<PAGE>
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
UNITED STATES SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D. C. 20549
FORM 10-Q
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 TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
- --- ACT OF 1934
FOR THE TRANSITION PERIOD FROM _____ TO _____
COMMISSION FILE NUMBER: 001-13637
APEX MORTGAGE CAPITAL, INC.
(Exact name of Registrant as specified in its Charter)
MARYLAND 95-4650863
(State or other jurisdiction of incorporation (I.R.S. Employer
or organization) Identification Number)
865 SOUTH FIGUEROA STREET
LOS ANGELES, CALIFORNIA 90017
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code (213) 244-0440
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
--- ---
APPLICABLE ONLY TO CORPORATE ISSUERS:
Indicate the number of shares outstanding of the issuer's classes of common
stock, as of the last practicable date.
Common Stock ($0.01 par value) 5,753,000 as of November 12, 1999
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
<PAGE>
APEX MORTGAGE CAPITAL, INC.
FORM 10-Q
INDEX
<TABLE>
<CAPTION>
PART I. FINANCIAL INFORMATION PAGE
<S> <C> <C>
ITEM 1. FINANCIAL STATEMENTS
BALANCE SHEETS AT SEPTEMBER 30, 1999 (UNAUDITED) AND DECEMBER 31, 1998 3
STATEMENT OF OPERATIONS FOR THE THREE MONTHS AND NINE
MONTHS ENDED SEPTEMBER 30, 1999 AND SEPTEMBER 30, 1999
(UNAUDITED) 4
STATEMENT OF STOCKHOLDERS' EQUITY FOR THE NINE MONTHS ENDED
SEPTEMBER 30, 1999 (UNAUDITED) 5
STATEMENTS OF CASH FLOWS FOR THE THREE MONTHS AND NINE MONTHS
ENDED SEPTEMBER 30, 1999 AND SEPTEMBER 30, 1999 (UNAUDITED) 6
NOTES TO FINANCIAL STATEMENTS (UNAUDITED) 7
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS 15
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK 24
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS 27
ITEM 2. CHANGES IN SECURITIES 27
ITEM 3. DEFAULTS UPON SENIOR SECURITIES 27
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS 27
ITEM 5. OTHER INFORMATION 27
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K 28
SIGNATURES 29
</TABLE>
<PAGE>
PART 1. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
APEX MORTGAGE CAPITAL, INC.
BALANCE SHEETS
<TABLE>
<CAPTION>
SEPTEMBER 30, 1999 DECEMBER 31, 1998
(Unaudited)
<S> <C> <C>
ASSETS
Cash and cash equivalents $ 6,236,000 $ 12,679,000
Fixed income securities available-for-sale, at fair value (Note 3) 730,002,000 829,712,000
Equity securities available-for-sale, at fair value (Note 3) 20,254,000 16,422,000
Accrued interest receivable 5,851,000 5,151,000
Principal payments receivable 3,827,000 937,000
Receivable for unsettled securities 63,000 -
Other assets 408,000 577,000
------------ ------------
$766,641,000 $865,478,000
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
Liabilities
Reverse repurchase agreements (Note 5) $699,647,000 $767,908,000
Payable for unsettled securities 16,000 838,000
Unrealized loss on forwards (Note 11) 869,000 -
Accrued interest payable 2,473,000 6,173,000
Dividend payable 2,724,000 1,777,000
Accrued expenses and other liabilities 831,000 752,000
------------ ------------
706,560,000 777,448,000
------------ ------------
Commitments and contingencies (Note 10)
Stockholders' Equity
Preferred Stock, par value $0.01 per share; 50,000,000 shares authorized;
no shares outstanding
Common Stock, par value $0.01 per share; 100,000,000 shares
authorized; 6,700,100 shares outstanding (Notes 8 and 9) 67,000 67,000
Additional paid-in-capital 93,194,000 92,978,000
Accumulated other comprehensive income (loss) (22,796,000) 6,689,000
Retained Earnings (Deficit) 185,000 (1,135,000)
Treasury stock, at cost (947,100 shares) (Note 7) (10,569,000) (10,569,000)
------------ ------------
60,081,000 88,030,000
------------ ------------
$766,641,000 $865,478,000
============ ============
</TABLE>
See accompanying notes to financial statements
3
<PAGE>
APEX MORTGAGE CAPITAL, INC.
STATEMENT OF OPERATIONS
(Unaudited)
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
SEPTEMBER 30, SEPTEMBER 30,
1999 1998 1999 1998
<S> <C> <C> <C> <C>
Interest Income:
Fixed income securities $13,045,000 $13,469,000 $39,913,000 $27,418,000
Cash and cash equivalents 79,000 173,000 229,000 629,000
----------- ----------- ----------- -----------
13,124,000 13,642,000 40,142,000 28,047,000
INTEREST EXPENSE 10,231,000 11,271,000 32,251,000 24,281,000
----------- ----------- ----------- -----------
NET INTEREST INCOME 2,893,000 2,371,000 7,891,000 3,766,000
----------- ----------- ----------- -----------
NET GAIN ON INVESTMENT TRANSACTIONS 437,000 7,000 1,714,000 476,000
DIVIDEND INCOME 503,000 186,000 1,899,000 186,000
GENERAL AND ADMINISTRATIVE EXPENSES:
Management fee (Note 8) 158,000 156,000 472,000 490,000
Incentive fee (Note 8) 480,000 197,000 1,498,000 197,000
Audit and tax fees 19,000 11,000 50,000 34,000
Insurance expense 67,000 67,000 200,000 200,000
Directors' fees 15,000 15,000 45,000 55,000
Stock option expense 71,000 28,000 217,000 84,000
Other 58,000 98,000 240,000 202,000
----------- ----------- ----------- -----------
868,000 572,000 2,722,000 1,262,000
----------- ----------- ----------- -----------
NET INCOME $ 2,965,000 $ 1,992,000 $ 8,782,000 $ 3,166,000
=========== =========== =========== ===========
Net Income Per Share:
Basic $ 0.52 $ 0.33 $ 1.53 $ 0.50
=========== =========== =========== ===========
Diluted $ 0.51 $ 0.33 $ 1.52 $ 0.50
=========== =========== =========== ===========
Weighted Average Number of Shares Outstanding:
Basic 5,753,000 6,022,000 5,753,000 6,334,000
=========== =========== =========== ===========
Diluted 5,784,000 6,022,000 5,782,000 6,334,000
=========== =========== =========== ===========
Dividends Declared Per Share $ 0.46 $ 0.27 $ 1.26 $ 0.77
=========== =========== =========== ===========
</TABLE>
4
<PAGE>
APEX MORTGAGE CAPITAL, INC.
STATEMENT OF STOCKHOLDERS' EQUITY
PERIOD ENDED SEPTEMBER 30, 1999
(Unaudited)
<TABLE>
<CAPTION>
Acccumulated
Common Stock Additional Other
------------------------------- Paid-in Comprehensive
Shares Amount Capital Income
--------------- -------------- ------------------ -------------------
<S> <C> <C> <C> <C>
Balance, December 31, 1998 6,700,100 $67,000 $92,978,000 $6,689,000
Repurchases of common stock - - - -
Issuance of stock options
to non-employees (Note 9) - - 74,000 -
Net income - - - -
Other comprehensive income:
Net unrealized (loss) on
investments available-
for-sale - - - (2,861,000)
Comprehensive income - - - -
Dividends declared - - - -
--------- ------- ----------- ------------
Balance, March 31, 1999 6,700,100 $67,000 $93,052,000 $ 3,828,000
Repurchases of common stock - - - -
Issuance of stock options
to non-employees (Note 9) - - 71,000 -
Net income - - - -
Other comprehensive income:
Net unrealized (loss) on
investments available-
for-sale - - - (13,036,000)
Comprehensive income (loss) - - - -
Dividends declared - - - -
--------- ------- ----------- ------------
Balance, June 30, 1999 6,700,100 $67,000 $93,123,000 ($9,208,000)
Repurchases of common stock
Issuance of stock options
to non-employees (Note 9) 71,000
Net income
Other comprehensive income:
Net unrealized (loss) on
investments available-
for-sale (13,588,000)
Comprehensive income (loss)
Dividends declared
--------- ------- ----------- ------------
Balance, September 30, 1999 6,700,100 $67,000 $93,194,000 ($22,796,000)
========= ======= =========== ============
<CAPTION>
Retained Treasury
Earnings Comprehensive Stock,
(Deficit) Income At Cost Total
--------- ------------- ----------- -------
<S> <C> <C> <C> <C>
Balance, December 31, 1998 ($1,135,000) ($10,569,000) $88,030,000
Repurchases of common stock - - - -
Issuance of stock options
to non-employees (Note 9) - - - 74,000
Net income 2,962,000 2,962,000 - 2,962,000
Other comprehensive income:
Net unrealized (loss) on
investments available-
for-sale - (2,861,000) - (2,861,000)
------------
Comprehensive income $ 101,000
============
Dividends declared (2,250,000) - (2,250,000)
----------- ------------ -----------
Balance, March 31, 1999 ($423,000) ($10,569,000) $85,955,000
Repurchases of common stock - - - -
Issuance of stock options
to non-employees (Note 9) - - - 71,000
Net income 2,854,000 2,854,000 - 2,854,000
Other comprehensive income:
Net unrealized (loss) on
investments available-
for-sale - (13,036,000) - (13,036,000)
-------------
Comprehensive income (loss) $(10,182,000)
=============
Dividends declared (2,487,000) - (2,487,000)
------------ ------------ ----------------
Balance, June 30, 1999 ($56,000) ($10,569,000) $73,357,000
Repurchases of common stock -
Issuance of stock options -
to non-employees (Note 9) 71,000
Net income 2,965,000 2,965,000 2,965,000
Other comprehensive income:
Net unrealized (loss) on
investments available-
for-sale (13,588,000) (13,588,000)
------------
Comprehensive income (loss) $(10,623,000) -
============
Dividends declared (2,724,000) (2,724,000)
----------- ------------ -----------
Balance, September 30, 1999 $185,000 ($10,569,000) $60,081,000
=========== ============ ===========
</TABLE>
5
<PAGE>
APEX MORTGAGE CAPITAL, INC.
