FORM 10-Q
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
X Quarterly report pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934
For the quarterly period ended March 31, 1999 or
Transition report pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934
For the transition period from to
Commission File Number: 1-13991
AMERICA FIRST MORTGAGE INVESTMENTS, INC.
(Exact name of registrant as specified in its charter)
Maryland 13-3974868
(State or other jurisdiction (IRS Employer
of incorporation or organization) Identification No.)
399 Park Avenue, 36th Floor, New York, New York 10022
(Address of principal executive offices) (Zip Code)
(212) 935-8760
(Registrant's telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to
such filing requirements for the past 90 days.
YES X NO
<PAGE> -i-
Part I. Financial Information
Item 1. Financial Statements
AMERICA FIRST MORTGAGE INVESTMENTS, INC.
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
March 31, 1999
(Unaudited) Dec. 31, 1998
--------------- ---------------
<S> <C> <C>
Assets
Investment in mortgage securities (Note 3) $ 341,540,726 $ 241,895,462
Investment in corporate securities (Note 4) 5,158,436 4,673,127
Investment in preferred stock 2,063,214 1,153,800
Cash and cash equivalents, at cost
which approximates market value 11,205,366 6,045,956
Accrued interest receivable 2,303,054 1,540,576
Other investments (Note 5) 1,150,486 1,197,341
Goodwill, net 7,461,506 7,361,338
Other assets 514,806 801,302
--------------- ---------------
$ 371,397,594 $ 264,668,902
=============== ===============
Liabilities
Repurchase agreements (Note 6) $ 297,073,067 $ 190,250,084
Accrued interest payable 839,284 795,785
Accounts payable 465,020 212,085
Dividends or distributions payable 2,417,269 2,413,803
--------------- ---------------
300,794,640 193,671,757
--------------- ---------------
Minority interest in Pension Fund (Note 1) 31,017 64,388
Stockholders' Equity
Stockholders' Equity
Common stock, $.01 par value; 10,000,000 shares authorized
9,055,142 issued and outstanding 90,551 90,551
Additional paid in capital 76,203,009 76,203,009
Retained earnings (5,466,446) (4,302,981)
Accumulated other comprehensive income (255,177) (1,057,822)
--------------- ---------------
70,571,937 70,932,757
--------------- ---------------
$ 371,397,594 $ 264,668,902
=============== ===============
The accompanying notes are an integral part of the consolidated and combined financial statements.
</TABLE>
<PAGE> - 1 -
AMERICA FIRST MORTGAGE INVESTMENTS, INC.
CONSOLIDATED AND COMBINED STATEMENTS OF INCOME
(UNAUDITED)
<TABLE>
<CAPTION>
Company and
Company Predecessor
For the Three For the Three
Months Ended Months Ended
March 31, 1999 March 31, 1998
----------------- ---------------
<S> <C> <C>
Mortgage securities income $ 4,564,789 $ 613,793
Corporate securities income 130,899 -
Interest income on temporary cash investments 131,385 148,799
--------------- ---------------
Total interest income 4,827,073 762,592
Interest expense on borrowed funds 3,143,155 -
--------------- ---------------
Net interest income 1,683,918 762,592
--------------- ---------------
Income from other investments 186,697 145,167
Loss on sale of investments (1,534) -
--------------- ---------------
185,163 145,167
--------------- ---------------
General and administrative expenses 616,193 421,293
Minority interest 490 -
--------------- ---------------
616,683 421,293
--------------- ---------------
Net income $ 1,252,398 $ 486,466
=============== ===============
Net income, basic and fully diluted, per share $ .14 N/A
=============== ===============
Net income, basic and fully diluted, per unit N/A $ .08
=============== ===============
Weighted average number of shares outstanding 9,055,142 N/A
Weighted average number of units outstanding N/A 5,775,797
The accompanying notes are an integral part of the consolidated and combined financial statements.
</TABLE>
<PAGE> - 2 -
AMERICA FIRST MORTGAGE INVESTMENTS, INC.
CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY
FOR THE THREE MONTHS ENDED MARCH 31, 1999
(UNAUDITED)
<TABLE>
<CAPTION>
Stockholders' Equity
---------------------------------------------------------------------------------
Accumulated
Other
Common Stock Paid-in Retained Comprehensive
# of Shares Amount Capital Earnings Income Total
------------ ------------ ------------ ------------ ------------ ------------
<S> <C> <C> <C> <C> <C> <C>
Balance at December 31, 1998 9,055,142 $ 90,551 $76,203,009 $(4,302,981) $(1,057,822) $70,932,757
Comprehensive income:
Net income - - - 1,252,398 - 1,252,398
Net unrealized holding gains arising
during the period - - - - 802,645 802,645
------------ ------------ ------------ ------------ ------------ ------------
Comprehensive income - - - 1,252,398 802,645 2,055,043
Dividends paid or accrued - - - (2,415,863) (2,415,863)
------------ ------------ ------------ ------------ ------------ ------------
Balance at March 31, 1999 9,055,142 $ 90,551 $76,203,009 $ (5,466,446) $ (255,177) $70,571,937
============ ============ ============ ============ ============ ============
The accompanying notes are an integral part of the consolidated and combined financial statements.
</TABLE>
<PAGE> - 3 -
AMERICA FIRST MORTGAGE INVESTMENTS, INC.
