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UNITED STATES SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D. C. 20549
FORM 10-K
(MARK ONE)
X ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
- ------- EXCHANGE ACT OF 1934
FOR THE FISCAL YEAR ENDED: DECEMBER 31, 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
Securities registered pursuant to Section 12(b) of the Act:
TITLE OF EACH CLASS NAME OF EXCHANGE WHICH REGISTERED
------------------- ---------------------------------
Common Stock ($.01 par value) New York Stock Exchange
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
----- -----
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
Regulation S-K is not contained herein, and will not be contained, to the best
of the Registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [ X ]
At March 10, 2000, the aggregate market value of the voting stock held by
non-affiliates was $53,709,752 based on the closing price of the Common Stock on
the New York Stock Exchange.
Number of shares of Common Stock outstanding at March 10, 2000: 5,753,000
DOCUMENTS INCORPORATED BY REFERENCE:
Portions of the Registrant's definitive Proxy Statement to be filed
pursuant to Regulation 14A within 120 days from December 31, 1999, are
incorporated by reference into Part III.
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SAFE HARBOR STATEMENT UNDER
THE PRIVATE SECURITIES LITIGATION REFORM ACT OF 1995
CERTAIN INFORMATION CONTAINED IN THIS REPORT 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. SOME
IMPORTANT FACTORS THAT WOULD CAUSE ACTUAL RESULTS TO DIFFER MATERIALLY FROM
THOSE IN ANY FORWARD-LOOKING STATEMENTS INCLUDE 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.
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APEX MORTGAGE CAPITAL, INC.
1999 FORM 10-K ANNUAL REPORT
TABLE OF CONTENTS
<TABLE>
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PAGE
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<S> <C>
ITEM 1. BUSINESS 4
ITEM 2. PROPERTIES 21
ITEM 3. LEGAL PROCEEDINGS 21
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS 21
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED
STOCKHOLDER MATTERS 21
ITEM 6. SELECTED FINANCIAL DATA 23
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS 23
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET
RISK 31
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA 34
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON
ACCOUNTING AND FINANCIAL DISCLOSURE 34
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT 34
ITEM 11. EXECUTIVE COMPENSATION 34
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND
MANAGEMENT 34
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS 34
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS
ON FORM 8-K 35
</TABLE>
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CERTAIN CAPITALIZED AND OTHER TERMS USED HEREIN SHALL HAVE THE MEANINGS
ASSIGNED TO THEM IN THE GLOSSARY AT THE END OF THIS REPORT.
PART I
ITEM 1. BUSINESS
GENERAL
Apex Mortgage Capital, Inc. (the "Company"), a Maryland corporation, was
formed on September 15, 1997, primarily to acquire United States agency and
other highly rated, single-family real estate adjustable and fixed rate
Mortgage Related Assets. The Company commenced operations on December 9, 1997
following 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 will 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 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 are selected
members of the TCW Group's Mortgage-Backed Securities Group (the "MBS
Group"), all of whom have over twelve 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.
RECENT EVENTS
ADOPTION OF SHAREHOLDER RIGHTS PLAN. On June 30, 1999, the Board of
Directors of Apex Mortgage Capital, Inc. (the "Company") declared a dividend
distribution of one Right for each outstanding share of Company Common Stock
to stockholders of record at the close of business on July 30, 1999 (the
"Record Date"). Each Right entitles the registered holder to purchase from
the Company one one-hundredth of a share of Series A Junior Participating
Preferred Stock, par value $0.01 per share (the "Preferred Stock"), at a
Purchase Price of $50.00, subject to adjustment. The description and terms of
the Rights are set forth in a Shareholder Rights Agreement (the "Rights
Agreement") between the Company and The Bank of New York, as Rights Agent.
Initially, the Rights will be attached to all Common Stock certificates
representing shares then outstanding, and no separate Rights Certificates
will be distributed. Subject to certain exceptions specified in the Rights
Agreement, the Rights will separate from the Common Stock and a Distribution
Date will occur upon the earlier of (i) 10 business days following a public
announcement that a person or group of affiliated or associated persons (an
"Acquiring Person") has acquired, or obtained the right to acquire,
beneficial ownership of 15% or more of the outstanding shares of Common Stock
(the "Stock Acquisition Date"), other than as a result of repurchases of
stock by the Company or certain inadvertent actions by institutional or
certain other stockholders or (ii) 10 business days (or such later date as
the Board shall determine) following the commencement of a tender offer or
exchange offer that would result in a person or group becoming an Acquiring
Person. Until the Distribution Date, (i) the Rights will be evidenced by the
Common Stock certificates and will be transferred with and only with such
Common Stock certificates, (ii) new Common Stock certificates issued after
the Record Date will contain a notation incorporating the Rights Agreement by
reference and (iii) the surrender for transfer of any certificates for Common
Stock outstanding will also constitute the transfer of the Rights associated
with the Common Stock
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represented by such certificate. Pursuant to the Rights Agreement, the
Company reserves the right to require prior to the occurrence of a triggering
event that, upon any exercise of Rights, a number of Rights be exercised so
that only whole shares of Preferred Stock will be issued.
The Rights are not exercisable until the Distribution Date and will
expire at 5:00 P.M. (New York City time) on July 30, 2009, unless earlier
redeemed or exchanged by the Company.
ACQUISITION ACTIVITY. On September 8, 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 ICH share
outstanding. 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. However, an acquisition of ICH by the Company appears
unlikely at this time.
DIVIDEND DECLARATION. On March 21, 2000, the Company's Board of
Directors declared a dividend distribution of $0.46 per share. The dividend
is payable on April 21, 2000, to shareholders of record on March 31, 2000.
REPORTING PERIOD. Unless otherwise noted, this report describes the
Company's operations and developments through the date hereof. Information
given for the year ended December 31, 1997 represents the Company's initial
twenty two days of operations which the reader should bear in mind when
making comparisons to 1999 and 1998 data.
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 fixed and adjustable rate Mortgage
Related Assets;
- 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 swaps, forward contracts on U.S. Treasury notes,
interest rate caps 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.
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MANAGEMENT POLICIES AND PROGRAMS
The Company is a financial company that uses its equity capital and
borrowed funds to seek to generate net income based on the difference between
the interest income on its assets and the cost of its borrowings. The Company
has elected to be taxed as a REIT under the Code. The Company intends to
operate in accordance with its operating policies as approved by the
Company's Board of Directors at least annually.
The Company has established the following four primary operating
policies to implement its business strategy of acquiring assets consisting
primarily of United States agency and other high rated single-family real
estate mortgage securities and mortgage loans in order to generate dividend
yields that provide a competitive rate of return for its stockholders.
- - Investment Policy
- - Leverage Policy
- - Interest Rate Risk Management Policy
- - REIT Compliance Policy
Compliance with the policy guidelines shall be determined at the time of
purchase of the Mortgage Related Assets (based on the most recent valuation
used by the Company) and will not be affected by events subsequent to such
purchase. Such events include, without limitation, changes in
characterization, value or rating of any specific Mortgage Related Assets or
economic conditions or other events generally affecting any Mortgage Related
Assets of the type held by the Company.
INVESTMENT POLICY
The Company intends to acquire investments that it believes will
maximize returns on capital invested, after considering (i) the amount and
nature of the anticipated returns from the investment, (ii) the Company's
ability to pledge the investment to secure collateralized borrowings, and
(iii) the costs associated with financing, hedging, managing, securitizing
and reserving for such investments.
The Company generally expects to primarily invest in Mortgage Related
Assets that may include Short-Term Investments, Mortgage-Backed Securities,
High Credit Quality Mortgage Loans, Mortgage Derivative Securities and Other
Investments.
The Company's investment policy is intended to provide guidelines for
the acquisition of its investments. Specifically, the investment policy
states that the Company intends to acquire a portfolio of investments that
can be segregated into specific categories. Each category and its respective
investment limitations are as follows:
50% CATEGORY
At least 50% of the Company's total assets are expected to consist of
(i) Short-Term Investments, (ii) Mortgage-Backed Securities that are either
issued or guaranteed by an agency of the U.S. government, (iii)
Mortgage-Backed Securities that are rated AAA by at least one nationally
recognized rating agency or (iv) High Credit Quality Mortgage Loans that are
funded with Committed Secured Borrowings.
75% CATEGORY
At least 75% of the Company's total assets are expected to consist of
investments that qualify for the 50% Category or other Mortgage-Backed
Securities that have received an investment grade rating by at least one
nationally recognized rating agency.
90% CATEGORY
At least 90% of the Company's total assets are expected to consist of
investments that qualify for the 75% Category or High Credit Quality Mortgage
Loans that are not funded by Committed Secured Borrowings.
10% CATEGORY
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Not more than 10% of the Company's total assets are expected to consist
of (i) Mortgage-Backed Securities rated below investment grade, (ii) Mortgage
Derivative Securities or (iii) Other Investments.
LEVERAGE POLICY
The Company generally anticipates utilizing leverage to increase returns
to its shareholders. The Company's goal is to strike a balance between the
under-utilization of leverage, which reduces potential returns to
stockholders, and the over-utilization of leverage, which could reduce the
Company's ability to meet its obligations during periods of adverse market
conditions. The Company has established a leverage policy to control the type
and amount of leverage used to fund the acquisition of its Mortgage Related
Assets. The Company's leverage policy is intended to provide guidelines for
utilizing secured borrowings in the form of Uncommitted Secured Borrowings
and Committed Secured Borrowings.
UNCOMMITTED SECURED BORROWINGS
The Company expects a substantial portion of its borrowings may consist
of Uncommitted Secured Borrowings including reverse repurchase agreements,
lines of credit, Dollar-Roll Agreements, and other financing transactions.
Such funding sources generally do not commit the lender to continue to
provide financing to the Company. The Company intends to limit the amount of
Uncommitted Secured Borrowings to 92% of its total assets, less any assets
that are funded with Committed Secured Borrowings, plus the market value of
any related hedging transactions. If the amount of such borrowings exceeds
92%, the Manager will be required to submit to the Company's Board of
Directors a plan designed to bring the total amount of Uncommitted Secured
Borrowings below the 92% limitation. It is anticipated that in many
circumstances this goal will be achieved over time without active management
through the natural process of mortgage principal repayments and increases in
the market value of the Company's total assets. The Company anticipates that
it will only enter into repurchase agreements and other financing
transactions with counter-parties rated investment grade by a Rating Agency.
COMMITTED SECURED BORROWINGS
The Company's borrowings may consist of Committed Secured Borrowings,
including the issuance of CMOs, structured commercial paper programs, secured
term notes and other financing transactions. Such funding sources generally
commit the lender to provide financing to the Company for a specified period
of time or to provide financing to the Company to fund specific assets until
they mature. The Company intends to limit the amount of Committed Secured
Borrowings to 97% of the assets funded with such borrowings at the time any
corresponding transaction is entered into.
INTEREST RATE RISK MANAGEMENT POLICY
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 of its Mortgage Related Assets that
are not funded by secured borrowings.
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.
The Company may implement its interest rate risk management policy by
utilizing various hedging transactions, including interest rate swaps,
interest rate swaptions, interest rate caps, interest rate floors, financial
futures contracts, options on financial futures contracts, and other
structured transactions. The Company does not intend to enter into such
transactions for speculative purposes.
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REIT COMPLIANCE POLICY
The Company intends to operate its business in compliance with the REIT
Provisions of the Code. Accordingly, all of the provisions outlined in the
Company's investment, leverage and interest rate risk management policies are
subordinate to the REIT Provisions of the Code if any conflicts arise.
To qualify for tax treatment as a REIT, the Company must meet certain
tests as fully described in sections 856 and 857 of the Code. A summary of
the requirements for qualification as a REIT is described immediately below.
STOCK OWNERSHIP TESTS. The capital stock of the Company must be held by
at least 100 persons and no more than 50% of the value of such capital stock
may be owned, directly or indirectly, by five or fewer individuals at all
times during the last half of the taxable year. Tax-Exempt Entities, other
than private foundations and certain unemployment compensation trusts, are
generally not treated as individuals for these purposes. The stock ownership
requirements must be satisfied in the Company's second taxable year and in
each subsequent taxable year.
ASSET TESTS. The Company must generally meet the following asset tests
at the close of each quarter of each taxable year. At least 75% of the value
of the Company's total assets must consist of Qualified REIT Real Estate
Assets, U.S. Government securities, cash and cash items (the "75% Asset
Test"). The value of securities held by the Company but not taken into
account for purposes of the 75% Asset Test must not exceed (i) 5% of the
value of the Company's total assets in the case of securities of any one
non-government issuer, or (ii) 10% of the outstanding voting securities of
any such issuer.
INCOME TESTS. The Company must generally meet certain gross income tests
for each taxable year. At least 75% of the Company's gross income must be
derived from certain specified real estate sources, including interest income
and gain from the disposition of Qualified REIT Real Estate Assets or
Qualified Temporary Investment Income (the "75% Gross Income Test"). At least
95% of the Company's gross income for each taxable year must be derived from
sources of income qualifying for the 75% Gross Income Test, dividends,
interest unrelated to real estate, and gains from the sale of stock or other
securities (including certain interest rate swap and cap agreements entered
into to hedge variable rate debt incurred to acquire Qualified REIT Real
Estate Assets) not held for sale in the ordinary course of business (the "95%
Gross Income Test").
DIVIDEND DISTRIBUTION REQUIREMENTS. The Company must generally
distribute to its stockholders an amount equal to at least 95% of the
Company's taxable income before deductions of dividends paid and excluding
net capital gains. The Company has until January 31 following the end of the
fiscal year to pay the dividends out to shareholders and is permitted to
offer a special dividend in order to meet the 95% requirement.
OTHER POLICIES
The Company intends to operate in a manner that will not subject it to
regulation under the Investment Company Act. The Company does not currently
intend to (i) originate Mortgage Loans or (ii) offer securities in exchange
for real property. The Company will not purchase any Mortgage Related Assets
from its Affiliates other than mortgage securities that may be purchased from
a taxable subsidiary of the Company that may be formed in connection with the
securitization of Mortgage Loans.
FUTURE REVISIONS IN POLICIES AND STRATEGIES
The Company's Board of Directors has established the policies and
strategies set forth in this report. The Board of Directors (subject to
approval by a majority of Unaffiliated Directors) has the power to modify or
waive such policies and strategies without the consent of the stockholders.
The Company's Board of Directors will at least annually establish and approve
(including approval by a majority of Unaffiliated Directors) the policies and
strategies of the Company.
DESCRIPTION OF MORTGAGE RELATED ASSETS
The Company invests principally in the following types of Mortgage
Related Assets subject to the operating restrictions described in "Management
Policies and Programs" below.
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PRIMARY MORTGAGE SECURITIES
PASS-THROUGH CERTIFICATES. Pass-Through Certificates are securities
representing interests in "pools" of mortgage loans secured by residential
real property in which payments of both interest and principal on the
securities are generally made monthly, in effect "passing through" monthly
payments made by the individual borrowers on the mortgage loans which
underlie the securities (net of fees paid to the issuer or guarantor of the
securities). Early repayment of principal on some Mortgage Related Assets
(arising from prepayments of principal due to sale of the underlying
property, refinancing, or foreclosure, net of fees and costs which may be
incurred) may expose the Company to a lower rate of return upon reinvestment
of principal. This is known as prepayment risk. Also, if a security subject
to prepayment has been purchased at a premium, the value of the premium would
be lost in the event of prepayment. Like other fixed income securities, when
interest rates rise, the value of a Mortgage Related Asset generally will
decline; however, when interest rates are declining, the value of Mortgage
Related Assets with prepayment features may not increase as much as other
fixed income securities. The rate of prepayments on underlying mortgages will
affect the price and volatility of a Mortgage Related Asset, and may have the
effect of shortening or extending the effective maturity of the security
beyond what was anticipated at the time of purchase. When interest rates
rise, the holdings of Mortgage Related Assets by the Company can reduce
returns if the owners of the underlying mortgages pay off their mortgages
later than anticipated. This is known as extension risk.
Payment of principal and interest on some mortgage pass-through
securities (but not the market value of the securities themselves) may be
guaranteed by the full faith and credit of the U.S. Government (in the case
of securities guaranteed by the Government National Mortgage Association
("GNMA")) or guaranteed by agencies or instrumentalities of the U.S.
Government (in the case of securities guaranteed by the federally chartered
and privately owned corporation organized and existing under the Federal
National Mortgage Association Charter Act (12 U.S.C., section 1716 et seq.),
formerly known as the Federal National Mortgage Association ("Fannie Mae"),
or the Federal Home Loan Mortgage Corporation ("FHLMC")) which are supported
only by the discretionary authority of the U.S. Government to purchase the
agency's obligations. Mortgage Related Assets created by non-governmental
issuers (such as commercial banks, savings and loan institutions, private
mortgage insurance companies, mortgage bankers and other secondary market
issuers) may be supported by various forms of insurance or guarantees,
including individual loan, title, pool and hazard insurance and letters of
credit, which may be issued by governmental entities, private insurers or the
mortgage poolers.
COLLATERALIZED MORTGAGE OBLIGATIONS. Collateralized Mortgage Obligations
("CMOs") are hybrid mortgage related instruments. Interest and pre-paid
principal on a CMO are paid, in most cases, on a monthly basis. CMOs may be
collateralized by whole mortgage loans but are more typically collateralized
by portfolios of mortgage pass-through securities guaranteed by GNMA, FHLMC,
or Fannie Mae. CMOs are structured into multiple classes, with each class
bearing a different stated maturity. Monthly payments of principal, including
prepayments, are first returned to investors holding the shortest maturity
class; investors holding the longer maturity classes receive principal only
after the first class has been retired. CMOs that are issued or guaranteed by
the U.S. Government or by any of its agencies or instrumentalities will be
considered U.S. Government securities by the Company.