STATEMENT OF CASH FLOWS
(Unaudited)
<TABLE>
<CAPTION>
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
1999 1998 1999 1998
<S> <C> <C> <C> <C>
OPERATING ACTIVITIES:
Net Income $ 2,965,000 $ 1,992,000 $ 8,782,000 $ 3,166,000
Adjustments to reconcile net income to net cash
provided by operating activities:
Amortization (52,000) 413,000 394,000 3,148,000
Net gain on sale of securities (437,000) (7,000) (1,714,000) (476,000)
Change in assets and liabilities:
Accrued interest receivable (116,000) 123,000 (700,000) (3,910,000)
Other assets 390,000 100,000 169,000 200,000
Accrued interest payable (210,000) (774,000) (3,700,000) 3,014,000
Accrued expenses and other liabilities 57,000 (668,000) 79,000 (1,011,000)
------------ ------------- ------------ -------------
Net cash provided by operating activities 2,597,000 1,179,000 3,310,000 4,131,000
------------ ------------- ------------ -------------
INVESTING ACTIVITIES:
Purchase of equity securities (5,089,000) (9,980,000) (12,630,000) (9,980,000)
Purchase of interest rate caps - - - (80,000)
Purchase of fixed income securities (1,410,000) (198,034,000) (117,141,000) (1,464,500,000)
Proceeds from sales of equity securities 2,494,000 - 6,870,000 -
Proceeds from sales of fixed income securities 172,000 80,199,000 40,578,000 541,801,000
Principal payments on fixed income securities 35,951,000 39,643,000 147,322,000 219,813,000
------------ ------------- ------------ -------------
Net cash provided by (used in) investing activities 32,118,000 (88,172,000) 64,999,000 (712,946,000)
------------ ------------- ------------ -------------
FINANCING ACTIVITIES:
Net proceeds from reverse repurchase agreements (37,021,000) 57,928,000 (68,261,000) 723,862,000
Dividend distributions (2,487,000) (1,560,000) (6,491,000) (3,454,000)
Purchase of treasury stock - (2,672,000) - (9,108,000)
------------ ------------- ------------ -------------
Net cash (used in) provided by financing activities (39,508,000) 53,696,000 (74,752,000) 711,300,000
------------ ------------- ------------ -------------
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS (4,793,000) (33,297,000) (6,443,000) 2,485,000
CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD 11,029,000 38,867,000 12,679,000 3,085,000
------------ ------------- ------------ -------------
CASH AND CASH EQUIVALENTS AT END OF PERIOD $ 6,236,000 $ 5,570,000 $ 6,236,000 $ 5,570,000
============ ============= ============ =============
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Cash paid for interest $ 10,474,000 $ 12,001,000 $ 35,908,000 $ 21,194,000
============ ============= ============ =============
NONCASH INVESTING AND FINANCING ACTIVITIES:
Net unrealized gain (loss) on mortgage-backed
securities available-for-sale $(13,588,000) $ 10,603,000 $(29,485,000) $ 11,859,000
============ ============= ============ =============
Securities sold, not yet settled $ (484,000) $ (56,593,000) $ 63,000 $ 0
============ ============= ============ =============
Principal payments, not yet received $ 463,000 $ (799,000) $ 2,890,000 $ 158,000
============ ============= ============ =============
Securities purchased, not yet settled $ 16,000 $(120,720,000) $ (822,000) $ (88,498,000)
============ ============= =========== =============
Dividends declared, not yet paid $ (2,724,000) $ (1,601,000) $(2,724,000) $ (1,601,000)
============ ============= =========== =============
</TABLE>
See accompanying notes to financial statements
6
<PAGE>
APEX MORTGAGE CAPITAL, INC.
NOTES TO FINANCIAL STATEMENTS
NOTE 1 - THE COMPANY
Apex Mortgage Capital, Inc. (the "Company") was incorporated in
Maryland on September 15, 1997. The Company commenced its operations of
acquiring and managing a portfolio of mortgage related assets on
December 9, 1997, upon receipt of the net proceeds from the initial
public offering of the Company's common stock. The Company uses its
equity capital and borrowed funds to seek to generate income based on
the difference between the yield on its fixed income securities and the
cost of its borrowings. The Company is structured for tax purposes as a
real estate investment trust ("REIT") under the Internal Revenue Code
of 1986, as amended (the "Code").
NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
CASH AND CASH EQUIVALENTS
Cash and cash equivalents include cash and highly liquid investments
with original maturities of three months or less. The carrying amount
of cash equivalents approximates their fair value.
FIXED INCOME SECURITIES
The Company's fixed income securities consist primarily of residential
mortgage securities and other fixed income securities. All fixed income
securities are recorded at cost on the date the assets are purchased.
Realized gains and losses on sales of the securities are determined on
a specific identification basis. A majority of the Company's fixed
income securities are expected to qualify as real estate assets under
the REIT Provisions of the Code.
Interest income on the Company's mortgage securities is accrued based
on the actual coupon rate and the outstanding principal amount.
Premiums and discounts are amortized into interest income over the
lives of the securities using the effective yield method adjusted for
the effects of estimated prepayments.
Interest income on the Company's other fixed income securities is
accrued using the effective interest method applied prospectively based
on current market assumptions.
The Company's policy is to generally classify its fixed income
securities as available-for-sale. The fixed income securities are
reported at fair value with unrealized gains and losses excluded from
earnings and reported in other comprehensive income.
EQUITY SECURITIES
The Company's equity securities consist primarily of equity securities
issued by other real estate investment trusts. Dividend income on
equity securities is recorded on the declaration date. Realized gains
and losses on sales of the securities are determined on a specific
identification basis. A majority of the Company's equity securities are
expected to qualify as real estate assets under the REIT Provisions of
the Code.
The Company's policy is to generally classify its equity securities as
available-for-sale. Equity securities are reported at fair value with
unrealized gains and losses excluded from earnings and reported in
other comprehensive income.
INTEREST RATE HEDGING TRANSACTIONS
The Company enters into interest rate swap and interest rate cap
agreements in order to mitigate the impact of rising interest rates on
the cost of its short-term borrowings. Amounts payable or receivable
from such agreements are accounted for on an accrual basis and
recognized as a net adjustment to interest expense. Premiums paid for
cap agreements accounted for as hedges are recorded as other assets and
amortized over the lives of such agreements as an adjustment to
interest expense.
The Company also enters into forward contracts to sell U.S. Treasury
notes in order to mitigate the negative impact of rising interest rates
on the fair value of its fixed income securities available-for-sale.
Unrealized gains are shown as an asset on the balance sheet as deferred
hedging income. Unrealized losses are shown as a liability on
7
<PAGE>
the balance sheet as deferred hedging expense. All changes in the fair
value of the forward contracts are included in other comprehensive
income in the Statement of Stockholders' Equity. Realized gains or
losses on the termination of the contracts are recorded as a deferred
asset or liability on the balance sheet and are amortized over the
remaining life of the fixed income securities being hedged as an
adjustment to interest income in the Statement of Operations.
STOCK BASED COMPENSATION
The Company grants stock options to its directors and officers and to
certain directors, officers and employees of its investment manager and
the investment manager itself, as discussed in Note 9. Options granted
to directors of the Company are accounted for using the intrinsic
method, and generally no compensation expense is recognized in the
statement of operations for such options. Other options are accounted
for using the fair value method; such options are measured at their
fair value when they are granted and are recognized as a general and
administrative expense during the periods when the options vest and the
related services are performed.
FEDERAL AND STATE INCOME TAXES
The Company has elected to be taxed as a REIT and generally is not
subject to federal and state taxes on its income to the extent it
distributes annually 95% of its predistribution taxable income to
stockholders and meets certain other asset, income and stock ownership
tests. As such, no accrual for income taxes has been included in the
financial statements.
NET INCOME PER SHARE
Basic net income per share is calculated on the basis of the weighted
average number of common shares outstanding during each period. Diluted
net income per share includes the additional dilutive effect of common
stock equivalents and outstanding stock options and is calculated using
the treasury stock method.
INCOME RECOGNITION
Income and expenses are recorded on the accrual basis of accounting.
CREDIT RISK
The Company has limited its exposure to credit losses on its portfolio
of fixed income securities by purchasing securities that are either
rated "AAA" by at least one nationally recognized rating agency or are
issued by the Federal Home Loan Mortgage Corporation ("FHLMC"), Fannie
Mae (formerly known as the Federal National Mortgage Corporation) or
the Government National Mortgage Association ("GNMA"). The payment of
principal and interest on the FHLMC, Fannie Mae and GNMA securities are
guaranteed by those respective agencies. In addition, the Company has
the ability to purchase up to 10% of the portfolio in below investment
grade securities.
USE OF ESTIMATES
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 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.
COMPREHENSIVE INCOME
The Company has adopted Statement of Financial Accounting Standards
("SFAS") No. 130, REPORTING COMPREHENSIVE INCOME. This statement
establishes standards for reporting and display of comprehensive income
and its components in a full set of general-purpose financial
statements. Comprehensive income is defined as "the change in equity of
a business enterprise during a period from transactions and other
events and circumstances from non-owner sources. It includes all
changes in equity during a period except those resulting from
investments by owners and distributions to owners."