CONSOLIDATED AND COMBINED STATEMENTS OF CASH FLOWS
(UNAUDITED)
<TABLE>
<CAPTION>
Company and
Company Predecessor
For the Three For the Three
Months Ended Months Ended
March 31, 1999 March 31, 1998
--------------- ---------------
<S> <C> <C>
Cash flows from operating activities
Net income $ 1,252,398 $ 486,466
Net cash provided by (used in)
operating activities:
Loss on sale of investments 1,534 -
Minority interest 490 -
Amortization 221,617 (1,959)
Decrease (increase) in interest receivable (762,478) 8,302
Decrease in other assets 298,779 6,241
Increase in accounts payable 252,935 565,608
Increase in accrued interest payable 43,499 -
---------------- ---------------
Net cash provided by operating activities 1,308,774 1,064,658
---------------- ---------------
Cash flows from investing activities
Principal payments on mortgage securities 25,533,537 867,630
Purchases of mortgage securities (124,778,490) -
Purchases of corporate securities (476,250) -
Purchases of preferred stock (850,333) -
Decrease in other investments 46,855 42,869
Merger transaction costs paid - (729,509)
---------------- ---------------
Net cash provided by (used in) investing activities (100,524,681) 180,990
---------------- ---------------
Cash flows from financing activities
Net borrowings from repurchase agreements 106,822,983 -
Dividends and distributions paid (2,447,666) (1,535,007)
---------------- ---------------
Net cash provided by (used in) financing activities 104,375,317 (1,535,007)
---------------- ---------------
Net increase (decrease) in cash and cash equivalents 5,159,410 (289,359)
Cash and temporary cash investments at beginning
of period 6,045,956 10,426,181
---------------- ---------------
Cash and temporary cash investments at end of period $ 11,205,366 $ 10,136,822
================ ===============
Supplemental disclosure of cash flow information:
Cash paid during the period for interest $ 3,099,656 $ -
The accompanying notes are an integral part of the consolidated and combined financial statements.
</TABLE>
<PAGE> - 4 -
AMERICA FIRST MORTGAGE INVESTMENTS, INC.
NOTES TO FINANCIAL STATEMENTS
MARCH 31, 1999
(UNAUDITED)
1. Organization
America First Mortgage Investments, Inc. (the Company) was incorporated in
Maryland on July 24, 1997, but had no operations prior to April 10, 1998.
On April 10, 1998, (the Merger Date) the Company and three partnerships:
America First Participating/Preferred Equity Mortgage Fund Limited Partnership
(Prep Fund 1), America First Prep Fund 2 Limited Partnership (Prep Fund 2),
America First Prep Fund 2 Pension Series Limited Partnership (Pension Fund),
consummated a merger transaction whereby their pre-existing net assets and
operations or majority interest in the preexisting partnership were
contributed to the Company in exchange for 9,035,084 shares of the Company's
common stock. For financial accounting purposes, Prep Fund 1, the largest of
the three partnerships, was considered the Predecessor entity (the
Predecessor) and its historical operating results are presented in the
financial statements contained herein. The Merger was accounted for using the
purchase method of accounting in accordance with generally accepted accounting
principles. Prep Fund 1 was deemed to be the acquirer of the other
partnerships under the purchase method. Accordingly, the Merger resulted, for
financial accounting purposes, in the effective purchase by Prep Fund 1 of all
the Beneficial Unit Certificates (BUCs) of Prep Fund 2 and approximately 99%
of the BUCs of Pension Fund. As the surviving entity for financial accounting
purposes, the assets and liabilities of Prep Fund 1 were recorded by the
Company at their historical cost and the assets and liabilities of Prep Fund 2
and Pension Fund were adjusted to fair value. The excess of the fair value of
stock issued over the fair value of net assets acquired has been recorded as
goodwill in the accompanying balance sheet.
The Company has entered into an advisory agreement with America First Mortgage
Advisory Company (the Advisor) which provides advisor services in connection
with the conduct of the Company's business activities.
2. Summary of Significant Accounting Policies
A) Method of Accounting
The accompanying 1999 consolidated financial statements include the
accounts of the Company and its subsidiaries, Pension Fund and America
First Capital Associates Limited Partnership Six (the general partner of
Pension Fund). All significant intercompany transactions and accounts have
been eliminated in consolidation. In addition, as more fully discussed in
Note 5, the Company has an investment in a corporation and investments in
four real estate limited partnerships, none of which are controlled by the
Company. These investments are accounted for under the equity method.
Neither the corporation nor the real estate limited partnerships are
consolidated for income tax purposes.
The accompanying 1998 consolidated and combined financial statements
include the consolidated accounts of the Company from April 10, 1998,
through December 31, 1998, and the combined accounts of the Company, Prep
Fund 1 and America First Participating/Preferred Equity Mortgage Fund
(the managing general partner of Prep Fund 1) (together referred to as the
Predecessor) for the periods prior to the Merger.
The financial statements are prepared on the accrual basis of accounting
in accordance with generally accepted accounting principles.
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the
financial statements and the reported amounts of revenues and expenses
during the reporting period. Actual results could differ from those
estimates.
B) Cash and Cash Equivalents
Cash and cash equivalents include cash on hand and highly liquid
investments with original maturities of three months or less. The
carrying amount of cash equivalents approximates their fair value.
<PAGE> - 5 -
C) Mortgage Securities and Corporate Securities
Statement of Financial Accounting Standards No. 115, "Accounting for
Certain Investments in Debt and Equity Securities" (SFAS 115), requires
the Company to classify its investments in mortgage securities and
corporate securities (collectively referred to as investment securities)
as either held-to-maturity, available-for-sale or trading. Although the
Company generally intends to hold most of its mortgage securities until
maturity, it may, from time to time, sell any of its mortgage securities
as part of its overall management of its business. In order to be
prepared to respond to potential future opportunities in the market, to
sell mortgage securities in order to optimize the portfolio's total return
and to retain its ability to respond to economic conditions that require
the Company to sell assets in order to maintain an appropriate level of
liquidity, the Company has classified all its mortgage securities as
available-for-sale.
Mortgage securities classified as available-for-sale are reported at
fair value, with unrealized gains and losses excluded from earnings
and reported in other comprehensive income. Corporate securities are
classified as held-to-maturity and are carried at amortized cost.
Unrealized losses on mortgage securities that are considered
other-than-temporary, as measured by the amount of decline in fair value
attributable to factors other than temporary, are recognized in income and
the cost basis of the mortgage security is adjusted. Other-than-temporary
unrealized losses are based on management's assessment of various factors
affecting the expected cash flow from the mortgage securities, including
an other-than-temporary deterioration of the credit quality of the
underlying mortgages and/or the credit protection available to the
related mortgage pool.