OTHER MORTGAGE SECURITIES
GENERAL. The Company may acquire other mortgage securities such as
non-High Quality Mortgage Related Assets and other mortgage securities
collateralized by single-family Mortgage Loans, mortgage warehouse
participations, Mortgage Derivative Securities, subordinated interests and
other mortgage-backed and mortgage-collateralized obligations, other than
pass-through certificates and CMOs.
MORTGAGE DERIVATIVE SECURITIES. The Company may acquire Mortgage
Derivative Securities not to exceed 10% of its total assets. Mortgage
Derivative Securities provide for the holder to receive interest only,
principal only, or interest and principal in amounts that are
disproportionate to those payable on the underlying Mortgage Loans. Payments
on Mortgage Derivative Securities are highly sensitive to the rate of
prepayments on the underlying Mortgage Loans. In the event of more rapid
(slower) than anticipated prepayments on such Mortgage Loans, the rates of
return on interests in Mortgage Derivative Securities representing the right
to receive interest only or a disproportionately large amount of interest
("Interest Only Derivatives") would be likely to decline (increase).
Conversely, the rates of return on Mortgage Derivative Securities
representing the right to receive principal only or a disproportionate amount
of principal ("Principal Only Derivatives") would be likely to increase
(decrease) in the event of rapid (slow) prepayments.
The Company may also invest in Inverse Floaters, a class of CMOs with a
coupon rate that resets in the opposite direction from the market rate of
interest to which it is indexed such as the London Inter-Bank Offered Rate
("LIBOR") or the 11th District Cost of Funds Index ("COFI"). Any rise in the
index rate (as a consequence of an increase in interest rates)
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causes a drop in the coupon rate of an Inverse Floater while any drop in the
index rate causes an increase in the coupon of an Inverse Floater. An Inverse
Floater may behave like a security that is leveraged since its interest rate
usually varies by a magnitude much greater than the magnitude of the index
rate of interest. The "leverage-like" characteristics inherent in Inverse
Floaters are associated with greater volatility in their market prices.
The Company also may invest in other Mortgage Derivative Securities that
may in the future be developed.
SUBORDINATED INTERESTS. The Company also may acquire subordinated
interests, which are classes of mortgage securities that are junior to other
classes of such series of mortgage securities in the right to receive
payments from the underlying Mortgage Loans. The subordination may be for all
payment failures on the Mortgage Loans securing or underlying such series of
mortgage securities. The subordination will not be limited to those resulting
from certain types of risks, such as those resulting from war, earthquake or
flood, or the bankruptcy of a borrower. The subordination may be for the
entire amount of the series of mortgage securities or may be limited in
amount.
MORTGAGE WAREHOUSE PARTICIPATIONS. The Company also may from time to
time acquire mortgage warehouse participations as an additional means of
diversifying its sources of income. The Company anticipates that such
investments, together with its investments in Other Mortgage Assets, will not
in the aggregate exceed 10% of its total Mortgage Related Assets. These
investments are participations in lines of credit to Mortgage Loan
originators that are secured by recently originated Mortgage Loans that are
in the process of being sold to investors. Mortgage warehouse participations
do not qualify as Qualified REIT Real Estate Assets. Accordingly, this
activity is limited by the REIT Provisions of the Code.
MORTGAGE LOANS
GENERAL. The Company intends to acquire and accumulate Mortgage Loans as
part of its investment strategy until a sufficient quantity has been
accumulated for securitization into High Credit Quality Mortgage Loans. The
Company anticipates that the Mortgage Loans acquired by it and not yet
securitized will not constitute more than 25% of the Company's total Mortgage
Related Assets at any time. All Mortgage Loans will be acquired with the
intention of securitizing them into High Credit Quality Mortgage Loans.
However, there can be no assurance that the Company will be successful in
securitizing the Mortgage Loans. To meet the Company's investment criteria,
the Mortgage Loans to be acquired by the Company will generally conform to
the underwriting guidelines established by Fannie Mae, FHLMC or other credit
insurers. Applicable banking laws generally require that an appraisal be
obtained in connection with the original issuance of Mortgage Loans by the
lending institution. The Company does not intend to obtain additional
appraisals at the time of acquiring Mortgage Loans.
The Mortgage Loans may be originated by or purchased from various
suppliers of Mortgage Related Assets throughout the United States, such as
savings and loan associations, banks, mortgage bankers, home-builders,
insurance companies and other mortgage lenders. The Company may acquire
Mortgage Loans directly from originators and from entities holding Mortgage
Loans originated by others. The Board of Directors of the Company has not
established any limits upon the geographic concentration of Mortgage Loans to
be acquired by the Company or the credit quality of suppliers of Mortgage
Related Assets.
CONFORMING AND NONCONFORMING MORTGAGE LOANS. The Company may acquire
both Conforming and Nonconforming Mortgage Loans for securitization.
Conforming Mortgage Loans comply with the requirements for inclusion in a
loan guarantee program sponsored by Fannie Mae, FHLMC or GNMA. Nonconforming
Mortgage Loans are Mortgage Loans that do not qualify in one or more respects
for purchase by Fannie Mae or FHLMC under their standard programs. The
Company expects that a majority of Nonconforming Mortgage Loans it purchases
will be nonconforming primarily because they have original principal balances
which exceed the requirements for FHLMC or Fannie Mae programs.
COMMITMENTS TO MORTGAGE LOAN SELLERS. The Company may issue commitments
to originators and other sellers of Mortgage Loans who follow policies and
procedures that generally comply with Fannie Mae and FHLMC regulations and
guidelines and that comply with all applicable federal and state laws and
regulations for Mortgage Loans secured by single-family (one-to-four units)
residential properties. In addition, commitments may be issued for agency
certificates as well as privately issued pass-through certificates and
Mortgage Loans. Although the Company may commit to acquire Mortgage Loans
prior to funding, all Mortgage Loans are to be fully funded prior to their
acquisition by the Company. Following the issuance of commitments, the
Company will be exposed to risks of interest rate fluctuations similar to
those risks on Mortgage Related Assets.
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SECURITIZATION OF MORTGAGE LOANS. The Mortgage Loans will be acquired by
the Company and held until a sufficient quantity has been accumulated for
securitization. During the accumulation period, the Company will be subject
to risks of borrower defaults and bankruptcies, fraud losses and special
hazard losses (such as those occurring from earthquakes or floods) that are
not covered by standard hazard insurance. In the event of a default on any
Mortgage Loan held by the Company, the Company will bear the risk of loss of
principal to the extent of any deficiency between the value of the collateral
underlying the Mortgage Loan and the principal amount of the Mortgage Loan.
No assurance can be given that any such mortgage, fraud or hazard insurance
will adequately cover a loss suffered by the Company. Also during the
accumulation period, the costs of financing the Mortgage Loans through
reverse repurchase agreements and other borrowings and lines of credit with
warehouse lenders could exceed the interest income on the Mortgage Loans. It
may not be possible or economical for the Company to complete the
securitization for all Mortgage Loans that the Company acquires, in which
case the Company will continue to bear the risks of borrower defaults and
special hazard losses.
PROTECTION AGAINST MORTGAGE LOAN RISKS. It is anticipated that each
Mortgage Loan purchased will have a commitment for mortgage pool insurance
from a mortgage insurance company with a claims-paying ability rated
investment grade by either of the Rating Agencies. Mortgage pool insurance
insures the payment of certain portions of the principal and interest on
Mortgage Loans. In lieu of mortgage pool insurance, the Company may arrange
for other forms of credit enhancement such as letters of credit,
subordination of cash flows, corporate guaranties, establishment of reserve
accounts or over-collateralization.
It is expected that when the Company acquires Mortgage Loans, the seller
will generally represent and warrant to the Company that there has been no
fraud or misrepresentation during the origination of the Mortgage Loans and
generally agree to repurchase any Mortgage Loan with respect to which there
is fraud or misrepresentation. The Company will provide similar
representations and warranties when the Company sells or pledges the Mortgage
Loans as collateral for mortgage securities. If a Mortgage Loan becomes
delinquent and the pool insurer is able to prove that there was a fraud or
misrepresentation in connection with the origination of the Mortgage Loan,
the pool insurer will not be liable for the portion of the loss attributable
to such fraud or misrepresentation. Although the Company will generally have
recourse to the seller based on the seller's representations and warranties
to the Company, the Company will generally be at risk for loss to the extent
the seller does not perform its repurchase obligations.
OTHER INVESTMENTS. The Company may acquire Other Investments that
include (i) equity and debt securities issued by other primarily mortgage
related finance companies, (ii) interests in mortgage related collateralized
bond obligations, (iii) other subordinated interests in pools of mortgage
related assets, (iv) commercial mortgage loans and securities, and (v)
residential mortgage loans other than High Credit Quality Mortgage Loans.
Although the Company expects that its Other Investments will be limited to
less than 10% of total assets, there is no limit to how much of the Company's
shareholders' equity will be allocated to Other Investments. There may be
periods in which Other Investments represent a large portion of the Company's
shareholders' equity.
PRINCIPAL RISKS AND SPECIAL CONSIDERATIONS
LEVERAGE RISK. The Company employs a leveraging strategy of generally
borrowing up to 92% of its total assets to finance the acquisition of
additional Mortgage Related Assets. The Company's borrowing may, at times,
exceed 92% of its total assets. In the event borrowing costs exceed the
income on its Mortgage Related Assets, the Company will experience negative
cash flow and incur losses. Another risk of leverage is the possibility that
the value of the collateral securing the borrowings will decline. In such
event, additional collateral or repayment of borrowings would be required.
The Company could be required to sell Mortgage Related Assets under adverse
market conditions in order to maintain liquidity. If these sales were made at
prices lower than the carrying value of the Mortgage Related Assets, the
Company would experience losses.
INTEREST RATE RISK. There is the possibility that the value of the
Company's Mortgage Related Assets may fall since fixed income securities
generally fall when interest rates rise. The longer the term of a fixed
income instrument, the more sensitive it will be to fluctuations in value
from interest rate changes. Changes in interest rates may have a significant
effect on the Company's operations, because it may hold Mortgage Related
Assets with long terms to maturity. Rising interest rates will negatively
impact the Company's borrowings since the value of the collateral securing
the borrowing will decline in value, requiring additional collateral or
repayments of borrowing. This could reduce the level of borrowings and reduce
returns. Also, when interest rates rise, the Company's holding of Mortgage
Related Assets can reduce returns if the owners of the underlying mortgages
pay-off their mortgages later than anticipated. This is known as EXTENSION
RISK. When interest rates drop, the Company's holdings of the Mortgage
Related Assets can reduce returns if the owners of the underlying
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mortgages pay off their mortgages sooner than anticipated since the funds
prepaid will have to be invested at the then lower prevailing rate. This is
known as PREPAYMENT RISK. In addition, when interest rates drop, not only can
the value of Mortgage Related Assets drop, but the yield can drop,
particularly where the yield on the security is tied to interest rates, such
as adjustable mortgages.
LIQUIDITY RISK. There is the possibility that the Company may lose money
or be prevented from earning capital gains if it cannot sell a Mortgage
Related Asset at a time and price that is most beneficial to the Company. The
Company is subject to liquidity risk because it invests in mortgage
securities which have experienced periods of illiquidity.
CREDIT RISK. Credit risk is the possibility that the Company could lose
money if an issuer is unable to meet its financial obligations, such as the
payment of principal and/or interest on an instrument, or goes bankrupt. The
Company may invest a portion of its assets in Mortgage Related Assets which
are not guaranteed by the U.S. Government or investment grade, which may make
the Company subject to substantial credit risk. This is especially true
during periods of economic uncertainty or during economic down-turns.
EQUITY RISK. Equity risk is the possibility that the Company could lose
money if its equity investments decline in value. Such a decline could be
caused by a number of factors including but not limited to overall market
conditions, suspension or omission of dividends, bankruptcies and litigation.
This is especially true during periods of economic uncertainties and economic
downturns.
FAILURE TO MAINTAIN REIT STATUS RISK. Failure to maintain REIT status
risk refers to the possibility that the Company may become subject to federal
income tax as a regular corporation. The Company intends at all times to
maintain substantially all of its investments in, and otherwise conduct its
business in a manner consistent with, the REIT Provisions of the Code. If the
Company fails to qualify as a REIT, it would be treated as a regular
corporation for federal tax purposes. This would result in the Company being
subject to federal income tax that would further result in a substantial
reduction of cash available for distribution to shareholders.
FAILURE TO MAINTAIN INVESTMENT COMPANY ACT EXEMPTION RISK. The Company
intends to conduct its business so as not to become a "regulated investment
company" under the Investment Company Act. As a result, the Company's
ownership of certain Mortgage Related Assets may be limited by the Investment
Company Act. This could have the effect of adversely affecting the Company's
operations and returns to shareholders. In addition, if the Company fails to
qualify for the exemption from registration as an investment company, its
ability to use leverage would be substantially reduced. This could reduce
income to the Company and returns to shareholders.
FEDERAL INCOME TAX CONSEQUENCES
The following discussion summarizes certain federal income tax
consequences for the Company. This discussion is based on current law. The
following discussion is not exhaustive of all possible tax considerations. It
does not give a detailed discussion of any state, local or foreign tax
considerations, nor does it discuss all of the aspects of federal, state,
local or foreign income taxation that may be relevant to a stockholder of the
Company in light of such stockholder's particular circumstances.
Prospective investors in the Company are urged to consult with their own
tax advisors regarding the specific consequences to each of them of the
purchase, ownership and sale of stock in an entity electing to be taxed as a
REIT, including the federal, state, local, foreign and other tax
considerations of such purchase, ownership, sale and election and the
potential changes in applicable tax laws.
GENERAL
The Code provides special tax treatment for organizations that qualify
and elect to be taxed as REITs. In brief, if certain specific conditions
imposed by the Code are met, entities that invest primarily in real estate
assets, including Mortgage Loans, that otherwise would be taxed as
corporations are generally not taxed at the corporate level on their taxable
income that is distributed to their stockholders. This treatment eliminates
most of the "double taxation" (at the corporate level and then again at the
stockholder level when the income is distributed) that typically results from
the use of corporate investment vehicles. A qualifying REIT, however, may be
subject to certain excise and other taxes, as well as normal corporate tax,
on Taxable Income that is not currently distributed to its stockholders.
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The Company has made an election to be taxed as a REIT under the Code
commencing with its taxable year ended December 31, 1997. There can be no
assurance, however, that all qualification requirements for such treatment
will be met.
In the event that the Company does not qualify as a REIT in any year, it
will be subject to federal income tax as a domestic corporation and its
stockholders will be taxed in the same manner as stockholders of ordinary
corporations. To the extent that the Company would, as a consequence, be
subject to potentially significant tax liabilities, the amount of earnings
and cash available for distribution to its stockholders would be reduced.
REQUIREMENTS FOR QUALIFICATION AS A REIT
To qualify for tax treatment as a REIT under the Code, the Company must
meet certain tests. The Company has adopted a policy to comply with the REIT
Provisions of the Code.
TERMINATION OR REVOCATION OF REIT STATUS
The Company's election to be treated as a REIT will be terminated
automatically if it fails to meet the Code's requirements. If this occurs,
the Company will not be eligible again to elect REIT status until the fifth
taxable year that begins after the year for which its election was terminated
unless all of the following relief provisions apply: (i) the Company did not
willfully fail to file a timely return with respect to the termination
taxable year; (ii) inclusion of incorrect information in such return was not
due to fraud with intent to evade tax; and (iii) the Company establishes that
failure to meet requirements was due to reasonable cause and not willful
neglect. The Company may also voluntarily revoke its election, although it
has no intention of doing so, in which event it will be prohibited, without
exception, from electing REIT status for the year to which the revocation
relates and the following four taxable years.
If the Company fails to qualify for taxation as a REIT in any taxable
year, and the relief provisions do not apply, the Company would be subject to
tax (including any applicable alternative minimum tax) on its taxable income
at regular corporate rates. Distributions to stockholders of the Company with
respect to any year in which it fails to qualify as a REIT would not be
deductible by the Company nor would they be required to be made. Failure to
qualify as a REIT would result in the Company's reduction of its
distributions to stockholders in order to pay the resulting taxes. If, after
forfeiting REIT status, the Company later qualifies and elects to be taxed as
a REIT again, the Company could face significant adverse tax consequences.
TAXATION OF THE COMPANY
In any year in which the Company qualifies as a REIT, it generally will
not be subject to federal income tax on that portion of its Taxable Income or
net capital gain which is distributed to its stockholders. The Company will,
however, be subject to tax at normal corporate rates upon any net income or
net capital gain not distributed with respect to undistributed income. The
Company intends to distribute substantially all of its Taxable Income to its
stockholders on a pro rata basis in each year.
In addition, the Company will also be subject to a tax of 100% of net
income from any prohibited transaction under the Code and will be subject to
a 100% tax on the amount by which it fails either the 75% or 95% Gross Income
Tests, reduced by approximated expenses, if the failure to satisfy such tests
is due to reasonable cause and not willful neglect and if certain other
requirements are met. The Company may also be subject to the alternative
minimum tax on certain items of tax preference with respect to undistributed
income.
