10-Q: Quarterly report pursuant to Section 13 or 15(d)
Published on November 12, 1999
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, 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
The number of shares outstanding of each of the issuer's classes of
common stock, as of November 11, 1999 was as follows:
Common Stock ($.01 par value) 9,063,242 shares
Part I. Financial Information
Item 1. Financial Statements
AMERICA FIRST MORTGAGE INVESTMENTS, INC.
CONSOLIDATED BALANCE SHEETS
AMERICA FIRST MORTGAGE INVESTMENTS, INC.
CONSOLIDATED AND COMBINED STATEMENTS OF INCOME
(UNAUDITED)
AMERICA FIRST MORTGAGE INVESTMENTS, INC.
CONSOLIDATED AND COMBINED STATEMENTS OF INCOME
(UNAUDITED)
AMERICA FIRST MORTGAGE INVESTMENTS, INC.
CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1999
(UNAUDITED)
AMERICA FIRST MORTGAGE INVESTMENTS, INC.
CONSOLIDATED AND COMBINED STATEMENTS OF CASH FLOWS
(UNAUDITED)
AMERICA FIRST MORTGAGE INVESTMENTS, INC.
NOTES TO CONSOLIDATED AND COMBINED FINANCIAL STATEMENTS
SEPTEMBER 30, 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.
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 pre-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, was considered the Predecessor entity (the
Predecessor) and its historical operating results are presented in the
financial statements contained herein. The Merger was accounted for using the
purchase method of accounting in accordance with generally accepted accounting
principles. Prep Fund 1 was deemed to be the acquirer of the other
partnerships under the purchase method. Accordingly, the Merger resulted, for
financial accounting purposes, in the effective purchase by Prep Fund 1 of all
the Beneficial Unit Certificates (BUCs) of Prep Fund 2 and approximately 99%
of the BUCs of Pension Fund. 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 December 31, 1998, and the combined accounts of the Company, Prep
Fund 1 and America First Participating/Preferred Equity Mortgage Fund
(the managing general partner of Prep Fund 1) (together referred to as the
Predecessor) for periods prior to the Merger.
The financial statements are prepared on the accrual basis of accounting
in accordance with generally accepted accounting principles.
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
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 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 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. Mortgage securities classified as
available-for-sale are reported at fair value, with unrealized gains and
losses excluded from earnings and reported in other comprehensive income.
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 investment securities are based on the
specific identification method.
Interest income is accrued based on the outstanding principal amount of
the investment securities and their contractual terms. Premiums and
discounts associated with the purchase of investment securities are
amortized into interest income over the lives of the securities using the
effective yield method based on, among other things, anticipated estimated
prepayments. Such calculations are periodically adjusted for actual
prepayment activity.
D) Credit Risk
The Company limits its exposure to credit losses on its investment
portfolio by requiring that at least 70% of its investment 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 Government National Mortgage Association
(GNMA), Federal National Mortgage Association (FNMA), or 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
be 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, 1999, approximately 86% of the Company's
investment portfolio consisted of mortgage securities insured or
guaranteed by the U.S. government or an agency thereof. At September
30, 1999, management determined no allowance for credit losses was
necessary.
E) Other Investments
Other investments consist of: (i) non-voting preferred stock of 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, and (iv) other real estate investments.
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 and 300,000
shares of common stock were issued April 9, 1998 and August 13, 1999,
respectively. 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 the three and nine months ended
September 30, 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 the three and nine months ended September 30, 1998, 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 and the Predecessor includes net
income and the change in net unrealized holding gains (losses) on
investments. Comprehensive income for the three and nine months ended
September 30, 1999 and 1998 was as follows:
H) Reclassifications
Certain prior period amounts have been reclassified to conform with the
current period classification.
3. Mortgage Securities
The following table presents the Company's mortgage securities as of September
30, 1999, and December 31, 1998.
At September 30, 1999, mortgage securities consisted of pools of
adjustable-rate mortgage securities with a carrying value of $397,389,579
and fixed-rate mortgage securities with a carrying value of $32,739,599.
At December 31, 1998, mortgage 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 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 Government National Mortgage Association (GNMA) Certificates are backed by
first mortgage loans on multifamily residential properties and 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 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-backed securities are rated AA or A by Standard and
Poor's.
The private label CMOs (collateralized mortgage obligations) are rated AAA by
Standard and Poor's.