Gains or losses on the sale of investment securities are based on the
specific identification method.
Interest income is accrued based on the outstanding principal amount of
the investment securities and their contractual terms. Premiums and
discounts associated with the purchase of the investment securities are
amortized into interest income over the lives of the securities using the
effective yield method based on, among other things, anticipated estimated
prepayments. Such calculations are periodically adjusted for actual
prepayment activity.
D) Credit Risk
The Company limits its exposure to credit losses on its investment
portfolio by requiring that at least 70% of its investment portfolio
consist of mortgage securities or mortgage loans that are either
(i) insured or guaranteed as to principal and interest by an agency of
the U.S. government, such as Government National Mortgage Association
(GNMA), Federal National Mortgage Association (FNMA), or Federal Home Loan
Mortgage Corporation (FHLMC), (ii) rated in one of the two highest rating
categories by either Standard & Poor's or Moody's, or (iii) considered to
be of equivalent credit quality as determined by the Advisor and approved
by the Company's investment committee. The remainder of the Company's
assets may be either: (i) mortgage assets rated at least investment grade
or considered to be of equivalent credit quality by the Advisor with
approval from the Company's investment committee; (ii) direct investment
(mezzanine or equity) in multifamily projects collateralizing mortgage
loans owned by the Company; (iii) investments in limited partnerships,
real estate investment trusts or closed-end funds owning a portfolio of
mortgage assets; or (iv) other fixed income instruments (corporate or
government) that provide increased call protection relative to the Company's
mortgage securities. Corporate debt that is rated below investment grade
will be limited to less than 5% of the Company's total assets. As of
March 31, 1999, approximately 93% of the Company's investment portfolio
consisted of mortgage securities insured or guaranteed by the U.S.
government or an agency thereof. At March 31, 1999, management determined
no allowance for credit losses was necessary.
E) Other Investments
Other investments consist of: (i) non-voting preferred stock of a
corporation owning interests in real estate limited partnerships,
(ii) investments in limited partnerships owning real estate,
(iii) direct investments in multifamily projects collateralizing mortgage
loans owned by the Company, and (iv) other real estate investments.
<PAGE> - 6 -
F) Net income per Share
Net income per share is based on the weighted average number of common
shares and common equivalent shares (e.g., stock options), if dilutive,
outstanding during the period. Basic net income per share is computed by
dividing net income available to shareholders by the weighted average
number of common shares outstanding during the period. Diluted net
income per share is computed by dividing the diluted net income available
to common shareholders by the weighted average number of common shares and
common equivalent shares outstanding during the period. The common
equivalent shares are calculated using the treasury stock method which
assumes that all dilutive common stock equivalents are exercised and the
funds generated by the exercise are used to buy back outstanding common
stock at the average market price during the reported period.
As more fully discussed in Note 7, options to purchase 520,000 shares of
common stock were issued during the quarter ended June 30, 1998. Because
the average stock price during the quarter during which such options were
issued was less than the exercise price, exercise of such options under the
treasury stock method would be anti-dilutive. Accordingly, these
potentially dilutive securities were not considered in fully diluted
earnings per share and, as a result, basic and fully diluted net income per
share are the same for the three months ended March 31, 1999. With regard
to the Predecessor, no options were issued. As such, basic and diluted net
income per Unit of the Predecessor were the same for the three months ended
March 31, 1998, as no dilutive equivalent units existed.
G) Comprehensive Income
Statement of Financial Accounting Standards No. 130, "Reporting
Comprehensive Income" requires the Company and the Predecessor to display
and report comprehensive income, which includes all changes in
Stockholders' Equity or Partners' Capital with the exception of additional
investments by or dividends to shareholders of the Company or additional
investments by or distributions to partners of the Predecessor.
Comprehensive income for the Company and the Predecessor include net
income and the change in net unrealized holding gains (losses) on
investments. Comprehensive income for the three months ended March 31,
1999, and March 31, 1998 was as follows:
<TABLE>
<CAPTION>
March 31, 1999 March 31, 1998
(Unaudited) (Unaudited)
--------------- ---------------
<S> <C> <C>
Net income $ 1,252,398 $ 486,466
Change in net unrealized holding gains (losses) 802,645 (21,235)
--------------- ---------------
Comprehensive income $ 2,055,043 $ 465,231
=============== ===============
</TABLE>
3. Mortgage Securities
The following table presents the Company's mortgage securities as of March 31,
1999, and December 31, 1998.
<TABLE>
<CAPTION>
March 31, 1999
(Unaudited) December 31, 1998
----------------- -----------------
<S> <C> <C>
GNMA Certificates $ 57,545,490 $ 59,452,502
FNMA Certificates 247,993,099 159,686,597
FHLMC Certificates 18,912,401 22,756,363
Commercial mortgage securities 17,089,736 -
----------------- -----------------
$ 341,540,726 $ 241,895,462
================= =================
</TABLE>
<PAGE> - 7 -
At March 31, 1999, mortgage securities consisted of pools of adjustable-rate
mortgage securities with a carrying value of $296,988,745, and fixed-rate
mortgage securities with a carrying value of $44,551,981. At December 31,
1998, mortgage securities consisted of pools of adjustable-rate mortgage
securities with a carrying value of $194,542,316 and fixed-rate mortgage
securities with a carrying value of $47,353,146.
The Government National Mortgage Association (GNMA) Certificates are backed by
first mortgage loans on multifamily residential properties and pools of
single-family properties. The GNMA Certificates are debt securities issued
by a private mortgage lender and are guaranteed by GNMA as to the full and
timely payment of principal and interest on the underlying loans.
The Federal National Mortgage Association (FNMA) Certificates are backed by
first mortgage loans on pools of single-family properties. The FNMA
Certificates are debt securities issued by FNMA and are guaranteed by FNMA as
to the full and timely payment of principal and interest on the underlying
loans.