RECENTLY ISSUED ACCOUNTING STANDARDS
During the nine months ended September 30, 1999, the Company wrote off
$64,000 of unamortized organizational costs in accordance with the
adoption of Statement of Position ("SOP") 98-5, "Reporting on the Cost
of Start-Up Activities."
8
<PAGE>
In June 1998, the Financial Accounting Standards Board issued SFAS No.
133, ACCOUNTING FOR DERIVATIVE INSTRUMENTS AND HEDGING ACTIVITIES. The
Statement establishes accounting and reporting standards requiring that
every derivative instrument (including certain derivative instruments
embedded in other contracts) be recorded in the balance sheet as either
an asset or liability measured at its fair value. The Statement
requires that changes in the derivative's fair value be recognized
currently in earnings unless specific hedge accounting criteria are
met. Special accounting for qualifying hedges allows a derivative's
gains and losses to offset related results on the hedged item in the
income statement, and requires that a company must formally document,
designate, and assess the effectiveness of transactions that receive
hedge accounting. SFAS No. 133, as amended by SFAS No. 137, is
effective for fiscal years beginning after June 15, 2000. A company may
also implement the Statement as of the beginning of any fiscal quarter
after issuance (that is, fiscal quarters beginning June 16, 1998 and
thereafter). Statement 133 cannot be applied retroactively. Statement
133 must be applied to (a) derivative instruments and (b) certain
derivative instruments embedded in hybrid contracts that were issued,
acquired, or substantively modified after December 31, 1998 (and, at
the Company's election, before January 1, 1998). The Company will adopt
the reporting requirements of SFAS No. 133 by the first quarter of
2001. An earlier adoption may be made if circumstances warrant. The
Company expects the impact of the adoption of the reporting
requirements of SFAS No. 133 to include the recording of the
approximate fair value of the Company's interest rate swaps as
comprehensive income.
RECLASSIFICATIONS
Certain prior year amounts have been reclassified to conform to the
current year presentation.
NOTE 3 - FIXED INCOME SECURITIES AND EQUITY SECURITIES
At September 30, 1999, fixed income securities consisted of the
following:
<TABLE>
<CAPTION>
Adjustable Rate Fixed Rate Other Fixed
(in thousands) Mortgage Mortgage Income
Securities Securities Securities Total
---------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Principal Amount $34,362 $706,455 $10,400 $751,217
Unamortized Premium (Discount) 596 1,838 (3,062) (628)
---------------------------------------------------------------------------
Amortized Cost 34,958 708,293 7,338 750,589
Unrealized Gains 33 23 0 56
Unrealized Losses (297) (19,645) (701) (20,643)
---------------------------------------------------------------------------
Fair Value $34,694 $688,671 $ 6,637 $730,002
---------------------------------------------------------------------------
---------------------------------------------------------------------------
</TABLE>
At December 31, 1998, fixed income securities consisted of the
following:
<TABLE>
<CAPTION>
Adjustable Rate Fixed Rate Other Fixed
(in thousands) Mortgage Mortgage Income
Securities Securities Securities Total
---------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Principal Amount $61,590 $758,110 $ 5,400 $825,100
Unamortized Premium (Discount) 772 800 (1,380) 192
---------------------------------------------------------------------------
Amortized Cost 62,362 758,910 4,020 825,292
Unrealized Gains 86 4,762 0 4,848
Unrealized Losses (110) (15) (303) (428)
---------------------------------------------------------------------------
Fair Value $62,338 $763,657 $ 3,717 $829,712
---------------------------------------------------------------------------
---------------------------------------------------------------------------
</TABLE>
The contractual final maturity of the mortgage loans supporting the
mortgage securities is generally between 15 and 30 years at
origination. Because of prepayments on the underlying mortgage loans,
the actual weighted-average maturity is expected to be less.
A portion of the other fixed income securities generally have an
original maturity of five years subject to certain acceleration
provisions. The expected average remaining maturity at September 30,
1999 and December 31, 1998
9
<PAGE>
were approximately 3.3 and 4.0 years, respectively. The remaining
portion has a fixed remaining maturity of approximately 2.8 years as
of September 30, 1999.
The adjustable rate mortgage securities are typically subject to
periodic and lifetime caps that limit the amount an adjustable rate
mortgage security's interest rate can change during any given period
and over the life of the asset. At September 30, 1999 and December 31,
1998, the average periodic cap on the adjustable rate mortgage
securities was 2.0% per annum and the average lifetime cap was equal
to 11.3%.
There were no sales of mortgage securities during the quarter ended
September 30, 1999. During the quarter ended September 30, 1998, the
Company realized $104,000 in gains on the sale of $79,300,000 mortgage
securities which were classified as available-for-sale.
At September 30, 1999 and December 31, 1998, equity securities
consisted of the following:
<TABLE>
<CAPTION>
(in thousands)
September 30, 1999 December 31, 1998
-------------------------------------------
<S> <C> <C>
Cost Basis $21,594 $14,154
Unrealized Gains 1,965 2,268
Unrealized Losses (3,305) (0)
-------------------------------------------
Fair Value $20,254 $16,422
-------------------------------------------
-------------------------------------------
</TABLE>
During the quarter ended September 30, 1999, the Company realized
$421,000 in gains on the sale of $2,494,000 of equity securities that
were classified as available-for-sale.
NOTE 4 - INTEREST RATE CAP AGREEMENTS AND TREASURY PUT OPTIONS
Interest rate cap agreements include the carrying value of purchased
interest rate caps, entered into by the Company in order to mitigate
the impact of rising interest rates on the cost of its short-term
borrowings. As discussed in Note 10, the Company has entered into
certain interest rate swap transactions. The execution of these swaps
eliminated the need for the cap protection previously purchased.
Accordingly, the interest rate cap agreements no longer qualify for
hedge accounting and were written down to zero during the year ended
December 31, 1998 which approximates their fair value.
The terms of outstanding interest rate cap agreements are as follows:
<TABLE>
<CAPTION>
At September 30, 1999 At December 31, 1998
---------------------------------------------
<S> <C> <C>
Notional Amount $900,000,000
Average Contract Rate - 10.4%
Average Final Maturity - January 24, 2002
</TABLE>
Under these agreements, the Company received cash payments to the
extent of the excess of the three month London Interbank Offered Rate
("LIBOR") over the agreements' contract rate times the notional amount.
During the quarter ended September 30, 1999, interest rate caps with a
notional amount of $900,000,000 were sold resulting in a realized gain
of $172,000 which is included in Net Gain on Investment Transactions in
the Statement of Operations.
During the quarter ended September 30, 1999, the expiration of put
options on ten-year U.S. Treasury futures contracts with a notional
amount of $50,000,000 resulted in a realized loss of $156,000 which is
included in Net Gain on Investment Transactions in the Statement of
Operations.
NOTE 5 - REVERSE REPURCHASE AGREEMENTS
The Company has entered into reverse repurchase agreements to finance
certain of its fixed income securities. These agreements are secured by
a portion of the Company's fixed income securities and bear interest
rates that have historically moved in close relationship to LIBOR.
10
<PAGE>
At September 30, 1999, the Company had outstanding $699,647,000 of
reverse repurchase agreements with a weighted average current borrowing
rate of 5.41% and a maturity of 1.9 months. The reverse repurchase
agreements were collateralized by mortgage related securities with an
estimated fair value of $739,986,000.
At December 31, 1998, the Company had outstanding $767,908,000 of
reverse repurchase agreements with a weighted average current borrowing
rate of 5.34% and a maturity of 2.9 months. The reverse repurchase
agreements were collateralized by fixed income securities with an
estimated fair value of $800,260,000.
For the quarter ended September 30, 1999, the average reverse
repurchase agreement balance was $715,263,000 with a weighted average
interest cost of 5.18%. The maximum reverse repurchase agreement
balance outstanding during the quarter ended September 30, 1999 was
$736,668,000.
For the quarter ended September 30, 1998, the average reverse
repurchase agreement balance was $774,420,000 with a weighted average
interest cost of 5.74%. The maximum reverse repurchase agreement
balance outstanding during the quarter ended September 30, 1998 was
$818,540,000.
NOTE 6 - FAIR VALUE OF FINANCIAL INSTRUMENTS
The following table presents the amortized cost and estimated fair
values of the Company's financial instruments. SFAS No. 107,
DISCLOSURES ABOUT FAIR VALUE OF FINANCIAL INSTRUMENTS, defines the fair
value of a financial instrument as the amount at which the instrument
could be exchanged in a current transaction between willing parties,
other than in a forced or liquidation sale (dollars in thousands):
<TABLE>
<CAPTION>
At September 30, 1999 At December 31, 1998
Amortized Amortized
Cost Fair Value Cost Fair Value
------------------------------ ---------------------------------
<S> <C> <C> <C> <C>
Mortgage related securities $743,251 $723,365 $821,272 $825,995
Equity securities 21,594 20,254 14,154 16,422
Other fixed income securities 7,338 6,637 4,020 3,717
Interest rate swaps - 1,146 - (9,994)
Forward contracts - (869) - -
</TABLE>
The Company bases its fair value estimates for fixed income securities,
equity securities, interest rate swaps, and forward contracts primarily
on third party price indications provided by dealers who make markets
in these financial instruments when such indications are available.
However, the fair value reported reflects estimates and may not
necessarily be indicative of the amounts the Company could realize in a
current market exchange. Cash and cash equivalents, interest receivable
and reverse repurchase agreements are reflected in the financial
statements at their costs, which approximates their fair value because
of the short-term nature of these instruments.
NOTE 7 - STOCK REPURCHASE PROGRAM
The Company's Board of Directors has authorized a program to repurchase
shares of the Company's common stock. At September 30, 1999 and
December 31, 1998, the Company was authorized to repurchase an
additional 552,900 shares of the Company's common stock pursuant to
the repurchase program.
