FORM 10-K
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
X Annual report pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934
For the year ended December 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)
Securities Registered Pursuant to Section 12(b) of the Act:
Title of Each Class Name of Exchange on which Registered
---------------------------- ------------------------------------
Common Stock, $.01 par value New York Stock Exchange
Securities Registered Pursuant to Section 12(g) of the Act:
None
<PAGE> -i-
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 of Regulation S-K (229.405 of the chapter) 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]
The aggregate market value of the common stock held by non-affiliates of the
Registrant on March 10, 2000, based on the final sales price per share as
reported in The Wall Street Journal on March 13, 2000, was $42,576,956.
The number of shares of the Registrant's common stock outstanding on
March 10, 2000, was 8,917,842.
DOCUMENTS INCORPORATED BY REFERENCE
Definitive proxy statement relating to the Company's 2000 Annual Meeting of
Stockholders to be filed hereafter (incorporated into Part III hereof).
<PAGE> - ii -
TABLE OF CONTENTS
Page
PART I
Item 1. Business. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1
Item 2. Properties. . . . . . . . . . . . . . . . . . . . . . . . . . . . . 10
Item 3. Legal Proceedings . . . . . . . . . . . . . . . . . . . . . . . . . 10
Item 4. Submission of Matters to a Vote of Security Holders . . . . . . . . 10
PART II
Item 5. Market for Registrant's Common Equity and
Related Stockholder Matters . . . . . . . . . . . . . . . . . . . . 12
Item 6. Selected Financial Data . . . . . . . . . . . . . . . . . . . . . . 12
Item 7. Management's Discussion and Analysis of Financial Condition and
Results of Operations . . . . . . . . . . . . . . . . . . . . . . . 14
Item 7A. Quantitative and Qualitative Disclosures About Market Risk. . . . . 17
Item 8. Financial Statements and Supplementary Data . . . . . . . . . . . . 20
Item 9. Changes in and Disagreements With Accountants on Accounting and
Financial Disclosure. . . . . . . . . . . . . . . . . . . . . . . . 38
PART III
Item 10. Directors and Executive Officers of the Registrant . . . . . . . . 38
Item 11. Executive Compensation . . . . . . . . . . . . . . . . . . . . . . 38
Item 12. Security Ownership of Certain Beneficial Owners and Management . . 38
Item 13. Certain Relationships and Related Transactions . . . . . . . . . . 38
PART IV
Item 14. Exhibits, Financial Statement Schedules and Reports on Form 8-K. . 38
SIGNATURES . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 40
<PAGE> - iii -
PART I
Item 1. Business.
THE COMPANY
America First Mortgage Investments, Inc. (the "Company") is primarily engaged
in the business of investing in mortgage-backed securities and mortgages. Its
principal business objective is to generate net income for distribution to its
stockholders resulting from the spread between the interest income it earns on
its investments and the costs of capital to finance its investments. The
Company's business and investment strategy is discussed in more detail below.
The Company has elected to be taxed as a real estate investment trust (a
"REIT"). One of the requirements of maintaining its status as a REIT is that
the Company distribute at least 95% of its annual taxable net income to its
stockholders, subject to certain adjustments. For additional information, one
should refer to the information under "Certain Federal Income Tax
Considerations," below.
The Company was incorporated in Maryland on July 24, 1997, and began business
operations on April 10, 1998, when the Company consummated a merger
transaction (the "Merger") with America First Participating/Preferred Equity
Mortgage Fund Limited Partnership ("PREP Fund 1" or the "Predecessor"),
America First PREP Fund 2 Limited Partnership ("PREP Fund 2") and America
First PREP Fund 2 Pension Series Limited Partnership ("Pension Fund")
(collectively referred to as the "PREP Funds"). As a result of the Merger,
PREP Fund 1 and PREP Fund 2 were merged into the Company and Pension Fund
became a partnership subsidiary of the Company. Pension Fund was liquidated
and dissolved in December, 1999, and, as a result, the Company acquired
approximately 99% of the assets of Pension Fund. The remaining assets,
consisting solely of cash, were distributed to the remaining holders of
Pension Fund BUCs. The Company issued a total of 9,035,084 shares of its
common stock to former partners of PREP Fund 1, PREP Fund 2 and Pension Fund.
Upon completion of the Merger, the Company began implementing the investment
strategy described below. The Company's investment strategy differs from that
of the PREP Funds.
The Company is an externally managed REIT. As such it has no employees of its
own. The Company has entered into an Advisory Agreement with America First
Mortgage Advisory Corporation (the "Advisor"), which is a subsidiary of
America First Companies L.L.C. ("America First"). Under the Advisory
Agreement, the Advisor provides day-to-day management of the Company's
operations. The executive officers of the Company are employees of America
First and are officers of the Advisor. More information relating to the
Company's management is discussed under "Executive Officers of the Company" in
Item 4 below and in the Company's Proxy Statement relating to its 2000 Annual
Meeting of Stockholders.
BUSINESS AND INVESTMENT STRATEGY
The Company is engaged in the business of investing in mortgages and
mortgage-backed securities acquired in the secondary market from investment
banks, savings and loans, banks and other mortgage banking institutions. The
Company is not in the business of originating mortgage loans or providing
other types of financing to the owners of real estate. While the Company has
the authority to hold other types of investments, including those it inherited
from the PREP Funds, its principal investment strategy is to acquire mortgages
and mortgage-backed securities financed through the use of leverage. See
"Financing Strategy," below. During the period from the consummation of the
Merger through December 31, 1999, the Company purchased mortgage securities
with a face value at the time of purchase of approximately $571.2 million
(mortgage securities with a face value of approximately $338.7 million were
purchased during the twelve months ended December 31, 1999).
The Company's investment policy requires 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 the Government National Mortgage Association ("GNMA"), the
Federal National Mortgage Association ("FNMA") or the 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
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be of equivalent credit quality by the Advisor with approval from the
Company's investment committee; (ii) direct investment (mezzanine or equity)
in multifamily apartment properties; (iii) investments in limited
partnerships, equities, real estate investment trusts or closed-end funds
owning a portfolio of mortgage and/or real estate assets; or (iv) other
corporate debt or equity securities or government fixed-income instruments
that provide increased call protection relative to the Company's mortgage
securities.
At December 31, 1999, approximately 79% of the Company's assets consisted of
mortgage-backed securities insured or guaranteed by GNMA, FNMA or FHLMC
("Agency Certificates") backed by single-family mortgage loans. Remaining
assets at that date consisted of equity interests in limited partnerships
owning apartment properties, non-voting preferred stock in a corporation
owning an interest in a retirement living facility and certain corporate debt
and equity securities. The corporation which owns a retirement living
facility is in the process of divesting itself of such facility and plans to
structure a like-kind-exchange transaction in order to defer recognition of a
gain on the sale. In addition, the Company is considering divesting itself of
certain of these other assets and will use net proceeds from the sale of these
assets to acquire additional assets which are consistent with its investment
strategy.
The Company intends that at least 66% of its mortgage assets be
adjustable-rate mortgages or mortgage-backed securities ("ARMs"). At December
31, 1999, approximately 93% of the Company's mortgage assets were ARMs.
Included within the Company's ARMs portfolio are hybrid ARMs which have an
interest rate that is fixed for an initial period of time, generally three to
five years, which then converts to an adjustable rate for the balance of the
term of the loan. Many ARMs are indexed to the one-year constant maturity
treasury ("CMT") rate with interest rates that are reset annually. Other ARMs
are indexed to the London Interbank Offered Rate ("LIBOR"), the six-month
certificate of deposit rate, the six-month CMT rate or the 11th District Cost
of Funds Index. ARMs that are indexed to the CMT are generally subject to a
limitation on the amount of the annual interest rate change. This limit is
usually 1% or 2% per year. Generally, all ARMS have lifetime limits on
interest rate increases over the initial interest rate. In general, such
lifetime interest rate caps do not exceed 600 basis points over the initial
interest rate.
While the Company's principal investment strategy, as described above, is to
acquire mortgages and mortgage-backed securities financed through the use of
leverage, upon consummation of the Merger, the Company acquired all of the
assets of the PREP Funds. The PREP Funds were in a different business from
that of the Company. The PREP Funds were formed to provide construction and
permanent financing for apartment complexes and retirement living facilities.
The PREP Funds provided this financing by making equity investments as a
limited partner in the limited partnerships that owned these apartment
complexes and retirement living facilities and by making loans to such limited
partnerships that were secured by first mortgages on these apartment
complexes. In order to reduce the risk of these investments, each of the
loans originated by the PREP Funds was made in the form of a mortgage-backed
security that was insured or guaranteed as to principal and interest by an
agency of the U.S. government, such as FHA or GNMA. In addition, the PREP
Funds acquired mortgage-backed securities backed by pools of single-family
mortgages that were insured or guaranteed by GNMA, FNMA or FHLMC.
FINANCING STRATEGY
The Company intends to finance the acquisition of additional mortgages and
mortgage-backed securities by borrowing against its portfolio of mortgage
assets and investing the proceeds of the borrowings in additional mortgage
assets. The Company does not currently intend to publicly offer additional
shares of its common stock or other debt or equity securities. When fully
invested, the Company plans to maintain an equity-to-assets ratio of
approximately 8% to 10%. The equity-to-assets ratio was approximately 13% as
of December 31, 1999.
The Company's borrowings are financed primarily at short-term borrowing
rates through the utilization of repurchase agreements. A repurchase
agreement, although structured as a sale and repurchase obligation, operates
as a financing under which the Company effectively pledges its
mortgage assets as collateral to secure a short-term loan which is equal in
value to a specified percentage of the market value of the pledged collateral.
<PAGE> - 2 -
Repurchase agreements take the form of a sale of the pledged collateral to a
lender at an agreed upon price in return for such lender's simultaneous
agreement to resell the same securities back to the borrower at a future date
(the maturity of the borrowing) at a higher price. The price difference is
the cost of borrowing under these agreements. The Company will retain
beneficial ownership of the pledged collateral, including the right to
distributions. At the maturity of a repurchase agreement, the Company will be
required to repay the loan and concurrently will receive back its pledged
collateral from the lender or will rollover such agreement at the then
prevailing financing rate. The repurchase agreements may require the Company
to pledge additional assets to the lender in the event the market value of any
existing pledged collateral declines. To date, the Company has not had any
significant margin calls on its repurchase agreements that were related to a
decrease in the market value of its collateral.
Repurchase agreements tend to be short-term in nature. Should the providers
of the repurchase agreements decide not to renew, the Company must either
refinance these obligations prior to maturity or be in a position to retire
the obligations. If, during the term of a repurchase agreement, a lender
should file for bankruptcy, the Company might experience difficulty recovering
its pledged assets and may have an unsecured claim against the lender's assets.
To reduce its exposure, the Company enters into repurchase agreements only
with financially sound institutions whose holding or parent company's
long-term debt rating is single A or better as determined by both Standard and
Poor's and Moody's, where applicable. If this minimum criterion is not met,
then the Company will not enter into repurchase agreements with such
counterparty without the specific approval of its Board of Directors. In the
event an existing counterparty is downgraded below single A, the Company will
seek Board approval before entering into additional repurchase agreements with
such counterparty. In addition, once the Company is fully invested, it
intends to enter into repurchase agreements with at least four lenders with a
maximum exposure to each lender of three times the Company's shareholders'
equity. As of December 31, 1999, the Company had repurchase agreements with
nine lenders with a maximum exposure to any one lender of not more than 1.8
times the Company's shareholders' equity.