At September 30, 1999, and December 31, 1998, 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 mortgage securities as of September 30,
1999 and December 31, 1998 respectively:
As of September 30, 1999, the Company had commitments to purchase six mortgage
securities with current face values totaling approximately $34.1 million. At
December 31, 1998, the Company had commitments to purchase two mortgage
securities with current face values totaling approximately $16.6 million.
4. Corporate Securities
Corporate securities are classified as held-to-maturity. At September 30,
1999, the total amortized cost, gross unrealized gains, gross unrealized
losses and fair value of the corporate securities were $8,009,908, $10,240,
($233,524), and $7,786,624. At December 31, 1998, the total amortized cost,
gross unrealized gains and fair value of the corporate securities were
$4,673,127, $273,123 and $4,946,250, respectively.
5. Other Investments
Other investments consisted of the following as of September 30, 1999 and
December 31, 1998:
The Company's investment in Retirement Centers Corporation (RCC) represents a
95% ownership interest in such corporation. The Company owns 100% of the
non-voting preferred stock of RCC and a third party owns 100% of the common
stock. RCC owned 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.
During the quarter ended September 30, 1999, four of the real estate limited
partnerships were liquidated with RCC receiving an undivided interest in its
net assets of each such limited partnership. RCC then sold its undivided
interests in the net assets of such limited partnerships. On a consolidated
basis, such sale contributed approximately $1.7 million, net of incentive fee
(see Note 8), to the Company's net income for the quarter.
Investments in and advances to real estate limited partnerships consist of
investments in or advances made to four limited partnerships which own the
properties underlying certain mortgage securities owned by the Company. These
investments are not insured or guaranteed but rather are collateralized by the
value 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 zero carrying value and, as such, earnings
are recorded only to the extent distributions are received. Such investments
have not been reduced below zero through recognition of allocated investment
losses since the Company has no legal obligation to provide additional cash
support to the underlying property partnerships as it is not the general
partner, nor has it indicated any commitment to provide this support.
6. Repurchase Agreements
As of September 30, 1999, the Company had outstanding balances of
$395,744,226 under 34 repurchase agreements with a weighted average
borrowing rate of 5.23% and a weighted average remaining maturity of 1.4
months. As of September 30, 1999, all of the Company's borrowings were
fixed-rate term repurchase agreements with original maturities that range from
one to twelve months. As of December 31, 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, 1999, the repurchase agreements had the following remaining
maturities:
The repurchase agreements are collateralized by the Company's mortgage
securities with a principal balance of approximately $409 million and bear
interest at rates that are LIBOR based.
As discussed in Note 10, as of November 12, 1999, approximately 80% of the
Company's repurchase agreements had maturity dates beyond January 15, 2000,
due to refinancings completed prior to November 12, 1999.
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
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 eligible to
receive grants of NQSOs with DERs pursuant to the provisions of the Plan. The
exercise price for any options granted to eligible persons under the Plan
shall not be less than the fair market value of the common stock on the day of
the grant. The options expire if not exercised ten years after the date
granted.
On April 9, 1998, 500,000 ISOs were granted to buy common shares at an
exercise price of $9.375 per share (the 1998 Grant). In addition, 20,000
NQSOs were issued at an exercise price of $9.375 per share. On August 13,
1999, 300,000 ISOs were granted to buy common shares at an exercise price of
$4.875 per share (the 1999 Grant). Prior to the 1998 Grant, no other options
were outstanding. At September 30, 1999 and December 31, 1998, respectively,
325,000 and 125,000 ISOs were vested and exercisable. At September 30, 1999
and December 31, 1998, respectively, 10,000 and 5,000 NQSOs were vested and
exercisable. As of September 30, 1999, no options had been exercised.
In addition to the options granted on April 9, 1998, 500,000 and 20,000 DERs
were also granted on the ISOs and NQSOs, respectively, based on the provisions
of the Plan. No DERs were granted on the ISOs granted on August 13, 1999.
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 the three and nine months ended September 30, 1999,
respectively, the Company recorded a $35,000 and $82,500 charge to
stockholders' equity (included in dividends paid or accrued) associated with
the DERs on ISOs and a $1,400 and $3,300 charge to earnings 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 as variable grants and a
periodic charge will be recognized based on the vesting schedule. The charge
for options which vested immediately with the 1998 Grant was included as
capitalized transaction costs in connection with the Merger. Until fixed and
determinable, management estimates the value of the ISOs granted as of each
balance sheet date using a Black-Scholes valuation model, as adjusted 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, a volatility rate, a
risk-free rate and a current dividend yield (or 0% if the related DERs are
issued). During the nine months ended September 30, 1999, as part of
operations, the Company reflected an earnings charge of approximately
$117,798, 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.