The Federal Home Loan Mortgage Corporation (FHLMC) Certificates are backed by
first mortgage loans on pools of single-family properties. The FHLMC
Certificates are debt securities issued by FHLMC and are guaranteed by FHLMC
as to the full and timely payment of principal and interest on the underlying
loans.
The commercial mortgage securities are rated AA or A by Standard and Poor's.
At March 31, 1999, and December 31, 1998, all mortgage securities were
classified as available-for-sale and as such are carried at their fair value.
The following table presents the amortized cost, gross unrealized gains, gross
unrealized losses and fair value of mortgage securities March 31, 1999 and
December 31, 1998 respectively:
<TABLE>
<CAPTION>
March 31, 1999
(Unaudited) Dec. 31, 1998
------------------ ------------------
<S> <C> <C>
Amortized cost $ 340,939,341 $ 242,142,861
Gross unrealized gains 2,039,686 1,177,638
Gross unrealized losses (1,438,301) (1,425,037)
------------------ ------------------
Fair value $ 341,540,726 $ 241,895,462
================== ==================
</TABLE>
As of March 31, 1999, the Company had commitments to purchase three mortgage
securities with a current face value totaling approximately $31.2 million.
4. Corporate Securities
Corporate securities are classified as held-to-maturity. At March 31, 1999,
and December 31, 1998, the total amortized cost, gross unrealized gains and
fair value of the corporate securities were $5,158,436, $350,514, and
$5,508,950 and $4,673,127, $273,123 and $4,946,250, respectively.
5. Other Investments
Other investments consisted of the following as of March 31, 1999 and December
31, 1998:
<TABLE>
<CAPTION>
March 31, 1999
(Unaudited) Dec. 31, 1998
-------------- -------------
<S> <C> <C>
Investment in Retirement Centers Corporation $ 320,121 $ 349,076
Investment in and advances to real estate limited partnerships 830,365 848,265
------------- -------------
Total $ 1,150,486 $ 1,197,341
============= =============
</TABLE>
<PAGE> - 8 -
The Company's investment in Retirement Centers Corporation (RCC) represents a
95% ownership interest in such corporation. The Company owns 100% of the
non-voting preferred stock of RCC and a third party owns 100% of the common
stock. RCC owns limited partnership interests in five real estate limited
partnerships which operate assisted living centers. The Company accounts for
its investment in RCC on the equity method.
Investments in and advances to real estate limited partnerships consist of
investments in or advances made to four limited partnerships which own the
properties underlying certain mortgage securities owned by the Company. These
investments are not insured or guaranteed but rather are collateralized by the
value of the real estate underlying the real estate owned by such limited
partnerships. They are accounted for under the equity method of accounting.
Certain of the investments have a zero carrying value and, as such, earnings
are recorded only to the extent distributions are received. Such investments
have not been reduced below zero through recognition of allocated investment
losses since the Company has no legal obligation to provide additional cash
support to the underlying property partnerships as it is not the general
partner, nor has it indicated any commitment to provide this support.
6. Repurchase Agreements
As of March 31, 1999, the Company had outstanding balances of $297,073,067
under 29 repurchase agreements with a weighted average borrowing rate of 4.9%
and a weighted average remaining maturity of 4.6 months. As of March 31,
1999, all of the Company's borrowings were fixed-rate term repurchase
agreements with original maturities that range from one to twelve months. As
of December 31, 1998, the Company had outstanding balances of $190,250,084
under 13 repurchase agreements with a weighted average borrowing rate of
5.04%.
At March 31, 1999, the repurchase agreements had the following remaining
maturities:
<TABLE>
<CAPTION>
<S> <C>
Within 30 days $ 47,110,792
30 to 90 days 87,152,000
90 days to one year 162,810,275
-------------
$ 297,073,067
=============
</TABLE>
The repurchase agreements are collateralized by the Company's mortgage
securities with a principal balance of approximately $303.4 million and bear
interest at rates that are LIBOR based.
7. Stockholders' Equity
1997 Stock Option Plan
- ---------------------
The Company has a 1997 Stock Option Plan (the Plan) which authorizes the
granting of options to purchase an aggregate of up to 1,000,000 shares of the
Company's common stock, but not more than 10% of the total outstanding shares
of the Company's common stock. The Plan authorizes the Board of Directors, or
a committee of the Board of Directors, to grant Incentive Stock Options (ISOs)
as defined under section 422 of the Internal Revenue Code, Non-Qualified Stock
Options (NQSOs) and Dividend Equivalent Rights (DERs) to eligible persons,
other than non-employee directors. Non-employee directors are eligible to
receive grants of NQSOs with DERs pursuant to the provisions of the Plan. The
exercise price for any options granted to eligible persons under the Plan
shall not be less than the fair market value of the common stock on the day of
the grant. The options expire if not exercised ten years after the date
granted.
During the quarter ended June 30, 1998, there were 500,000 ISOs granted to buy
common shares at an exercise price of $9.375 per share, of which 125,000 were
vested and exercisable. In addition, there were 20,000 NQSOs issued at an
exercise price of $9.375 per share, of which 5,000 were vested and
exercisable. Prior to this grant, no other options were outstanding and no
additional options were granted through March 31, 1999. As of March 31, 1999,
no options have been exercised.
<PAGE> - 9 -
In addition to options, 500,000 and 20,000 DERs were granted on the ISOs and
NQSOs, respectively, during the quarter ended June 30, 1998, based on the
provisions of the Plan. DERs vest on the same basis as the options and
payments are made on vested DERs only. Vested DERs are paid only to the
extent of ordinary income and not on returns of capital. Dividends paid on
ISOs are charged to stockholders' equity when declared and dividends paid on
NQSOs are charged to earnings when declared. For the three months ended March
31, 1999, the Company recorded a $16,250 charge to stockholders' equity
(included in dividends paid or accrued) associated with the DERs on ISOs and a
$650 charge to earnings associated with DERs on NQSOs. There were no DERs
granted as of March 31, 1998.