RISK FACTORS
The results of the Company's operations are affected by various factors, many
of which are beyond the control of the Company. The results of the Company's
operations depend on, among other things, the level of net interest income
generated by the Company's mortgage assets, the market value of its assets and
the supply of and demand for such assets. The Company's net interest income
varies primarily as a result of changes in short-term interest rates,
borrowing costs and prepayment rates, the behavior of which involves various
risks and uncertainties as set forth below. Prepayment rates, interest rates
and borrowing costs depend on the specific type of asset, conditions in
financial markets, competition and other factors, none of which can be
predicted with any certainty. Since changes in interest rates may
significantly affect the Company's activities, the operating results of the
Company depend, in large part, upon the ability of the Company to effectively
manage its interest rate and prepayment risks while maintaining its status as
a REIT.
INTEREST RATE RISKS
The Company has financed the acquisition of additional mortgage assets through
borrowings under numerous repurchase agreements. As a result, the Company is
exposed to the following principal interest rate risks:
The cost of the Company's borrowings under its repurchase agreements is
based on the prevailing short-term market rates that adjust over periods
of one to 12 months. However, a substantial majority of the Company's
mortgage assets have either fixed interest rates or interest rates that
reset only every six to 12 months. At December 31, 1999, the repricing
gap between the Company's assets and obligations was approximately 11
months.
There is no limitation on the interest rate that the Company could have
to pay in order to borrow money to finance its mortgage assets. However,
the ability to raise interest rates on its assets is limited, either
because such rates are fixed for the life of the asset or, in the case of
ARMs, the ability to raise interest rates is limited on both an annual
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basis and over the term of the ARM. Generally, interest rates on ARMs
can change a maximum of 100 or 200 basis points per annum and only up to
600 basis points from the initial interest rate over the term of the ARM.
The cost of the Company's borrowings is generally based on LIBOR while
interest rates on its ARM portfolio are primarily based on one-year CMT
rates. Therefore, any increase in the LIBOR relative to the CMT rates
will result in an increase in the Company's borrowing cost that is not
matched by a corresponding increase in the interest earnings on its ARM
portfolio.
In any of these cases, increasing short-term interest rates may cause the
Company's financing costs to increase faster than it is able to increase
interest rates on its ARMs. As a result, the net interest margin earned by
the Company will be reduced or eliminated during such periods. Accordingly,
in a period of increasing interest rates, the Company could experience a
decrease in net interest income or a net loss because the interest rates on
borrowings could adjust faster than the interest rates on the Company's ARMs.
Such a decrease in the Company's net interest income could negatively impact
the level of dividend distributions made by the Company and reduce the market
price of its common stock.
In order to mitigate its interest rate risks, the Company intends to have a
substantial majority of its mortgage assets consist of ARMs rather than fixed
rate mortgages. This allows the Company to increase its interest income
during periods of rising interest rates. While the lag in its ability to reset
interest rates on its ARMs portfolio relative to changes in the interest rates
it pays on its liabilities and the annual and lifetime limitations on
adjustments to interest rates on ARMs can negatively affect earnings over the
short term, the ability to make interest rate adjustments on the ARMs does
help mitigate this risk over a longer time period.
The Company's policy is to maintain an asset/borrowings repricing gap (as
measured by the average time period to assets repricing, less the average time
period to liability repricing) at less than 24 months when its leverage ratio
is less than 5 to 1 and at less than 18 months when its leverage ratio is
greater than 5 to 1. At December 31, 1999, the Company's leverage ratio
equaled 7.76 to 1 and the repricing gap stood at approximately 11 months. For
purposes of this analysis, equity assets and zero coupon Treasury securities
and assets of comparable duration purchased as a hedge against prepayments are
excluded from the calculation.
As discussed above, the relationship between LIBOR and the CMT can change over
time. At December 31, 1999, the one-year LIBOR was 6.5% and the one-year CMT
was 5.96%. However, as of December 31, 1999, the average interest rate on the
Company's CMT based ARMs was 195 basis points over the CMT. Therefore, the
LIBOR index would have to increase by approximately 65 basis points relative
to the CMT in order to eliminate the positive spread between the yield on
these ARMs and the Company's cost of borrowing. During 1999, the largest
differential between the one-year LIBOR and one-year CMT was 90 basis points
and the average differential was 64 basis points.
Lifetime interest rate caps on ARMs could impact the earnings on the Company's
assets. However, based on the assets available in the current market, such an
impact should only occur if the one-month LIBOR rate increased to
approximately 10%. This rate was 5.83% at December 31, 1999. Periodic caps
could also have an impact on the earnings of the Company's assets. At
December 31, 1999, approximately 44% of the Company's adjustable rate
mortgages and 37% of the total assets had a 1% periodic cap. The impact of
periodic caps, if any, would be slight since the weighted average coupon of
these assets equals 7.51% (175 basis points greater than the one-year CMT.)
The Company may attempt to partially offset the potential negative effect of
lifetime and periodic maximum interest rates on its ARMs through the purchase
of interest rate caps on its liabilities. An interest rate cap agreement is a
contractual agreement whereby the Company pays a fee in exchange for the right
to receive payments equal to the difference between a contractually specified
interest rate and a periodically determined future interest rate times a
specified principal, or notional amount. Such interest rate cap agreements
are subject to the risk that the other party to the agreement will not be able
to perform its obligations. Although the Company would seek to enter interest
rate agreements only with financially sound institutions and to monitor the
financial strength of such institutions on a periodic basis, no assurance can
be given that the Company can avoid such third party risks. As of December
31, 1999, the Company had not utilized this hedging strategy.
<PAGE> - 4 -
As a part of its hedging strategy, the Company may engage in limited amounts
of the buying and selling of mortgage derivative securities or other
derivative products including interest rate swap agreements, financial futures
contracts and options. Although the Company and its Predecessor have not
historically used such instruments, it is not precluded from doing so. In the
future, management anticipates using such instruments only as hedges to manage
interest rate risk. Management does not anticipate entering into derivatives
for speculative or trading purposes. Any such strategies will be selected by
the Advisor and approved by the Company's investment committee. While the
Company may hedge certain risks associated with interest rate increases, no
hedging strategy can insulate the Company completely from interest rate
risks. In addition, there can be no assurance that any such hedging
activities will have the desired impact on the Company's results of operations
or financial condition. Hedging typically involves costs, including
transaction costs, which increase dramatically as the period covered by the
hedge increases and which also increase during periods of rising or volatile
interest rates. Such hedging costs may cause the Company to conclude that a
particular hedging transaction is not appropriate for the Company, thereby
affecting the Company's ability to mitigate interest rate risk. As of
December 31, 1999, the Company had not entered into any interest rate hedging
agreements.
PREPAYMENT RISKS
In general, the borrower under a mortgage loan may prepay the loan at any time
without penalty or premium. Prepayments result when a homeowner sells his
home or decides to either retire or refinance his existing mortgage loan. In
addition, defaults and foreclosures have the same effect as a prepayment in
that no future interest payments are earned on the mortgage. Prepayments
usually can be expected to increase when mortgage interest rates decrease
significantly and decrease when mortgage interest rates increase, although
such effects are not entirely predictable. Prepayment experience also may be
affected by the conditions in the housing and financial markets, general
economic conditions and the relative interest rates on fixed-rate and
adjustable-rate mortgage loans. During 1999, prepayments generally slowed due
to an increase in mortgage interest rates and a widening of the short-term and
long-term interest rate spread.
Prepayments are the primary feature of mortgage-backed securities that
distinguishes them from other types of bonds. While a certain percentage of
the pool of mortgage loans underlying a mortgage-backed security are expected
to prepay during a given period of time, the actual rate of prepayment can,
and often does, vary significantly from the anticipated rate of prepayment.
Accordingly, the Company incurs a risk that its mortgage assets will prepay at
a more rapid pace than anticipated. The potential negative impact on the
Company of prepayments is twofold. In the first instance, prepayments reduce
the amount of the Company's interest earning assets. In addition, if the
Company has paid more than par for a mortgage-backed security, the premium is
amortized against earnings over the life of the security. Higher than
expected prepayments lead to an increase in premium amortization, which
reduces the Company's earnings.
One way the Company seeks to reduce its exposure to prepayment risk is to
purchase mortgage assets trading closer to par and thus reduce the Company's
earnings exposure resulting from amortization of premiums. In the current
marketplace, ARM securities are trading at 96% to 104% of par depending on
seasoning and the interest rate. The Company's current policy is to maintain
the average purchase price of the Company's mortgage portfolio at less than
103.5% of par. The Company's weighted average purchase price for the mortgage
assets it acquired in 1999 and 1998 were approximately 101.7% and 101.5% of
par, respectively. Another way the Company seeks to address this risk is to
use less leverage in less advantageous market environments. While this
strategy may not maximize earnings potential in the short term, it should lead
to more predictable earnings with less potential risk to capital.
The Company seeks to minimize prepayment risk through a number of other means,
including structuring a diversified portfolio with a variety of prepayment
characteristics. An additional natural hedge to prepayment risk is for the
Company to maintain a position in direct investments (mezzanine or equity) in
multifamily properties collateralizing mortgage loans owned by the Company.
These assets do not face prepayment risk and should increase in value in a
declining interest rate environment where prepayments would have the largest
negative impact. Another potential hedge for the Company is to hold zero
coupon Treasury securities or other assets of long duration which increase in
<PAGE> - 5 -
value when interest rates decline. As of December 31, 1999, the Company did
not own any zero coupon Treasury securities. No strategy, however, can
completely insulate the Company from prepayment risks arising from the effects
of interest rate changes.
RISKS ASSOCIATED WITH LEVERAGE
The Company's financing strategy is designed to increase the size of its
mortgage investment portfolio by borrowing a substantial portion of the market
value of its mortgage assets. If the interest income on the mortgage assets
purchased with borrowed funds fails to cover the cost of the borrowings, the
Company will experience net interest losses and may experience net losses.
Such losses could be increased substantially as a result of the Company's
substantial leverage.
The ability of the Company to achieve its investment objectives depends on its
ability to borrow money in sufficient amounts and on favorable terms.
Currently, all of the Company's borrowings are collateralized borrowings in
the form of repurchase agreements. The ability of the Company to enter into
repurchase agreements in the future will depend on the market value of the
mortgage assets pledged to secure the specific borrowings, the availability of
financing, and other conditions then applicable in the lending market. The
Company may effect additional borrowings through the use of other types of
collateralized borrowings, loan agreements, lines of credit, dollar-roll
agreements and other credit facilities with institutional lenders or through
the issuance of debt securities. The cost of borrowings under repurchase
agreements generally corresponds to LIBOR plus or minus a margin, although
such agreements may not expressly incorporate a LIBOR index. The cost of
borrowings under other sources of funding which the Company may use may refer
or correspond to other short-term indices, plus or minus a margin. Through
increases in haircuts (i.e., the over-collateralization amount required by a
lender), decreases in the market value of the Company's mortgage assets,
increases in interest rate volatility, and changes in the availability of
financing in the market, the Company may not be able to achieve the degree of
leverage it believes to be optimal. As a result, the Company may be less
profitable than it would be otherwise.