The Company may securitize Mortgage Loans and sell such mortgage
securities through a taxable subsidiary. However, if the Company itself were
to sell such mortgage securities on a regular basis, there is a substantial
risk that they would be deemed dealer property and that all of the profits
from such sales would be subject to tax at the rate of 100% as income from
prohibited transactions under the Code. The Company therefore, intends to
make any such sales through a taxable subsidiary. The taxable subsidiary will
not be subject to this 100% tax on income from prohibited transactions under
the Code, which is only applicable to REITs.
The Company may elect to retain and pay income tax on all or a portion
of its net long-term capital gains for any taxable year, in which case the
Company's stockholders would include in their income as long-term capital
gains their proportionate share of such undistributed capital gains. The
stockholders would be treated as having paid their
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proportionate share of the capital gains tax paid by the Company, which
amounts would be credited or refunded to the stockholders.
The Company will also be subject to a nondeductible 4% excise tax if it
fails to make timely dividend distributions for each calendar year. The
Company intends to declare its fourth regular annual dividend during the
final quarter of the year and to make such dividend distribution no later
than 31 days after the end of the year in order to avoid imposition of the
excise tax. Such a distribution would be taxed to the stockholders in the
year that the distribution was declared, not in the year paid. Imposition of
the excise tax on the Company would reduce the amount of cash available for
distribution to its stockholders.
TAXABLE SUBSIDIARIES
The Company may, in the future, cause the creation and sale of mortgage
securities through a taxable corporation. The Company and one or more persons
or entities will own all of the capital stock of that taxable corporation,
sometimes referred to as a "taxable subsidiary." In order to ensure that the
Company will not violate the prohibition on ownership of more than 10% of the
voting stock of a single issuer and the prohibition on investing more than 5%
of the value of its assets in the stock or securities of a single issuer, the
Company will own only shares of nonvoting preferred stock of that taxable
subsidiary corporation and will not own any of the taxable subsidiary's
common stock. In addition, the dividends that the taxable subsidiary pays to
the Company will not qualify as income from Qualified REIT Real Estate Assets
for purposes of the 75% Gross Income Test, and will have to be limited, along
with the Company's other interest, dividends, gains on the sale of
securities, hedging income, and other income not derived from Qualified REIT
Real Estate Assets to less than 25% of the Company's gross revenues in each
year. If the taxable subsidiary creates a taxable mortgage pool, such pool
itself will constitute a separate taxable subsidiary of the taxable
subsidiary. The taxable subsidiary would be unable to offset the income
derived from such a taxable mortgage pool with losses derived from any other
activities. The Company's ability to establish and maintain taxable
subsidiaries may be adversely affected by a recent legislative proposal. See
"Recent Proposed Legislation" below.
TAXATION OF STOCKHOLDERS
For any taxable year in which the Company is treated as a REIT for
federal income purposes, amounts distributed by the Company to its
stockholders out of current or accumulated earnings and profits will be
includable by the stockholders as ordinary income for federal income tax
purposes unless properly designated by it as capital gain dividends. In the
latter case, the distributions will be taxable to the stockholders as
long-term capital gains.
Distributions of the Company will not be eligible for the dividends
received deduction for corporations. Stockholders may not deduct any net
operating losses or capital losses of the Company.
Any loss on the sale or exchange of shares of the Common Stock held by a
stockholder for six months or less will be treated as a long-term capital
loss to the extent of any capital gain dividend received on the Common Stock
held by such stockholders during the six-month period.
If the Company makes distributions to its stockholders in excess of its
current and accumulated earnings and profits, those distributions will be
considered first a tax-free return of capital, reducing the tax basis of a
stockholder's shares until the tax basis is zero. Such distributions in
excess of the tax basis will be taxable as a gain realized from the sale of
the Company's Common Stock.
The Company will notify stockholders after the close of the Company's
taxable year as to the portions of the distributions which constitute
ordinary income, return of capital and capital gain. Dividends and
distributions declared in the last quarter of any year payable to
stockholders of record on a specified date in such month may be deemed to
have been received by the stockholders and paid by the Company on December 31
of the record year, provided that such dividends are paid before February 1
of the following year.
TAXATION OF TAX-EXEMPT ENTITIES
In general, a Tax-Exempt Entity that is a stockholder of the Company is
not subject to tax on distributions. The IRS has ruled that amounts
distributed by a REIT to an exempt employees' pension trust do not constitute
UBTI and thus should
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be nontaxable to such a Tax-Exempt Entity. However, if a Tax-Exempt Entity
has financed the acquisition of any of its stock in the Company with
"acquisition indebtedness" within the meaning of the Code, distributions on
such stock could be treated as UBTI. Under certain conditions, if a
tax-exempt employee pension or profit sharing trust were to acquire more than
10% of the Company's Common Stock, a portion of the dividends on such Common
Stock could be treated as UBTI.
For social clubs, voluntary employee benefit associations, supplemental
unemployment benefit trusts, and qualified group legal services plans exempt
from federal income taxation under Code Sections 501(c)(7), (c)(9), (c)(17)
and (c)(20), respectively, income from an investment in the Company will
constitute UBTI unless the organization is able to properly deduct amounts
set aside or placed in reserve for certain purposes so as to offset the UBTI
generated by its investment in the Company. Such entities should review Code
Section 512(a)(3) and should consult their own tax advisors concerning these
"set aside" and reserve requirements.
STATE AND LOCAL TAXES
The Company and its stockholders may be subject to state or local
taxation in various jurisdictions, including those in which it or they
transact business or reside. The state and local tax treatment of the Company
and its stockholders may not conform to the federal income tax consequences
discussed above. Consequently, prospective stockholders should consult their
own tax advisors regarding the effect of state and local tax laws on an
investment in the Common Stock.
CERTAIN UNITED STATES FEDERAL INCOME TAX CONSEQUENCES APPLICABLE TO FOREIGN
HOLDERS
The following discussion summarizes certain United States tax
consequences of the acquisition, ownership and disposition of the Common
Stock by a purchaser of the Common Stock that, for United States income tax
purposes, is not a "United States Holder" (a "Foreign Holder"). For purposes
of discussion, a United States Holder means: a citizen or resident of the
United States; a corporation, partnership, or other entity created or
organized in the United States or under the laws of the United States or of
any political subdivision thereof (unless, in the case of a partnership, the
IRS provides otherwise by regulations); an estate whose income is includable
in gross income for United States income tax purposes regardless of its
source; or, a trust if a court within the United States is able to exercise
primary supervision over the administration of the trust and one or more
United States persons have the authority to control all substantial decisions
of the trust. This discussion does not consider any specific facts or
circumstances that may apply to a particular Foreign Holder. Prospective
investors are urged to consult their tax advisors regarding the United States
tax consequences of acquiring, holding and disposing of Common Stock, as well
as any tax consequences that may arise under the laws of any foreign, state,
local or other taxing jurisdiction.
DIVIDENDS. Dividends paid by the Company out of earnings and profits to
a Foreign Holder will generally be subject to federal income tax withholding
at the rate of 30%, unless reduced or eliminated by an applicable tax treaty
or unless such dividends are treated as effectively connected with a United
States trade or business conducted by the Foreign Holder. A Foreign Holder
eligible for a reduction in withholding under an applicable treaty must so
notify the Company by completing the appropriate IRS form. Distributions paid
by the Company in excess of its earnings and profits will be treated as a
tax-free return of capital to the extent of the holder's adjusted basis in
his Common Stock, and thereafter as gain from the sale or exchange of a
capital asset as described below. If it cannot be determined at the time a
distribution is made whether such distribution will exceed the Company's
earnings and profits (which, under most circumstances, will correspond to the
Company's net income before the deduction for dividends paid), the
distribution will be subject to withholding at the same rate as dividends.
However, any amounts withheld will be refundable or creditable against the
Foreign Holder's United States tax liability if the Company subsequently
determines that such distribution was, in fact, in excess of the earnings and
profits of the Company. If the receipt of the dividend is treated as being
effectively connected with the conduct of a trade or business within the
United States by a Foreign Holder, the dividend received will be subject to
the United States federal income tax on net income that applies to United
States persons generally (and, in addition with respect to foreign corporate
holders and under certain circumstances, the 30% branch profits tax).
For any year in which the Company qualifies as a REIT, distributions to
a Foreign Holder that are attributable to gain from the sales or exchanges by
the Company of "United States real property interests" will be treated as if
such gain were effectively connected with a United States business and will
thus be subject to tax at the normal capital gain rates applicable to United
States stockholders (subject to applicable alternative minimum tax) under the
provisions of the Foreign Investment in Real Property Tax Act of 1980
("FIRPTA"). Also, distributions subject to FIRPTA may be subject to a 30%
branch profits tax in the hands of a foreign corporate stockholder not
entitled to a treaty exemption. The Company is
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required to withhold 35% of any distribution that could be designated by the
Company as a capital gains dividend. This amount may be credited against the
Foreign Holder's FIRPTA tax liability.
GAIN ON DISPOSITION. A Foreign Holder will generally not be subject to
United States federal income tax on a gain recognized on a sale or other
disposition of the Common Stock unless (i) the gain is effectively connected
with the conduct of a trade or business within the United States by the
Foreign Holder, (ii) in the case of a Foreign Holder who is a nonresident
alien individual and holds the Common Stock as a capital asset, such holder
is present in the United States for 183 or more days (computed in part by
reference to days present in the two prior years) in the taxable year and
certain other requirements are met, or (iii) the Foreign Holder is subject to
tax under the FIRPTA rules discussed below. Gain that is effectively
connected with the conduct of a United States Holder will be subject to the
United States federal income tax on net income that applies to United States
persons generally (and, with respect to corporate holders and under certain
circumstances, the branch profits tax) but will not be subject to
withholding. Foreign Holders should consult applicable treaties, which may
provide for different rules.
Gain recognized by a Foreign Holder upon a sale of its Common Stock will
generally not be subject to tax under FIRPTA if the Company is a
"domestically controlled REIT," which is defined generally as a REIT in which
at all times during a specified testing period less than 50% in value of its
shares were held directly or indirectly by non-U.S. persons. Because only a
minority of the Company's stockholders are expected to be Foreign Holders,
the Company anticipates that it will qualify as a domestically controlled
REIT. Accordingly, a Foreign Holder should not be subject to U.S. tax from
gains recognized upon disposition of the Common Stock. However, because the
Common Stock is publicly traded, no assurance can be given that the Company
will continue to be a domestically controlled REIT.
INFORMATION REPORTING AND BACKUP WITHHOLDING. United States information
reporting requirements and backup withholding tax will generally not apply to
dividends paid on the Common Stock to a Foreign Holder at an address outside
the United States. Payments by a United States office of a broker of the
proceeds of a sale of the Common Stock is subject to both backup withholding
at a rate of 31% and information reporting unless the holder certifies its
Foreign Holder status under penalties of perjury or otherwise establishes an
exemption. Information reporting requirements (but not backup withholding)
will also apply to payments of the proceeds of sales of the Common Stock by
foreign offices of United States brokers, or foreign brokers with certain
types of relationships to the United States, unless the broker has
documentary evidence in its records that the holder is a Foreign Holder and
certain other conditions are met, or the holder otherwise establishes an
exemption.
Backup withholding is not an additional tax. Any amounts withheld under
the backup withholding rules will be refunded or credited against the Foreign
Holder's United States federal income tax liability, provided that the
required information is furnished to the IRS.
These information reporting and backup withholding rules are under
review by the United States Treasury and their application to the Common
Stock could be changed by future regulations.
RECENT PASSED LEGISLATION
On December 17, 1999, the President signed into law the provisions known
as the "REIT Modernization Act of 1999". The new law is effective for tax
years beginning January 1, 2001 and thereafter. The most significant item in
the new law is the creation of a new entity, the "Taxable REIT Subsidiary".
This effectively replaces the old "preferred stock subsidiaries" that REIT's
previously used for similar purposes. The Taxable REIT Subsidiary (TRS) will
allow REIT's a vehicle with which to provide otherwise impermissible services
to tenants without disqualifying the rental income from them. Additionally,
it should enable the Company to engage in non-qualifying activities such as
the holding of property primarily for sale in the ordinary course of business
as well as certain hedging activities. The new law contains size limits on
TRS's to ensure that a REIT remains focused on core real estate ownership and
operations. Specifically, TRS securities may not exceed 20% of a REIT's
assets. Additionally, the dividends from a TRS do not qualify as "good
income" for the 75% income test. To avoid the stripping of taxable income
from a TRS, there are limits on the amount of debt and rental payments that a
TRS can pay its parent. Finally, there is a 100% excise tax on non-arm's
length charges between a REIT and its TRS. Effective for tax year 2001, the
distribution requirement for REIT's is reduced from 95% to 90% of taxable
income. Though not specific to REITs, the installment sale method for
reporting income from a sale of assets is repealed for accrual basis
taxpayers (as virtually all REITs are). This would require all gain from a
sale of assets to be recognized in the year of sale regardless of the payment
terms of the sale.
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ERISA CONSIDERATIONS
In considering an investment in the Common Stock, a fiduciary of a
profit-sharing, pension stock bonus plan or individual retirement account
("IRA"), including a plan for self-employed individuals and their employees
or any other employee benefit plan subject to prohibited transaction
provisions of the Code or the fiduciary responsibility provisions of ERISA
(an "ERISA Plan") should consider (a) whether the ownership of Common Stock
is in accordance with the documents and instruments governing such ERISA
Plan, (b) whether the ownership of Common Stock is consistent with the
fiduciary's responsibilities and satisfies the requirements of Part 4 of
Subtitle B of Title I of ERISA (where applicable) and, in particular, the
diversification, prudence and liquidity requirements of Section 404 of ERISA,
(c) ERISA's prohibitions in improper delegation of control over, or
responsibility for, "plan assets" and ERISA's imposition of co-fiduciary
liability on a fiduciary who participates in, permits (by action or inaction)
the occurrence of, or fails to remedy a known breach of duty by another
fiduciary and (d) the need to value the assets of the ERISA Plan annually.
In regard to the "plan assets" issue noted in clause (c) above,
O'Melveny & Myers LLP, the Company's counsel, at the time of the Company's
public offering was of the opinion that the Common Stock should qualify as a
"publicly offered security," and, therefore, the acquisition of such Common
Stock by ERISA Plans should not cause the Company's assets to be treated as
assets of such investing ERISA Plans for purposes of the fiduciary
responsibility provisions of ERISA or the prohibited transaction provisions
of the Code. Fiduciaries of ERISA Plans and IRAs should consult with and rely
upon their own advisors in evaluating the consequences under the fiduciary
provisions of ERISA and the Code of an investment in Common Stock in light of
their own circumstances.
COMPETITION
The Company believes that the principal competition in the business of
acquiring and holding Mortgage Related Assets are financial institutions such
as banks, savings and loans, life insurance companies, institutional
investors such as mutual funds and pension funds, and certain other mortgage
REITs. The Company anticipates that it will be able to compete effectively
and generate competitive rates of return for stockholders due to the
Manager's experience in managing mortgage capital, access to and experience
in secondary mortgage markets, relative freedom to securitize its Mortgage
Related Assets, relatively low level of operating costs, ability to utilize
prudent amounts of leverage through accessing the wholesale market for
collateralized borrowings, freedom from certain forms of regulation and the
tax advantages of its REIT status.
EMPLOYEES
As of December 31, 1999, the Company had no employees. The Manager
manages the day to day operations of the Company, subject to the direction
and oversight of the Company's Board of Directors and under the terms of a
Management Agreement discussed below.
THE MANAGEMENT AGREEMENT
The Company has entered into a Management Agreement with the Manager for
a one year term ending on December 31, 2000. The Manager is primarily
involved in two activities: (i) asset/liability management--acquisition,
financing, hedging, management and disposition of Mortgage Related Assets,
including credit and prepayment risk management; and (ii) capital
management--oversight of the Company's structuring, analysis, capital raising
and investor relations activities. In conducting these activities, the
Manager formulates operating strategies for the Company, arranges for the
acquisition of Mortgage Related Assets by the Company, arranges for various
types of financing for the Company, monitors the performance of the Company's
Mortgage Related Assets and provides certain administrative and managerial
services in connection with the operation of the Company. The Manager is
required to manage the business affairs of the Company in conformity with the
policies that are approved and monitored by the Company's Board of Directors.
The Manager is required to prepare regular reports for the Company's Board of
Directors that will review the Company's acquisitions of Mortgage Related
Assets, portfolio composition and characteristics, credit quality,
performance and compliance with the policies approved by the Company's Board
of Directors.
At all times, the Manager is subject to the direction and oversight of
the Company's Board of Directors and will have only such functions and
authority as the Company may delegate to it. The Manager is responsible for
the day-to-day operations of the Company.
17
<PAGE>
The Management Agreement may be renewed for additional one-year terms at
the discretion of the Unaffiliated Directors, unless previously terminated by
the Company or the Manager upon written notice. Except in the case of a
termination or non-renewal by the Company for cause, upon termination or
non-renewal of the Management Agreement by the Company, the Company is
obligated to pay the Manager a termination or non-renewal fee, which may be
significant. The termination or non-renewal fee shall be equal to the fair
market value of the Management Agreement without regard to the Company's
termination right, as determined by an independent appraisal. The selection
of the independent appraiser shall be subject to the approval of the
Unaffiliated Directors. Neither the fair market value of the Management
Agreement nor the various factors which the appraiser may find relevant in
its determination of the fair market value can be determined at this time.