The options and related DERs issued were accounted for under the provisions of
SFAS 123, "Accounting for Stock Based Compensation". Because the ISOs were
not issued to officers who are direct employees of the Company, ISOs granted
were accounted for under the option value method and a periodic charge will be
recognized based on the vesting schedule. The charge of options which vested
at date of grant were included as capitalized transaction costs in connection
with the Merger. Management estimated the value of the ISOs at the date of
grant to be approximately $1.88 per share using a Black-Scholes valuation
model, as adjusted for the discounted value of dividends not to be received
under the unvested DERs. In the absence of comparable historical market
information for the Company, management utilized assumptions consistent with
activity of a comparable peer group of companies including an estimated option
life of five years, a 25% volatility rate and a risk-free rate of 5.5% and a
dividend yield of 0% (because of the DERs). During the three months ended
March 31, 1999, as part of operations, the Company reflected an earnings
charge of approximately $58,899, representing the value of ISOs/DERs
granted over their vesting period. NQSOs granted were accounted for using the
intrinsic method and, accordingly, no earnings charge was reflected since the
exercise price was equal to the fair market value of the common stock at the
date of the grant.
Dividends/Distributions
- -----------------------
On March 24, 1999, the Company declared a distribution of $.265 per share for
the quarter ended March 31, 1999, which is to be paid on May 17, 1999, to
shareholders of record as of April 5, 1999. The distribution consists in
part of a dividend paid from earnings and in part of a return of capital.
8. Related Party Transactions
The Advisor manages the operations and investments of the Company and performs
administrative services for the Company. In turn, the Advisor receives a
management fee payable monthly in arrears in an amount equal to 1.10% per
annum of the first $300 million of Stockholders' Equity of the Company, plus
.80% per annum of the portion of Stockholders' Equity of the Company above
$300 million. The Company also pays the Advisor, as incentive compensation
for each fiscal quarter, an amount equal to 20% of the dollar amount by which
the annualized Return on Equity for such fiscal quarter exceeds the amount
necessary to provide an annualized Return on Equity equal to the Ten-Year U.S.
Treasury Rate plus 1%. For the three months ended March 31, 1999, the Advisor
earned a base management fee of $189,822 and incentive compensation of
approximately $45,000.
America First Properties Management Company L.L.C., (the Manager), provides
property management services for certain of the multifamily properties in
which the Company has an interest. The Manager also provided property
management services to certain properties previously associated with the
Predecessor which were acquired in the Merger. The Manager receives a
management fee equal to a stated percentage of the gross revenues generated by
the properties under management, ranging from 4.5% to 5% of gross revenues.
Such fees paid by the Company for the three months ended March 31, 1999,
amounted to $73,108 and such fees paid by the Predecessor for the three
months ended March 31, 1998, amounted to $45,527.
Prior to the Merger Date, the general partner of the Predecessor (AFCA 3) was
entitled to an administrative fee of .35% per annum of the outstanding amount
of investments of the Predecessor to be paid by the Predecessor to the extent
such amount is not paid by property owners. AFCA 3 earned administrative fees
of $53,617 for the three months ended March 31, 1998 of which $38,659 was paid
by the Predecessor and the remainder was paid by owners of real properties
financed by the Predecessor.
<PAGE> - 10 -
Prior to the Merger Date, substantially all of Predecessor's general and
administrative expenses and certain costs capitalized by the Predecessor were
paid by AFCA 3 or an affiliate and reimbursed by the Predecessor. The amount
of such expenses reimbursed to AFCA 3 or an affiliate was $165,439 for the
three months ended March 31, 1998.
9. Subsequent Events
During April, 1999, the Company acquired three FNMA whole-pool mortgage-backed
certificates with an aggregate remaining principal balance of $31.2 million
(FNMA Certificates). The FNMA Certificates bear interest at rates ranging
from 7.06% to 7.27% per annum. The total purchase price paid for the FNMA
Certificates, including accrued interest, was approximately $32.2 million.
The Company also acquired four private label floating rate securities with an
aggregate remaining principal balance of $43.1 million. The private label
floating rate securities bear interest at rates ranging from 5.71% to 5.89%
per annum. The total purchase price paid for the private label floating rate
securities, including accrued interest, was approximately $43.2 million. The
acquisitions were financed in part with the proceeds of various LIBOR-based
repurchase agreements aggregating $73.8 million and the remainder from cash
reserves of the Company.
10. Pro Forma Financial Statements (Unaudited)
The following summary pro forma information includes the effects of the
Merger as if the Merger had been completed on January 1, 1998.
Pro Forma Statement of Operations
<TABLE>
<CAPTION>
For the Three
Months Ended
March 31, 1998
---------------
<S> <C>
Mortgage securities income $ 986,379
Interest income on temporary cash investments 214,082
---------------
Total interest income 1,200,461
Income from other investments 201,662
General and administrative expenses (1) 675,417
---------------
Net income $ 726,706
===============
Net income, basic and fully diluted, per share $ .08
===============
Weighted average number of shares outstanding 9,035,084
</TABLE>
(1) Excludes transaction costs incurred by Prep Fund 2 and Pension Fund.
The pro forma financial information is not necessarily indicative of what the
consolidated results of operations of the Company would have been as of and
for the period indicated, nor does it purport to represent the results of
operations for future periods.
<PAGE> - 11 -
Item 2.
AMERICA FIRST MORTGAGE INVESTMENTS, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
General
The Company was incorporated in Maryland on July 24, 1997, but did not begin
operations until April 10, 1998.