RISKS OF DECLINE IN MARKET VALUE
The value of interest-bearing obligations such as mortgages and
mortgage-backed securities may move inversely with interest rates.
Accordingly, in a rising interest rate environment, the value of such
instruments may decline. Because the interest earned on ARMs may increase as
interest rates increase subject to a delay until each such security's next
reset date, the values of these assets are generally less sensitive to changes
in interest rates than are fixed-rate instruments. Therefore, in order to
mitigate this risk, the Company intends to maintain a substantial majority of
its mortgage assets as ARMs. At December 31, 1999, ARMs constituted
approximately 93% of the Company's total mortgage assets.
A decline in the market value of the Company's mortgage assets may limit the
Company's ability to borrow or result in lenders initiating margin calls
(i.e., requiring a pledge of cash or additional mortgage assets to
re-establish the ratio of the amount of the borrowing to the value of the
collateral). The Company could be required to sell mortgage assets under
adverse market conditions in order to maintain liquidity. If these sales were
made at prices lower than the amortized cost of the mortgage assets, the
Company would experience losses. A default by the Company under its
collateralized borrowings could also result in a liquidation of the
collateral, and a resulting loss of the difference between the value of the
collateral and the amount borrowed.
Additionally, in the event of a bankruptcy of the Company, certain repurchase
agreements may qualify for special treatment under the Bankruptcy Code, the
effect of which is, among other things, to allow the creditors under such
agreements to avoid the automatic stay provisions of the Bankruptcy Code and
to liquidate the collateral under such agreements without delay. To the
extent the Company is compelled to liquidate mortgage assets qualifying as
Qualified REIT Real Estate Assets to repay borrowings, the Company may be
unable to comply with the REIT provisions of the Internal Revenue Code
regarding assets and sources of income requirements, ultimately jeopardizing
the Company's status as a REIT.
The value of the Company's other investments, such as corporate debt and
<PAGE> - 6 -
equity securities, is also subject to fluctuation due to changes in interest
rates and many other factors.
CREDIT RISKS ASSOCIATED WITH INVESTMENTS
The holder of a mortgage or mortgage-backed security assumes a risk that the
borrowers may default on their obligations to make full and timely payments of
principal and interest. The Company seeks to mitigate this risk of credit
loss by requiring that at least 70% of its investment portfolio consist of
mortgage or mortgage securities that are either (i) insured or guaranteed as
to principal and interest by an agency of the U.S. government, such as GNMA,
FNMA or FHLMC, (ii) rated in one of the two highest rating categories by
either Standard and 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 assets. Currently, these other
fixed-income instruments are below investment grade in quality. These other
below investment grade fixed-income instruments constituted less than 3% of
the Company's total assets as of December 31, 1999. As of December 31, 1999,
approximately 79% of the Company's assets consisted of mortgage-backed
securities insured or guaranteed by the U.S. government or an agency thereof.
RISKS OF ASSET CONCENTRATION
Although the Company seeks geographic diversification of the properties
underlying its mortgage assets, it does not set specific limitations on the
aggregate percentage of underlying properties which may be located in any one
area. Consequently, properties underlying such mortgage assets may be located
in the same or a limited number of geographical regions. Adverse changes in
the economic conditions of the geographic regions in which the properties
securing mortgage assets are concentrated likely would have an adverse effect
on real estate values, interest rates and prepayment rates and increase the
risk of default by the obligors on the underlying mortgage loans.
Accordingly, the Company's results of operations could be adversely affected.
INVESTMENT COMPANY ACT
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 December 31,
1999, the Company determined that it is in and has maintained compliance with
this requirement.
CERTAIN FEDERAL INCOME TAX CONSIDERATIONS
The following discussion summarizes certain federal income tax considerations
to the Company and its stockholders. This discussion is based on existing
federal income tax law, which is subject to change, possibly retroactively.
This discussion does not address all aspects of federal income taxation that
may be relevant to a particular stockholder in light of its personal
investment circumstances or to certain types of investors subject to special
treatment under the federal income tax laws (including financial institutions,
insurance companies, broker-dealers and, except to the extent discussed below,
tax-exempt entities and foreign taxpayers) and it does not discuss any aspects
<PAGE> - 7 -
of state, local or foreign tax law. This discussion assumes that stockholders
will hold their common stock as a "capital asset" (generally, property held
for investment) under the Internal Revenue Code of 1986, as amended (the
"Code"). Stockholders are advised to consult their tax advisors as to the
specific tax consequences to them of purchasing, holding and disposing of the
common stock, including the application and effect of federal, state, local
and foreign income and other tax laws.
GENERAL
The Company has elected to become subject to tax as a REIT, for federal income
tax purposes, commencing with the taxable year ending December 31, 1998.
Management currently expects that the Company will continue to operate in a
manner that will permit the Company to maintain its qualifications as a REIT.
This treatment will permit the Company to deduct dividend distributions to its
stockholders for federal income tax purposes, thus effectively eliminating the
"double taxation" that generally results when a corporation earns income and
distributes that income to its stockholders. There can be no assurance that
the Company will continue to qualify as a REIT in any particular taxable year,
given the highly complex nature of the rules governing REITs, the ongoing
importance of factual determinations and the possibility of future changes in
the circumstances of the Company. If the Company failed to qualify as a REIT
in any particular year, it would be subject to federal income tax as a
regular, domestic corporation, and its stockholders would be subject to tax in
the same manner as stockholders of such corporation. In this event, the
Company could be subject to potentially substantial income tax liability in
respect of each taxable year that it fails to qualify as a REIT, and the
amount of earnings and cash available for distribution to its stockholders
could be significantly reduced or eliminated. The following is a brief
summary of certain technical requirements that the Company must meet on an
ongoing basis in order to qualify, and remain qualified, as a REIT under the
Code.
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. Under the Code, most tax-exempt entities including employee
benefit trusts and charitable trusts (but excluding trusts described in 401(a)
and exempt under 501(a)) are generally treated as individuals for these
purposes. These stock ownership requirements must be satisfied by the Company
each taxable year. The Company must solicit information from certain of its
shareholders to verify ownership levels and its Articles of Incorporation
provide restrictions regarding the transfer of the Company's shares in order
to aid in meeting the stock ownership requirements. If the Company were to
fail either of the stock ownership tests, it would generally be disqualified
from REIT status, unless, in the case of the "five or fewer" requirement, the
recently enacted "good faith" exemption is available.
ASSET TESTS
The Company must generally meet the following asset tests (the "REIT Asset
Tests") at the close of each quarter of each taxable year: (a) at least 75% of
the value of the Company's total assets must consist of Qualified REIT Real
Estate Assets, government securities, cash, and cash items (the "75% Asset
Test"); and (b) 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, and (ii) 10% of the outstanding voting securities of
any such issuer.
The Company does not expect that the value of any non-qualifying security of
any one entity would ever exceed 5% of the Company's total assets, and the
Company does not expect to own more than 10% of any one issuer's voting
securities. The Company intends to monitor closely the purchase, holding and
disposition of its assets in order to comply with the REIT Asset Tests. In
particular, the Company intends to limit and diversify its ownership of any
assets not qualifying as Qualified REIT Real Estate Assets to less than 25% of
the value of the Company's assets and to less than 5%, by value, of any single
issuer. If it is anticipated that these limits would be exceeded, the Company
intends to take appropriate measures, including the disposition of
non-qualifying assets, to avoid exceeding such limits.
<PAGE> - 8 -
GROSS INCOME TESTS
The Company must generally meet the following gross income tests (the "REIT
Gross Income Tests") for each taxable year: (a) 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" (i.e., income derived
from "new capital" within one year of the receipt of such capital) (the "75%
Gross Income Test") and; (b) 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, or from dividends, interest, and gains from the sale of
stock or other securities (including certain interest rate swap and cap
agreements, options, futures and forward contracts 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").
The Company intends to maintain its REIT status by carefully monitoring its
income, including income from liability hedging transactions and sales of
mortgage assets, to comply with the REIT Gross Income Tests. In particular,
the Company will treat income generated by its interest rate caps and other
liability hedging instruments, if any, as non-qualifying income for purposes
of the 95% Gross Income Tests unless it receives advice from counsel that such
income constitutes qualifying income for purposes of such test. Under certain
circumstances, for example, (i) the sale of a substantial amount of mortgage
assets to repay borrowings in the event that other credit is unavailable or
(ii) unanticipated decrease in the qualifying income of the Company which may
result in the non-qualifying income exceeding 5% of gross income, the Company
may be unable to comply with certain of the REIT Gross Income Tests. See
"Taxation of the Company" below for a discussion of the tax consequences of
failure to comply with the REIT Provisions of the Code.
DISTRIBUTION REQUIREMENT
The Company must generally distribute to its stockholders an amount equal to
at least 95% of the Company's REIT taxable income before deductions of
dividends paid and excluding net capital gain.
TAXATION OF THE COMPANY
In any year in which the Company qualifies as a REIT, the Company will
generally not be subject to federal income tax on that portion of its REIT
taxable income or capital gain which is distributed to its stockholders. The
Company will, however, be subject to federal income tax at normal corporate
income tax rates upon any undistributed taxable income or capital gain.
Notwithstanding its qualification as a REIT, the Company may also be subject
to tax in certain other circumstances. If the Company fails to satisfy either
the 75% or the 95% Gross Income Test, but nonetheless maintains its
qualification as a REIT because certain other requirements are met, it will
generally be subject to a 100% tax on the greater of the amount by which the
Company fails either the 75% or the 95% Gross Income Test multiplied by net
income and divided by gross income. The Company will also be subject to a tax
of 100% on net income derived from any "prohibited transaction," and if the
Company has (i) net income from the sale or other disposition of "foreclosure
property" which is held primarily for sale to customers in the ordinary course
of business or (ii) other non-qualifying income from foreclosure property, it
will be subject to federal income tax on such income at the highest corporate
income tax rate. In addition, if the Company fails to distribute during each
calendar year at least the sum of (i) 85% of its REIT ordinary income for such
year and (ii) 95% of its REIT capital gain net income for such year, the
Company would be subject to a 4% federal excise tax on the excess of such
required distribution over the amounts actually distributed during the taxable
year, plus any undistributed amount of ordinary and capital gain net income
from the preceding taxable year. The Company may also be subject to the
corporate alternative minimum tax, as well as other taxes in certain
situations not presently contemplated. If the Company fails to qualify as a
REIT in any taxable year, and certain relief provisions of the Code do not
apply, the Company would be subject to federal income tax (including any
applicable alternative minimum tax) on its taxable income at the regular
corporate income tax rates. Distributions to stockholders in any year in
which the Company fails to qualify as a REIT would not be deductible by the
Company, nor would they generally be required to be made under the Code.
Further, unless entitled to relief under certain other provisions of the Code,
the Company would also be disqualified from re-electing REIT status for the
four taxable years following the year in which it became disqualified.