At September 30, 1999 and December 31, 1998, the Company held 947,100
shares of treasury stock. During the quarter ended September 30, 1999,
the Company did not repurchase any treasury shares, however, for the
quarter ended September 30, 1998, the Company repurchased 247,500
shares which are held at cost in the financial statements herein.
NOTE 8 - TRANSACTIONS WITH AFFILIATES
11
<PAGE>
The Company has entered into a Management Agreement (the "Management
Agreement") with TCW Investment Management Company (the "Manager"),
a wholly owned subsidiary of The TCW Group, Inc., under which the
Manager will manage its day-to-day operations, subject to the
direction and oversight of the Company's Board of Directors. The
Company will pay the Manager annual base management compensation,
payable monthly in arrears, equal to 3/4 of 1% of the average net
invested capital as further defined in the Management Agreement.
The Company paid the Manager $158,000 and $156,000 in base management
compensation during the quarters ended September 30, 1999 and September
30, 1998, respectively.
The Company also pays the Manager, as incentive compensation, an amount
equal to 30% of the Net Income of the Company, before incentive
compensation, in excess of the amount that would produce an annualized
return on equity equal to the ten-year U.S. Treasury rate plus 1% as
further defined in the Management Agreement.
The Company accrued $480,000 and $197,000 for incentive compensation to
the Manager for the quarters ended September 30, 1999 and September 30,
1998, respectively.
The Company may also grant stock options to directors, officers and key
employees of the Company, the Manager, its directors, officers and key
employees.
The Company's other fixed income securities include securities that are
issued by special purpose companies that invest primarily in
mortgage-related assets. An affiliate of the Manager serves as the
investment manager to these companies and is paid fees in connection
with such services. The Company does not anticipate paying any
management fees directly to any affiliate of the Manager in connection
with these investments.
NOTE 9 - STOCK OPTIONS
The Company has adopted a stock option plan (the "Amended and Restated
1997 Stock Option Plan") that provides for the grant of both qualified
incentive stock options that meet the requirements of Section 422 of
the Code, and non-qualified stock options, stock appreciation rights
and dividend equivalent rights. Stock options may be granted to
directors, officers and key employees of the Company, the Manager, its
directors, officers and key employees.
The exercise price for any stock option granted under the Amended and
Restated 1997 Stock Option Plan may not be less than 100% of the fair
market value of the shares of common stock at the time the option is
granted. Each option must terminate no more than ten years from the
date it is granted. Subject to anti-dilution provisions for stock
splits, stock dividends and similar events, the Amended and Restated
1997 Stock Option Plan authorizes the grant of options to purchase an
aggregate 1,000,000 shares of common stock.
The Company recognized stock option expenses relating to these options
of $71,000 and $28,000 during the quarters ended September 30, 1999 and
September 30, 1998, respectively.
If the Company had recorded stock option grants to Company directors at
fair value and related compensation expense, the pro forma effect on
the Company's net income and earnings per share would have been as
follows:
<TABLE>
<CAPTION>
Quarter Ended Quarter Ended
September 30, 1999 September 30, 1998
----------------------- -----------------------
<S> <C> <C>
Net income - as reported $2,965,000 $1,992,000
Net income - pro forma 2,840,000 1,951,000
Basic and diluted earnings per share - as reported $0.52 $0.33
Basic and diluted earnings per share - pro forma $0.49 $0.32
</TABLE>
12
<PAGE>
Information regarding stock option activity during the nine months
ended September 30, 1999 is as follows:
<TABLE>
<CAPTION>
Weighted Average
Shares Exercise Price
---------------------------------------
<S> <C> <C>
Options Granted Prior to December 31, 1998 570,000 $13.62
Exercised - -
Expired - -
---------------------------------------
Options Outstanding at September 30, 1999 570,000 $13.62
---------------------------------------
---------------------------------------
</TABLE>
NOTE 10 - CONTRACTUAL COMMITMENTS
At September 30, 1999 the Company had entered into interest rate swap
agreements with the total current notional amount as stated below.
Under these agreements, the Company receives a floating rate and pays a
fixed rate.
<TABLE>
<CAPTION>
Average Unrealized
Current Average Termination Gains (Losses)
Notional Amount (000) Type Fixed Rate Floating Rate Date (000)
- ------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
$410,552 Interest Rate Swap 5.869% 1Mo LIBOR 8/9/2001 $1,146
</TABLE>
At December 31, 1998 the Company entered into interest rate swap
agreement as follows:
<TABLE>
<CAPTION>
Average Unrealized
Current Average Termination Gains (Losses)
Notional Amount (000) Type Fixed Rate Floating Rate Date (000)
- -------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
$703,590 Interest Rate Swap 5.850% 1Mo LIBOR 2/16/2001 $(9,994)
</TABLE>
The Company paid $736,000 and $146,000 to the swap counter-parties
during the quarters ended September 30, 1999 and September 30, 1998,
respectively, which is included in interest expense in the statement of
operations.
During the quarter ended September 30, 1999, the Company terminated
interest rate swap agreements with a combined notional amount of
$255,530,000 which resulted in a net deferred loss of $66,000, which
will be amortized over the remaining life of the original swap
agreements. The deferred loss is included in Accrued Expenses and Other
Liabilities on the Balance Sheet and the amortization expense is
included in Interest Expense on the Statement of Operations. During the
quarter ended September 30, 1999, $17,000 of the deferred loss was
amortized.
The Company is generally required to deposit collateral with the swap
agreement counter-parties in an amount at least equal to the amount of
any unrealized losses. At September 30, 1999 and December 31, 1998, the
Company had securities with a fair market value of $2,975,000 and
$17,327,000, respectively, on deposit with its counter-parties. If
unrealized losses on the interest rate swap agreements were to
increase, the Company would be required to deposit additional
collateral.
13
<PAGE>
NOTE 11 - FORWARD CONTRACTS
At September 30, 1999, the Company had entered into forward contracts to
sell U.S. Treasury notes with terms stated below.
<TABLE>
<CAPTION>
Average Unrealized Average Maturity
Current Termination Gains (Losses) of Underlying
Notional Amount (000) Type (Underlying Security) Date (000) Securities
- --------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
$235,000 Forward Sale-(US Treasury Notes) 11/12/99 $(869) 3.35 Years
</TABLE>
The contracts were entered into to mitigate the negative impact of rising
interest rates on fixed income securities available-for-sale that generally have
a market value approximately equal to the notional amounts shown above.
NOTE 12 - ACQUISITION PROPOSAL
On September 7, 1999, the Company submitted an offer to acquire Impac Commercial
Holdings, Inc. ("ICH") in a tax free merger by exchanging 0.60328 shares of its
common stock for each outstanding ICH share. By letter dated October 26, 1999,
the ICH Board of Directors rejected the Company's offer. The offer by the
Company to acquire ICH is still outstanding and the Company is currently
evaluating its options regarding the offer.
14
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
SAFE HARBOR/FORWARD LOOKING STATEMENTS
Certain information contained in this Quarterly Report on Form 10-Q
constitutes "forward-looking statements" which can be identified by the use of
forward-looking terminology such as "may," "will," "should," "expect,"
"anticipate," "estimate," "intend," "continue," or "believes" or the negatives
thereof or other variations thereon or comparable terminology. Discussed below
are some important factors that would cause actual results to differ materially
from those in any forward-looking statements, including changes in interest
rates; domestic and foreign business, market, financial or legal conditions;
differences in the actual allocation of the assets of the Company from those
assumed; and the degree to which assets are hedged and the effectiveness of the
hedge, among others. In addition, the degree of risk is increased by the
Company's leveraging of its assets. For additional discussion of factors that
could cause actual results to differ from those contained in such
forward-looking statements, see "Principal Risks and Special Considerations",
"Item 7 Management's Discussion and Analysis of Financial Conditions and Results
of Operations" and "Item 7A Quantitative and Qualitative Disclosures About
Market Risk" in the Company's annual report on Form 10-K for the year ended
December 31, 1998. The Company does not undertake, and specifically disclaims
any obligation, to update any forward-looking statements to reflect occurrences
or unanticipated events or circumstances after the date of such statements.
GENERAL
Apex Mortgage Capital, Inc. (the "Company"), a Maryland corporation, was
formed on September 15, 1997, primarily to acquire United States agency
securities and other highly rated, single-family real estate adjustable and
fixed rate mortgage related assets. The Company commenced operations on December
9, 1997, upon receipt of the net proceeds from the initial public offering of
the Company's common stock. The Company's principal executive offices are
located at 865 South Figueroa Street, Suite 1800, Los Angeles, California 90017,
and its telephone number is (213) 244-0440.
The Company uses its equity capital and borrowed funds to seek to
generate income based on the difference between the yield on its mortgage
related assets and the cost of its borrowings. The Company has elected to be
taxed as a real estate investment trust ("REIT") under the Internal Revenue Code
of 1986, as amended (the "Code"). The Company should not generally be subject to
federal taxes on its income to the extent that it distributes its net income to
its stockholders and maintains its qualification as a REIT.
The goal of the Company is to be an efficient investor in mortgage assets.
The Company generally acquires mortgage assets primarily in the secondary
mortgage market through the operational experience and market relationships of
TCW Investment Management Company and its affiliates.
The day-to-day operations of the Company are managed by an external
management company, TCW Investment Management Company (the "Manager"), subject
to the direction and oversight of the Company's Board of Directors. A majority
of the Board of Directors are unaffiliated with The TCW Group, Inc. ("TCW" and
together with its subsidiaries and affiliates, the "TCW Group") or the Manager.
The Manager is a wholly-owned subsidiary of TCW. The Manager was established in
1992 and the TCW Group began operations in 1971 through one of its affiliates.