On April 10, 1998, the Company and three partnerships: America First
Participating/Preferred Equity Mortgage Fund Limited Partnership (Prep Fund
1), America First Prep Fund 2 Limited Partnership (Prep Fund 2), America First
Prep Fund 2 Pension Series Limited Partnership (Pension Fund), consummated a
merger transaction whereby their pre-existing net assets and operations or
majority interest in the pre-existing partnership were contributed to the
Company in exchange for 9,035,084 shares of the Company's common stock. For
financial accounting purposes, Prep Fund 1, the largest of the three
Partnerships, was considered the Predecessor entity (the Predecessor) and its
historical operating results are presented in the financial statements
contained herein. The Merger was accounted for using the purchase method of
accounting in accordance with generally accepted accounting principles. Prep
Fund 1 was deemed to be the acquirer of the other Partnerships under the
purchase method. Accordingly, the Merger resulted, for financial accounting
purposes, in the effective purchase by Prep Fund 1 of all the Beneficial Unit
Certificates (BUCs) of Prep Fund 2 and approximately 99% (98% on the date of
the Merger and 1% since the Merger) of the BUCs of Pension Fund. As the
surviving entity for financial accounting purposes, the assets and liabilities
of Prep Fund 1 were recorded by the Company at their historical cost and the
assets and liabilities of Prep Fund 2 and Pension Fund were adjusted to fair
value. The excess of the fair value of stock issued over the fair value of
net assets acquired has been recorded as goodwill in the accompanying balance
sheet of the Company.
Concurrently with the Merger, the Company entered into an Advisory Agreement
with America First Mortgage Advisory Corporation (the "Advisor") and adopted
an investment policy which significantly differed from that pursued by the
predecessor partnerships. This strategy includes leveraged investing in
adjustable rate mortgage securities and mortgage loans. The Company began
implementing this investment strategy in the second quarter of 1998. During
the period from the consummation of the Merger through March 31, 1999, the
Company purchased 29 positions in mortgage backed securities for an aggregate
purchase cost of approximately $297.1 million (16 positions for an aggregate
purchase cost of approximately $64.6 million for the three months ended March
31, 1999).
The Company has elected to become subject to tax as a real estate investment
trust (REIT) under the Code beginning with its 1998 taxable year and, as such,
anticipates distributing annually at least 95% of its taxable income, subject
to certain adjustments. Generally, cash for such distributions is expected to
be largely generated from the Company's operations, although the Company may
borrow funds to make distributions. Further, as part of the Merger
transaction, the Company has committed to make distributions in the first year
following the Merger of at least $1.06 per common share, to be paid in four
equal quarterly installments, which is expected to significantly exceed
taxable income. Accordingly, a portion of distributions received by
shareholders in 1998 and 1999 will consist in part of a dividend paid from
earnings and in part of a cash merger payment representing non-taxable return
of capital. There is no commitment by the Company to distribute amounts in
excess of taxable income beyond the first year of operations. For tax
purposes, the dividend declared on December 15, 1998, and paid on February 19,
1999, will be treated as a 1999 event for shareholders.
The Company's operations for any period may be affected by a number of factors
including the investment assets held, general economic conditions affecting
underlying borrowers and, most significantly, factors which affect the
interest rate market. Interest rates are highly sensitive to many factors,
including governmental monetary and tax policies, domestic and international
economic and political considerations, and other factors beyond the control of
the Company.
The Merger, other related transactions and on-going implementation of the
change in investment strategy will materially impact the Company's future
operations as compared to those of the Predecessor. Accordingly, the
<PAGE> - 12
currently reported financial information is not necessarily indicative of the
Company's future operating results or financial condition.
Liquidity and Capital Resources
The Company requires capital to fund its investment strategy and pay its
operating expenses. The Company's capital sources upon consummation of the
Merger include cash flow from operations and borrowings under repurchase
agreements.
Since the Merger, the Company has primarily financed its mortgage investments
through repurchase agreements totaling $297.1 million with a weighted average
borrowing rate of 4.9% at March 31, 1999. The repurchase agreements have
balances of between $639,000 and $48.8 million. These arrangements have
original terms to maturity ranging from one month to twelve months and annual
interest rates based on LIBOR. To date, the Company has not had any
significant margin calls on its repurchase agreements.
The Company believes it has adequate financial resources to meet its
obligations as they come due and fund committed dividends as well as to
actively pursue its new investment policy.
Results of Operations
Three Month Period Ended March 31, 1999 Compared to 1998
During the three months ended March 31, 1999, total interest income for the
Company increased $4.1 million as compared to total interest income of the
Predecessor for the three months ended March 31, 1998. This increase is a
result of the interest generated by mortgage investments acquired in the
merger from Prep Fund 2 and Pension Fund in the Merger as well as the
acquisition of additional mortgage investments during 1998 and 1999.
The increase in the Company's interest expense on borrowed funds during the
three months ended March 31, 1999 compared to that of the Predecessor for
the three months ended March 31, 1998, relates to interest expense on
repurchase arrangements used to fund additional investments.
Income from other investments increased as a result of income generated by
other investments acquired from Prep Fund 2 and Pension Fund.
General and administrative expenses for the Company for the three months ended
March 31, 1999 increased $194,900 as compared to that of the Predecessor for
the three months ended March 31, 1998 as a result of the increased scope of
operations resulting from the Merger.
Year 2000
The Company does not own or operate its own computer system and owns no
business or other equipment. However, the operation of the Company's business
relies on the computer system and other equipment maintained by America First
Companies L.L.C., the principal shareholder of the Company's Advisor ("America
First"). In addition, the Company has business relationships with a number of
third parties whose ability to perform their obligations to the Company depend
on such systems and equipment. Some or all of these systems and equipment may
be affected by the inability of certain computer programs and embedded
circuitry to correctly recognize dates occurring after December 31, 1999.
America First has adopted a plan to deal with this so-called "Year 2000
problem" with respect to its information technology ("IT") systems, non-IT
systems and third party business relationships.
State of Readiness
The IT system maintained by America First consists primarily of personal
computers, most of which are connected by a local area network. All
accounting and other record keeping functions relating to the Company that are
conducted in house by America First are performed on this PC-LAN system.