<PAGE> - 9 -
The Company intends to monitor on an ongoing basis its compliance with the
REIT requirements described above. In order to maintain its REIT status, the
Company will be required to limit the types of assets that the Company might
otherwise acquire, or hold certain assets at times when the Company might
otherwise have determined that the sale or other disposition of such assets
would have been more prudent.
TAXATION OF STOCKHOLDERS
Distributions (including constructive distributions) made to holders of common
stock other than tax-exempt entities (and not designated as capital gain
dividends) will generally be subject to tax as ordinary income to the extent
of the Company's current and accumulated earnings and profits as determined
for federal income tax purposes. If the amount distributed exceeds a
stockholder's allocable share of such earnings and profits, the excess will be
treated as a return of capital to the extent of the stockholder's adjusted
basis in the common stock, which will not be subject to tax, and thereafter as
a taxable gain from the sale or exchange of a capital asset.
Distributions designated by the Company as capital gain dividends will
generally be subject to tax as long-term capital gain to stockholders, to the
extent that the distribution does not exceed the Company's actual net capital
gain for the taxable year. Distributions by the Company, whether
characterized as ordinary income or as capital gain, are not eligible for the
corporate dividends received deduction. In the event that the Company realizes
a loss for the taxable year, stockholders will not be permitted to deduct any
share of that loss.
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.
COMPETITION
The Company believes that its principal competitors in the business of
acquiring and holding mortgage assets of the type in which it invests are
financial institutions such as banks and savings and loans, life insurance
companies, institutional investors such as mutual funds and pension funds, and
certain mortgage REITs. Such investors may not be subject to similar
regulatory constraints (i.e. REIT tax compliance or maintaining 1940 Act
exemption). In addition, many of the other entities purchasing mortgages and
mortgage-backed securities have greater financial resources and better access
to capital than the Company. The existence of these competitive entities, as
well as the possibility of additional entities forming in the future, may
increase the competition for the acquisition of mortgages and mortgage-backed
securities resulting in higher prices and lower yields on such assets.
Item 2. Properties. The Company does not directly own or lease any physical
properties.
Item 3. Legal Proceedings. There are no material pending legal proceedings
to which the Company or any of its assets are subject.
Item 4. Submission of Matters to a Vote of Security Holders. No matter was
submitted during the fourth quarter of the fiscal year ending December 31,
1999, to a vote of the Company's security holders.
<PAGE> - 10 -
Executive Officers of the Company.
The Company's executive officers are as follows:
<TABLE>
<CAPTION>
Name Position Held Position Held Since
- ----------------------- -------------------------- -------------------
<S> <C> <C>
Stewart Zimmerman President and Chief 1998
Executive Officer
Gary Thompson Chief Financial Officer 1998
and Treasurer
William S. Gorin Executive Vice President 1998
and Secretary
Ronald A. Freydberg Senior Vice President 1998
</TABLE>
Stewart Zimmerman, 55, serves as president and chief executive officer of the
Company. He served as executive vice president of America First Companies
L.L.C. since January 1989, during which time he has served in a number of
positions: president and chief operating officer of America First REIT, Inc.;
president of several America First Mortgage funds including America First
Participating/Preferred Equity Mortgage Fund, America First PREP Fund 2
Limited Partnership, America First PREP Fund 2 Pension Series Limited
Partnership, Capital Source L.P., Capital Source II L.P.-A, America First Tax
Exempt Mortgage Fund Limited Partnership and America First Tax Exempt Fund 2
Limited Partnership. From September 1986 to September 1988, he served as a
managing director and director of Security Pacific Merchant Bank responsible
for Mortgage Trading and Finance. Prior to that time, he served as first vice
president of E.F. Hutton & Company, Inc., where he was responsible for
mortgage-backed securities trading and sales distribution, and vice president
of Lehman Brothers, where he was responsible for the distribution of mortgage
products. From 1968 to 1972, Mr. Zimmerman was vice president of Zenith
Mortgage Company and Zenith East Inc., a national mortgage banking and
brokerage company specializing in the structuring and sales of mortgage assets
to the institutional financial community.
Gary Thompson, 57, serves as chief financial officer and treasurer of the
Company. He serves as financial vice president of America First Companies
L.L.C. and is responsible for financial accounting and tax reporting for all
America First funds. Prior to 1989, Mr. Thompson was an audit partner at KPMG
Peat Marwick. He is a certified public accountant.
William S. Gorin, 41, serves as executive vice president and secretary of the
Company. From 1989 to 1997, Mr. Gorin held various positions with PaineWebber
Incorporated/Kidder, Peabody & Co. Incorporated, New York, New York, most
recently serving as a first vice president in the Research Department. Prior
to that position, Mr. Gorin was senior vice president in the Special Products
Group. From 1982 to 1988, Mr. Gorin was employed by Shearson Lehman Hutton,
Inc./E.F. Hutton & Company, Inc., New York, New York, in various positions in
corporate finance and direct investments.
Ronald A. Freydberg, 39, serves as senior vice president of the Company. From
1995 to 1997, Mr. Freydberg served as a vice president of Pentalpha Capital,
in Greenwich, Connecticut, where he was a fixed-income quantitative analysis
and structuring specialist. In that capacity he designed a variety of
interactive pricing and forecasting models, including a customized subordinate
residential and commercial mortgage-backed analytical program and an ARM REIT
five-year forecasting model. In addition, he worked with various financial
institutions on the acquisition and sale of residential, commercial and
asset-backed securities. From 1988 to 1995, Mr. Freydberg held various
positions with J.P. Morgan & Co. in New York, New York. From 1994 to 1995, he
was with the Global Markets Group. In that position he was involved in all
aspects of commercial mortgage-backed securitization and sale of distressed
commercial real estate, including structuring, due diligence and marketing.
From 1985 to 1988, Mr. Freydberg was employed by Citicorp in New York, New
York.
<PAGE> - 11 -
PART II
Item 5. Market for Registrant's Common Equity and Related Stockholder Matters.
(a) Market Information. The Company's common stock began trading on the New
York Stock Exchange on April 10, 1998, under the symbol "MFA." The following
table sets forth the high and low sale prices for the Company's shares of
common stock for the twelve months ending December 31, 1999, and from April 10,
1998, through December 31, 1998.
<TABLE>
<CAPTION>
1999 1998
Sale Prices Sale Prices
----------------------- ----------------------
<S> <C> <C> <C> <C>
High Low High Low
1st Quarter $ 5-26/32 $ 4-1/4 N/A N/A
2nd Quarter $ 5-3/8 $ 4 $ 9-3/4 $ 7-1/4 (from April 10, 1998)
3rd Quarter $ 5-1/8 $ 4-10/32 $ 7-7/8 $ 5-11/16
4th Quarter $ 5-3/8 $ 4-1/4 $ 5-3/4 $ 4-5/16
</TABLE>
(b) Investors. The approximate number of common stockholders as of March 10,
2000, was 6,300.
(c) Dividends. The Company currently pays cash dividends on a quarterly
basis. Total cash dividends declared by the Company to common stockholders
during the fiscal years ended December 31, 1999 and 1998, were $6,174,870
($0.67 per share) and $7,234,050 ($0.795 per share). For tax purposes, a
portion of the dividend declared on December 16, 1999, and paid on February
18, 2000, will be treated as a 2000 dividend for shareholders. Similarly, for
tax purposes, the dividend declared on December 15, 1998, and paid on February
19, 1999, was treated as a 1999 dividend for shareholders. As part of the
Merger transaction, the Company made quarterly distributions of $.265 per
common share ($1.06 per common share per year) in the first year following the
Merger (i.e. through the first quarter of 1999.) A portion of the
distributions received by shareholders in 1998 consisted in part of a dividend
and in part of a cash merger payment. There is no commitment by the Company
to distribute amounts in excess of taxable income beyond the first year of
operations. The Company intends to continue to distribute to its shareholders
an amount equal to at least 95% of the Company's taxable income before
deductions of dividends paid and excluding net capital gains in order to
maintain its REIT status.
See Item 7, Management's Discussion and Analysis of Financial Conditions and
Results of Operations, for information regarding the sources of funds used for
dividends and for a discussion of factors, if any, which may adversely affect
the Company's ability to pay dividends at the same levels in 2000 and
thereafter.
Item 6. Selected Financial Data.
Set forth below is selected financial data for the Company (for periods after
April 9, 1998) and the Predecessor (for periods up to April 9, 1998). The
information set forth below should be read in conjunction with the
consolidated and combined financial statements and notes to the consolidated
and combined financial statements filed in response to Item 8 hereof.
For financial accounting purposes, PREP Fund 1 was considered the sole
predecessor to the Company and, accordingly, the historical operating results
presented in this report as those of the "Predecessor" are those of PREP Fund
1. Under generally accepted accounting principles, the Merger was accounted
for as a purchase by PREP Fund 1 of 100% of the assigned limited partnership
interests (known as "BUCs") of PREP Fund 2 and approximately 99% of the BUCs
of Pension Fund. As a result of this treatment, the Company, as the successor
to PREP Fund 1, recorded all of the assets and liabilities of PREP Fund 1 at
their book value, but was required to record the assets of PREP Fund 2 and
Pension Fund at their fair value as of the date of the Merger. The amount by
which the fair value of the Company's stock issued to the BUC holders of PREP
Fund 2 and Pension Fund exceeded the fair value of the total net assets of
PREP Fund 2 and Pension Fund was recorded as goodwill by the Company.
<PAGE> - 12 -
<TABLE>
<CAPTION>
Company and Predecessor Company and
Company As of or for the Year Ended December 31, 1998 Predecessor
---------------------------------------------
As of or Company and As of or
for the Company Predecessor for the
Year Ended From April 10 to Through Year Ended
Dec. 31, 1999 December 31, 1998 April 9, 1998 Total Dec. 31, 1997
-------------- ---------------- -------------- ------------- -------------
<S> <C> <C> <C> <C> <C>
Operating Data:
Mortgage securities income $ 24,302,401 $ 7,626,742 $ 613,793 $ 8,240,535 $ 2,654,975
Corporate securities income 674,747 164,738 - 164,738 -
Dividend income 331,233 - - - -
Interest income on temporary cash
investments 365,897 439,889 148,799 588,688 569,624
Income from other investments 3,012,688 (1) 581,716 145,167 726,883 606,582
Gain on sale of investments 54,994 414,951 - 414,951 -
General and administrative expenses (2,672,333) (2) (1,674,114) (421,293) (2,095,407) (1,405,514)
Interest expense on borrowed funds (18,465,529) (4,619,500) - (4,619,500) -
Minority interest (4,218) (3,353) - (3,353) -
-------------- -------------- -------------- ------------- --------------
Net income $ 7,599,880 $ 2,931,069 $ 486,466 $ 3,417,535 $ 2,425,667
============== ============== ============== ============= ==============
Net income, basic and diluted,
per share $ .84 $ 0.32 $ N/A $ 0.32 $ N/A
============== ============== ============== ============= ==============
Net income, basic and diluted,
per exchangeable unit $ N/A $ N/A $ 0.08 $ N/A $ 0.42
============== ============== ============== ============= ==============
Dividends declared per common share or
cash distributions paid or accrued
per exchangeable unit $ 0.6700 $ 0.7950 $ 0.2649 $ 1.0599 $ 1.0596
============== ============== ============== ============= ==============
Balance Sheet Data:
Investment in mortgage securities $ 475,719,711 $ 241,895,462 $ 33,506,388
============== ============== =============
Investment in corporate securities $ 8,020,026 $ 4,673,127 $ -
============== ============== =============
Investment in preferred stock $ 3,130,823 $ 1,153,800 $ -
============== ============== =============
Total assets - Company $ 524,384,473 $ 264,668,902 $ 1,000
============== ============== =============
Total assets - Predecessor $ N/A $ N/A $ 54,439,993
============== ============== =============
Repurchase agreements $ 452,101,803 $ 190,250,084 $ -
============== ============== =============
Total stockholders' equity $ 67,614,613 $ 70,932,757 $ 1,000
============== ============== =============
Total partners' capital $ N/A $ N/A $ 46,252,826
============== ============== =============
(1) Includes income of approximately $2,163,000 resulting from the sale of
undivided interests in the net assets of four assisted living centers
as described in Note 5 to the consolidated and combined financial statements.