The Company's investment management team consists of selected members of TCW's
mortgage-backed securities group, all of whom have over eleven years of
experience in raising and managing mortgage capital. The Company has elected to
be externally managed by the Manager to take advantage of the existing
operational systems, expertise and economies of scale associated with the
Manager's current business operations, among other reasons. The Manager's key
officers have experience in raising and managing mortgage capital, mortgage
finance and the purchase and administration of mortgage related assets.
STRATEGY
To achieve its business objective and generate dividend yields that provide
a competitive rate of return for its stockholders, the Company's strategy is to:
- purchase primarily single-family adjustable and fixed rate mortgage
related assets;
15
<PAGE>
- manage the credit risk of its mortgage related assets through, among
other activities (i) carefully selecting mortgage related assets to be
acquired, (ii) complying with the Company's investment policy, (iii)
actively monitoring the ongoing credit quality and servicing of its
mortgage related assets, and (iv) maintaining appropriate capital
levels and allowances for possible credit losses;
- finance purchases of mortgage related assets with the net proceeds of
equity offerings and, to the extent permitted by the Company's
leverage policy, to utilize leverage to increase potential returns to
stockholders through borrowings (primarily reverse repurchase
agreements) with interest rates that will also reflect changes in
short-term market interest rates;
- seek to structure its borrowings in accordance with its interest rate
risk management policy;
- utilize interest rate caps, swaps and similar financial instruments to
mitigate interest rate risks; and
- seek to minimize prepayment risk primarily by structuring a
diversified portfolio with a variety of prepayment characteristics.
There can be no assurance that the Company will be able to generate
competitive earnings and dividends while holding primarily high quality mortgage
related assets and maintaining a disciplined risk-control profile.
The Company may attempt to increase the return to stockholders over time
by: (i) raising additional capital in order to increase its ability to invest in
additional mortgage related assets; (ii) lowering its effective borrowing costs
through direct funding with collateralized lenders, in addition to using Wall
Street intermediaries, and investigating the possibility of using collateralized
commercial paper and medium-term note programs; and (iii) improving the
efficiency of its balance sheet structure by issuing uncollateralized
subordinated debt and other forms of capital.
POLICIES
The Company's current investment policies are set forth in its Annual
Report on Form 10-K for the year ended December 31, 1998.
16
<PAGE>
FINANCIAL CONDITION
FIXED INCOME SECURITIES
At September 30, 1999, the Company held $730,002,000 of Fixed Income
Securities as compared to $829,712,000 at December 31, 1998. The following table
is a schedule of Fixed Income Securities held listed by security type (dollars
in thousands):
<TABLE>
<CAPTION>
September 30, 1999 December 31, 1998
--------------------------------------------------------------------
Carrying Percent of Carrying Percent of
Fixed Income Securities Value Portfolio Value Portfolio
---------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Mortgage Securities:
Adjustable Rate (1) $ 34,694 4.8% $ 62,338 7.5%
Fixed Rate 688,671 94.3% 763,657 92.0%
Other Fixed Income Securities 6,637 0.9% 3,717 0.5%
-------- ------ -------- ------
Totals $730,002 100.0% $829,712 100.0%
-------- ------ -------- ------
-------- ------ -------- ------
</TABLE>
(1) At September 30, 1999 and December 31, 1998, the interest rate
indices for 97% and 3% of the adjustable rate mortgage securities
were based on the one-year U.S. Treasury rate and the six-month
London Inter-Bank Offered Rate, respectively.
The following table shows various weighted average characteristics of the
Fixed Income Securities held by the Company at September 30, 1999 (dollars in
thousands):
<TABLE>
<CAPTION>
Percent of Weighted
Total Par Amortized Market Current Average
Security Type Par Amount Amount Cost Basis Price Coupon Life (1)
- ------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
15 Year Agency/AAA Pass-throughs $202,314 26.9% 100.40% 98.15% 6.50% 5.1
20 Year Agency Pass-throughs 256,899 34.2% 100.46% 96.92% 6.50% 6.6
30 Year Agency Pass-throughs 32,531 4.3% 101.40% 97.32% 7.00% 7.9
AAA CMOs 214,712 28.6% 99.72% 97.60% 6.85% 7.9
-------- ---- ------ ------ ----- ---
Total Fixed Rate Holdings $706,455 94.0% 100.26% 97.50% 6.63% 6.6
Other Fixed Income Securities 10,400 1.4% 70.56% 64.89% 14.56% 3.0
Adjustable Rate Holdings 34,362 4.6% 101.73% 100.97% 6.49% 1.0
-------- ---- ------ ------ ----- ---
Total Portfolio $751,217 100.0% 100.07% 97.37% 6.70% 6.3
-------- ---- ------ ------ ----- ---
-------- ---- ------ ------ ----- ---
</TABLE>
17
<PAGE>
The following table shows various weighted average characteristics of the
Fixed Income Securities held by the Company at December 31, 1998 (dollars in
thousands):
<TABLE>
<CAPTION>
Percent of Weighted
Total Par Amortized Market Current Average
Security Type Par Amount Amount Cost Basis Price Coupon Life (1)
- --------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
15 Year Agency/AAA Pass-throughs $253,581 33.4% 100.42% 101.23% 6.50% 3.7
20 Year Agency Pass-throughs 209,566 27.6% 100.45% 101.06% 6.50% 6.1
30 Year Agency Pass-throughs 8,076 1.1% 102.19% 101.99% 7.50% 3.2
AAA CMOs 286,887 37.8% 99.52% 100.01% 6.82% 2.7
-------- ----- ------ ------ ---- ---
Total Fixed Rate Holdings $758,110 91.9% 100.11% 100.73% 6.63% 3.9
Other Fixed Income Securities 5,400 0.7% 74.43% 72.24% 21.83% 4.0
Adjustable Rate Holdings 61,590 7.5% 101.25% 101.21% 6.79% 1.0
-------- ----- ------ ------ ---- ---
Total Portfolio $825,100 100.0% 100.02% 100.58% 6.74% 3.7
-------- ----- ------ ------ ---- ---
-------- ----- ------ ------ ---- ---
</TABLE>
(1) The weighted average life of the fixed rate mortgage securities is
based upon market prepayment expectations as of the dates shown. The
actual weighted average life could be longer or shorter depending on
the actual prepayment rates experienced over the life of the
securities. The weighted average life shown for the adjustable rate
mortgage assets represents the average time until the next coupon
reset date. All averages are shown in years.
EQUITY SECURITIES
At September 30, 1999, the Company held $20,254,000 of equity securities
compared to $16,422,000 at December 31, 1998. Equity securities consist
primarily of investment in equities issued by other real estate investment
trusts.
The Company's investments in other real estate investment trusts consist of
publicly traded preferred and common stock securities issued by companies
involved in the mortgage finance industry. The Company generally expects to
receive dividend income on the majority of these investments.
HEDGING RELATED TRANSACTIONS
The Company utilizes interest rate caps, swaps and similar financial
instruments to mitigate the risk of the cost of its variable-rate liabilities
exceeding the earnings on its mortgage assets during a period of rising interest
rates. The Company is currently utilizing interest rate swap agreements.
Interest rate cap agreements consisted of LIBOR based agreements as
follows:
At September 30, 1999 At December 31, 1998
-------------------------------------------------------
Notional Amount - $900,000,000
Average Contract Rate - 10.4%
Average Final Maturity - January 24, 2002
Under these agreements, the Company received cash payments to the extent of
the excess of three-month LIBOR over the agreements' contract rate times the
notional amount. During the quarter ended September 30, 1999, the sale of
interest rate caps with a notional amount of $900,000,000 resulted in a realized
gain of $172,000 which is included in Net Gain on Investment Transactions in the
Statement of Operations.
18
<PAGE>
During the quarter ended September 30, 1999, the expiration of put options
on ten-year U.S. Treasury futures contracts with a notional amount of
$50,000,000 resulted in a realized loss of $156,000 which is included in Net
Gain on Investment Transactions in the Statement of Operations.
At September 30, 1999, the Company had entered into interest rate swap
agreements with the total current notional amount as stated below. Under these
agreements, the Company receives a floating rate and pays a fixed rate.
<TABLE>
<CAPTION>
Average Unrealized
Current Average Termination Gains (Losses)
Notional Amount (000) Type Fixed Rate Floating Rate Date (000)
- ----------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
$410,552 Interest Rate Swap 5.869% 1Mo LIBOR 8/9/2001 $1,146
</TABLE>
The weighted average life of the agreements at September 30, 1999 was 1.8
years. During the quarter ended September 30, 1999, the sale of interest rate
swaps with a combined notional amount of $255,530,000 resulted in a net deferred
loss of $66,000 which is amortized over the remaining life of the original swap
agreements. The deferred loss is included in Accrued Expenses and Other
Liabilities in the Balance Sheet while the monthly amortization is included in
Interest Expense in the Statement of Operations. During the quarter ended
September 30, 1999, $17,000 of the deferred loss was amortized.
At December 31, 1998, the Company had entered into interest rate swap
agreements with the total current notional amount as stated below.
<TABLE>
<CAPTION>
Average Unrealized
Current Average Termination Gains (Losses)
Notional Amount (000) Type Fixed Rate Floating Rate Date (000)
- ----------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
$703,590 Interest Rate Swap 5.850% 1Mo LIBOR 2/16/2001 $(9,994)
</TABLE>
The weighted average life of the agreements at December 31, 1998 was 1.9
years.
The Company is generally required to deposit collateral with the swap
agreement counter-parties in an amount at least equal to the amount of any
unrealized losses. At September 30, 1999 the Company had securities with a fair
market value of $2,975,000 on deposit with its counter-parties. If the
unrealized losses on the interest rate swap agreements were to increase, the
Company would be required to deposit additional collateral.