America First does not own or operate any "mainframe" computer systems. The
PC-LAN system runs software programs that America First believes are
compatible with dates after December 31, 1999. America First has engaged a
third party computer consulting firm to review and test its PC-LAN system to
ensure that it will function correctly after that date and expects that this
process, along with any necessary remediation, will be completed by mid-1999.
America First believes any Year 2000 problems relating to its IT systems will
<PAGE> - 13 -
be resolved without significant operational difficulties. However, there can
be no assurance that testing will discover all potential Year 2000 problems or
that it will not reveal unanticipated material problems with the America First
IT systems that will need to be resolved.
Non-IT systems include embedded circuitry such as microcontrollers found in
telephone equipment, security and alarm systems, copiers, fax machines, mail
room equipment, heating and air conditioning systems and other infrastructure
systems that are used by America First in connection with the operation of the
Company's business. America First is reviewing its non-IT systems along with
the providers that service and maintain these systems, with initial emphasis
being placed on those, such as telephone systems, which have been identified
as necessary to America First's ability to conduct the operation of the
Company's business activities. America First expects that any necessary
modification or replacement of such "mission critical" systems will be
accomplished by mid-1999.
The Company has no control over the remediation efforts of third parties with
which it has material business relationships and the failure of certain of
these third parties to successfully remediate their Year 2000 issues could
have a material adverse effect on the Company. Accordingly, America First has
undertaken the process of contacting each such third party to determine the
state of their readiness for Year 2000. Such parties include, but are not
limited to, the obligors on the Company's mortgage securities, the Company's
transfer and paying agent and the financial institutions with which the
Company maintains accounts. America First has received initial assurances
from certain of these third parties that their ability to perform their
obligations to the Company are not expected to be materially adversely
affected by the Year 2000 problem. America First will continue to request
updated information from these material third parties in order to assess their
Year 2000 readiness. If a material third party vendor is unable to provide
assurance to America First that it is, or will be, ready for Year 2000,
America First intends to seek an alternative vendor to the extent practical.
Costs
All of the IT systems and non-IT systems used to conduct the Company's
business operations are owned or leased by America First. The
Company will bear its proportionate share of the costs associated with
surveying the Year 2000 readiness of third parties and with the
identification, remediation and testing of America First's IT and non-IT
systems. However, the Company's share of the costs associated with these
activities is expected to be insignificant. Accordingly, the costs
associated with addressing the Company's Year 2000 issues are not expected to
have a material effect on the Company's results of operations, financial
position or cash flow.
Year 2000 Risks
The Company's Advisor believes that the most reasonably likely worst-case
scenario will be that one or more of the third parties with which it has a
material business relationship will not have successfully dealt with its Year
2000 issues and, as a result, is unable to provide services or otherwise
perform its obligations to the Company. For example, if an obligor on the
Company's mortgage securities encounters a serious and unexpected Year 2000
issue, it may be unable to make a timely payment of principal and interest to
the Company. This, in turn, could cause a delay in dividend payments to
shareholders. In addition, if the Company's transfer and paying agent
experiences Year 2000-related difficulties, it may cause delays in making
dividend payments to shareholders or in the processing of trading of shares.
It is also possible that one or more of the IT and non-IT systems of America
First will not function correctly, and that such problems may make it
difficult to conduct necessary accounting and other record keeping functions
for the Company. However, based on currently available information, the
Company's Advisor does not believe that there will be any protracted systemic
failures of the IT or non-IT systems utilized by America First in connection
with the operation of the Company's business.
Contingency Plans
Because of the progress which America First has made toward achieving Year
2000 readiness, the Company has not made any specific contingency plans with
respect to the IT and non-IT systems of America First. In the event of a Year
2000 problem with its IT system, America First may be required to manually
<PAGE> - 14 -
perform certain accounting and other record-keeping functions. America First
plans to terminate the Company's relationships with material third party
service providers that are not able to represent to America First that they
will be able to successfully resolve their material Year 2000 issues in a
timely manner. However, the Company will not be able to readily terminate its
relationships with all third parties, such as the obligors on its mortgage
securities, who may experience Year 2000 problems. The Company has no
specific contingency plans for dealing with Year 2000 problems experienced
with these third parties.
All forecasts, estimates or other statements in this report relating to the
Year 2000 readiness of the Company and its affiliates are based on
information and assumptions about future events. Such "forward-looking
statements" are subject to various known and unknown risks and uncertainties
that may cause actual events to differ from such statements. Important
factors upon which the Company's Year 2000 forward-looking statements are
based include, but are not limited to, (a) the belief of America First that
the software used in IT systems is already able to correctly read and
interpret dates after December 31, 1999 and will require little or any
remediation; (b) the ability to identify, repair or replace mission critical
non-IT equipment in a timely manner, (c) third parties' remediation of their
internal systems to be Year 2000 ready and their willingness to test their
systems interfaces with those of America First, (d) no third party system
failures causing material disruption of telecommunications, data transmission,
payment networks, government services, utilities or other infrastructure, (e)
no unexpected failures by third parties with which the Company has a
material business relationship and (f) no material undiscovered flaws in
America First's Year 2000 testing process.
Other Matters
The Company at all times intends to conduct its business so as to not become
regulated as an investment company under the Investment Company Act of 1940.
If the Company were to become regulated as an investment company, then, among
other things, the Company's ability to use leverage would be substantially
reduced. The Investment Company Act exempts entities that are "primarily
engaged in the business of purchasing or otherwise acquiring mortgages and
other liens on and interests in real estate" (i.e. "Qualifying Interests").
Under the current interpretation of the staff of the SEC, in order to qualify
for this exemption, the Company must maintain at least 55% of its assets
directly in Qualifying Interests. In addition, unless certain mortgage
securities represent an undivided interest in the entire pool backing such
mortgage securities (i.e. "whole pool" mortgage securities), such mortgage
securities may be treated as securities separate from the underlying mortgage
loan, thus, may not be considered Qualifying Interests for purposes of the 55%
exemption requirement. Accordingly, the Company monitors its compliance with
this requirement in order to maintain its exempt status. As of March 31,
1999, the Company determined that it is in and has maintained compliance with
this requirement.