(2) Includes an incentive fee of approximately $433,000 earned by the
Advisor in connection with the sale described in (1) above.
</TABLE>
<PAGE> - 13 -
<TABLE>
<CAPTION>
Predecessor Predecessor
As of or As of or
for the for the
Year Ended Year Ended
Dec. 31, 1996 Dec. 31, 1995
------------- -------------
<S> <C> <C>
Mortgage securities income $ 3,011,347 $ 3,398,068
Interest income on temporary cash investments
and U.S. government securities 442,931 408,645
Income from other investments 504,611 399,746
General and administrative expenses (895,961) (834,594)
------------- -------------
Net income $ 3,062,928 $ 3,371,865
============= =============
Net income, basic and diluted,
per exchangeable unit $ 0.52 $ 0.57
============= =============
Net income per passthrough certificate $ 1,201.57 $ 1,426.95
============= =============
Cash distributions paid or accrued per
exchangeable unit $ 1.0596 $ 1.0596
============= =============
Cash distributions paid or accrued per
passthrough certificate $ 2,428.25 $ 2,649.00
============= =============
Investment in U.S. government securities $ - $ 5,025,000
============= =============
Investment in mortgage securities $ 37,322,028 $ 43,103,240
============= =============
Total assets $ 60,144,705 $ 64,566,103
============= =============
Total partners' capital $ 49,702,829 $ 53,605,422
============= =============
</TABLE>
Item 7. Management's Discussion and Analysis of Financial Condition and
Results of Operations.
General
The Company was incorporated in Maryland on July 24, 1997, and began
operations on 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%
of the BUCs of Pension Fund. (Pension Fund was liquidated and dissolved
during December, 1999.) 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.
Concurrent 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
<PAGE> - 14 -
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 December 31, 1999, the
Company purchased mortgage securities with a face value at the time of
purchase of approximately $571.2 million (mortgage securities with a face
value of approximately $338.7 million were purchased during the year ended
December 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 made quarterly distributions through the first
quarter of 1999 totaling $1.06 per common share. These distributions were
paid in four equal quarterly installments. A portion of distributions
received by shareholders in 1998 consisted in part of a dividend and in part
of a cash merger payment. There is no commitment by the Company to distribute
amounts in excess of taxable income beyond the first year of operations. For
tax purposes, a portion of the dividend declared on December 16, 1999, and
paid on February 18, 2000, will be treated as a 2000 tax event for
shareholders. Similarly, for tax purposes, the dividend declared on December
15, 1998, and paid on February 19, 1999, was treated as a 1999 tax event for
shareholders.
The Company's operations for any period may be affected by a number of factors
including the investment assets held, general economic conditions affecting
underlying borrowers and, most significantly, factors which affect the
interest rate market. Interest rates are highly sensitive to many factors,
including governmental monetary and tax policies, domestic and international
economic and political considerations, and other factors beyond the control of
the Company.
The Merger, other related transactions and on-going implementation of the
change in investment strategy will materially impact the Company's future
operations as compared to those of the Predecessor. Accordingly, the
currently reported financial information is not necessarily indicative of the
Company's future operating results or financial condition.
Liquidity and Capital Resources
The Company's principal sources of capital consist of borrowings under
repurchase agreements, principal payments received on its portfolio of
mortgage securities and cash provided by operations. Principal uses of cash
include the acquisition of investment securities, the payment of operating
expenses and the payment of dividends to shareholders.
During the year ended December 31, 1999, the Company acquired $359 million of
mortgage securities, corporate securities and preferred stock. Financing
for these acquisitions was provided primarily through the utilization of
repurchase agreements, supplemented by cash flow from operations of $10.3
million. Net borrowings under such repurchase agreements totaled $262 during
1999. The Company also received principal payments of $113 million on its
mortgage securities during 1999 and had proceeds of $1.1 million from the sale
of preferred stock. Other uses of funds in 1999 consisted of dividend
payments of $7.3 million and $0.4 million for the acquisition of 84,600
shares of its own common stock pursuant to a stock repurchase program
implemented in the fourth quarter.
The Company's borrowings under repurchase agreements totaled $452.1 million at
December 31, 1999, and had a weighted average borrowing rate of 5.72% as of
such date. At December 31, 1999, the repurchase agreements had balances of
between $3.2 million and $71.3 million. These arrangements have original
terms to maturity ranging from two months 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 that were related to a decrease in the
value of its collateral.
The Company believes it has adequate financial resources to meet its
obligations as they come due and fund dividends as well as to actively pursue
its investment policy.
<PAGE> - 15 -
Results of Operations
Year Ended December 31, 1999, Compared to 1998
During the year ended December 31, 1999, total interest income earned by the
Company increased $16.7 million compared to total interest income earned by the
Company and its Predecessor in 1998. This increase is attributable to the
growth in the Company's interest-earning assets pursuant to its investment
strategy. The yield on the Company's interest earning assets was 6.72% in
1999 compared to 6.04% in 1998.
The Company's interest expense increased $13.8 million for the year ended
December 31, 1999 compared to 1998 primarily due to an increase in funds
borrowed to finance the Company's asset growth. The Company had outstanding
borrowings of $452 million at December 31, 1999 compared to $190 million at
December 31, 1998. The Company's interest cost averaged 5.75% in 1999
compared to 4.86% in 1998.
Income from other investments increased $2,285,805 during the year ended
December 31, 1999, compared to the year ended December 31, 1998.
Approximately $2,163,000 of such increase is attributable to Retirement
Centers Corporation's (RCC's) sale of its undivided interests in the net
assets of four assisted living centers as described in Note 5 to the Company's
consolidated and combined financial statements. The remaining decrease of
approximately $123,000 is due to a reduction in the amount of income generated
on the Company's investments in real estate limited partnerships.
During the year ended December 31, 1999, the Company realized a gain of
$54,994 on the sale of investments whereas the Company realized a gain of
$414,951 during the comparable period in 1998. Approximately $385,000 of such
gain realized in 1998 was due to the payoff of a participating loan acquired
by the Company in the Merger.
General and administrative expenses of the Company in 1999 increased $576,926
as compared to that of the Company and the Predecessor in 1998. Approximately
$433,000 of such increase is attributable to non-recurring incentive
compensation earned by the Company's Advisor as a result of RCC's sale of its
undivided interests in the net assets of four assisted living centers as
described in Note 5 to the Company's consolidated and combined financial
statements. The remaining increase of approximately $144,000 is due to: (i)
an increase of $305,000 in incentive compensation earned by the Advisor due to
the improved financial results of the Company, and (ii) an increase of
$171,000 in base management fees earned by the Advisor primarily due to the
Company operating a full year in 1999 compared to operating approximately nine
months in 1998 offset by (iii) a decrease of $332,000 in other general and
administrative expenses primarily attributable to the difference in scope of
the Company in 1999 compared to that of the Company and Predecessor in 1998.
Year Ended December 31, 1998, Compared to 1997
During the year ended December 31, 1998, total interest income for the Company
and the Predecessor increased $5.8 million as compared to total interest
income of the Predecessor for the year ended December 31, 1997. 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.
The increase in the Company's interest expense on borrowed funds during the
year ended December 31, 1998, compared to that of the Predecessor for
the year ended December 31, 1997, 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.
The gain on sale of investments of $414,951 during the year ended December 31,
1998, was due primarily to the payoff of a participating loan acquired by the
Company in the Merger in the amount of $385,000. No such gain was recorded in
1997.
General and administrative expenses for the Company and Predecessor in 1998
increased $689,893 as compared to that of the Predecessor in 1997 as a result
of (i) the management fee payable to the Advisor and (ii) the increased scope
of operations resulting from the Merger.
<PAGE> - 16 -
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. To date, the Company has not experienced any
significant problems with such systems and equipment arising from the
inability of computer programs and embedded circuitry to correctly recognize
dates occurring after December 31, 1999. Although the Company does not
anticipate that so-called "Year 2000 problems" will surface, there can be no
assurance that such problems will not arise. The Company has not incurred any
significant costs in rectifying Year 2000 problems.
Forward Looking Statements
When used in this Form 10-K, 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 7A. Quantitative and Qualitative Disclosures About Market Risk.
The Company seeks to manage the interest rate, market value, liquidity,
prepayment and credit risks inherent in all financial institutions in a
prudent manner designed to insure the longevity of the Company while, at the
same time, seeking to provide an opportunity to shareholders to realize
attractive total rates of return through stock ownership of the Company.
While the Company does not seek to avoid risk, it does seek, to the best of its
ability, to assume risk that can be quantified from historical experience, to
actively manage such risk, to earn sufficient compensation to justify the
taking of such risks and to maintain capital levels consistent with the risks
it does undertake.
Interest Rate Risk
The Company primarily invests in fixed-rate, hybrid and variable-rate mortgage
investments. The hybrid investments represent fixed-rate coupons for a given
period and variable rate coupons thereafter. The Company's debt obligations
are generally repurchase agreements of limited duration which are periodically
refinanced at new market rates.
Most of the Company's variable-rate assets are dependent on the one-year CMT
rate and debt obligations are generally dependent on LIBOR. These indexes
generally move in parallel, but there can be no assurance that this will
continue to occur.
The Company's variable-rate investment assets and debt obligations reset at
various different dates for the specific asset or obligation. In general, the
repricing of the Company's debt obligations occurs more quickly than on the
Company's assets. Therefore, on average, the Company's cost of funds may rise
or fall more quickly than does its earnings rate on the assets. Further, the
Company's net income may vary somewhat as the yield curve between one-month
interest rates and six and twelve month interest rates varies.