At September 30, 1999, the Company had entered into forward contracts to sell
U.S. Treasury notes with terms stated below.
<TABLE>
<CAPTION>
Fair value of Average Unrealized
Current Average contracts Termination Gains (Losses)
Notional Amount (000) Type Contract Price (000) Date (000)
- ---------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
$235,000 Forward Sale 99.711 233,929 11/12/99 $(869)
</TABLE>
The contracts were entered into to mitigate the negative impact of rising
interest rates on fixed income securities available-for-sale that generally have
a market value approximately equal to the notional amounts shown above.
There can be no assurance that the Company will enter into hedging
activities or that, if entered into, such activities will have the desired
beneficial impact on the Company's results of operations or financial condition.
Moreover, no
19
<PAGE>
hedging activity can completely insulate the Company from the risks
associated with changes in interest rates and prepayment rates.
Hedging involves risk and typically involves costs, including transaction
costs. Such costs increase dramatically as the period covered by the hedging
increases and during periods of rising and volatile interest rates. The Company
may increase its hedging activity and, thus, increase its hedging costs during
such periods when interest rates are volatile or rising and hedging costs have
increased. The Company intends generally to hedge as much of the interest rate
risk as the Manager determines is in the best interest of the shareholders of
the Company given the cost of such hedging transactions and the Company's desire
to maintain its status as a REIT. The Company's policies do not contain specific
requirements as to the percentages or amount of interest rate risk which the
Manager is required to hedge.
LIABILITIES
The Company has entered into reverse repurchase agreements to finance
certain of its mortgage-backed securities. These agreements are secured by a
portion of the Company's mortgage-backed securities and bear interest rates that
have historically moved in close relationship to LIBOR.
At September 30, 1999, the Company had outstanding $699,647,000 of reverse
repurchase agreements with a weighted average current borrowing rate of 5.41%
and a maturity of 1.9 months. The reverse repurchase agreements were
collateralized by mortgage-backed securities with an estimated fair value of
$739,986,000.
At December 31, 1998, the Company had outstanding $767,908,000 of reverse
repurchase agreements with a weighted average current borrowing rate of 5.34%
and a maturity of 2.9 months. The reverse repurchase agreements were
collateralized by mortgage-backed securities with an estimated fair value of
$800,260,000.
The Company had $6,913,000 and $9,540,000 of other liabilities at September
30, 1999 and December 31, 1998, respectively, consisting primarily of accrued
interest payable and payables for unsettled securities at September 30, 1999 and
December 31, 1998, respectively. The Company anticipates settling all other
liabilities within one year by entering into additional reverse repurchase
agreements.
RESULTS OF OPERATIONS FOR THE QUARTER ENDED SEPTEMBER 30, 1999
For the quarter ended September 30, 1999, the Company's net income was
$2,965,000, or $0.52 per share on a basic basis and $0.51 on a diluted basis,
based on a weighted average of 5,753,000 and 5,784,000 shares outstanding,
respectively. That compares to $1,992,000, or $0.33 per share on both a basic
and diluted basis, based on a weighted average of 6,022,000 shares outstanding
for the quarter ending September 30, 1998. Net interest income for the third
quarter 1999 was $2,893,000 consisting of interest income on mortgage assets and
cash balances less interest expense on reverse repurchase agreements compared to
$2,371,000 for the third quarter in 1998. The Company reported dividend income
of $503,000 from dividends on equity investments for the quarter ended September
30, 1999. The Company reported dividend income of $186,000 from dividends on
equity investments for the quarter ended September 30, 1998. The Company
reported gains on investment transactions, net of $437,000 primarily from the
sale of equity securities during the quarter ending September 30, 1999. The
Company realized a net gain of $104,000 on the sale mortgage-backed securities,
which was offset by a charge of $97,000 to write-off the interest rate cap
agreements for the quarter ending September 30, 1998. The Company incurred
operating expenses of $868,000 for the quarter ending September 30, 1999
consisting of management fees, audit, tax, legal, printing, insurance and other
expenses compared to $572,000 for the quarter ending September 30, 1998.
The following table reflects the average balances for each category of
the Company's interest earning assets as well as the Company's interest bearing
liabilities, with the corresponding effective rate of interest annualized
(dollars in thousands):
20
<PAGE>
AVERAGE BALANCE AND RATE TABLE
(Dollars in thousands)
<TABLE>
<CAPTION>
For the Quarter Ended For the Quarter Ended
September 30, 1999 September 30, 1998
Average Effective Average Effective
Balance Rate Balance Rate
---------- ---------- ----------- -----------
<S> <C> <C> <C> <C>
Interest Earning Assets:
Mortgage Securities $754,167 6.77% $830,079 6.49%
Other Fixed Income Assets 6,458 17.62% - -
Cash and Cash Equivalents 7,128 4.43% 13,185 5.25%
---------- ---------- ----------- -----------
Total Interest Earning Assets 767,753 6.84% 843,264 6.47%
---------- ---------- ----------- -----------
Interest Bearing Liabilities:
Reverse Repurchase Agreements 715,263 5.72% 774,420 5.82%
---------- ---------- ----------- -----------
Net Interest Earning Assets and Spread $52,490 1.12% $68,844 0.65%
---------- ---------- ----------- -----------
---------- ---------- ----------- -----------
</TABLE>
The effective yield data is computed by dividing the annualized net
interest income or expense including hedging transactions into the average daily
balance shown.
The following table reflects the average balances for the Company's equity
securities (dollars in thousands):
AVERAGE BALANCE AND RATE TABLE
(Dollars in thousands)
<TABLE>
<CAPTION>
For the Quarter Ended For the Quarter Ended
September 30, 1999 September 30, 1998
Effective Effective
Average Dividend Average Dividend
Balance Yield Balance Yield
------- -------- ------- --------
<S> <C> <C> <C> <C>
Equity securities $19,618 10.26% $3,343 16.73%
</TABLE>
RESULTS OF OPERATIONS FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1999
For the nine months ended September 30, 1999, the Company's net income was
$8,782,000, or $1.53 per share on a basic and $1.52 per share on a diluted
basis, based on a weighted average of 5,753,000 and 5,782,000 shares
outstanding, respectively. That compares to $3,166,000, or $0.50 per share on
both a basic and diluted basis, based on a weighted average of 6,334,000 shares
outstanding for the nine months ending September 30, 1998. Net interest income
for the nine months ended 1999 was $7,891,000 consisting of interest income on
mortgage assets and cash balances less interest expense on reverse repurchase
agreements compared to $3,766,000 for the nine months in 1998. The Company
reported dividend income of $1,899,000 from dividends on equity investments for
the nine months ended September 30, 1999. The Company reported dividend income
of $186,000 from dividends on equity investments for the nine months ended
September 30, 1998. The Company reported gains on investment transactions, net
of $1,714,000 primarily from the sale of mortgage securities and equity
securities during the nine months ending September 30, 1999. For the nine months
ended September 30, 1998 the Company reported gains on investment transactions,
net of $686,000 which was offset by a charge of $210,000 to write off the
interest rate cap agreements. The Company incurred operating expenses of
$2,722,000 for the nine months ending September 30, 1999 consisting of
management fees, audit, tax, legal, printing, insurance and other expenses
compared to $1,262,000 for the nine months ending September 30, 1998.
The following table reflects the average balances for each category of
the Company's interest earning assets as well as the Company's interest bearing
liabilities, with the corresponding effective rate of interest annualized
(dollars in thousands):
21
<PAGE>
AVERAGE BALANCE AND RATE TABLE
(Dollars in thousands)
<TABLE>
<CAPTION>
For the Nine months Ended For the Nine months Ended
September 30, 1999 September 30, 1998
Average Effective Average Effective
Balance Rate Balance Rate
---------- ----------- ---------- -----------
<S> <C> <C> <C> <C>
Interest Earning Assets:
Mortgage Securities $786,934 6.67% $621,082 5.89%
Other Fixed Income Assets 5,339 14.24% 0 0%
Cash and Cash Equivalents 6,365 4.80% 16,306 5.14%
---------- ----------- ---------- -----------
Total Interest Earning Assets 798,638 6.70% 637,388 5.87%
---------- ----------- ---------- -----------
Interest Bearing Liabilities:
Reverse Repurchase Agreements 748,533 5.74% 568,630 5.69%
---------- ----------- ---------- -----------
Net Interest Earning Assets and Spread $50,105 0.96% $68,758 0.18%
---------- ----------- ---------- -----------
</TABLE>
The effective yield data is computed by dividing the annualized net
interest income or expense including hedging transactions into the average daily
balance shown.
The following table reflects the average balances for the Company's equity
securities (dollars in thousands):
AVERAGE BALANCE AND RATE TABLE
(Dollars in thousands)
<TABLE>
<CAPTION>
For the Nine months Ended For the Nine months Ended
September 30, 1999 September 30, 1998
Effective Effective
Average Dividend Average Dividend
Balance Yield Balance Yield
--------- --------- --------- ----------
<S> <C> <C> <C> <C>
Equity securities $18,375 13.78% $3,343 16.73%
</TABLE>
LIQUIDITY AND CAPITAL RESOURCES
The Company's primary sources of funds as of September 30, 1999 and
December 31, 1998, consisted of reverse repurchase agreements totaling
$699,647,000 and $767,908,000, respectively. The Company expects to continue to
borrow funds in the form of reverse repurchase agreements. At September 30, 1999
and December 31, 1998, the Company had borrowing arrangements with more than
twenty different investment banking firms. Increases in short-term interest
rates could negatively impact the valuation of the Company's mortgage assets
which could limit the Company's borrowing ability or cause its lenders to
initiate margin calls.
The Company will also rely on the cash flow from operations, primarily
monthly principal and interest payments to be received on the mortgage assets,
for liquidity.