Dividends/Distributions
- -----------------------
The Company declared the following distributions through September 30, 1999:
Declaration Date Record Date Payment Date Amount per share
- ---------------- ----------- ------------ ----------------
March 24, 1999 April 5, 1999 May 17, 1999 $.265
June 14, 1999 June 30, 1999 August 17, 1999 .125
September 21, 1999 September 30, 1999 November 17, 1999 .140
For tax purposes, the distribution of $.265 per share declared on December 15,
1998, but payable on February 19, 1999, will be treated as a 1999 distribution
for shareholders and partially taxable in 1999. Cash distributions paid by the
Company during the year consist in part of a dividend paid from earnings and
in part of 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%. For the three and nine months ended September 30,
1999, the Advisor earned a base management fee of $190,760 and $573,546,
respectively, and incentive compensation of $498,543 and $633,150,
respectively. Approximately $435,000 of the incentive fee for the quarter and
nine months ended September 30, 1999 was attributable to the sale of undivided
interests in the net assets of four real estate limited partnerships as
described in Note 5. Subsequent to the Merger Date and through September
30, 1998, the Advisor earned a base management fee of $386,126 and incentive
compensation of approximately $2,807.
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 for the three and nine months ended September
30, 1999, amounted to $85,014 and $252,459, respectively. Such fees paid by
the Company subsequent to the Merger Date and through September 30, 1998,
amounted to $166,754 and such fees paid in 1998 by the three partnerships
which merged (see Note 1) for periods prior to the Merger Date amounted to
$83,017 (including $45,527 paid by the Predecessor).
Prior to the Merger Date, the general partner of the Predecessor (AFCA 3) was
entitled to an administrative fee of .35% per annum of the outstanding amount
of investments of the Predecessor to be paid by the Predecessor to the extent
such amount is not paid by property owners. Prior to the Merger Date, AFCA 3
earned administrative fees of $53,617 in 1998 of which $38,659 was paid by the
Predecessor and the remainder was paid by owners of real estate properties
financed by the Predecessor.
Prior to the Merger Date, substantially all of Predecessor's general and
administrative expenses and certain costs capitalized by the Predecessor were
paid by AFCA 3 or an affiliate and reimbursed by the Predecessor. Prior to
the Merger Date, the amount of such expenses reimbursed to AFCA 3 or an
affiliate was $165,439. The capitalized costs consisted of transaction costs
incurred in conjunction with the merger described in Note 1.
9. Pro Forma Financial Statements (Unaudited)
The following summary pro forma information includes the effects of the
Merger as if the Merger had been completed on January 1, 1998.
Pro Forma Statement of Operations
(1) Excludes transaction costs of $364,924 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 period indicated, nor does it purport to represent the results of
operations for future periods.
10. Subsequent Events
To help mitigate any uncertainty with financial market turmoil associated with
the Year 2000, prior to November 12, 1999, management opted to refinance a
significant portion of its repurchase agreements with maturity dates beyond
January 15, 2000. As a result of these refinancings, as of November 12, 1999,
approximately 80% of the Company's repurchase agreements had maturity dates
beyond January 15, 2000. In addition, prior to December 15, 1999, the Company
currently plans to refinance its remaining repurchase agreements with maturity
dates beyond January 15, 2000. The refinanced repurchase agreements generally
have original terms of two to four months and interest rates that are
approximately 60 basis points higher than the Company's September 30, 1999,
weighted average interest rate on its repurchase agreements.
Item 2.
AMERICA FIRST MORTGAGE INVESTMENTS, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
General
The Company was incorporated in Maryland on July 24, 1997, but did not begin
operations until April 10, 1998.