<PAGE> - 17 -
As of December 31, 1999, the Company's investment assets and debt obligations
will prospectively reprice based on the following time frames:
<TABLE>
<CAPTION>
Assets Debt Obligations
------------------------ ------------------------
Amount Percent of Amount Percent of
Total Total
Investments Investments
-------- ----------- ------- -----------
<S> <C> <C> <C> <C>
Investment type/rate reset dates
Fixed-Rate Investments $ 31.6 7% $ - -
Variable Investment/Obligation Rates:
Less than 3 months 73.5 15% 452.1 100%
> 3 months and < 1 year 279.2 59% - -
> 1 year and < 2 years 19.5 4% - -
> 2 years and < 3 years - - - -
> 3 years and < 4 years 71.9 15% - -
> 4 years and < 5 years - - - -
-------- ------ -------- ------
444.1 93% 452.1 100%
-------- ------ -------- ------
Total $ 475.7 100% $ 452.1 100%
======== ====== ======== ======
Weighted average roll date
of variable-rate
investments/obligations 12 months 1 month
</TABLE>
Market Value Risk
Substantially all of the Company's investments are "available-for-sale"
assets. As such, they are reflected at fair value (i.e. market value) with
the adjustment to fair value reflected as part of accumulated other
comprehensive income which is included in the equity section of the Company's
balance sheet. (See Note 2 to the Company's consolidated financial
statements.) The market value of the Company's assets can fluctuate due to
changes in interest rates and other factors.
Liquidity Risk
The primary liquidity risk of the Company arises from financing long-maturity
mortgage assets with short-term debt. The Company had no long-term debt at
December 31, 1999. Although the interest rate adjustments of these assets and
liabilities are matched within the Company's operating policies, maturities
are not matched.
The Company's assets which are pledged to secure short-term borrowings are
high-quality, liquid assets. As a result, the Company has not had difficulty
rolling over its short-term debt as it matures. Still, the Company cannot
give assurances that it will always be able to roll over its short-term debt.
At December 31, 1999, the Company had unrestricted cash of $19.9 million. In
addition, the Company had unpledged AAA rated mortgage securities with a
market value of $5.1 million available to secure additional borrowings or
serve as additional collateral for existing borrowings. The resources the
Company had available to meet margin calls on short-term debt that could be
caused by asset value declines or changes in lender over-collateralization
requirements thus equaled $25 million, or 5.5% of short-term debt. As the
Company becomes more fully invested, it is anticipated that the
over-collaterization amount will decline.
Prepayment Risk
As the Company receives repayments of mortgage principal, it amortizes into
income its mortgage premium balances as a reduction to income and its mortgage
discount balances as an increase to income. Mortgage premium balances arise
<PAGE> - 18 -
when the Company acquires mortgage assets at a price in excess of the
principal value of the mortgages, or when an asset appreciates and is
marked-to-market at a price above par. Mortgage discount balances arise when
the Company acquires mortgage assets at a price below the principal value of
the mortgages, or when an asset depreciates and is marked-to-market at a price
below par. For financial accounting purposes, the premium is amortized based
on the effective yield of the asset at each financial reporting date. For tax
accounting purposes, the premium is amortized based on the asset yield at the
purchase date. Therefore, if prepayments are higher than anticipated, it is
anticipated that the yield for financial accounting purposes will decline and
there will be greater premium amortization under tax accounting requirements
than for financial accounting purposes. At December 31, 1999, unamortized
mortgage premium balances of adjustable rate assets for financial accounting
purposes was $6.7 million (1.3% of total assets) and $8.0 million for federal
tax purposes (1.6% of total assets).
In general, the Company believes it will be able to reinvest prepayments at
acceptable yields; however, no assurances can be given that, should
significant prepayments occur, market conditions would be such that acceptable
investments could be identified and the proceeds reinvested.
Tabular Presentation
The information presented in the table below, projects the impact on 2000 net
income and net assets based on investments in place on December 31, 1999, and
includes all the Company's interest-rate sensitive assets and liabilities.
The Company acquires interest-rate sensitive assets and funds them with
interest-rate sensitive liabilities. The Company generally plans to retain
such assets and the associated interest rate risk to maturity.
The table below includes information about the possible future repayments and
interest rates of the Company's assets and liabilities and constitutes a
"forward-looking statement." There are many assumptions used to generate this
information and there can be no assurance that assumed events will occur as
assumed or that other events will occur that would affect the outcomes.
Furthermore, future sales, acquisitions, calls, and restructuring could
materially change the Company's interest rate risk profile. The table
quantifies the potential changes in net income should interest rates go up or
down (shocked) by 100 and 200 basis points, assuming the yield curves of the
rate shocks will be parallel to each other. The cash flows associated with
the adjustable rate securities for each rate shock are calculated based on a
variety of assumptions, including prepayment vectors, repurchase rates,
repurchase haircuts, yield on reinvestment of prepayment, and growth in the
portfolio.
When interest rates are shocked, these prepayment assumptions are further
adjusted based on management's best estimate of the effects of changes on
interest rates or prepayment speeds. For example, under current market
conditions, a 100 basis point decline in interest rates is estimated to result
in a 275% increase in the prepayment rate of the ARM portfolio. The base
interest rate scenario assumes interest rates at December 31, 1999. Actual
results could differ significantly from those estimated in the table.
As of December 31, 1999, all interest-rate sensitive liabilities were scheduled
to mature in 2000.
<TABLE>
<CAPTION>
Change in Percentage Change Percentage Change
Interest Rates in Net Income in Net Assets
-------------- ----------------- -----------------
<C> <C> <C>
-2% +63.4% +5.1%
-1% +39.9% +2.7%
0 0.0 0.0
1% -19.6% -1.3%
2% -36.4% -3.7%
</TABLE>
<PAGE> - 19 -
Item 8. Financial Statements and Supplementary Data.
Index to Financial Statements
Financial Statements: Page
Report of Independent Accountants........................................21
Consolidated Balance Sheets of the Company as of December 31, 1999, and
December 31, 1998........................................................22
Consolidated Statements of Income of the Company for the year
ended December 31, 1999 and for the period from April 10, 1998 through
December 31, 1998, and Combined Statements of Income of the Predecessor
from January 1, 1998 through April 9, 1998 and for the year ended
December 31, 1997........................................................23
Consolidated Statements of Stockholders' Equity of the Company for the
years ended December 31, 1999 and 1998, and for the period from November
11, 1997 through December 31, 1997 and Combined Statements of Partners'
Capital of the Predecessor from January 1, 1998 through April 9, 1998
and for the year ended December 31, 1997.................................24
Consolidated Statements of Cash Flows of the Company for the year ended
December 31, 1999, and for the period from April 10, 1998 through
December 31, 1998, and Combined Statements of Cash Flows of the
Predecessor from January 1, 1998 through April 9, 1998 and for the year
ended December 31, 1997..................................................26
Notes to Consolidated and Combined Financial Statements of Company and
the Predecessor..........................................................28
All other schedules are omitted because they are not applicable or the
required information is shown in the consolidated or combined statements
or notes thereto.
Financial statements of one 95%-owned company, a 99% limited partnership
interest in two real estate limited partnerships, a 50% limited partnership
interest in one real estate limited partnership and a 49% interest in one
real estate limited partnership have been omitted because the Company's
proportionate share of the income from continuing operations before income
taxes is less than 20% of the respective consolidated amount, and the
investment in, and advances to, each entity is less than 20% of
consolidated total assets.
<PAGE> - 20 -
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors of
America First Mortgage Investments, Inc.
In our opinion, the accompanying consolidated balance sheets and the related
consolidated statements of income, shareholders' equity and cash flows present
fairly, in all material respects, the financial position of America First
Mortgage Investments, Inc. and its subsidiaries (the "Company") at December
31, 1999 and 1998, and the results of their operations and their cash flows
for the year ended December 31, 1999 and for the period from April 10, 1998 to
December 31, 1998, and the results of operations and cash flows of America
First Participating/Preferred Equity Mortgage Fund Limited Partnership and
America First Participating/Preferred Equity Mortgage Fund (the "Fund") for
the period from January 1, 1998 to April 9, 1998, and for the year ended
December 31, 1997, in conformity with accounting principles generally accepted
in the United States. 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 of these
statements in accordance with auditing standards generally accepted in the
United States, which 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, assessing
the accounting principles used and significant estimates made by management,
and evaluating the overall financial statement presentation. We believe that
our audits provide a reasonable basis for the opinion expressed above.
/s/ PricewaterhouseCoopers LLP
New York, New York
February 25, 2000
<PAGE> - 21 -
AMERICA FIRST MORTGAGE INVESTMENTS, INC.
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
As of As of
Dec. 31, 1999 Dec. 31, 1998
--------------- ---------------
<S> <C> <C>
Assets
Investment in mortgage securities (Note 3) $ 475,719,711 $ 241,895,462
Investment in corporate securities (Note 4) 8,020,026 4,673,127
Investment in preferred stock 3,130,823 1,153,800
Cash and cash equivalents
Unrestricted 19,895,833 6,045,956
Restricted 3,709,577 -
Accrued interest receivable 2,855,321 1,540,576
Other investments (Note 5) 3,220,346 1,197,341
Goodwill, net 7,587,948 7,361,338
Other assets 244,888 801,302
--------------- ---------------
$ 524,384,473 $ 264,668,902
=============== ===============
Liabilities
Repurchase agreements (Note 6) $ 452,101,803 $ 190,250,084
Accrued interest payable 2,778,842 795,785
Accounts payable 595,805 212,085
Dividends or distributions payable 1,293,410 2,413,803
--------------- ---------------
456,769,860 193,671,757
--------------- ---------------
Minority interest in consolidated partnership (Note 1) - 64,388
Stockholders' Equity
Common stock, $.01 par value; 10,000,000 shares authorized
8,978,642 and 9,055,142 issued and outstanding in 1999 and 1998, respectively 89,786 90,551
Additional paid-in capital 75,831,560 76,203,009
Retained earnings (2,877,971) (4,302,981)
Accumulated other comprehensive income (5,428,762) (1,057,822)
--------------- ---------------
67,614,613 70,932,757
--------------- ---------------
$ 524,384,473 $ 264,668,902
=============== ===============
The accompanying notes are an integral part of the consolidated and combined financial statements.
</TABLE>
<PAGE> - 22 -
AMERICA FIRST MORTGAGE INVESTMENTS, INC.