The fair market value of the Management Agreement will be affected by
significant variables, including (i) the historical management fees paid to
the Manager, (ii) any projections of future management fees to be paid to the
Manager determined by the independent appraiser, (iii) the relative
valuations of agreements similar to the Management Agreement and (iv) other
factors, all of which may be unrelated to the performance of the Manager.
The Management Agreement may be assigned by the Manager to an Affiliate
of TCW without the consent of the Company. The Management Agreement may be
assigned to a non-Affiliate of TCW only with the approval of a majority of
the Unaffiliated Directors.
MANAGER COMPENSATION
The Manager will receive annual base management compensation based on
the Average Net Invested Capital of the Company, payable monthly in arrears,
equal to 3/4 of 1% of Average Net Invested Capital. The term "Average Net
Invested Capital" means the month end sum of (1) the Company's total
shareholders' equity computed in accordance with generally accepted
accounting principles plus (2) any unsecured debt that has been approved for
inclusion by the Unaffiliated Directors at issuance plus or minus (3) an
adjustment to exclude the impact of any unrealized gains, losses or other
items that do not affect realized net income. Accordingly, incurring
collateralized debt to finance specific investment purchases does not
ordinarily increase Average Net Invested Capital.
The Manager shall also be entitled to receive as incentive compensation
for each fiscal quarter, 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%. The incentive compensation calculation and payment will be made
quarterly in arrears. The term "Return on Equity" is calculated for any
quarter by dividing the Company's Net Income for the quarter by its Average
Net Worth for the quarter. For purposes of calculating the incentive
compensation payable, the definition "Return on Equity" is not related to the
actual distributions received by stockholders or to an individual investor's
actual return on investment. For such calculations, the "Net Income" of the
Company means the taxable income of the Company (including net capital gains,
if any) before the Manager's incentive compensation, net operating loss
deductions arising from losses in prior periods and deductions permitted by
the Code in calculating taxable income for a REIT plus the effects of
adjustments, if any, necessary to record hedging and interest transactions in
accordance with generally accepted accounting principles. A deduction for all
of the Company's interest expenses for borrowed funds is taken into account
in calculating Net Income. "Average Net Worth" for any period means the
arithmetic average of the sum of the gross proceeds from any offering of its
equity securities by the Company, before deducting any underwriting discounts
and commissions and other expenses and costs relating to the offerings, plus
the Company's retained earnings (without taking into account any losses
incurred in prior periods) computed by taking the average of such values at
the end of each month during such period, minus the cumulative amounts paid
by the Company to repurchase its shares.
The ability of the Company to achieve an annualized Return on Equity in
excess of the Ten-Year U.S. Treasury Rate plus 1%, and of the Manager to earn
the incentive compensation described in the preceding paragraph, is dependent
upon the level and volatility of interest rates, the Company's ability to
react to changes in interest rates and to utilize successfully the operating
strategies described herein, and other factors, many of which are not within
the Company's or the Manager's control. The Manager's base compensation shall
be calculated by the Manager within 15 days after the end of each month, and
such calculation shall be promptly delivered to the Company. The Company is
obligated to pay the base compensation within 30 days after the end of each
month. The Manager shall compute the quarterly incentive compensation within
45 days after the end of each fiscal quarter, and the Company shall pay the
incentive compensation with respect to each fiscal quarter within 15 days
following the delivery to the Company of the Manager's written statement
setting forth the computation of the incentive compensation for such quarter.
The Company's Board of Directors shall review and approve the calculation of
base and incentive compensations paid to the Manager quarterly, one quarter
in arrears, during each scheduled quarterly Board of Directors meeting.
Quarterly incentive compensation is subject to an annual adjustment so
18
<PAGE>
that the incentive compensation is based on earnings for the entire year. The
Company believes that this compensation arrangement benefits its stockholders
because it ties the Manager's compensation to Return on Equity and, in
periods of low earnings, the Manager's incentive compensation is reduced or
eliminated, thereby lowering the Company's operating expenses.
EXPENSES
Subject to the limitations set forth below, the Company will generally
pay all its operating expenses, except those specifically required to be
borne by the Manager under the Management Agreement. The operating expenses
required to be borne by the Manager include the compensation of the Company's
officers and the cost of office space, equipment and other personnel required
for the Company's day-to-day operations. The expenses that are paid by the
Company will include (but not necessarily be limited to) the cost of money
borrowed by the Company (including interest), taxes and license fees,
issuance and transaction costs incident to the acquisition, disposition and
financing of investments, costs related to hedging transactions, legal,
investigatory, accounting and auditing fees and expenses, consultants'
advisory services with respect to REIT and other compliance matters, the
compensation and expenses of the Company's Unaffiliated Directors, the costs
of making distributions and printing and mailing proxies and reports to
stockholders, costs incurred by employees of the Manager for travel on behalf
of the Company, costs incident to the issuance of mortgage securities, costs
incident to the accumulation and servicing of Mortgage Loans, costs
associated with any computer software or hardware that is used solely for the
Company, costs to obtain liability insurance to indemnify the Manager, the
Company's directors and officers, and the Company's underwriters, the
compensations and expenses of the Company's custodian, transfer agent and
registrar, and any extraordinary or non-recurring costs or charges incurred
by the Company, if any. Certain Company operating expenses shall be limited
to an amount per year equal to the greater of 2% of the Average Net Invested
Capital of the Company or 25% of its Net Income for that year. The operating
expenses that are subject to this limitation are:
(i) all insurance costs incurred by the Company or any subsidiary
of the Company, including any costs to obtain liability or other insurance
to indemnify the Manager and underwriters of any securities of the Company;
(ii) expenses connected with payments of dividends or interest or
distributions in any other form made or caused to be made by the Board of
Directors to holders of the securities of the Company or any subsidiary of
the Company;
(iii) all expenses of third parties pertaining to communications to
holders of equity securities or debt securities of the Company or any
subsidiary of the Company and the other bookkeeping and clerical work
necessary to maintain relations with holders of such securities and in
complying with the continuous reporting and other requirements of
governmental bodies or agencies (these expenses include any costs of
computer services utilized in connection with these communications and
reporting requirements, the cost of printing and mailing certificates for
such securities and proxy solicitation materials and reports to holders of
the Company's or any subsidiary's securities and reports to third parties
required under any indenture to which the Company or any subsidiary of the
Company is a party);
(iv) custodian's, transfer agent's and registrar's fees and charges;
(v) compensation, fees and expenses paid to Unaffiliated Directors
of the Company or any subsidiary of the Company, the cost of director and
officer liability insurance and premiums for fidelity and errors and
omissions insurance;
(vi) legal, accounting and auditing fees and expenses relating to
the Company's or any subsidiary's operations (excluding litigation-related
fees and expenses);
(vii) expenses relating to any office or office facilities maintained
by the Company or any subsidiary of the Company, exclusive of the office of
the Manager;
(viii) travel and related expenses of directors, officers and
employees of the Manager and of directors, officers and employees of the
Company or any subsidiary of the Company who are also directors, officers
or employees of the Manager, incurred in connection with attending meetings
of the Board of Directors or holders of securities of the Company or any
subsidiary of the Company or performing other business activities that
relate to the Company or any subsidiary of the Company, including expenses
allocable to such meetings or business activities;
(ix) costs associated with computer hardware and software, third
party information services and office expenses that relate solely to the
business activities of the Company; and
19
<PAGE>
(x) all other expenses regarded as ordinary operating expenses in
accordance with generally accepted accounting principles, exclusive of
certain specifically excluded expenses as described below.
Expenses excluded from the expense limitation and wholly payable by the
Company are (but are not limited to) those incurred in connection with the
accumulation and servicing of Mortgage Loans, the issuance and administration
of mortgage securities from pools of Mortgage Loans, the raising of capital,
the acquisition of Mortgage Related Assets, interest and hedging expenses,
taxes and license fees, non-cash costs, litigation, investigations in
connection with litigation or threatened litigation, base and incentive
management compensation and extraordinary and non-recurring expenses. The
determination of Net Income for purposes of calculating the expense
limitation will be the same as for calculating the Manager's incentive
compensation except that it will include any incentive compensation payable
for such period.
Expenses in excess of the expense limitation will be paid and shall not
be recoverable (by reclassification as compensation or otherwise) by the
Manager, unless the Unaffiliated Directors determine that, based upon unusual
or non-recurring factors, a higher level of expenses is justified for such
fiscal year. In that event, such expenses may be recovered by the Manager in
succeeding years to the extent that expenses in succeeding quarters are below
the limitation of expenses. Expense reimbursement will be made monthly,
subject to adjustment at the end of each year.
CERTAIN RELATIONSHIPS; CONFLICTS OF INTEREST
In addition to its base management compensation under the Management
Agreement, the Manager has the opportunity to earn incentive compensation for
each fiscal quarter, subject to an annual reconciliation so that the
incentive compensation is based on earnings for the entire calendar year, in
an amount equal to 30% of the Net Income of the Company (before payment of
such incentive compensation) in excess of the amount that would produce on
annualized Return on Equity equal to the Ten-Year U.S. Treasury Rate plus 1%.
In evaluating Mortgage Related Assets for investment and in other operating
strategies, an undue emphasis on the maximization of income at the expense of
other criteria, such as preservation of capital, in order to achieve a higher
incentive fee could result in increased risk to the value of the Company's
Mortgage Related Asset portfolio.
The Company, on the one hand, and the Manager and its Affiliates, on the
other, do not presently expect to, but may in the future, enter into a number
of relationships other than those governed by the Management Agreement, some
of which may give rise to conflicts of interest between the Manager and its
Affiliates and the Company. The market in which the Company will seek to
purchase Mortgage Related Assets is characterized by rapid evolution of
products and services and, thus, there may in the future be relationships
between the Company and the Manager and its Affiliates in addition to those
described herein. Any such relationships or transactions will require the
approval of the Company's Board of Directors, including a majority of the
Unaffiliated Directors.
The Manager and its Affiliates may act as investment adviser or manager
for other entities, which may or may not include services similar to those it
renders to the Company. Pursuant to the terms of the Management Agreement,
the Manager and its Affiliates will agree on the allocation of mortgage
securities between the Company and other accounts over which the Manager and
its Affiliates have control. The Manager will base allocation decisions on
the procedures the Manager considers fair and equitable, including, without
limitation, such considerations as investment objectives, restrictions and
time horizon, availability of cash and the amount of existing holdings.
LIMITS OF RESPONSIBILITY
Pursuant to the Management Agreement, the Manager does not assume any
responsibility other than to undertake the services called for thereunder and
is not responsible for any action of the Company's Board of Directors in
following or declining to follow its advice or recommendations. The Manager,
its directors and its officers will not be liable to the Company, any issuer
of mortgage securities, any subsidiary of the Company, the Unaffiliated
Directors, the Company's stockholders or any subsidiary's stockholders for
acts performed in accordance with and pursuant to the Management Agreement,
except by reason of acts constituting bad faith, willful misconduct, gross
negligence or reckless disregard of their duties under the Management
Agreement.
The Company has agreed to indemnify the Manager, its directors and its
officers with respect to all expenses, losses, damages, liabilities, demands,
charges and claims arising from any acts or omissions of the Manager made in
good faith in the performance of its duties under the Management Agreement.
The Management Agreement does not limit or restrict the
20
<PAGE>
right of the Manager or any of its officers, directors, employees or
Affiliates from engaging in any business or rendering services of any kind to
any other person, including the purchase of, or rendering advice to others
purchasing Mortgage Related Assets that meet the Company's policies and
criteria. The Manager may also advise or manage other mortgage related
entities subject to certain limitations, including REITs, that invest in
residential and commercial mortgages and other residential and
non-residential mortgage securities. The ability of the Manager and its
officers and employees to engage in other business activities could reduce
the time and effort spent on the Company. The Management Agreement does not
specify a minimum amount of time or attention that the Manager or its
officers or employees must devote to the Company's business.
ITEM 2. PROPERTIES
The Company does not own or lease any real property. The Company's
principal executive offices are located at 865 South Figueroa Street, Los
Angeles, California 90017, telephone (213) 244-0440. Such offices are
provided by the Manager in accordance with the Management Agreement.
ITEM 3. LEGAL PROCEEDINGS
There are no legal proceedings pending against the Company.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
The Annual Meeting of Shareholders of the Company was held on June 30,
1999. At the meeting, the election of John C., Argue, Carl C. Gregory, III,
and Jeffrey E. Gundlach as directors and the ratification of the appointment
of Deloitte & Touche LLP, as auditors of the Company was submitted to a
shareholder vote and approval by a majority of the Company's outstanding
voting securities. The voting for directors was: (votes for: 5,560,606; votes
against: 55,983; exceptions/abstentions: 8,300). The voting for the
ratification of Deloitte & Touche LLP was: (votes for: 5,605,869; votes
against: 8,300; exceptions/abstentions: 10,730). 5,792,900 shares of the
Company were outstanding on the record date and 5,624,889 shares of the
Company entitled to vote were present in person or by proxy at the meeting.
No matters were submitted to shareholders in the fourth quarter of 1999.
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
EQUITY MARKET ACTIVITY
The Company's Common Stock began trading on December 4, 1997 and is
traded on the New York Stock Exchange under the trading symbol AXM. As of
March 17, 2000, the Company had 5,753,000 shares of Common Stock issued and
outstanding which were held of record by 76 shareholders.
21
<PAGE>
The following table sets forth the high, low and closing sales prices
per share of Common Stock as reported on the New York Stock Exchange
composite tape and the cash dividend declared per share of Common Stock.
<TABLE>
<CAPTION>
Cash
Stock Price Dividends
--------------------------- Declared
1999 High Low Close Per Share
- ---- ---- --- ----- ---------
<S> <C> <C> <C> <C>
Fourth Quarter ended December 31, 1999 $12.69 $10.06 $10.19 $0.46
Third Quarter ended September 30, 1999 $13.56 $11.50 $12.38 $0.46
Second Quarter ended June 30, 1999 $13.94 $12.13 $13.31 $0.42
First Quarter ended March 31, 1999 $13.50 $ 9.86 $13.50 $0.38
1998
- ----
Fourth Quarter ended December 31, 1998 $11.13 $7.25 $ 9.63 $0.30
Third Quarter ended September 30, 1998 $12.06 $9.06 $ 9.56 $0.27
Second Quarter ended June 30, 1998 $12.75 $10.44 $10.50 $0.25
First Quarter ended March 31, 1998 $14.06 $11.50 $12.38 $0.25
1997
- ----
Fourth Quarter ended December 31, 1997 $15.00 $14.00 $14.00 $0.04
</TABLE>
On March 21, 2000, the Company's Board of Directors declared a dividend
distribution of $0.46 per share. The dividend is payable on April 21, 2000,
to shareholders of record on March 31, 2000.
The Company intends to pay quarterly dividends and to make distributions
to its stockholders of all or substantially all of its taxable income each
year (subject to certain adjustments) so as to qualify for the tax benefits
accorded to a REIT under the Code. All distributions will be made by the
Company at the discretion of the Board of Directors and will depend on the
taxable earnings of the Company, financial condition of the Company,
maintenance of REIT status and such other factors as the Board of Directors
may deem relevant from time to time.
In order to maintain REIT status, the Company may be required to
distribute dividends in excess of reported net income to the extent it
recognizes net gains on the sale of securities including its forward
contracts to sell U.S. Treasury securities. At December 31, 1999, the Company
had unrealized gains of $3,909,000 on forward contracts to sell U.S. Treasury
notes that are expected to settle during the first quarter of 2000. The
Company may be required to distribute those gains during 2000 to the extent
they are not offset by future transactions. There can be no assurance that
any net gains will be recognized by Company and there can be no assurance
that net gains recognized, if any, will result in greater dividend
distributions.
SHARE REPURCHASE PROGRAM
On January 13, 1998, the Company's board of directors authorized a
program to repurchase up to 750,000 shares of the Company's Common Stock. On
September 16, 1998, the Company's board of directors authorized a program to
repurchase up to an additional 750,000 shares of the Company's Common Stock
having completed the original repurchase program of 750,000 shares.
The Company repurchased 947,100 shares during the year ended December
31, 1998. The average price per share repurchased during the year ended
December 31, 1998 was $11.16. The repurchased shares are held in treasury at
cost in the financial statements herein. No shares were repurchased during
the year ended December 31, 1999.
An additional 552,900 shares are currently authorized for potential
repurchase in the future. The Company may continue to repurchase shares in
the future when market conditions warrant.
22
<PAGE>
ITEM 6. SELECTED FINANCIAL DATA
The following selected financial data are derived from audited financial
statements for the years ended December 31, 1999, December 31, 1998, and the
period from commencement of operations on December 9, 1997 to December 31,
1997. The selected financial data should be read in conjunction with the more
detailed information contained in the financial statements and notes thereto
and "Management's Discussion and Analysis of Financial Condition and Results
of Operations" included elsewhere in this report.