Forward Looking Statements
When used in this Form 10-Q, in future SEC filings or in press releases or
other written or oral communications, the words or phrases "will likely
result", "are expected to", "will continue", "is anticipated", "estimate",
"project" or similar expressions are intended to identify "forward looking
statements" within the meaning of the Private Securities Litigation Reform
Act of 1995. The Company cautions that such forward looking statements
speak only as of the date made and that various factors including regional
and national economic conditions, changes in levels of market interest
rates, credit and other risks of lending and investment activities, and
competitive and regulatory factors could affect the Company's financial
performance and could cause actual results for future periods to differ
materially from those anticipated or projected.
The Company does not undertake and specifically disclaims any obligation to
update any forward-looking statements to reflect events or circumstances after
the date of such statements.
Item 3. Quantitative and Qualitative Disclosures About Market Risk.
There have been no material changes in the Company's market risk since
December 31, 1998.
<PAGE> - 15 -
PART II. OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
2.1 Agreement and Plan of Merger by and among the Registrant,
America First Participating/Preferred Equity Mortgage Fund
Limited Partnership, America First Prep Fund 2 Limited
Partnership, America First Prep Fund 2 Pension Series
Limited Partnership and certain other parties, dated as of
July 29, 1997 (incorporated herein by reference to Exhibit
2.1 of the Registration Statement on Form S-4 dated
February 12, 1998, filed by the Registrant pursuant to the
Securities Act of 1933 (Commission File No. 333-46179)).
3.1 Amended and Restated Articles of Incorporation of the
Registrant (incorporated herein by reference from Form 8-K
dated April 10, 1998, filed by the Registrant pursuant to
the Securities Exchange Act of 1934 (Commission File No.
1-13991)).
3.2 Amended and Restated Bylaws of the Registrant (incorporated
herein by reference from Form 8-K dated April 10, 1998,
filed by the Registrant pursuant to the Securities Exchange
Act of 1934 (Commission File No. 1-13991)).
3.3 Agreement of Limited Partnership, dated May 25, 1988, of
America First Prep Fund 2 Pension Series Limited
Partnership (incorporated herein by reference to Form
10-K, dated December 31, 1988, filed with the
Securities and Exchange Commission (File No. 33-13407)).
4.1 Specimen of Common Stock Certificate of the Company.
(incorporated herein by reference to Exhibit 4.1 of the
Registration Statement on Form S-4 dated February 12, 1998,
filed by the Registrant pursuant to the Securities Act of
1933 (Commission File No. 333-46179)).
10.1 Advisory Agreement, dated April 9, 1998, by and between
the Company and the Advisor (incorporated herein by
reference from Form 8-K dated April 10, 1998 filed by
the Company pursuant to the Securities Exchange Act of
1934 (Commission File No. 1-13991)).
10.2 Employment Agreement of Stewart Zimmerman (incorporated
herein by reference to Exhibit 10.2 of the Registration
Statement on Form S-4 dated February 12, 1998, filed by
the Registrant pursuant to the Securities Act of 1933
(Commission File No. 333-46179)).
10.3 Employment Agreement of William S. Gorin (incorporated
herein by reference to Exhibit 10.3 of the Registration
Statement on Form S-4 dated February 12, 1998, filed by
the Registrant pursuant to the Securities Act of 1933
(Commission File No. 333-46179)).
10.4 Employment Agreement of Ronald A. Freydberg (incorporated
herein by reference to Exhibit 10.4 of the Registration
Statement on Form S-4 dated February 12, 1998, filed by
the Registrant pursuant to the Securities Act of 1933
(Commission File No. 333-46179)).
10.5 1997 Stock Option Plan of the Company (incorporated herein
by reference from Form 8-K dated April 10, 1998, filed by
the Company pursuant to the Securities Exchange Act of
1934 (Commission File No. 1-13991)).
10.6 Form of Dividend Reinvestment Plan (incorporated herein by
reference to Appendix C of the Registration Statement on
Form S-4 dated February 12, 1998, filed by the Registrant
pursuant to the Securities Act of 1933 (Commission File No.
333-46179)).
<PAGE> - 16 -
21. Subsidiaries of the Registrant
27. Financial Data Schedule
(b) Reports on Form 8-K
The Registrant filed the following reports on Form 8-K during
the quarter for which this report is filed.
Item Reported Financial Statements Filed Date of Report
2. Acquisition No January 25, 1999
or Disposition
of Assets
<PAGE> - 17 -
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
Dated: May 12, 1999 AMERICA FIRST MORTGAGE INVESTMENTS, INC.
By /s/ Gary Thompson
Gary Thompson
Authorized Officer and Chief Financial Officer
<PAGE> - 18 -
EXHIBIT 21
SUBSIDIARIES OF THE REGISTRANT
America First Prep Fund 2 Pension Series Limited Partnership
America First Capital Associates Limited Partnership Six
<PAGE> - 19 -
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-END> MAR-31-1999
<CASH> 11,205,366
<SECURITIES> 348,762,376
<RECEIVABLES> 2,303,054
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 13,508,420
<PP&E> 0
<DEPRECIATION> 0
<TOTAL-ASSETS> 371,397,594
<CURRENT-LIABILITIES> 300,794,640
<BONDS> 0
<COMMON> 90,551
0
0
<OTHER-SE> 70,481,386
<TOTAL-LIABILITY-AND-EQUITY> 371,397,594
<SALES> 0
<TOTAL-REVENUES> 1,869,081
<CGS> 0
<TOTAL-COSTS> 0
<OTHER-EXPENSES> 185,163
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> 1,252,398
<INCOME-TAX> 0
<INCOME-CONTINUING> 0
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 1,252,398
<EPS-PRIMARY> 0
<EPS-DILUTED> .14
</TABLE>