CONSOLIDATED AND COMBINED STATEMENTS OF INCOME
<TABLE>
<CAPTION>
For the Year Ended December 31, 1998
-----------------------------------------------
Company and
Company Company Company and Predecessor
For the Predecessor For the
Year Ended From April 10 Through Year Ended
Dec. 31, 1999 to Dec. 31, 1998 April 9, 1998 Total Dec. 31, 1997
--------------- --------------- --------------- ------------- --------------
<S> <C> <C> <C> <C> <C>
Mortgage securities income $ 24,302,401 $ 7,626,742 $ 613,793 $ 8,240,535 $ 2,654,975
Corporate securities income 674,747 164,738 - 164,738 -
Dividend income 331,233 - - - -
Interest income on temporary cash investments 365,897 439,889 148,799 588,688 569,624
--------------- --------------- --------------- ------------- --------------
Total interest income 25,674,278 8,231,369 762,592 8,993,961 3,224,599
Interest expense on borrowed funds 18,465,529 4,619,500 - 4,619,500 -
--------------- --------------- --------------- ------------- --------------
Net interest income 7,208,749 3,611,869 762,592 4,374,461 3,224,599
--------------- --------------- --------------- ------------- --------------
Income from other investments 3,012,688 581,716 145,167 726,883 606,582
Gain on sale of investments 54,994 414,951 - 414,951 -
--------------- --------------- --------------- ------------- --------------
3,067,682 996,667 145,167 1,141,834 606,582
--------------- --------------- --------------- ------------- --------------
General and administrative expenses 2,672,333 1,674,114 421,293 2,095,407 1,405,514
Minority interest in consolidated
partnership (Note 1) 4,218 3,353 - 3,353 -
--------------- --------------- --------------- ------------- --------------
2,676,551 1,677,467 421,293 2,098,760 1,405,514
--------------- --------------- --------------- ------------- --------------
Net income $ 7,599,880 $ 2,931,069 $ 486,466 $ 3,417,535 $ 2,425,667
=============== =============== =============== ============= ==============
Net income, basic and fully diluted, per share $ .84 $ 0.32 N/A N/A
=============== =============== =============== =============
Net income, basic and fully diluted, per unit N/A $ 0.08 $ 0.42
=============== =============== =============
Net income allocated to:
General Partner $ 3,931 $ 21,920
BUC Holders 482,535 2,403,747
--------------- -------------
$ 486,466 $ 2,425,667
=============== =============
Weighted average number of shares outstanding 9,046,467 9,043,172 N/A N/A
Weighted average number of units outstanding N/A N/A 5,775,797 5,775,797
The accompanying notes are an integral part of the consolidated and combined financial statements.
</TABLE>
<PAGE> - 23 -
AMERICA FIRST MORTGAGE INVESTMENTS, INC.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
<TABLE>
<CAPTION>
Stockholders' Equity - Company
---------------------------------------------------------------------------------
Accumulated
Treasury Other
Common Stock Paid-in Stock Retained Comprehensive
# of Shares Amount Capital At Cost Earnings Income Total
------------ ------------ ------------ ---------- ----------- ------------ --------
<S> <C> <C> <C> <C> <C> <C> <C>
Balance at November 11, 1997 (date of
capitalization) and
December 31, 1997 90,621 $ 906 $ 94 $ - $ - $ - $ 1,000
Effects of Merger:
Issuance of stock of the Company
in exchange for Units of
the Predecessor 5,775,797 57,758 45,126,359 - - - 45,184,117
Issuance of stock of the Company in
exchange for Units of Prep Fund 2
and Pension Fund 3,168,666 31,687 29,949,413 - - - 29,981,100
Issuance of stock options - - 942,390 - - - 942,390
Comprehensive income:
Net income - - - - 2,931,069 - 2,931,069
Other comprehensive income:
Change in classification of mortgage
securities from held-to-maturity to
available-for-sale - - - - - (704,828) (704,828)
Net unrealized holding losses
arising during the period - - - - (352,994) (352,994)
------------ ------------ ------------ ----------- ------------- ------------ ------------
Comprehensive income - - - - 2,931,069 (1,057,822) 1,873,247
Dividends paid or accrued - - - - (7,234,050) (7,234,050)
Common stock issued 20,058 200 184,753 - - - 184,953
------------ ------------ ------------ ------------ ------------- ------------ -----------
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 - - - - 7,599,880 - 7,599,880
Other comprehensive income:
Net unrealized holding losses
arising during the period - - - - - (4,370,940) (4,370,940)
------------ ------------ ------------ ------------- ------------ ------------ -----------
Comprehensive income - - - - 7,599,880 (4,370,940) 3,228,940
Dividends paid or accrued - - - - (6,174,870) (6,174,870)
Common stock issued 8,100 81 39,913 - - - 39,994
Purchase of shares for treasury - (412,208) - - (412,208)
Retirement of treasury stock (84,600) (846) (411,362) 412,208 - - -
------------ ------------ ------------ ------------- ------------ ------------ -----------
Balance at December 31, 1999 8,978,642 $ 89,786 $75,831,560 $ - $(2,877,971)$(5,428,762) $67,614,613
============ ============ ============ ============= ============ ============ ===========
The accompanying notes are an integral part of the consolidated and combined financial statements.
</TABLE>
<PAGE> - 24 -
AMERICA FIRST MORTGAGE INVESTMENTS, INC.
COMBINED STATEMENTS OF PARTNERS' CAPITAL
<TABLE>
<CAPTION>
Partners' Capital - Predecessor
---------------------------------------------------
Exchangeable Unit
Holders
-------------------------
General
Partner # of Units Amount Total
-------- ---------- ------------ ------------
<S> <C> <C> <C> <C>
Balance at December 31, 1996 $ 100 5,775,797 $49,399,062 $49,399,162
Net income 21,920 2,403,747 2,425,667
Cash distributions paid or accrued (21,920) - (6,120,035) (6,141,955)
-------- ---------- ------------ ------------
Balance at December 31, 1997 100 5,775,797 45,682,774 45,682,874
Net income 3,931 - 482,535 486,466
Cash distributions paid or accrued (3,931) - (1,530,009) (1,533,940)
-------- ------------ ------------ -----------
Balance at April 10, 1998 100 5,775,797 44,635,300 44,635,400
-------- ------------ ------------ -----------
Accumulated other comprehensive income
Balance at December 31, 1996 - - 303,667 303,667
Other comprehensive income - - 266,285 266,285
-------- ------------ ------------ ------------
Balance at December 31, 1997 - - 569,952 569,952
Other comprehensive income - - (21,235) (21,235)
-------- ------------ ------------ ------------
Balance at April 10, 1998 - - 548,717 548,717
-------- ------------ ------------ ------------
Issuance of stock of the Company in
exchange for Units of the Predecessor (100) (5,775,797) (45,184,017) (45,184,117)
-------- ------------ ------------ -------------
Total Partners' Capital-Predecessor
at April 10, 1998 $ - - $ - $ -
======== ============ ============ ==============
</TABLE>
The accompanying notes are an integral part of the consolidated and combined
financial statements.
<PAGE> - 25 -
AMERICA FIRST MORTGAGE INVESTMENTS, INC.
CONSOLIDATED AND COMBINED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
For the Year Ended December 31, 1998
----------------------------------------------------
Company Company Company and Company and
Predecessor Predecessor
For the For the
Year Ended From April 10 Through Year Ended
Dec. 31, 1999 to Dec. 31, 1998 April 9, 1998 Total Dec. 31, 1997
--------------- ----------------- --------------- --------------- -----------
<S> <C> <C> <C> <C> <C>
Cash flows from operating activities
Net income $ 7,599,880 $ 2,931,069 $ 486,466 $ 3,417,535 $ 2,425,667
Adjustments to reconcile net income to
net cash provided by
operating activities:
Gain on sale of investments (54,994) (414,951) - (414,951) -
Minority interest in consolidated partnership 4,218 3,353 - 3,353 -
Other 44,701 - - - -
Amortization 1,424,635 308,384 (1,959) 306,425 (11,860)
Decrease (increase) in interest receivable (1,301,925) (1,134,069) 8,302 (1,125,767) 33,342
Decrease (increase) in other assets 329,448 (252,473) 6,241 (246,232) 325
Increase (decrease) in accounts payable 233,719 (1,860,513) 565,608 (1,294,905) 623,186
Increase in accrued interest payable 1,983,057 795,785 - 795,785 -
------------- -------------- --------------- -------------- -----------
Net cash provided by operating activities 10,262,739 376,585 1,064,658 1,441,243 3,070,660
------------- -------------- --------------- -------------- -----------
Cash flows from investing activities
Principal payments on mortgage securities 113,346,110 46,682,908 867,630 47,550,538 4,116,822
0 Sale of preferred stock 1,127,500 - - - -
Proceeds from sale of other investments - 1,290,000 - 1,290,000 2,100,000
Net cash from Merger - 4,820,481 - 4,820,481 -
Increase in restricted cash (3,709,577) - - - -
Purchases of mortgage securities (352,732,908) (236,107,915) - (236,107,915) -
Purchases of corporate securities (3,307,750) (4,662,500) - (4,662,500) -
Purchases of preferred stock (3,091,997) (1,081,773) - (1,081,773) -
Decrease (increase) in other investments (2,149,060) (58,567) 42,869 (15,698) (675,643)
Merger transaction costs paid - - (729,509) (729,509) (859,642)
------------- -------------- --------------- ------------- -----------
Net cash provided by (used in)
investing activities (250,517,682) (189,117,366) 180,990 (188,936,376) 4,681,537
------------- -------------- --------------- -------------- -----------
Cash flows from financing activities
Net borrowings from repurchase agreements 261,851,719 190,250,084 - 190,250,084 -
Stock purchased for treasury (412,208) - - - -
Dividends and distributions paid (7,334,691) (5,600,169) (1,535,007) (7,135,176) (6,143,343)
Issuance of stock - - - - 1,000
------------- -------------- --------------- -------------- -----------
Net cash provided by (used in)
financing activities 254,104,820 184,649,915 (1,535,007) 183,114,908 (6,142,343)
------------- -------------- --------------- -------------- -----------
Net increase (decrease) in cash
and cash equivalents 13,849,877 (4,090,866) (289,359) (4,380,225) 1,609,854
Cash and temporary cash investments at
beginning of period 6,045,956 10,136,822 10,426,181 10,426,181 8,817,327
------------- --------------- --------------- -------------- -----------
Cash and temporary cash investments
at end of period $ 19,895,833 $ 6,045,956 $ 10,136,822 $ 6,045,956 $10,427,181
============= =============== =============== ============== ===========
Supplemental disclosure of cash flow information:
Cash paid during the period for interest $ 16,482,472 $ 3,823,715 $ - $ 3,823,715 $ -
The accompanying notes are an integral part of the consolidated and combined financial statements.
</TABLE>
<PAGE> - 26 -
Supplemental disclosure on non-cash investing activities:
The following assets and liabilities were assumed by the Company in
conjunction with the Merger and issuance of common stock (see Note 1):
<TABLE>
From April 10 Through
to Dec. 31, 1998 April 9, 1998 Total
----------------- --------------- ------------
<S> <C> <C> <C>
Mortgage securities $ 20,420,336 $ - $ 20,420,336
Accrued interest receivable 142,545 - 142,545
Other investments 175,369 - 175,369
Accounts payable 712,888 - 712,888
Distributions payable 265,545 - 265,545
</TABLE>
The Company recorded goodwill of $7,507,902 in 1998 as a result of the
Merger. The Company recorded $413,615 of additional goodwill in 1999 due to
the resolution of contingencies associated with the Merger.
During 1999 and 1998, the Company issued 8,100 and 7,440 shares,
respectively, of common stock to its non-employee directors in payment of a
portion of such directors' compensation for the respective year. The Company
also issued 12,618 shares of common stock in 1998 to unit holders of Pension
Fund who exchanged their units of Pension Fund for shares of the Company
subsequent to April 10, 1998. The aggregate value of such common stock
issued was $39,994 in 1999 and $184,953 in 1998.
<PAGE> - 27 -
AMERICA FIRST MORTGAGE INVESTMENTS, INC.