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 pre-existing net assets and operations or
majority interest in the pre-existing partnership were contributed to the
Company in exchange for 9,035,084 shares of the Company's common stock. For
financial accounting purposes, Prep Fund 1, the largest of the three
Partnerships, was considered the Predecessor entity (the Predecessor) and its
historical operating results are presented in the financial statements
contained herein. The Merger was accounted for using the purchase method of
accounting in accordance with generally accepted accounting principles. Prep
Fund 1 was deemed to be the acquirer of the other Partnerships under the
purchase method. Accordingly, the Merger resulted, for financial accounting
purposes, in the effective purchase by Prep Fund 1 of all the Beneficial Unit
Certificates (BUCs) of Prep Fund 2 and approximately 99% (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 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, 1999, the
Company purchased mortgage securities with a face value at the time of
purchase of approximately $503.8 million (mortgage securities with a face
value of approximately $271.2 million were purchased during the nine months
ended September 30, 1999).
The Company has elected to become subject to tax as a real 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 made distributions through the first quarter of 1999
of $1.06 per common share. These distributions were paid in four equal
quarterly installments and significantly exceeded taxable income.
Accordingly, a portion of distributions received by shareholders in 1998 and
1999 consisted 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, was 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. Accordingly, the
currently reported financial information is not necessarily indicative of the
Company's future operating results or financial condition.
Liquidity and Capital Resources
The Company 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.
Since the Merger, the Company has primarily financed its mortgage investments
through repurchase agreements totaling $395.7 million with a weighted average
borrowing rate of 5.23% at September 30, 1999. The repurchase agreements have
balances of between $537,000 and $74.3 million. These arrangements have
original terms to maturity ranging from one 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. As discussed in
Note 10 to the financial statements, as of November 12, 1999, approximately
80% of the Company's repurchase agreements had maturity dates beyond January
15, 2000, due to refinancings completed prior to November 12, 1999. The
repurchase agreements were refinanced to help mitigate any uncertainty with
financial market turmoil associated with the Year 2000.
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, 1999 Compared to 1998
During the three months ended September 30, 1999, total interest income
increased $3.6 million as compared to total interest income for the three
months ended September 30, 1998. This increase is a result of the acquisition
of additional mortgage investments in accordance with the Company's investment
strategy.
The $3 million increase in interest expense on borrowed funds
during the three months ended September 30, 1999 compared to the three months
ended September 30, 1998, relates to interest expense on repurchase
arrangements used to fund additional investments.
Income from other investments increased $2,119,830 during the three months
ended September 30, 1999, compared to the three months ended September 30,
1998. Net of earnings (excluding the related incentive fee) recorded as a
result of RCC's sale of its undivided interests in the net assets of four
limited partnerships, income from other investments decreased approximately
$143,000. This decrease is due to a reduction in the amount of income
realized on the Company's investments in real estate limited partnerships.
General and administrative expenses for the three months ended September 30,
1999 increased $520,114 as compared to the three months ended September 30,
1998. This increase is a result of an increase of approximately $498,000 in
incentive compensation payable to the Advisor of which $435,000 resulted from
the RCC sale described above and $63,000 resulted from improved operations of
the Company. Also contributing to the increase in general and administrative
expenses is an overall increase of approximately $22,000 due to the increased
scope of operations resulting from the Merger.
Nine Month Period Ended September 30, 1999 Compared to 1998
During the nine months ended September 30, 1999, total interest income for the
Company increased $12.5 million as compared to total interest income of the
Predecessor and the Company for the nine months ended September 30, 1998.
This increase is a result of the acquisition of additional mortgage
investments during 1998 and 1999 as well as interest generated by mortgage
investments acquired from Prep Fund 2 and Pension Fund in the Merger.
The $10 million increase in the Company's interest expense on borrowed funds
during the nine months ended September 30, 1999 compared to that of the
Predecessor and Company for the nine months ended September 30, 1998, relates
to interest expense on repurchase arrangements used to fund additional
mortgage investments.
The Company's income from other investments increased $2,010,046 during the
nine months ended September 30, 1999, compared to that of the Predecessor and
the Company for the nine months ended September 30, 1998. Net of earnings
(excluding the related incentive fee) recorded by the Company as a result of
RCC's sale of its undivided interests in the net assets of four real estate
limited partnerships, income from other investments decreased approximately
$253,000. Approximately $199,000 of such decrease is due to a reduction in the
amount of income realized on the Company's investments in real estate limited
partnerships and approximately $54,000 of such decrease is due to interest
income recorded in 1998 on a participating loan which was paid off in May of
1998.
The Company recorded a gain of $54,994 on the sale of investments during the
nine months ended September 30, 1999 compared to a gain of $414,951 for the
comparable period of 1998. The gain recorded for the nine months ended
September 30, 1998 was due primarily to the payoff of the Company's only
participating loan in the amount of $385,000.