<TABLE>
<CAPTION>
PERIOD FROM
YEAR ENDED YEAR ENDED DECEMBER 9, 1997 TO
DECEMBER 31, 1999 DECEMBER 31, 1998 DECEMBER 31, 1997
------------------------------------------------------------
<S> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Days in period 365 365 22
Interest income $52,517,000 $41,975,000 $428,000
Interest expense $42,345,000 $36,007,000 $111,000
Net interest income $10,172,000 $5,968,000 $317,000
General and administrative expenses $3,385,000 $2,104,000 $167,000
Net income $11,112,000 $5,547,000 $150,000
Average number of shares outstanding 5,753,000 6,190,000 6,700,100
Basic net income per share $1.93 $0.90 $0.02
Diluted net income per share $1.92 $0.90 $0.02
Dividends declared per share $1.72 $1.07 $0.04
</TABLE>
<TABLE>
<CAPTION>
AT DECEMBER 31, AT DECEMBER 31,
1999 1998 AT DECEMBER 31, 1997
------------------------------------------------------------
<S> <C> <C> <C>
BALANCE SHEET DATA:
Fixed income securities $701,143,000 $829,712,000 $265,880,000
Equity securities $17,481,000 $16,422,000 0
Total assets $735,745,000 $865,478,000 $271,307,000
Reverse repurchase agreements $672,660,000 $767,908,000 $87,818,000
Total liabilities $679,704,000 $777,448,000 $178,310,000
Stockholders' equity $56,041,000 $88,030,000 $92,997,000
Book value per share $9.74 $15.30 $13.88
Fair Value of Off Balance Sheet Hedging Instruments $3,815,000 ($9,994,000) 0
Book value per share net of Hedging Instruments $10.40 $13.56 $13.88
</TABLE>
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
GENERAL
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 will elect to be
taxed as a REIT under the Code. The Company will 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.
23
<PAGE>
FINANCIAL CONDITION
FIXED INCOME SECURITIES
At December 31, 1999, the Company held $701,143,000 of Fixed Income
Securities as compared to $829,712,000 at December 31, 1998. The original
maturity of a significant portion of the Fixed Income Securities ranges from
fifteen to thirty years; the actual maturity is subject to change based on
the prepayments of the underlying mortgage loans. The following table is a
schedule of Fixed Income Securities held listed by security type (dollars in
thousands):
<TABLE>
<CAPTION>
December 31, 1999 December 31, 1998
-----------------------------------------------------------
Percent of Carrying Percent of
Fixed Income Securities Carrying Value Portfolio Value Portfolio
- ---------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Mortgage Securities:
Adjustable Rate (1) $32,256 4.60% $62,338 7.50%
Fixed Rate 662,348 94.40% 763,657 92.00%
Other Fixed Income Securities 6,539 1.00% 3,717 0.50%
--------------- ------------ ------------- ---------------
Totals $701,143 100.00% $829,712 100.00%
=============== ============ ============= ===============
</TABLE>
(1) At December 31, 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 December 31, 1999 (dollars
in thousands):
<TABLE>
<CAPTION>
Percent of Weighted
Total Par Amortized Current Average
Security Type Par Amount Amount Cost Basis Market Price Coupon Life (1)
- ---------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
15 Year Agency/AAA Pass-throughs $167,717 23.00% 100.49% 97.30% 6.50% 5.1
20 Year Agency Pass-throughs 251,819 34.50% 100.46% 96.26% 6.50% 6.4
30 Year Agency Pass-throughs 31,424 4.30% 101.36% 95.98% 6.99% 7.7
AAA CMOs 237,202 32.40% 99.76% 95.53% 6.82% 7.2
--------------- ------------ ------------- --------------- ---------- -----------
Total Fixed Rate Holdings $688,162 94.20% 100.26% 96.25% 6.63% 6.4
Other Fixed Income Securities 10,400 1.40% 69.38% 62.88% 15.53% 2.1
Adjustable Rate Holdings 31,923 4.40% 101.73% 101.04% 6.62% 1.0
--------------- ------------ ------------- --------------- ---------- -----------
Total Portfolio $730,485 100.00% 99.89% 95.88% 6.76% 6.1
=============== ============ ============= =============== ========== ===========
</TABLE>
24
<PAGE>
The following table shows various weighted average characteristics of
the Mortgage-Backed 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 30.9% 100.42% 101.23% 6.50% 3.7
20 Year Agency Pass-throughs 209,566 25.6% 100.45% 101.06% 6.50% 6.1
30 Year Agency Pass-throughs 8,076 1.0% 102.19% 101.99% 7.50% 3.2
AAA CMOs 286,887 35.0% 99.52% 100.01% 6.82% 2.7
--------------- ------------ ------------- --------------- ---------- -----------
Total Fixed Rate Holdings $758,110 92.5% 100.11% 100.74% 6.63% 3.9
Adjustable Rate Holdings 61,590 7.5% 101.25% 101.21% 6.79% 1.0
--------------- ------------ ------------- --------------- ---------- -----------
Total Portfolio $819,700 100.0% 100.20% 100.77% 6.64% 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 December 31, 1999 the Company held $17,481,000 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.
At December 31, 1999, equity securities consisted of the following:
<TABLE>
<CAPTION>
(In thousands) Shares Held Cost Fair Value
---------------------------------
<S> <C> <C> <C>
COMMON STOCK:
American Residential Investment Trust, Inc. 109 $611 $748
Anthracite Capital, Inc. 500 3,071 3,188
Anworth Mortgage Asset Corporation 222 994 997
Dynex Capital, Inc. 75 1,080 483
Hanover Capital Mortgage Holdings, Inc. 385 1,842 1,396
Impac Commercial Holdings, Inc. 249 1,441 1,307
-------------------
Total Common Stock 9,039 8,119
-------------------
CONVERTIBLE PREFERRED STOCK:
Capstead Mortgage Corporation, Series B 520 4,408 4,940
Dynex Capital, Inc., Series A 53 920 715
Dynex Capital, Inc., Series B 150 2,711 1,987
Dynex Capital, Inc., Series C 108 2,292 1,720
-------------------
Total Convertible Preferred Stock 10,331 9,362
-------------------
Total Equity Securities $19,370 $17,481
===================
</TABLE>
25
<PAGE>
At December 31, 1998, equity securities consisted of the following:
<TABLE>
<CAPTION>
(In thousands) Shares Held Cost Fair Value
----------------------------------
<S> <C> <C> <C>
COMMON STOCK:
American Residential Investment Trust, Inc. 94 $459 $504
Annaly Mortgage Management Inc. 600 4,803 4,950
Anthracite Capital, Inc. 160 647 1,250
Anworth Mortgage Asset Corporation 28 113 127
-------------------
Total Common Stock 6,022 6,831
-------------------
CONVERTIBLE PREFERRED STOCK:
Capstead Mortgage Corporation, Series B 841 7,125 8,563
Dynex Capital, Inc., Series A 15 249 259
Dynex Capital, Inc., Series B 20 311 317
Dynex Capital, Inc., Series C 22 447 452
--------------------
Total Convertible Preferred Stock 8,132 9,591
--------------------
Total Equity Securities $14,154 $16,422
====================
</TABLE>
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 INSTRUMENTS
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.
Interest rate cap agreements consisted of LIBOR based agreements as
follows:
<TABLE>
<CAPTION>
At December 31, 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 three-month LIBOR over the agreements' contract rate times
the notional amount. During the year ended December 31, 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 1999 Statement of Operations.
During the year ended December 31, 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 $334,000 which is included in Net
Gain on Investment Transactions in the 1999 Statement of Operations.
26
<PAGE>
At December 31, 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
Notional Amount (000) Fixed Rate Floating Rate Date (000)
- -----------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
$400,129 5.869% 1Mo LIBOR 8/9/2001 $3,815
</TABLE>
The weighted average life of the agreements at December 31, 1999 was 1.6
years. During the year ended December 31, 1999, the Company terminated
interest rate swap agreements with a combined notional amount of $255,530,000
resulting in a net deferred loss of $66,000 which is being amortized over the
remaining life of the original swap agreements. The deferred loss is included
in Other Assets on the Balance Sheet while the monthly amortization is
included in Interest Expense in the Statement of Operations. During the year
ended December 31, 1999, $42,000 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) Fixed Rate Floating Rate Date (000)
- -------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
$703,590 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 December 31, 1999 the Company had securities with a
fair market value of $2,592,000 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 December 31,
1999 the Company received fixed income securities with a fair market value of
$1,600,000 as a deposit from a swap agreement counter-party.
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 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.
27
<PAGE>
At December 31, 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 Contract contracts Termination Gains (Losses)
Notional Amount (000) Price (000) Date (000)
- -----------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
$335,000 99.278 336,492 2/12/2000 $3,909
</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 weighted average duration approximately equal to the
contracts shown above.
During the year ended December 31, 1999, two forward contracts to sell
U.S. Treasury notes with a notional amount of $135,000,000 and $100,000,000
were closed resulting in a deferred loss of $390,000 and deferred gain of
$51,000, respectively. The deferred loss and gain are being amortized as an
adjustment to interest income over the remaining weighted average lives of
the fixed income securities being hedged, which was 4.8 years at December 31,
1999.
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 December 31, 1999, the Company had outstanding $672,660,000 of
reverse repurchase agreements with a weighted average current borrowing rate
of 5.98% and a maturity of 2.0 months. The reverse repurchase agreements were
collateralized by mortgage-backed securities with an estimated fair value of
$689,396,000.
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.
At December 31, 1997, the Company had outstanding $87,818,000 of reverse
repurchase agreements with a weighted average current borrowing rate of 5.82%
and a maturity of 2.8 months. The reverse repurchase agreements were
collateralized by mortgage-backed securities with an estimated fair value of
$90,043,000.
The Company had $7,044,000, $9,540,000 and $90,492,000 of other
liabilities at December 31, 1999, December 31, 1998 and December 31, 1997,
respectively, consisting primarily of accrued interest payable and payables
for unsettled securities at December 31, 1999, December 31, 1998 and December
31, 1997, respectively. The Company anticipates settling all other
liabilities within one year by entering into additional reverse repurchase
agreements.
OTHER MATTERS
At December 31, 1999, the Company held equity securities and senior
unsecured notes issued by Dynex Capital, Inc. ("Dynex") with fair market
values of $4,905,000 and $3,750,000, respectively. During the year ended
December 31, 1999, Dynex suspended the payment of dividends on its preferred
stock. Accordingly, the Company is no longer recognizing dividend income on
its equity investments in Dynex. Dynex is currently paying interest on its
senior notes. Accordingly, the Company is recognizing interest income on the
senior note investments issued by Dynex. If Dynex were to suspend payment of
interest on its senior notes, interest income recognized by the Company would
be negatively impacted. The Company could also incur losses if the Dynex
investments are sold or written down if permanent impairment were to occur.
RESULTS OF OPERATIONS - 1999 COMPARED TO 1998
For the year ended December 31, 1999, the Company's net income was
$11,112,000, or $1.93 per share on a basic basis and $1.92 on a diluted
basis, based on a weighted average of 5,753,000 and 5,779,000 shares
outstanding, respectively. That compares to $5,547,000, or $0.90 per share on
both a basic and diluted basis, based on a weighted
28
<PAGE>
average of 6,190,000 shares outstanding for the year ending December 31,
1998. Net interest income for the year ended December 31, 1999 was
$10,172,000 consisting of interest income on mortgage assets and cash
balances less interest expense on reverse repurchase agreements compared to
$5,968,000 for the year ended December 31, 1998. The Company reported
dividend income of $2,387,000 from dividends on equity investments for the
year ended December 31, 1999 compared to $636,000 for the year ended December
31, 1998. The Company reported net gains on investment transactions of
$1,938,000 primarily from the sale of equity securities during the year ended
December 31, 1999. The Company realized a net gain of $1,047,000 primarily
from the sale mortgage-backed securities and other investments for the year
ending December 31, 1998. The Company incurred operating expenses of
$3,385,000 for the year ending December 31, 1999 consisting of incentive
fees, management fees, audit, tax, legal, printing, insurance and other
expenses compared to $2,104,000 for the year ending December 31, 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):
AVERAGE BALANCE AND RATE TABLE
(Dollars in thousands)
<TABLE>
<CAPTION>
For the Year Ended For the Year Ended
December 31, 1999 December 31, 1998
Average Effective Average Effective
Balance Rate Balance Rate
------------ ------------ ------------ -----------
<S> <C> <C> <C> <C>
Interest Earning Assets:
Mortgage Securities $772,464 6.65% $670,559 6.13%
Other Fixed Income Assets 5,822 14.40% 1,324 14.37%
Cash and Cash Equivalents 6,322 4.76% 13,923 5.10%
------------ ------------ ------------ -----------
Total Interest Earning Assets 784,608 6.69% 685,806 6.12%
------------ ------------ ------------ -----------
Interest Bearing Liabilities:
Reverse Repurchase Agreements 732,960 5.78% 624,865 5.76%
------------ ------------ ------------ -----------
Net Interest Earning Assets and Spread $51,648 0.91% $60,941 0.36%
============ ============ ============ ===========
</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 Year Ended For the Year Ended
December 31, 1999 December 31, 1998
Effective Effective
Average Dividend Average Dividend
Balance Yield Balance Yield
------------ ------------ ------------ ----------
<S> <C> <C> <C> <C>
Equity securities $18,763 12.73% $3,718 17.10%
</TABLE>
RESULTS OF OPERATIONS - 1998 COMPARED TO 1997
The results of operations for the year ended December 31, 1998 represent
a full year of income from operations, net gains on the sale of investments
and include a large impact from leverage. In contrast, the results of
operations for the twenty-two day period ended December 31, 1997 largely
consisted of income from short-term investments and mortgage-backed
securities with little or no leverage applied. Because of this disparity in
operating periods, a direct comparative
29
<PAGE>
analysis of the year ended December 31, 1998 to the twenty-two day period
ended December 31, 1997 would generally not be relevant to investors.
Therefore, the results from operations for the two periods are discussed
separately in this report.
RESULTS OF OPERATIONS FOR THE PERIOD ENDED DECEMBER 31, 1997
For fiscal period from commencement of operations on December 9,
1997 through December 31, 1997, the Company's net income was $150,000, or
$0.02 per share based on 6,700,100 shares outstanding. Net interest income
for the period was $317,000 consisting of interest income on Mortgage Assets
and cash balances less interest expense on reverse repurchase agreements. The
Company incurred operating expenses of $167,000 for the period consisting of
management fees, audit, tax, legal, printing, insurance and other expenses.
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 for the partial period ended December 31, 1997 (dollars in
thousands):
AVERAGE BALANCE AND RATE TABLE
(Dollars in thousands)
<TABLE>
<CAPTION>
Twenty-two days ended
December 31, 1997
----------------------------------
Average Effective
Balance Rate
--------------- -------------
<S> <C> <C>
Interest Earning Assets:
Mortgage Assets $60,828 6.10%
Cash and Cash Equivalents 56,539 5.40%
--------------- -------------
Total Interest Earning Assets 117,367 5.97%
--------------- -------------
Interest Bearing Liabilities:
Reverse Repurchase Agreements 29,895 5.75%
--------------- -------------
Net Interest Earning Assets and Spread $ 87,472 0.22%
=============== =============
</TABLE>
The effective yield data is computed by dividing the annualized net
interest income or expense into the average daily balance shown.
LIQUIDITY AND CAPITAL RESOURCES
The Company's primary sources of funds as of December 31, 1999 consisted
of reverse repurchase agreements totaling $672,660,000. The Company expects
to continue to borrow funds in the form of reverse repurchase agreements. At
December 31, 1999, the Company had borrowing arrangements with over 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.
30
<PAGE>
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 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.
ITEM 7A. 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.
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
31
<PAGE>
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
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 $45,096 $36,208 $21,115
Change in Fair Value $8,888 - ($15,093)
Change as a Percent of Fair Value 1.27% - (2.15%)
Change as a Percent of Stockholders' Equity 15.86% - (26.93%)
Change on a Per Share Basis $1.54 - ($2.62)
</TABLE>
32
<PAGE>
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 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.
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 year ended December 31, 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 December 31, 1999, this difference was
approximately two 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 increased in volatility could be material.
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 $15,733 $17,481 $19,229
Change in Fair Value (1,748) - 1,748
Change as a Percent of Fair Value (10%) - 10%
Change as a Percent of Stockholders' Equity (3.1%) - 3.1%
Change on a Per Share Basis (0.30) - 0.30
</TABLE>
33
<PAGE>
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.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The financial statements of the Company and the related notes, together
with the Independent Auditors' Report thereon, are set forth on pages F-3
through F-20 on this Form 10-K.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None.
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
The information required by Item 10 is incorporated herein by reference
to the definitive Proxy Statement to be filed within 120 days from December
31, 1999 pursuant to general instruction G(3).
ITEM 11. EXECUTIVE COMPENSATION
The information required by Item 11 is incorporated herein by reference
to the definitive Proxy Statement to be filed within 120 days from December
31, 1999 pursuant to general instruction G(3).
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The information required by Item 12 is incorporated herein by reference
to the definitive Proxy Statement to be filed within 120 days from December
31, 1999 pursuant to general instruction G(3).
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The information required by Item 13 is incorporated herein by reference
to the definitive Proxy Statement to be filed within 120 days from December
31, 1999 pursuant to general instruction G(3).
34
<PAGE>
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
(a) Documents filed as part of this report:
1. The following financial statements of the Company are included in Part
II, Item 8 of this Annual Report on Form 10-K:
- Independent Auditors' Report;
- Balance Sheets as of December 31, 1999 and December 31, 1998;
- Statements of Operations: Years Ended December 31, 1999 and
December 31, 1998 and Period from December 9, 1997 (Commencement
of Operations) to December 31, 1997;
- Statements of Stockholders' Equity: Period from December 9, 1997
(Commencement of Operations) to December 31, 1997 and Years Ended
December 31, 1998 and December 31, 1999;
- Statements of Cash Flows: Years Ended December 31, 1999 and
December 31, 1998 and Period from December 9, 1997 (Commencement
of Operations) to December 31, 1997;
- Notes to Financial Statements.