The Company believes that equity capital, combined with the cash flow from
operations and the utilization of borrowings, will be sufficient to enable the
Company to meet anticipated liquidity requirements. If the Company's cash
resources are at any time insufficient to satisfy the Company's liquidity
requirements, the Company may be required to liquidate mortgage assets or sell
debt or additional equity securities. If required, the sale of mortgage assets
at prices lower than the carrying value of such assets would result in losses.
The Company may in the future increase its capital resources by making
additional offerings of equity and debt securities, including classes of
preferred stock, common stock, commercial paper, medium-term notes, CMOs and
senior or
22
<PAGE>
subordinated notes. All debt securities, other borrowings, and classes of
preferred stock will be senior to the Common Stock in a liquidation of the
Company. The effect of additional equity offerings may be the dilution of
stockholders' equity of the Company or the reduction of the price of shares
of the Common Stock, or both. The Company is unable to estimate the amount,
timing or nature of additional offerings as they will depend upon market
conditions and other factors.
INFLATION
Virtually all of the Company's assets and liabilities are financial in
nature. As a result, interest rates and other factors drive the Company's
performance far more than does inflation. Changes in interest rates do not
necessarily correlate with inflation rates or changes in inflation rates. The
Company's financial statements are prepared in accordance with generally
accepted accounting principles and the Company's dividends are determined by the
Company's net income as calculated for tax purposes; in each case, the Company's
activities and balance sheet are measured with reference to historical cost and
or fair market value without considering inflation.
YEAR 2000 MATTERS
The year 2000 issue is the result of computer programs using two digits
rather than four to define the applicable year. Any computer system that the
Company relies on with time sensitive software may recognize a date entered as
"00" as the year 1900 rather than the year 2000. This could result in a system
failure or miscalculations causing disruption of operations, including, among
other things, a temporary inability to process transactions or engage in normal
business activities. The Company believes that most of its exposure to year 2000
issues involves the readiness of external third parties such as, but not limited
to, loan servicers, security master servicers, security paying agents and
trustees, its stock transfer agent, its securities custodian, the counterparties
on its various financing agreements and hedging contracts and vendors ("External
Service Providers").
The Company relies on the Manager for its computer services and the Manager
has been addressing this issue at no cost to the Company. Specifically, the
Manager's internally developed computer systems have been implemented within the
past five years. These systems have been developed with software tools that
utilize a century date format (ccyymmdd). Although it has been a standard
procedure to use this format for all date fields, the Manager is nonetheless in
the process of unit testing its internally developed applications for numerous
date conditions, including: the first and last day of the year 2000, the leap
year day and the day after, the first day of the year 2001, functions with date
ranges from 1999 which cross over into year 2000, functions which have both
"from date" and "to date" in the year 2000, date arithmetic and validation using
standard routines through the year 2199.
The Manager has been, and is currently in contact with, each of its
External Service Providers to evaluate their readiness for the year 2000. The
Manager has requested each of its External Service Providers to either (i)
prepare a description of its process for identifying date sensitive areas, its
approach for implementing changes, its testing methodology, along with its
timetable for completion, or (ii) certify as to its year 2000 compliance. The
Manager has received replies from each of its External Service Providers
indicating that each is in a state of year 2000 compliance. No assurances can be
given as to the adequacy of the External Service Providers' internal
evaluations.
Due to the technical architecture of the Manager's internally developed
applications, its emphasis on using major providers and its ongoing
communication with those providers, the Manager anticipates it will be well
positioned to begin the year 2000. There can be no assurance, however, that the
Company's External Service Providers will resolve their own year 2000 issues in
a timely manner, or that any failure by these External Service Providers to
resolve such issues would not have an adverse effect on the Company's operations
and financial condition. Each External Service Provider is in turn subject to
the year 2000 issues of various third parties with which it does business,
making the Company's exposure to the noncompliance of any External Service
Provider difficult to assess. In a worst case scenario, a significant portion of
the Company's External Service Providers and contractual counter-parties could
fail to fulfill their respective obligations which would significantly impair
the Company's ability to meet its obligations under its financing and hedging
agreements. This would in turn cause the Company to liquidate assets at
potentially substantial losses and possibly render the Company insolvent. The
Company believes it is devoting the necessary resources to address the year 2000
issues over which it has control. The Company has completed all necessary
procedures for year 2000 compliance as of June 30, 1999. With respect to the
year 2000 issues of External Service Providers, over which the Company has no
control, the Company's contingency plan is to identify replacement vendors,
where possible.
23
<PAGE>
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
MARKET RISK
The Company's two primary components of market risk are interest rate risk
and equity price risk as discussed below.
INTEREST RATE RISK
EFFECT ON NET INCOME. The Company invests in fixed-rate mortgage assets
that are expected to be funded with short-term borrowings. During periods of
rising interest rates, the borrowing costs associated with funding such
fixed-rate assets are subject to increase while the income earned on such assets
may remain substantially unchanged. This would result in a narrowing of the net
interest spread between the related assets and borrowings and may even result in
losses. The Company may enter into derivative transactions seeking to mitigate
the negative impact of a rising interest rate environment. Hedging techniques
will be based, in part, on assumed levels of prepayments of the Company's
mortgage assets. If prepayments are slower or faster than assumed, the life of
the mortgage assets will be longer or shorter which would reduce the
effectiveness of the Company's hedging techniques and may result in losses on
such transactions. Hedging techniques involving the use of derivative securities
are highly complex and may produce volatile returns. The hedging activity of the
Company will also be limited by the asset and sources of income requirements
applicable to the Company as a REIT.
Two primary risks the Company faces are that of extension risk and
prepayment risk.
EXTENSION RISK. Fixed-rate assets are generally acquired with a projected
weighted average life based on certain assumptions regarding prepayments. In
general, when a fixed-rate mortgage asset is acquired with borrowings, the
Company will enter into an interest rate swap agreement or other hedging
instrument that effectively fixes the Company's borrowing costs for a period
close to the anticipated average life of the related asset. This strategy is
designed to protect the Company from rising interest rates because the borrowing
costs are fixed for the duration of the asset. However, if prepayment rates
decrease in a rising interest rate environment, the life of the mortgage asset
could extend beyond the term of the swap agreement or other hedging instrument.
This situation could negatively impact the Company as borrowing costs would no
longer be fixed after the end of the hedging instrument while the income earned
on the asset would remain fixed. This situation may also cause the market value
of the Company's mortgage assets to decline with little or no offsetting gain
from the related hedging transactions. In certain situations, the Company may be
forced to sell assets and incur losses to maintain adequate liquidity.
PREPAYMENT RISK. Fixed-rate assets in combination with hedging instruments
are also subject to prepayment risk. In falling interest rate scenarios, the
fixed-rate mortgage assets may prepay faster such that the average life becomes
shorter than its related hedging instrument. If this were to happen, the Company
would potentially need to reinvest at rates lower than that of the related
hedging instrument. This situation may result in the narrowing of interest rate
spreads or may cause losses.
The Company also invests in adjustable-rate mortgage assets that are
typically subject to periodic and lifetime interest rate caps that limit the
amount an adjustable-rate mortgage asset's interest rate can change during any
given period, as well as the minimum rate payable. The Company's borrowings will
not be subject to similar restrictions. Hence, in a period of increasing
interest rates, interest rates on its borrowings could increase without
limitation by caps, while the interest rates on its mortgage assets are
generally limited by caps. This problem will be magnified to the extent the
Company acquires mortgage assets that are not fully indexed. Further, some
adjustable-rate mortgage assets may be subject to periodic payment caps that
result in some portion of the interest being deferred and added to the principal
outstanding. This could result in receipt by the Company of less cash income on
its adjustable-rate mortgage assets than is required to pay interest on the
related borrowings. These factors could lower the Company's net interest income
or cause a net loss during periods of rising interest rates, which would
negatively impact the Company's financial condition, cash flows and results of
operations.
The Company intends to fund a substantial portion of its acquisitions of
adjustable-rate mortgage assets with borrowings that have interest rates based
on indices and repricing terms similar to, but of somewhat shorter maturities
than, the interest rate indices and repricing terms of the mortgage assets.
Thus, the Company anticipates that in most cases the interest rate indices and
repricing terms of its mortgage assets and its funding sources will not be
identical, thereby creating an interest rate mismatch between assets and
liabilities. While the historical spread between relevant short-term interest
rate indices has been relatively stable, there have been periods, especially
during the 1979-1982 and 1994 interest rate
24
<PAGE>
environments, when the spread between such indices was volatile. During
periods of changing interest rates, such interest rate mismatches could
negatively impact the Company's financial condition, cash flows and results
of operations.
Prepayment rates generally increase when prevailing interest rates fall
below the interest rates on existing mortgage assets. In addition, prepayment
rates generally increase when the difference between long-term and short-term
interest rates declines. Prepayments of mortgage assets could adversely affect
the Company's results of operations in several ways. The Company anticipates
that a substantial portion of its adjustable-rate mortgage assets may bear
initial "teaser" interest rates that are lower than their "fully indexed" rates
(the applicable index plus a margin). In the event that such an adjustable-rate
mortgage asset is prepaid prior to or soon after the time of adjustment to a
fully indexed rate, the Company will have held the mortgage asset while it was
less profitable and lost the opportunity to receive interest at the fully
indexed rate over the expected life of the adjustable-rate mortgage asset. In
addition, the prepayment of any mortgage asset that had been purchased at a
premium by the Company would result in the immediate write-off of any remaining
capitalized premium amount and consequent reduction of the Company's net
interest income by such amount. Finally, in the event that the Company is unable
to acquire new mortgage assets to replace the prepaid mortgage assets, its
financial condition, cash flow and results of operations could be materially
adversely affected.