General and administrative expenses of the Company for the nine months ended
September 30, 1999 increased $803,022 as compared to that of the Predecessor
and the Company for the nine months ended September 30, 1998. This increase
is a result of an increase of approximately $630,000 in incentive compensation
payable to the Advisor of which $435,000 resulted from the RCC sale described
above and $195,000 resulted from improved operations of the Company. Also
contributing to the increase in general and administrative expenses is an
overall increase of approximately $173,000 due to the increased scope of
operations resulting from the Merger.
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 engaged a third
party computer consulting firm to review and test its PC-LAN system to ensure
that it will function correctly after that date. This process, along with any
necessary remediation or plans for remediation, has been completed. America
First believes any Year 2000 problems relating to its IT systems will 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 reviewed 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. Based on this review, a need for significant
modification or replacement of such "mission critical" systems was not
identified.
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 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.
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,
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.
There have been no material changes in the Company's market risk since
December 31, 1998.
PART II. OTHER INFORMATION
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 Advisory Agreement, dated April 9, 1998, by and between
the Company and the Advisor (incorporated herein by
reference from Form 8-K dated April 10, 1998 filed by
the Company pursuant to the Securities Exchange Act of
1934 (Commission File No. 1-13991)).
10.2 Employment Agreement of Stewart Zimmerman (incorporated
herein by reference to Exhibit 10.2 of the Registration
Statement on Form S-4 dated February 12, 1998, filed by
the 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 1997 Stock Option Plan of the Company (incorporated herein
by reference from Form 8-K dated April 10, 1998, filed by
the Company pursuant to the Securities Exchange Act of
1934 (Commission File No. 1-13991)).
10.6 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)).
10.7 First Amendment to the 1997 Stock Option Plan of
the Company.
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. Acquisition or No September 1, 1999
Disposition of Assets
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 11, 1999 AMERICA FIRST MORTGAGE INVESTMENTS, INC.
By /s/ Stewart Zimmerman
Stewart Zimmerman
President and Chief Executive Officer
By /s/ Gary Thompson
Gary Thompson
Authorized Officer and Chief Financial Officer
EXHIBIT 10.7
FIRST AMENDMENT TO THE 1997 STOCK OPTION PLAN OF
AMERICA FIRST MORTGAGE INVESTMENTS, INC.
Pursuant to the action of the Board of Directors of America First Mortgage
Investments, Inc. (the "Corporation") taken on August 9, 1999, Section 6 of
the Corporation's 1997 Stock Option Plan (the "Plan") is hereby amended and
restated in its entirety to read as follows:
6. STOCK. Subject to adjustments pursuant to Section 10, Options with respect
to an aggregate of no more than 1,000,000 Shares may be granted under the Plan,
nor may the number of Shares subject to Options outstanding at any time exceed
10% of the total outstanding shares of the Company's Common Stock. In no
event may any Optionee receive Options for more than 100,000 Shares of Common
Stock over the life of the Plan; provided, however, that this sentence shall
not apply to Options granted prior to the first meeting of the Company's
shareholders at which directors are to be elected that occurs after December
31, 1999, and such Options shall not be taken into account in determining
whether the limitation of this sentence has been satisfied. Notwithstanding
the foregoing provisions of this Section 6, Shares as to which an Option is
granted under the Plan that remains unexercised at the expiration, forfeiture
or other termination of such Option may be the subject of the grant of
further Options. Shares of Common Stock issued hereunder may consist, in
whole or in part, of authorized and unissued shares or treasury shares. The
certificates for Shares issued hereunder may include any legend which the
Committee deems appropriate to reflect any restrictions on transfer hereunder
or under the Agreement, or as the Committee may otherwise deem appropriate.
All other provisions of the Plan shall remain as set forth in the Plan
Agreement dated December 12, 1997.
The Corporation has caused this First Amendment to the Plan to be executed in
the name and on behalf of the Corporation by an officer of the Corporation
thereunto duly authorized.
Dated: August 9, 1999 AMERICA FIRST MORTGAGE INVESTMENTS, INC.
By /s/ Stewart Zimmerman
Stewart Zimmerman
President
EXHIBIT 21
SUBSIDIARIES OF THE REGISTRANT
America First Prep Fund 2 Pension Series Limited Partnership
America First Capital Associates Limited Partnership Six