2. Schedules to financial statements:
All financial statement schedules have been omitted because they are
either inapplicable or the information required is provided in the
Company's Financial Statements and Notes thereto, included in Part II,
Item 8 of this Annual Report on Form 10-K.
3. Exhibits:
Exhibit
Number Exhibit
------ -------
10.1 Second Amendment to Management Agreement between the
Registrant and TCW Investment Management Company.
24.1.1 Powers of Attorney.
27 Financial Data Schedule.
(b) Reports on Form 8-K.
A Form 8-K was filed by Registrant on July 27, 1999 announcing the adoption
of a shareholder rights plan.
35
<PAGE>
GLOSSARY
As used in this Annual Report on Form 10-K, the capitalized and other
terms listed below have the meanings indicated.
"Affiliate" means, when used with reference to a specified person, any
person that directly, or indirectly through one or more intermediaries,
controls or is controlled by, or is under common control with the specified
person.
"Average Net Invested Capital" means the month end sum of (1) the
Company's total shareholders' equity computed in accordance with generally
accepted accounting principles plus (2) any unsecured debt that has been
approved for inclusion by the Unaffiliated Directors at issuance plus or
minus (3) an adjustment to exclude the impact of any unrealized gains, losses
or other items that do not affect realized net income.
"Average Net Worth" means for any period the arithmetic average of the
sum of the gross proceeds from the offerings of its equity securities by the
Company, before deducting any underwriting discounts and commissions and
other expenses and costs relating to the offerings, plus the Company's
retained earnings (without taking into account any losses incurred in prior
periods) computed by taking the average of such values at the end of each
month during such period, minus the cumulative amounts paid by the Company to
repurchase its shares.
"Bankruptcy Code" means Title 11 of the United States Code, as amended
"CMOs" means debt obligations (bonds) that are collateralized by
mortgage loans or mortgage certificates other than Mortgage Derivative
Securities and subordinated interests. CMOs are structured so that principal
and interest payments received on the collateral are sufficient to make
principal and interest payments on the bonds. Such bonds may be issued by
United States government agencies or private issuers in one or more classes
with fixed or variable interest rates, maturities and degrees of
subordination that are characteristics designed for the investment objectives
of different bond purchasers.
"Code" means the Internal Revenue Code of 1986, as amended.
"COFI" is the 11th District Cost of Funds Index, the index made
available monthly by the Federal Home Loan Bank Board of the cost of funds to
members of the Federal Home Loan Bank 11th District.
"Committed Secured Borrowings" means (i) CMOs, (ii) structured
commercial paper programs, (iii) secured term notes and (iv) other secured
financing transactions that generally commit the lender to provide financing
to the Company for a specified period of time or to provide financing to the
Company to fund specific assets until they mature.
"Common Stock" means the Company's shares of Common Stock, $0.01 par
value per share.
"Company" means Apex Mortgage Capital, Inc., a Maryland corporation.
"Conforming Mortgage Loans" means conventional Mortgage Loans that
either comply with requirements for inclusion in credit support programs
sponsored by Fannie Mae, FHLMC, or GNMA or are FHA or VA Loans, all of which
are secured by first mortgages or deeds of trust on single-family (one to
four unit) residences.
"Dollar-Roll Agreement" means an agreement to sell a security for
delivery on a specified future date and a simultaneous agreement to
repurchase the same or substantially similar security on a specified future
date.
"ERISA" means the Employee Retirement Income Security Act of 1974, as
amended.
"ERISA Plan" means a pension, profit-sharing, retirement or other
employee benefit plan that is subject to ERISA.
"Fannie Mae" means the federally chartered and privately owned
corporation organized and existing under the Federal National Mortgage
Association Charter Act (12 U.S.C., ss. 1716 et seq.), formerly known as the
Federal National Mortgage Association.
"FHA" means the United States Federal Housing Administration.
"FHA Loans" means Mortgage Loans insured by the FHA.
"FHLMC" means the Federal Home Loan Mortgage Corporation.
36
<PAGE>
"FIRPTA" means the Foreign Investment in Real Property Tax Act of 1980,
as amended.
"Foreign Holder" means a purchaser of the Common Stock that, for United
States income tax purposes, is not a United States person.
"GNMA" means the Government National Mortgage Association.
"High Credit Quality Mortgage Loans" means individual loans secured by
residential real property that are either underwritten to credit standards
that generally comply with the credit standards approved by Fannie, Freddie
Mac or GNMA or pools of loans that have other credit support features that
generally reduce the associated credit risk to that of investment grade
securities.
"High Quality" means either (i) securities that are rated investment
grade or above by at least one of the Rating Agencies, or (ii) securities
that are unrated but are obligations of the United States or obligations
guaranteed by the United States government or an agency or instrumentality
thereof.
"Interest Only Derivatives" means Mortgage Derivative Securities
representing the right to receive interest only or a disproportionately large
amount of interest.
"Inverse Floaters" means a class of CMOs with a coupon rate that moves
inversely to a designated index, such as LIBOR or COFI. Income floaters have
coupon rates that typically change at a multiple of the changes at the
relevant index rate. Any rise in the index rate (as a consequence of an
increase in interest rates) causes a drop in the coupon rate of an Inverse
Floater while any drop in the index rate causes an increase in the coupon of
an Inverse Floater.
"Investment Company Act" means the Investment Company Act of 1940, as
amended.
"IRAs" means Individual Retirement Accounts.
"IRS" means the Internal Revenue Service.
"Keogh Plans" means H.R. 10 Plans.
"LIBOR" means the London-Inter-Bank Offered Rate.
"Management Agreement" means the agreement by and between the Company
and the Manager whereby the Manager agrees to perform certain services to the
Company in exchange for certain compensation.
"Manager" means TCW Investment Management Company, a California
corporation.
"MBS Group" means the TCW Group's Mortgage-Backed Securities Group.
"Mortgage-Backed Securities" means securities representing interests in,
or secured by mortgages on residential real property that are not Mortgage
Derivative Securities.
"Mortgage Derivative Securities" means mortgage backed securities that
are (i) Interest Only Derivatives, (ii) Principal Only Derivatives, (iii)
inverse interest only derivatives, (iv) Inverse Floaters and (v) other
mortgage related derivative instruments.
"Mortgage Loans" means Conforming and Nonconforming Mortgage Loans, FHA
Loans and VA Loans.
"Mortgage Related Assets" means (i) Short-Term Investments, (ii)
Mortgage-Backed Securities, (iii) High Credit Quality Mortgage Loans, (iv)
Mortgage Derivative Securities and (v) Other Investments.
"Net Income" means the taxable income of the Company before the
Manager's incentive compensation, net operating loss deductions arising from
losses in prior periods and deductions permitted by the Code in calculating
taxable income for a REIT, including a deduction for the Company's interest
expenses for borrowed funds, plus the effects of adjustments, if any,
necessary to record hedging and interest transactions in accordance with
generally accepted accounting principles.
37
<PAGE>
"Nonconforming Mortgage Loans" means conventional Mortgage Loans that do
not conform to one or more requirements of Fannie Mae, FHA, FHLMC, GNMA or VA
for participation in one or more of such agencies' mortgage loan credit
support programs, such as the principal amounts financed or the underwriting
guidelines used in making the loan.
"Other Investments" means (i) equity and debt securities issued by other
primarily mortgage related finance companies, (ii) interests in mortgage
related collateralized bond obligations, (iii) other subordinated interests
in pools of Mortgage Related Assets, (iv) commercial mortgage loans and
securities, and (v) residential mortgage loans other than High Credit Quality
Mortgage Loans.
"Principal Only Derivatives" means Mortgage Derivative Securities
representing the right to receive principal only or a disproportionate amount
of principal.
"Qualified REIT Real Estate Assets" means pass-through certificates,
Mortgage Loans, agency certificates, and other assets of the type described
in Section 856(c)(6)(B) of the Code.
"Qualified Temporary Investment Income" means income attributable to
stock or debt instruments acquired with new capital of the Company received
during the one-year period beginning on the day such proceeds were received.
"Rating Agencies" means any nationally recognized rating agency.
"REIT" means a real estate investment trust as defined under Section 856
of the Code.
"REIT Provisions of the Code" means Sections 856 through 860 of the Code.
"Return on Equity" means an amount calculated for any quarter by
dividing the Company's Net Income for the quarter by its Average Net Worth
for the quarter.
"Short-Term Investments" means short-term bank certificates of deposit,
short-term United States Treasury securities, short-term United States
government agency securities, commercial paper, repurchase agreements,
short-term CMOs, short-term asset-backed securities, and other similar types
of short-term investment instruments.
"Tax-Exempt Entity" means a qualified pension, profit-sharing or other
employee retirement benefit plans, Keogh plans, bank commingled trust funds
for such plans, and IRAs, and other similar entities intended to be exempt
from federal income taxation.
"Taxable Income" means for any year the taxable income of the Company
for such year (excluding any net income derived either from property held
primarily for sale to customers or from foreclosure property) subject to
certain adjustments provided in the REIT Provisions of the Code.
"TCW" means The TCW Group, Inc.
"TCW Group" means TCW and its subsidiaries and Affiliates.
"Ten-Year U.S. Treasury Rate" means the arithmetic average of the weekly
average yield to maturity for actively traded current coupon U.S. Treasury
fixed interest rate securities (adjusted to a constant maturity of ten years)
published by the Federal Reserve Board during a quarter, or, if such rate is
not published by the Federal Reserve Board, any Federal Reserve Bank or
agency or department of the federal government selected by the Company. If
the Company determines in good faith that the Ten-Year U.S. Treasury Rate
cannot be calculated as provided above, then the rate shall be the arithmetic
average of the per annum average yields to maturities, based upon closing
asked prices on each business day during a quarter, for each actively traded
marketable U.S. Treasury fixed interest rate security with a final maturity
date not less than eight nor more than twelve years from the date of the
closing asked prices as chosen and quoted for each business day in each such
quarter in New York City by at least three recognized dealers in U.S.
government securities selected by the Company.
"UBTI" means "unrelated trade or business income" as defined in Section
512 of the Code.
"Unaffiliated Directors" means those directors that are not affiliated,
directly or indirectly, with the Manager or the TCW Group, whether by
ownership of, ownership interest in, employment by, any material business or
professional
38
<PAGE>
relationship with, or serving as an officer or director of the Manager or the
TCW Group, and are not employed by or officers of the Company.
"Uncommitted Secured Borrowings" means (i) reverse repurchase
agreements, (ii) lines of credit, (iii) Dollar-Roll Agreements, and (iv)
other secured financing transactions that generally do not commit the lender
to continue to provide financing to the Company.
"United States Holder" means a purchaser of the Common Stock that, for
United States income tax purposes, is a United States person (i.e., is not a
Foreign Holder).
"VA" means the United States Veterans Administration.
"VA Loans" means Mortgage Loans partially guaranteed by the VA under the
Serviceman's Readjustment Act of 1944, as amended.
39
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) 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.
(Registrant)
Dated: March 30, 2000 /s/ Philip A. Barach
--------------------------------------
Philip A. Barach
President and Chief Executive Officer
(Principal Executive Officer)
Dated: March 30, 2000 /s/ Daniel K. Osborne
--------------------------------------
Daniel K. Osborne
Executive Vice President
Chief Operating Officer and
Chief Financial Officer
(Principal Accounting Officer)
Pursuant to the requirements of the Securities and Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
registrant and in the capacities and on the dates indicated.
<TABLE>
<CAPTION>
Signature Capacity Date
- --------- -------- ----
<S> <C> <C>
/s/ Marc I. Stern Chairman of the Board March 30, 2000
- --------------------------
Marc I. Stern
/s/ Jeffrey E. Gundlach Vice Chairman of the Board March 30, 2000
- -------------------------- Chief Investment Officer
Jeffrey E. Gundlach
/s/ Philip A. Barach President and March 30, 2000
- -------------------------- Chief Executive Officer
Philip A. Barach (Principal Executive Officer)
/s/ Peter G. Allen* Director March 30, 2000
- --------------------------
Peter G. Allen
/s/ John C. Argue* Director March 30, 2000
- --------------------------
John C. Argue
/s/ John A. Gavin* Director March 30, 2000
- --------------------------
John A. Gavin
/s/ Carl C. Gregory III* Director March 30, 2000
- --------------------------
Carl C. Gregory III
*By: /s/ Daniel K. Osborne
--------------------------
Daniel K. Osborne
Attorney-in-Fact
</TABLE>
40
<PAGE>
APEX MORTGAGE CAPITAL, INC.
FINANCIAL STATEMENTS
AND
INDEPENDENT AUDITORS' REPORT
FOR INCLUSION IN FORM 10-K
FILED WITH
SECURITIES AND EXCHANGE COMMISSION
DECEMBER 31, 1999
F-1
<PAGE>
APEX MORTGAGE CAPITAL, INC.
INDEX TO FINANCIAL STATEMENTS
PAGE
----
Independent Auditors' Report F-3
Balance Sheets F-4
Statements of Operations F-5
Statements of Stockholders' Equity F-6
Statements of Cash Flows F-7
Notes to Financial Statements F-8
F-2
<PAGE>
INDEPENDENT AUDITORS' REPORT
To the Stockholders of
Apex Mortgage Capital, Inc.
We have audited the accompanying balance sheets of Apex Mortgage Capital,
Inc. (the "Company") as of December 31, 1999 and 1998 and the related
statements of operations, stockholders' equity, and cash flows for the years
then ended and for the period from December 9, 1997 (commencement of
operations) to December 31, 1997. These financial statements are the
responsibility of the Company's management. Our responsibility is to express
an opinion on these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free
of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements.
An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of Apex Mortgage Capital, Inc.
as of December 31, 1999 and 1998 and the results of its operations and its
cash flows for the years then ended and for the period from December 9, 1997
(commencement of operations) to December 31, 1997 in conformity with
generally accepted accounting principles.
DELOITTE & TOUCHE LLP
Los Angeles, California
February 29, 2000
F-3
<PAGE>
APEX MORTGAGE CAPITAL, INC.
BALANCE SHEETS
<TABLE>
<CAPTION>
DECEMBER 31, 1999 DECEMBER 31, 1998
<S> <C> <C>
ASSETS
Cash and cash equivalents $ 2,605,000 $ 12,679,000
Fixed income securities available-for-sale, at fair value (Note 3) 701,143,000 829,712,000
Equity securities available-for-sale, at fair value (Note 3) 17,481,000 16,422,000
Accrued interest receivable 6,254,000 5,151,000
Principal payments receivable 3,537,000 937,000
Unrealized gain on forward contracts (Note 11) 3,909,000 --
Other assets 816,000 577,000
----------------- -----------------
$ 735,745,000 $ 865,478,000
================= =================
LIABILITIES AND STOCKHOLDERS' EQUITY
Liabilities
Reverse repurchase agreements (Note 5) $ 672,660,000 $ 767,908,000
Payable for unsettled securities -- 838,000
Accrued interest payable 3,660,000 6,173,000
Dividend payable 2,724,000 1,777,000
Accrued expenses and other liabilities 660,000 752,000
----------------- -----------------
679,704,000 777,448,000
----------------- -----------------
Commitments and contingencies (Notes 5, 10, and 11)
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 93,265,000 92,978,000
Accumulated other comprehensive income (loss) (26,513,000) 6,689,000
Accumulated dividend distributions in excess of net income (209,000) (1,135,000)
Treasury stock, at cost (947,100 shares) (Note 7) (10,569,000) (10,569,000)
----------------- -----------------
56,041,000 88,030,000
----------------- -----------------
$ 735,745,000 $ 865,478,000
================= =================
</TABLE>
See accompanying notes to financial statements
F-4
<PAGE>
APEX MORTGAGE CAPITAL, INC.
STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
Period from
December 9, 1997
(Commencement
Year Ended of Operations) to
December 31, December 31, 1997
------------------------------------- ----------------------
1999 1998
<S> <C> <C> <C>
INTEREST INCOME:
Fixed income securities $ 52,216,000 $ 41,265,000 $ 227,000
Cash and cash equivalents 301,000 710,000 201,000
----------------- ----------------- -----------------
52,517,000 41,975,000 428,000
INTEREST EXPENSE 42,345,000 36,007,000 111,000
----------------- ----------------- -----------------
Net Interest Income 10,172,000 5,968,000 317,000
----------------- ----------------- -----------------
Net Gain on Investment Transactions 1,938,000 1,047,000 --
DIVIDEND INCOME 2,387,000 636,000 --
GENERAL AND ADMINISTRATIVE EXPENSES:
Management fee (Note 8) 629,000 644,000 43,000
Incentive fee (Note 8) 1,714,000 619,000 --
Audit and tax fees 73,000 75,000 45,000
Insurance expense 267,000 267,000 20,000
Directors' fees 60,000 70,000 15,000
Stock option expense (Note 9) 287,000 118,000 7,000
Other 355,000 311,000 37,000
----------------- ----------------- -----------------
3,385,000 2,104,000 167,000
----------------- ----------------- -----------------
NET INCOME $ 11,112,000 $ 5,547,000 $ 150,000
================= ================= =================
Net Income Per Share:
Basic $ 1.93 $ 0.90 $ 0.02
================= ================= =================
Diluted $ 1.92 $ 0.90 $ 0.02
================= ================= =================
Weighted Average Number of Shares Outstanding:
Basic 5,753,000 6,190,000 6,700,100
================= ================= =================
Diluted 5,779,000 6,190,000 6,700,100
================= ================= =================
Dividends Declared Per Share $ 1.72 $ 1.07 $ 0.04
================= ================= =================
</TABLE>
See accompanying notes to financial statements
F-5
<PAGE>
APEX MORTGAGE CAPITAL, INC.
