by
the RegistrantCompany pursuant to the Securities Exchange Act of
19331934 (Commission File No. 333-46179)1-13991)).
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)).
- 16 -
21. Subsidiaries of the Registrant
27. Financial Data Schedule
(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. Acquistion Yes June 26, 1998
or Disposition
of Assets
2. Acquisition Yes July 29, 1998No January 25, 1999
or Disposition
of Assets
- 1917 -
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
Dated: November 13, 1998May 12, 1999 AMERICA FIRST MORTGAGE INVESTMENTS, INC.
By /s/ Gary Thompson
Gary Thompson
Authorized Officer and Chief Financial Officer
- 2018 -
EXHIBIT 21
SUBSIDIARIES OF THE REGISTRANT
America First Prep Fund 2 Pension Series Limited Partnership
America First Capital Associates Limited Partnership Six
- 19 -