EFFECT ON FAIR VALUE. Another component of interest rate risk is the effect
changes in interest rates will have on the market value of the Company's assets.
This is the risk that the market value of the Company's assets will increase or
decrease at different rates than that of the Company's liabilities including its
hedging instruments.
The Company primarily assesses its interest rate risk by estimating the
duration of its assets and the duration of its liabilities including all hedging
instruments. Duration essentially measures the market price volatility of
financial instruments as interest rates change. The Company generally calculates
duration using various financial models and empirical data.
The following sensitivity analysis table shows the estimated impact on the
fair value of the Company's interest rate sensitive investments net of its
hedging instruments and reverse repurchase agreement liabilities assuming rates
instantaneously fall one hundred basis points and rise one hundred basis points.
(Dollars are in thousands except per share amounts.)
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------------------------------
Fair Value for Scenario Shown
Interest Interest
Rates Fall Rates Rise
100 Basis 100 Basis
Points Unchanged Points
- --------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Interest Rate Sensitive Instruments $38,858 $30,632 $ 15,020
Change in Fair Value $8,226 -- $ (15,612)
Change as a Percent of Stockholders' Equity 13.69% -- (25.98)%
Change on a Per Share Basis $1.43 -- $ (2.71)
</TABLE>
It is important to note that the impact of changing interest rates on fair
value can change significantly when interest rates change beyond one hundred
basis points from current levels. Therefore, the volatility in fair value for
the Company could increase significantly when interest rates change beyond one
hundred basis points. In addition, there are other factors that impact the fair
value of the Company's interest rate sensitive investments and hedging
instruments such as the shape of the yield curve, market expectations as to
future interest rate changes, the spread between mortgage rates and U.S.
Treasury rates and other market conditions. Accordingly, there may be
differences between the fair value changes shown above and actual changes in
fair value as interest rates change and those differences may be material.
The Company has established an interest rate risk management policy that is
intended to mitigate the negative impact of changing interest rates. The Company
generally intends to mitigate interest rate risk by targeting the difference
between the market weighted average duration on its mortgage related assets
funded with secured borrowings to the market weighted average duration of such
borrowings to one year or less, taking into account all hedging transactions.
The Company generally does not intend to have any specific duration target for
the portion its mortgage related assets that are not funded by secured
borrowings.
25
<PAGE>
There can be no assurance that the Company will be able to limit such
duration differences and there may be periods of time when the duration
difference will be greater than one year.
During the quarter ended September 30, 1999 a general increase in
interest rates and a widening of the spread between mortgage rates and U.S.
Treasury rates caused the market weighted average duration of the Company's
mortgage related assets to extend beyond the original market weighted average
duration at the time the assets were purchased. While the Company has taken
steps to extend the duration of its borrowings through various hedging
strategies, the market weighted average duration of the Company's borrowings
has not been extended as much as the extension experienced on the mortgage
related assets. This has caused the difference between the market weighted
average duration on the mortgage related assets and the related borrowings to
exceed the Company's one year target. At September 30, 1999, this difference
was approximately 1.5 years. A duration difference of over one year is
generally expected to increase the fair value volatility of the Company's
interest rate sensitive investments. This increase in volatility could be
material and could negatively impact the value of the Company's investments.
The contract terms of the Company's liabilities exclusive of hedging
instruments are subject to change as interest rates change. In general, the
Company utilizes short-term borrowings in the form of reverse repurchase
agreements to finance certain of its mortgage-backed securities. These
agreements are secured by a portion of the Company's mortgage-backed securities
and bear interest rates that have historically moved in close relationship to
LIBOR.
EQUITY PRICE RISK
Another component of market risk for the Company is equity price risk. This
is the risk that the market value of the Company's equity investments will
decrease. The following table shows the impact on the Company's fair value as
the price of its equity securities change assuming price decreases of 10% and
increases of 10%. Actual price decreases or increases may be greater or smaller.
(Dollars are in thousands except per share amounts.)
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------------------------------------
Fair Value for Scenario Shown
Prices Prices
Decrease 10% Unchanged Increase 10%
- ---------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Equity Investments $18,229 $20,254 $22,279
Change in Fair Value (2,025) -- 2,025
Change as a Percent of Fair Value (10)% -- 10%
Change as a Percent of Stockholders' Equity (3.4)% -- 3.4%
Change on a Per Share Basis (0.35) -- 0.35
</TABLE>
Although there is no direct link between changes in fair value and changes
in earnings in many cases, a decline in fair value for the Company may translate
into decreased earnings over the remaining life of the investment portfolio.
If the fair market value of the Company's portfolio were to decline
significantly, the Company's overall liquidity may be impaired which could
result in the Company being required to sell assets at losses.
THE COMPANY'S ANALYSIS OF RISKS IS BASED ON MANAGEMENT'S EXPERIENCE,
ESTIMATES, MODELS AND ASSUMPTIONS. THESE ANALYSES RELY ON MODELS OF FINANCIAL
INFORMATION WHICH UTILIZE ESTIMATES OF FAIR VALUE AND INTEREST RATE SENSITIVITY.
ACTUAL ECONOMIC CONDITIONS OR IMPLEMENTATION OF INVESTMENT DECISIONS BY THE
MANAGER MAY PRODUCE RESULTS THAT DIFFER SIGNIFICANTLY FROM THE ESTIMATES AND
ASSUMPTIONS USED IN THE COMPANY'S MODELS AND THE PROJECTED RESULTS SHOWN IN THE
ABOVE TABLES AND IN THIS REPORT. THESE ANALYSES CONTAIN CERTAIN "FORWARD-LOOKING
STATEMENTS" AND ARE SUBJECT TO THE SAFE HARBOR CONTAINED IN THE PRIVATE
SECURITIES LITIGATION REFORM ACT OF 1995.
26
<PAGE>
PART 2. OTHER INFORMATION
Item 1. Legal Proceedings
None.
Item 2. Changes in Securities
None.
Item 3. Defaults Upon Senior Securities
Not Applicable.
Item 4. Submission of Matters to a Vote of Security Holders
Not Applicable.
Item 5. Other Information
None.
Item 6. Exhibits and Reports on Form 8-K:
(a) EXHIBITS
The following exhibits are part of this quarterly report on Form 10-Q and are
numbered in accordance with Item 601 of Regulation S-K.
<TABLE>
<CAPTION>
Exhibit No. Description
- ----------- -----------------------------------------------------
<S> <C>
3.1 Articles of Amendment and Restatement of Apex
Mortgage Capital, Inc. (the "Company"), as filed with
the Maryland State Department of Assessments and
Taxation on November 25, 1997 (previously filed as
Exhibit 3.2 to Form S-11/A, filed November 21, 1997,
and incorporated herein by reference).
3.2 Articles Supplementary relating to the Series A
Junior Participating Preferred Stock of Apex Mortgage
Capital, Inc., as filed with the State Department of
Assessments and Taxation of the State of Maryland on
July 26, 1999 (previously filed as Exhibit 3.1 to
Form 8-K, filed July 27, 1999, and incorporated
herein by reference).
3.3 Bylaws of Apex Mortgage Capital, Inc. (previously
filed as Exhibit 3.2 to Form S-11/A, filed
November 21, 1997, and incorporated herein by
reference).
4.1 Shareholder Rights Agreement between Apex Mortgage
Capital, Inc. and The Bank of New York, as Rights
Agent, dated July 19, 1999 (previously filed as
Exhibit 3.1 to Form 8-K, filed July 27, 1999, and
incorporated herein by reference).
4.2 Form of Rights Certificate (included as Exhibit B to
the Shareholder Rights Agreement filed as
Exhibit 4.1).
4.3 Form of Common Stock certificate (including the
legend specified in the Shareholder Rights Agreement)
for all shares issued on or after July 30, 1998
(previously filed as Exhibit 4.3 to Form 8-K, filed
July 27, 1999, and incorporated herein by reference).
27 Financial Data Schedule
</TABLE>
27
<PAGE>
(b) REPORTS ON FORM 8-K
On July 27, 1999 Apex filed a Form 8-K, dated June 30, 1999, disclosing
under Item 5 its adoption of a Shareholder Rights Plan.
28
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities and Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
Apex Mortgage Capital, Inc.
Dated: November 12, 1999
By: /s/ Philip A. Barach
----------------------------------
Philip A. Barach
President and Chief Executive Officer
(Principal Executive Officer)
By: /s/ Daniel K. Osborne
----------------------------------
Daniel K. Osborne
Executive Vice President
Chief Operating Officer
Chief Financial Officer
(Principal Accounting Officer)
29
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTS FROM THE
CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION OF THE REGISTRANT AS OF SEPTEMBER
30, 1999 AND THE CONSOLIDATED STATEMENTS OF OPERATIONS OF THE REGISTRANT FOR THE
PERIOD FROM JANUARY 1, 1999 TO SEPTEMBER 30, 1999 AND IS QUALIFIED IN ITS
ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-START> JUL-01-1999
<PERIOD-END> SEP-30-1999
<CASH> 6,236
<SECURITIES> 750,256
<RECEIVABLES> 9,678
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 471
<PP&E> 0
<DEPRECIATION> 0
<TOTAL-ASSETS> 766,641
<CURRENT-LIABILITIES> 706,560
<BONDS> 0
0
0
<COMMON> 67
<OTHER-SE> 60,014
<TOTAL-LIABILITY-AND-EQUITY> 766,641
<SALES> 0
<TOTAL-REVENUES> 14,064
<CGS> 0
<TOTAL-COSTS> 0
<OTHER-EXPENSES> 868
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 10,231
<INCOME-PRETAX> 2,965
<INCOME-TAX> 0
<INCOME-CONTINUING> 2,965
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 2,965
<EPS-BASIC> 0.52
<EPS-DILUTED> 0.51
</TABLE>