STATEMENT OF OPERATIONS
<TABLE>
<CAPTION>
Three Months Three Months
Ended Dec. 31, Ended Dec. 31,
1999 1998
<S> <C> <C>
Interest Income:
Fixed income securities $ 12,303,000 $ 13,800,000
Cash and cash equivalents 72,000 82,000
----------------- -----------------
12,375,000 13,882,000
INTEREST EXPENSE 10,093,000 11,726,000
----------------- -----------------
NET INTEREST INCOME 2,282,000 2,156,000
----------------- -----------------
NET GAIN ON INVESTMENT TRANSACTIONS 225,000 571,000
DIVIDEND INCOME 489,000 496,000
GENERAL AND ADMINISTRATIVE EXPENSES:
Management fee (Note 8) 157,000 154,000
Incentive fee (Note 8) 216,000 422,000
Audit and tax fees 23,000 41,000
Insurance expense 67,000 67,000
Directors' fees 15,000 15,000
Stock option expense 71,000 34,000
Other 116,000 108,000
----------------- -----------------
665,000 841,000
----------------- -----------------
NET INCOME $ 2,331,000 $ 2,382,000
================= =================
Net Income Per Share:
Basic $ 0.41 $ 0.41
================= =================
Diluted $ 0.40 $ 0.41
================= =================
Weighted Average Number of Shares Outstanding:
Basic 5,753,000 5,761,000
================= =================
Diluted 5,771,000 5,761,000
================= =================
Dividends Declared Per Share $ 0.46 $ 0.30
================= =================
</TABLE>
See accompanying notes to financial statements
F-6
<PAGE>
APEX MORTGAGE CAPITAL, INC.
STATEMENTS OF STOCKHOLDERS' EQUITY
<TABLE>
<CAPTION>
Acccumulated
Acccumulated Dividend
Common Stock Additional Other Distributions
------------------------------ Paid-in Comprehensive in Exesss of
Shares Amount Capital Income (Loss) Net Income
--------------- -------------- ----------------- ------------------- -----------------
<S> <C> <C> <C> <C> <C>
Balance, December 9, 1997 100 $ - $ 2,000 $ - $ -
Issuance of common stock:
Initial public offering,
net of offering costs 6,700,000 67,000 92,851,000 - -
Issuance of stock options
to non-employees (Note 9) - - 7,000 - -
Other comprehensive income:
Net unrealized gain on
mortgage-backed securities
available-for-sale - - - 188,000 -
Net income - - - - 150,000
Comprehensive Income
Dividends declared - - - - (268,000)
- --------------------------------------------------------------------------------------------------------------------------------
Balance, December 31, 1997 6,700,100 67,000 92,860,000 188,000 (118,000)
Repurchases of common stock - - - -
Issuance of stock options
to non-employees (Note 9) - - 118,000 -
Net income - - - - 5,547,000
Other comprehensive income:
Net unrealized gain on
investments available-for-sale,
net of reclassification adjustment
(Note 13) - - - 6,501,000
Comprehensive income
Dividends declared - - - - (6,564,000)
- --------------------------------------------------------------------------------------------------------------------------------
Balance, December 31, 1998 6,700,100 67,000 92,978,000 6,689,000 (1,135,000)
Issuance of stock options
to non-employees (Note 9) - - 287,000 - -
Net income - - - - 11,112,000
Other comprehensive income:
Net unrealized (loss) on
investments available-for-sale,
net of reclassification adjustment - - - (37,111,000) -
(Note 13)
Unrealized gain on
forward contracts - - - 3,909,000
Comprehensive income (loss) - - - - -
Dividends declared - - - - (10,186,000)
- --------------------------------------------------------------------------------------------------------------------------------
Balance, December 31, 1999 6,700,100 $ 67,000 $ 93,265,000 $ (26,513,000) $ (209,000)
=============== ============== ================= =================== =================
</TABLE>
F-7
<PAGE>
<TABLE>
<CAPTION>
Treasury
Comprehensive Stock,
Income At Cost Total
------------------- ------------------- ------------------
<S> <C> <C> <C>
Balance, December 9, 1997 $ - $ - $ 2,000
Issuance of common stock:
Initial public offering,
net of offering costs - - 92,918,000
Issuance of stock options
to non-employees (Note 9) - - 7,000
Other comprehensive income:
Net unrealized gain on
mortgage-backed securities
available-for-sale 188,000 - 188,000
Net income 150,000 - 150,000
-------------------
Comprehensive Income $ 338,000
===================
Dividends declared - (268,000)
- ---------------------------------------- ---------------------------------------
Balance, December 31, 1997 $ - - 92,997,000
Repurchases of common stock - (10,569,000) (10,569,000)
Issuance of stock options
to non-employees (Note 9) - 118,000
Net income 5,547,000 - 5,547,000
Other comprehensive income:
Net unrealized gain on
investments available-for-sale,
net of reclassification adjustment
(Note 13) 6,501,000 - 6,501,000
-------------------
Comprehensive income $ 12,048,000
===================
Dividends declared - (6,564,000)
- ---------------------------------------- ---------------------------------------
Balance, December 31, 1998 $ - (10,569,000) 88,030,000
Issuance of stock options
to non-employees (Note 9) - - 287,000
Net income 11,112,000 - 11,112,000
Other comprehensive income:
Net unrealized (loss) on
investments available-for-sale,
net of reclassification adjustment (37,111,000) - (37,111,000)
(Note 13)
Unrealized gain on
forward contracts 3,909,000 - 3,909,000
-------------------
Comprehensive income (loss) $ (22,090,000) -
===================
Dividends declared - (10,186,000)
- ---------------------------------------- ---------------------------------------
Balance, December 31, 1999 $ (10,569,000) $ 56,041,000
=================== ==================
</TABLE>
F-8
<PAGE>
APEX MORTGAGE CAPITAL, INC.
STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
PERIOD FROM
DECEMBER 9, 1997
(COMMENCEMENT
YEAR ENDED OF OPERATIONS) TO
DECEMBER 31, DECEMBER 31, 1997
---------------------------------- -----------------
1999 1998
<S> <C> <C> <C>
OPERATING ACTIVITIES:
Net Income $ 11,112,000 $ 5,547,000 $ 150,000
Adjustments to reconcile net income to net cash
provided by operating activities:
Amortization 668,000 3,533,000 15,000
Net gain on investment transactions (1,938,000) (1,047,000) --
Change in assets and liabilities: -- -- --
Accrued interest receivable (1,103,000) (3,835,000) (1,316,000)
Other assets (239,000) 275,000 (852,000)
Accrued interest payable (2,513,000) 6,063,000 110,000
Accrued expenses and other liabilities (92,000) (724,000) 1,476,000
--------------- ----------------------------------
Net cash provided by (used in) operating activities 5,895,000 9,812,000 (417,000)
--------------- ----------------------------------
INVESTING ACTIVITIES:
Purchase of equity securities (12,946,000) (19,716,000) --
Purchase of interest rate caps -- (80,000) (175,000)
Purchase of fixed income securities (117,094,000) (1,511,359,000) (177,061,000)
Proceeds from sales of equity securities 9,636,000 1,662,000 --
Proceeds from sales of fixed income securities 40,406,000 594,201,000 --
Proceeds from sales of interest rate caps 172,000 -- --
Principal payments on fixed income securities 168,344,000 270,608,000 --
--------------- ----------------------------------
Net cash provided by (used in) investing activities 88,518,000 (664,684,000) (177,236,000)
--------------- ----------------------------------
FINANCING ACTIVITIES:
Net proceeds from reverse repurchase agreements (95,248,000) 680,090,000 87,818,000
Dividend distributions (9,239,000) (5,055,000) --
Proceeds from stock offering, Net -- -- 92,918,000
Purchase of treasury stock -- (10,569,000) --
--------------- ----------------------------------
Net cash (used in) provided by financing activities (104,487,000) 664,466,000 180,736,000
--------------- ----------------------------------
NET (DECREASE) INCREASE IN CASH AND CASH EQUIVALENTS (10,074,000) 9,594,000 3,083,000
CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD 12,679,000 3,085,000 2,000
--------------- ----------------------------------
CASH AND CASH EQUIVALENTS AT END OF PERIOD $ 2,605,000 $ 12,679,000 $ 3,085,000
=============== ==================================
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Cash paid for interest $ 44,970,000 $ 29,944,000 $ 2,000
=============== ==================================
NONCASH INVESTING AND FINANCING ACTIVITIES:
Net unrealized gain (loss) on securities
available-for-sale and forward contracts $ (33,202,000) $ 6,501,000 $ 188,000
=============== ==================================
Principal payments, not yet received $ 2,600,000 $ 937,000 --
=============== ==================================
Securities purchased, not yet settled $ 838,000 $ 87,800,000 $ 88,638,000
=============== ==================================
Dividends declared, not yet paid $ 2,724,000 $ 1,777,000 $ 268,000
=============== ==================================
</TABLE>
See accompanying notes to financial statements
F-9
<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 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 investments 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 an average cost 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 accumulated 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 an average cost 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
accumulated 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.
F-8
<PAGE>
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. Unrealized losses are shown as a liability on the
balance sheet. All changes in the fair value of the forward contracts
are included in accumulated other comprehensive income in the
Statements of Stockholders' Equity. Realized gains or losses on the
termination of the contracts are recorded as a deferred asset or
liability on the Balance Sheets and are amortized over the remaining
lives of the fixed income securities being hedged as an adjustment to
interest income in the Statements 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 value method, and generally no compensation expense is
recognized in the Statements 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.
Stock options that could potentially dilute net income per share in
the future were not included in the computation of diluted net income
per share in 1998 and 1997 because they would have been antidilutive
for the period presented.
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
Statement of Financial Accounting Standards ("SFAS") No. 130,
REPORTING COMPREHENSIVE INCOME, 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
F-9
<PAGE>
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 year ended December 31, 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.
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,
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, 1997
(and, at the Company's election, before January 1, 1998). The Company
will adopt the reporting requirements of SFAS No. 133 in the first
quarter of 2001. 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. The Company also expects that the non-effective
portion of its interest rate swaps and forward contracts will be
recognized in earnings beginning with the quarter ended March 31,
2001.
NOTE 3 - FIXED INCOME AND EQUITY SECURITIES
At December 31, 1999, fixed income securities consisted of the
following:
<TABLE>
<CAPTION>
Adjustable Rate Fixed Rate Other Fixed
Mortgage Mortgage Income
(in thousands) Securities Securities Securities Total
---------------------------------------------------------------
<S> <C> <C> <C> <C>
Principal Amount $31,923 $688,162 $10,400 $730,485
Unamortized Premium (Discount) 553 1,823 (3,185) (809)
---------------------------------------------------------------
Amortized Cost 32,476 689,985 7,215 729,676
Unrealized Gains 33 - - 33
Unrealized Losses (253) (27,637) (676) (28,566)
---------------------------------------------------------------
Fair Value $32,256 $662,348 $6,539 $701,143
===============================================================
</TABLE>
F-10
<PAGE>
At December 31, 1998, fixed income securities consisted of the
following:
<TABLE>
<CAPTION>
Adjustable Rate Fixed Rate Other Fixed
Mortgage Mortgage Income
(in thousands) Securities Securities Securities Total
------------------------------------------------------------------
<S> <C> <C> <C> <C>
Principal Amount $61,590 $758,110 $5,400 $825,100
Unamortized Premium (Discount) 772 800 (1,381) 191
------------------------------------------------------------------
Amortized Cost 62,362 758,910 4,019 825,291
Unrealized Gains 86 4,762 - 4,848
Unrealized Losses (110) (15) (302) (427)
------------------------------------------------------------------
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 December 31,
1999 and December 31, 1998 was approximately 3.0 and 3.8 years,
respectively. The remaining portion has a fixed remaining maturity of
approximately 2.5 years as of December 31, 1999.
The adjustable rate mortgage securities are typically subject to
periodic and lifetime caps that limit the amount an adjustable rate
mortgage-backed security's interest rate can change during any given
period and over the life of the asset. At December 31, 1999, the
average periodic cap on the adjustable rate mortgage assets was 2.0%
per annum and the average lifetime cap was equal to 11.3%. At 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%.
During the year ended December 31, 1999 the Company realized $194,000
in gains on the sale of $40,406,000 of fixed income securities which
were classified as available-for-sale. During the year ended December
31, 1998 the Company realized $972,000 in gains on the sale of
$594,201,000 of fixed income securities which were classified as
available-for-sale.
At December 31, 1999 and December 31, 1998, equity securities
consisted of the following:
<TABLE>
<CAPTION>
(in thousands) December 31, 1999 December 31, 1998
------------------ ------------------
<S> <C> <C>
Cost $19,370 $14,154
Unrealized Gains 789 2,268
Unrealized Losses (2,678) -
------------------ ------------------
Fair Value $17,481 $16,422
================== ==================
</TABLE>
During the year ended December 31, 1999 the Company realized
$1,906,000 in gains on the sale of $9,636,000 of equity securities
which were classified as available-for-sale. During the year ended
December 31, 1998, the Company realized $303,000 in gains on the sale
of $1,662,000 of equity securities which were classified as
available-for-sale.
F-11
<PAGE>
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. During the year ended December 31, 1999, the
interest rate caps were sold resulting in a realized gain of $172,000
which is included in Net Gain on Investment Transactions in the 1999
Statement of Operations.
The terms of outstanding interest rate cap agreements are as follows:
<TABLE>
<CAPTION>
At December 31, 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 year ended December 31, 1999, the Company purchased put
options on ten-year U.S. Treasury futures contracts with a notional
amount of $50,000,000. The options did not qualify for hedge
accounting under SFAS No. 80 and were therefore accounted for as
trading securities under SFAS No. 115. The options expired during the
year which resulted in a realized loss of $334,000, which is included
in Net Gain on Investment Transactions in the 1999 Statement of
Operations.
NOTE 5 - REVERSE REPURCHASE AGREEMENTS
The Company has entered into reverse repurchase agreements to finance
certain of its investments. These agreements are secured by a portion
of the Company's investments and bear interest rates that have
historically moved in close relationship to LIBOR.
At December 31, 1999, the Company had outstanding $672,660,000 of
reverse repurchase agreements with a weighted average current
borrowing rate of 5.98% and a maturity of 2.0 months. The reverse
repurchase agreements were collateralized by securities with an
estimated fair value of $689,396,000.
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 securities with an
estimated fair value of $800,260,000.
For the year ended December 31, 1999, the average reverse repurchase
agreement balance was $732,960,000 with a weighted average interest
cost of 5.28%. The maximum reverse repurchase agreement balance
outstanding during the year ended December 31, 1999 was $812,019,000.
For the year ended December 31, 1998, the average reverse repurchase
agreement balance was $624,865,000 with a weighted average interest
cost of 5.58%. The maximum reverse repurchase agreement balance
outstanding during the year ended December 31, 1998 was $823,296,000.
F-12
<PAGE>
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 December 31, 1999 At December 31, 1998
Amortized Amortized
Cost Fair Value Cost Fair Value
--------- ---------- --------- ----------
<S> <C> <C> <C> <C>
Mortgage related securities $722,461 $694,604 $821,272 $825,995
Equity securities 19,370 17,481 14,154 16,422
Other fixed income securities 7,215 6,539 4,019 3,717
Interest rate swaps - 3,815 - (9,994)
Forward contracts - 3,909 - -
</TABLE>
The Company bases its fair value estimates for mortgage related
securities, equity securities, other fixed income 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 December 31, 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 December 31, 1999 and December 31, 1998, the Company held 947,100
shares of treasury stock. During the year ended December 31, 1999, the
Company did not repurchase any treasury shares. For the year ended
December 31, 1998, the Company repurchased 947,100 shares which are
held at cost in the Balance Sheets.
NOTE 8 - TRANSACTIONS WITH AFFILIATES
The Company has entered into a Management Agreement (the "Management
Agreement"), as amended, 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 $629,000, $644,000, and $43,000 in base
management compensation during the years ended December 31, 1999 and
1998, and for the period from December 9, 1997 (commencement of
operations) to December 31, 1997, respectively.
F-13
<PAGE>
The accrued liability for base management compensation was $157,000
and $154,000 at December 31, 1999 and 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 US Treasury rate plus 1% as
further defined in the Management Agreement.
F-13
<PAGE>
The Company expensed $1,714,000 and $619,000 for incentive
compensation to the Manager for the years ended December 31, 1999 and
1998, respectively. No incentive compensation was incurred for the
period December 9, 1997 (commencement of operations) to December 31,
1997.
The accrued liability for incentive compensation was $216,000 and
$422,000 at December 31, 1999 and December 31, 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 (see Note 9).
The Company's other fixed income investments include securities that
are issued by special purpose companies that invest primarily in
mortgage-related assets. 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
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 of the Company ("employees"), and to the Manager and the
directors, officers and key employees of the Manager
("non-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 expense relating to the options
granted to the non-employees of $287,000 and $118,000 during the years
ended December 31, 1999 and 1998, respectively, and $7,000 during the
period December 9, 1997 (commencement of operations) to December 31,
1997.
For stock options outstanding at December 31, 1999, the range of
exercise prices is $10.38 to $15.00 per share and the weighted-average
remaining contractual life is 8.24 years.
For the year ended December 31, 1998, options to purchase 112,000
shares of the Company's common stock were granted to directors of the
Company and options to purchase 58,000 shares were granted to officers
of the Company and officers and key employees of the Manager. The
exercise price of the options granted during 1998 was $10.38 per
share. All of the options granted during 1998 include dividend
equivalent rights that entitle the option holder to receive a cash
payment equal to the dividends declared on the Company's common stock
multiplied by the number of options held until the options are
exercised or expire.
The fair value of each option granted during 1998 was estimated to be
$5.32 as of the grant date using the Black-Scholes option pricing
model with the following assumptions: dividend yield of 0% per annum
(to account for the dividend equivalent rights); expected volatility
of 30%; risk free interest rate of 4.57% per annum; and an expected
life of 10 years.
The options granted during 1998 expire in December 2008 and vest in
two equal installments during the month of December in 1999 and 2000.
For the year ended December 31, 1997, options to purchase 210,000
shares of the Company's common stock were granted to directors of the
Company and options to purchase 190,000 shares were granted to
officers of the Company and officers and key employees of the Manager.
The exercise price of the options granted during 1997 was $15 per
share.
The fair value of each option granted during 1997 was estimated to be
$1.05 as of the grant date using the Black-Scholes option pricing
model with the following assumptions: dividend yield of 11% per annum;
expected volatility of 30%; risk free interest rate of 5.82% per
annum; and an expected life of 10 years.
F-14
<PAGE>
The options granted during 1997 expire in December 2007 and vest in
three equal installments during the month of February in 1999, 2000
and 2001.
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>
Year Ended Period Ended
Year Ended December 31, December 31,
December 31, 1999 1998 1997
---------------------------------------------------
<S> <C> <C> <C>
Net income - as reported $11,112,000 $5,547,000 $150,000
Net income - pro forma 10,611,000 5,411,000 143,000
Basic earnings per share - as reported $1.93 $0.90 $0.02
Diluted earnings per share - as reported $1.92 $0.90 $0.02
Basic earnings per share - pro forma $1.84 $0.87 $0.02
Diluted earnings per share - pro forma $1.84 $0.87 $0.02
</TABLE>
Information regarding stock option activity during the years ended
December 31, 1999, December 31, 1998, and the period ended December
31, 1997 is as follows:
<TABLE>
<CAPTION>
Weighted Average
Shares Exercise Price
-----------------------------------
<S> <C> <C>
Options Granted During 1997 400,000 $15.00
Exercised - -
Expired - -
------------------
Options Outstanding at December 31, 1997 400,000 15.00
Options Granted During 1998 170,000 10.38
Exercised - -
Expired - -
------------------
Options Outstanding at December 31, 1998 570,000 13.62
Options Granted During 1999 - -
Exercised - -
Expired - -
------------------
Options Outstanding at December 31, 1999 570,000 $13.62
==================
</TABLE>
F-15
<PAGE>
NOTE 10 - CONTRACTUAL COMMITMENTS
During the years ended December 31, 1999 and December 31, 1998 the
Company entered into interest rate swap agreements as summarized
below. Under these agreements, the Company receives a floating rate
and pays a fixed rate.
December 31, 1999:
<TABLE>
<CAPTION>
Average Unrealized
Current Average Termination Gains
Notional Amount (000) Fixed Rate Floating Rate Date (000)
-----------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
$400,129 5.869% 1Mo LIBOR 8/9/2001 $3,815
</TABLE>
December 31, 1998:
<TABLE>
<CAPTION>
Average Unrealized
Current Average Termination (Losses)
Notional Amount (000) Fixed Rate Floating Rate Date (000)
-----------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
$703,590 5.850% 1Mo LIBOR 2/16/2001 $(9,994)
</TABLE>
The Company paid $3,614,000 and $414,000 to the swap counter-parties
during the years ended December 31, 1999 and 1998, respectively, which
is included in interest expense in the Statements of Operations.
During the year ended December 31, 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 net deferred loss is included in Other Assets on the
1999 Balance Sheet and the amortization expense is included in
Interest Expense on the 1999 Statement of Operations. During the year
ended December 31, 1999, $42,000 of the net deferred loss was
amortized. The remaining net deferred loss will be fully amortized by
August 31, 2000.
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 December 31, 1999 and 1998, the Company had
securities with a fair market value of $2,592,000 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. At
December 31, 1999 the Company received fixed income securities with a
fair market value of $1,600,000 as a deposit from a swap agreement
counter-party.
F-16
<PAGE>
NOTE 11 - FORWARD CONTRACTS
At December 31, 1999, the Company had entered into forward contracts
to sell U.S. Treasury notes with terms stated below.
<TABLE>
<CAPTION>
Average Unrealized
Current Termination Gains Average Maturity of
Notional Amount (000) Date (000) Underlying Securities
----------------------------------------------------------------------------
<S> <C> <C> <C>
$335,000 2/12/2000 $3,909 3.36 Years
</TABLE>
During the year ended December 31, 1999, two forward contracts to sell
U.S. Treasury notes with a notional amount of $135,000,000 and
$100,000,000 were closed resulting in a deferred loss of $390,000 and
deferred gain of $51,000, respectively. The deferred loss and gain are
being amortized as an adjustment to interest income over the remaining
weighted average lives of the fixed income securities being hedged,
which was 4.8 years at December 31, 1999.
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-weighted average duration approximately
equal to the contracts shown above.
NOTE 12 - ADOPTION OF SHAREHOLDER RIGHTS PLAN
On June 30, 1999, the Board of Directors of Apex Mortgage Capital,
Inc. (the "Company") declared a dividend distribution of one Right for
each outstanding share of Company Common Stock to stockholders of
record at the close of business on July 30, 1999 (the "Record Date").
Each Right entitles the registered holder to purchase from the Company
one one-hundredth of a share of Series A Junior Participating
Preferred Stock, par value $0.01 per share (the "Preferred Stock"), at
a Purchase Price of $50, subject to adjustment. The description and
terms of the Rights are set forth in a Shareholder Rights Agreement
(the "Rights Agreement") between the Company and The Bank of New York,
as Rights Agent.
Initially, the Rights will be attached to all Common Stock
certificates representing shares then outstanding, and no separate
Rights Certificates will be distributed. Subject to certain exceptions
specified in the Rights Agreement, the Rights will separate from the
Common Stock and a Distribution Date will occur upon the earlier of
(i) 10 business days following a public announcement that a person or
group of affiliated or associated persons (an "Acquiring Person") has
acquired, or obtained the right to acquire, beneficial ownership of
15% or more of the outstanding shares of Common Stock (the "Stock
Acquisition Date"), other than as a result of repurchases of stock by
the Company or certain inadvertent actions by institutional or certain
other stockholders or (ii) 10 business days (or such later date as the
Board shall determine) following the commencement of a tender offer or
exchange offer that would result in a person or group becoming an
Acquiring Person. Until the Distribution Date, (i) the Rights will be
evidenced by the Common Stock certificates and will be transferred
with and only with such Common Stock certificates, (ii) new Common
Stock certificates issued after the Record Date will contain a
notation incorporating the Rights Agreement by reference and (iii) the
surrender for transfer of any certificates for Common Stock
outstanding will also constitute the transfer of the Rights associated
with the Common Stock represented by such certificate. Pursuant to the
Rights Agreement, the Company reserves the right to require prior to
the occurrence of a triggering event that, upon any exercise of
Rights, a number of Rights be exercised so that only whole shares of
Preferred Stock will be issued.
The Rights are not exercisable until the Distribution Date and will
expire on July 30, 2009, unless earlier redeemed or exchanged by the
Company.
F-17
<PAGE>
NOTE 13 - RECLASSIFICATION ADJUSTMENTS OF COMPREHENSIVE INCOME
The following is a presentation of the reclassification amounts to
Comprehensive Income for the years ended December 31, 1999 and 1998:
<TABLE>
<CAPTION>
For the Year Ended For the Year Ended
December 31, 1999 December 31, 1998
------------------- --------------------
<S> <C> <C>
Unrealized gains arising during the year $ (36,212,000) $ 6,689,000
Less: reclassification adjustment for net gains included in net
income (899,000) (188,000)
------------------- --------------------
Net unrealized (loss) gains on investments available-for-sale $ (37,111,000) $ 6,501,000
=================== ====================
</TABLE>
NOTE 14 - ACQUISITION ACTIVITY
On September 8, 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 ICH share outstanding. 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. However, an acquisition of ICH by the Company appears
unlikely at this time.
F-18
<PAGE>
NOTE 15 - SUMMARIZED QUARTERLY RESULTS (UNAUDITED)
The following is a presentation of the quarterly results of operations
(amounts are in thousands except per share amounts):
<TABLE>
<CAPTION>
Year Ended December 31, 1999
Fourth Third Second First
Quarter Quarter Quarter Quarter
------------ ------------ ------------ -----------
<S> <C> <C> <C> <C>
Interest Income $12,375 $13,124 $13,081 $13,937
Interest Expense 10,093 10,231 10,760 11,261
------------ ------------ ------------ -----------
Net Interest Income 2,282 2,893 2,321 2,676
------------ ------------ ------------ -----------
Net Gain on Investment Transactions 225 437 662 614
Dividend Income 489 503 684 711
General and Administrative Expenses (665) (868) (813) (1,039)
------------ ------------ ------------ -----------
Net Income $2,331 $2,965 $2,854 $2,962
============ ============ ============ ===========
Basic EPS $0.41 $0.52 $0.50 $0.51
============ ============ ============ ===========
Diluted EPS $0.40 $0.51 $0.49 $0.51
============ ============ ============ ===========
Average Number of Shares Outstanding - Basic
(net of treasury shares) 5,753 5,753 5,753 5,753
============ ============ ============ ===========
Average Number of Shares Outstanding - Diluted
(net of treasury shares) 5,771 5,784 5,787 5,773
============ ============ ============ ===========
Dividend Declared Per Share $0.46 $0.46 $0.42 $0.38
============ ============ ============ ===========
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
Year Ended December 31, 1998
Fourth Third Second First
Quarter Quarter Quarter Quarter
-----------------------------------------------------
<S> <C> <C> <C> <C>
Interest Income $13,882 $13,688 $9,498 $4,907
Interest Expense 11,726 11,271 8,999 4,011
------------ ----------- ------------ ------------
Net Interest Income 2,156 2,417 499 896
------------ ----------- ------------ ------------
Net Gain on Investment Transactions 571 7 469 -
Dividend Income 496 140 - -
General and Administrative Expenses (841) (572) (359) (332)
------------ ----------- ------------ ------------
Net Income $2,382 $1,992 $609 $564
============ =========== ============ ============
Basic and Diluted EPS $0.41 $0.33 $0.10 $0.09
============ =========== ============ ============
Average Number of Shares Outstanding
(net of treasury shares) 5,761 6,022 6,387 6,603
============ =========== ============ ============
Dividend Declared Per Share $0.30 $0.27 $0.25 $0.25
============ =========== ============ ============
</TABLE>
F-20
<PAGE>
APEX MORTGAGE CAPITAL, INC.
SECOND AMENDMENT TO MANAGEMENT AGREEMENT
This Second Amendment to the Management Agreement between APEX MORTGAGE
CAPITAL, INC., a Maryland corporation (the "COMPANY"), and TCW INVESTMENT
MANAGEMENT COMPANY, a California corporation (the "MANAGER") executed
December 9, 1997 is entered into as of December 16, 1999 by the Company and
the Manager pursuant to section 26 of the Management Agreement.
The Management Agreement is amended as follows:
1.4 "AVERAGE NET INVESTED CAPITAL" means the month end sum of (1) the
Company's total shareholders' equity computed in accordance with
generally accepted accounting principles plus (2) any unsecured debt
that has been approved for inclusion by the Unaffiliated Directors at
issuance plus or minus (3) an adjustment to exclude the impact of any
unrealized gains, losses or other items that do not affect realized
net income.
A new section is added:
3.3 DELEGATION. Manager may appoint an Affiliate investment adviser to
perform, on Manager's behalf, any and all of the services to be
performed by Manager hereunder. No additional compensation shall be
charged the Company for the services of the Affiliate investment
adviser.
IN WITNESS WHEREOF, the parties have executed this Second Amendment to
the Management Agreement as of the effective date.
APEX MORTGAGE CAPITAL, INC.
By: /s/ Daniel K. Osborne
-------------------------------------
Daniel K. Osborne
Executive Vice President
TCW INVESTMENT MANAGEMENT COMPANY
By: /s/ Alvin R. Albe, Jr.
-------------------------------------
Alvin R. Albe, Jr.
President
<PAGE>
EXHIBIT 24.1.1
POWER OF ATTORNEY
KNOW ALL MEN BY THESE PRESENTS, that I, John C. Argue, constitute and
appoint Philip A. Barach and Daniel K. Osborne, and each of them, as my true
and lawful attorneys-in-fact and agents with full power of substitution and
resubstitution, for me and in my name, place and stead, in any and all
capacities, to sign any Form 10-K or Form 10-Q of Apex Mortgage Capital,
Inc., and to file the same, with all exhibits thereto, and other documents in
connection therewith, with the Securities and Exchange Commission, granting
unto said attorneys-in-fact and agents, and each of them, full power and
authority to do and perform each and every act and thing in as I might or
could do in person, hereby ratifying and confirming all that said
attorneys-in-fact or agents or any of them, or their or his substitute or
substitutes, may lawfully do or cause to be done by virtue hereof.
/s/ John C. Argue
- ----------------------------
John C. Argue
<PAGE>
POWER OF ATTORNEY
KNOW ALL MEN BY THESE PRESENTS, that I, Peter G. Allen, constitute and
appoint Philip A. Barach and Daniel K. Osborne, and each of them, as my true
and lawful attorneys-in-fact and agents with full power of substitution and
resubstitution, for me and in my name, place and stead, in any and all
capacities, to sign any Form 10-K or Form 10-Q of Apex Mortgage Capital,
Inc., and to file the same, with all exhibits thereto, and other documents in
connection therewith, with the Securities and Exchange Commission, granting
unto said attorneys-in-fact and agents, and each of them, full power and
authority to do and perform each and every act and thing in as I might or
could do in person, hereby ratifying and confirming all that said
attorneys-in-fact or agents or any of them, or their or his substitute or
substitutes, may lawfully do or cause to be done by virtue hereof.
/s/ Peter G. Allen
- ----------------------------
Peter G. Allen
<PAGE>
POWER OF ATTORNEY
KNOW ALL MEN BY THESE PRESENTS, that I, John A. Gavin, constitute and
appoint Philip A. Barach and Daniel K. Osborne, and each of them, as my true
and lawful attorneys-in-fact and agents with full power of substitution and
resubstitution, for me and in my name, place and stead, in any and all
capacities, to sign any Form 10-K or Form 10-Q of Apex Mortgage Capital,
Inc., and to file the same, with all exhibits thereto, and other documents in
connection therewith, with the Securities and Exchange Commission, granting
unto said attorneys-in-fact and agents, and each of them, full power and
authority to do and perform each and every act and thing in as I might or
could do in person, hereby ratifying and confirming all that said
attorneys-in-fact or agents or any of them, or their or his substitute or
substitutes, may lawfully do or cause to be done by virtue hereof.
/s/ John A. Gavin
- ----------------------------
John A. Gavin
<PAGE>
POWER OF ATTORNEY
KNOW ALL MEN BY THESE PRESENTS, that I, Carl C. Gregory III, constitute
and appoint Philip A. Barach and Daniel K. Osborne, and each of them, as my
true and lawful attorneys-in-fact and agents with full power of substitution
and resubstitution, for me and in my name, place and stead, in any and all
capacities, to sign any Form 10-K or Form 10-Q of Apex Mortgage Capital,
Inc., and to file the same, with all exhibits thereto, and other documents in
connection therewith, with the Securities and Exchange Commission, granting
unto said attorneys-in-fact and agents, and each of them, full power and
authority to do and perform each and every act and thing in as I might or
could do in person, hereby ratifying and confirming all that said
attorneys-in-fact or agents or any of them, or their or his substitute or
substitutes, may lawfully do or cause to be done by virtue hereof.
/s/ Carl C. Gregory
- ----------------------------
Carl C. Gregory III
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION OF THE REGISTRANT AS OF DECEMBER
31, 1999 AND THE CONSOLIDATED STATEMENTS OF OPERATIONS OF THE REGISTRANT FOR THE
PERIOD FROM JANUARY 1, 1999 TO DECEMBER 31, 1999 AND IS QUALIFIED IN ITS
ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-START> JAN-01-1999
<PERIOD-END> DEC-31-1999
<CASH> 2,605
<SECURITIES> 718,624
<RECEIVABLES> 9,791
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 4,725
<PP&E> 0
<DEPRECIATION> 0
<TOTAL-ASSETS> 735,745
<CURRENT-LIABILITIES> 679,704
<BONDS> 0
0
0
<COMMON> 67
<OTHER-SE> 55,974
<TOTAL-LIABILITY-AND-EQUITY> 735,745
<SALES> 0
<TOTAL-REVENUES> 56,842
<CGS> 0
<TOTAL-COSTS> 0
<OTHER-EXPENSES> 3,385
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 42,345
<INCOME-PRETAX> 11,112
<INCOME-TAX> 0
<INCOME-CONTINUING> 11,112
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 11,112
<EPS-BASIC> 1.93
<EPS-DILUTED> 1.92
</TABLE>