NOTES TO CONSOLIDATED AND COMBINED FINANCIAL STATEMENTS
DECEMBER 31, 1999
1. Organization
America First Mortgage Investments, Inc. (the Company) was incorporated in
Maryland on July 24, 1997, and began operations on 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 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%
of the BUCs of Pension Fund. Pension Fund was liquidated and dissolved during
December, 1999, and, as a result, the Company acquired approximately 99% of
the assets of Pension Fund. The remaining assets, consisting solely of cash,
were distributed to the remaining holders of Pension Fund BUCs. 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 Corporation (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 and combined financial statements
include the consolidated accounts of the Company from April 10, 1998
through December 31, 1999, and the combined accounts of the Company,
Prep Fund 1 and America First Participating/Preferred Equity Mortgage
Fund (the managing general partner of Prep Fund 1) (together referred
to as the Predecessor) for periods prior to the Merger. The financial
statements are prepared on the accrual basis of accounting in accordance
with generally accepted accounting principles.
The consolidated financial statements include the accounts of the
Company and its subsidiaries, Pension Fund and Pension Fund's general
partner, America First Capital Associates Limited Partnership Six (AFCA 6).
All significant intercompany transactions and accounts have been
eliminated in consolidation. Pension Fund and AFCA 6 were liquidated and
dissolved under the terms of their respective partnership agreements
during December, 1999. As more fully discussed in Note 5, the Company
also 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 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.
<PAGE> - 28 -
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.
Restricted cash represents amounts held with certain lending
institutions with which the Company has repurchase agreements.
Such amounts may be used to make principal and interest payments
on the related repurchase agreements.
C) Mortgage Securities, Corporate Securities and Preferred Stock
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,
corporate securities and preferred stock (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. Likewise, the Company has classified all
its preferred stock investments as available-for-sale. Mortgage securities
and preferred stock 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 investment 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 investment security is adjusted.
Other-than-temporary unrealized losses are based on management's assessment
of various factors affecting the expected cash flow from the investment
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 the Government National Mortgage Association
(GNMA), the Federal National Mortgage Association (FNMA), or the 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, equities, real estate investment trusts or closed-end
funds owning a portfolio of mortgage and/or real estate assets; or (iv)
other corporate debt or equity securities or government fixed-income
instruments that provide increased call protection relative to the Company's
mortgage securities. Corporate debt that is rated below investment grade
<PAGE> - 29 -
will be limited to less than 5% of the Company's total assets. As of
December 31, 1999 and 1998, approximately 79% and 91%, respectively, of the
Company's assets consisted of mortgage securities insured or guaranteed by
the U.S. government or an agency thereof. Management determined no allowance
for credit losses was necessary at December 31, 1999 or 1998.
E) Other Investments
Other investments consist of: (i) non-voting preferred stock of a
corporation owning interests in real estate limited partnerships, and (ii)
investments in limited partnerships owning real estate.
F) Net Income per Share
Net income per share is based on the weighted average number of common
shares and common equivalent shares (e.g., stock options), if dilutive,
outstanding during the period. Basic net income per share is computed by
dividing net income available to shareholders by the weighted average
number of common shares outstanding during the period. Diluted net
income per share is computed by dividing the diluted net income available
to common shareholders by the weighted average number of common shares and
common equivalent shares outstanding during the period. The common
equivalent shares are calculated using the treasury stock method which
assumes that all dilutive common stock equivalents are exercised and the
funds generated by the exercise are used to buy back outstanding common
stock at the average market price during the reported period.
As more fully discussed in Note 7, options to purchase 520,000 and 300,000
shares of common stock were issued on April 6, 1998, and August 13, 1999,
respectively. Because the average stock price during the quarter during
which such options were issued was less than the exercise price, exercise
of such options under the treasury stock method would be anti-dilutive.
Accordingly, these potentially dilutive securities were not considered in
fully diluted earnings per share and, as a result, basic and fully
diluted net income per share are the same for all periods presented. With
regard to the Predecessor, no options were issued. As such, basic and
diluted net income per Unit of the Predecessor were the same for all
periods presented as no dilutive equivalent units existed.
G) Comprehensive Income
Statement of Financial Accounting Standards No. 130, "Reporting
Comprehensive Income" requires the Company and the Predecessor to display
and report comprehensive income, which includes all changes in
Stockholders' Equity or Partners' Capital with the exception of additional
investments by or dividends to shareholders of the Company or additional
investments by or distributions to partners of the Predecessor.
Comprehensive income for the Company and the Predecessor includes net
income and the change in net unrealized holding gains (losses) on
investments. Comprehensive income for the years ended December 31, 1999,
1998 and 1997 was as follows:
<TABLE>
<CAPTION>
For the Year Ended December 31, 1998
------------------------------------------------
Company for Company Company and Company and
the Year Ended From April 10 to Predecessor Predecessor for
through the Year Ended
Dec. 31, 1999 Dec. 31, 1998 April 9, 1998 Total Dec. 31,1997
-------------- ---------------- --------------- ------------ --------------
<S> <C> <C> <C> <C> <C>
Net income $ 7,599,880 $ 2,931,069 $ 486,466 $ 3,417,535 $ 2,425,667
Change in classification of mortgage
securities from held-to-maturity to
available-for-sale - (704,828) - (704,828) -
Change in net unrealized
holding gains (losses) (4,370,940) (352,994) (21,235) (374,229) 266,285
-------------- --------------- --------------- --------------- --------------
Comprehensive income $ 3,228,940 $ 1,873,247 $ 465,231 $ 2,338,478 $ 2,691,952
============== =============== =============== =============== ==============
</TABLE>
H) Federal Income Taxes
The Company has elected to be taxed as a real estate investment trust
(REIT) under the provisions of the Internal Revenue Code and the
<PAGE> - 30 -
corresponding provisions of state law. As such, no provision for income
taxes has been made in the accompanying consolidated financial statements.
Since the Predecessor was a partnership and generally not subject to taxes
directly, it did not make a provision for income taxes. The Predecessor's
Beneficial Unit Certificate (BUC) holders were required to report their
share of the Predecessor's income for federal and state income tax
purposes.
I) New Accounting Pronouncement
In June, 1998, the Financial Accounting Standards Board issued Financial
Accounting Standards No. 133, "Accounting for Derivative Instruments and
Hedging Activities " (FAS 133). This statement provides new accounting
and reporting standards for the use of derivative instruments. Adoption
of this statement, as amended, is required by the Company effective
January 1, 2001. Management intends to adopt the statement as required
in fiscal 2001. Management believes that the impact of such adoption will
not be material to the financial statements. Although the Company and its
Predecessor have not historically used such instruments, it is not
precluded from doing so. In the future, management anticipates using such
derivative instruments only as hedges to manage interest rate risk.
Management does not anticipate entering into derivatives for speculative
or trading purposes.
3. Mortgage Securities
The following table presents the Company's mortgage securities as of December
31, 1999 and 1998.
<TABLE>
<CAPTION> As of As of
December 31, 1999 December 31, 1998
----------------- ----------------
<S> <C> <C>
FNMA Certificates $ 359,891,164 $ 159,686,597
GNMA Certificates 43,678,897 59,452,502
FHLMC Certificates 13,220,884 22,756,363
Commercial mortgage-backed securities 16,650,544 -
Private label CMOs 42,278,222 -
----------------- -----------------
$ 475,719,711 $ 241,895,462
================= =================
</TABLE>
At December 31, 1999, and 1998 mortgage securities consisted of pools of
adjustable-rate mortgage securities with carrying values of $444,140,267 and
$194,542,316, respectively and fixed-rate mortgage securities with carrying
values of $31,579,444 and $47,353,146, respectively.
The Federal National Mortgage Association (FNMA) Certificates are backed by
first mortgage loans on pools of single-family properties. The FNMA
Certificates are debt securities issued by FNMA and are guaranteed by FNMA as
to the full and timely payment of principal and interest on the underlying
loans.
The Government National Mortgage Association (GNMA) Certificates are backed by
first mortgage loans on multifamily residential properties and pools of
single-family properties. The GNMA Certificates are debt securities issued
by a private mortgage lender and are guaranteed by GNMA as to the full and
timely payment of principal and interest on the underlying loans.
Federal Home Loan Mortgage Corporation (FHLMC) Certificates are backed by
first mortgage loans on pools of single-family properties. The FHLMC
Certificates are debt securities issued by FHLMC and are guaranteed by FHLMC
as to the full and timely payment of principal and interest on the underlying
loans.
The commercial mortgage-backed securities are rated AA or A by Standard and
Poor's.
The private label CMOs (collateralized mortgage obligations) are rated AAA by
Standard and Poor's.
As of December 31, 1999 and 1998, all the mortgage securities were classified
as available-for-sale and as such are carried at their fair value.
<PAGE> - 31 -
The following table presents the amortized cost, gross unrealized gains, gross
unrealized losses and fair value of mortgage securities as of December 31,
1999 and 1998:
<TABLE>
<CAPTION>
As of As of
December 31, 1999 December 31, 1998
------------------ ------------------
<S> <C> <C>
Amortized cost $ 481,176,498 $ 242,142,861
Gross unrealized gains 461,675 1,177,638
Gross unrealized losses (5,918,462) (1,425,037)
------------------ ------------------
Fair value $ 475,719,711 $ 241,895,462
================== ==================
</TABLE>
As of December 31, 1999, the Company had a commitment to purchase one mortgage
security with a remaining principal balance of approximately $34.9 million.
See Note 12 - Subsequent Events.
4. Corporate Securities
Corporate securities are classified as held-to-maturity. The following table
presents the amortized cost, gross unrealized gains, gross unrealized losses
and fair value of the corporate securities as of December 31,
1999 and 1998:
<TABLE>
<CAPTION>
As of As of
December 31, 1999 December 31, 1998
------------------ ------------------
<S> <C> <C>
Amortized cost $ 8,020,026 $ 4,673,127
Gross unrealized gains 92,211 273,123
Gross unrealized losses (174,487) -
------------------ ------------------
Fair value $ 7,937,750 $ 4,946,250
================== ==================
</TABLE>
5. Other Investments
Other investments consisted of the following as of December 31, 1999 and 1998:
<TABLE>
<CAPTION>
As of As of
Dec. 31, 1999 Dec. 31, 1998
------------- -------------
<S> <C> <C>
Investment in Retirement Centers Corporation $ 2,389,980 $ 349,076
Investment in and advances to real estate limited partnerships 830,366 848,265
------------- -------------
Total $ 3,220,346 $ 1,197,341
============= =============
</TABLE>
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. The Company accounts for its investment in RCC on the equity method. As
of December 31, 1998, RCC owned limited partnership interests in five real
estate limited partnerships which operate assisted living centers. However,
during 1999, four of the real estate limited partnerships were liquidated with
RCC receiving an undivided interest in the net assets of each such limited
partnership. RCC then sold its undivided interests in the net assets of each
such assisted living center. On a consolidated basis, such sale contributed
approximately $1,730,000, ($2,163,000 less an incentive fee of approximately
$433,000 (see Note 8)), to the Company's net income for 1999. Also see Note
12 - Subsequent Events.
<PAGE> - 32 -
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 or its
Predecessor. 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 neither the Company nor its
Predecessor have any legal obligation to provide additional cash support to
the underlying property partnerships as they are not the general partner, nor
have they indicated any commitment to provide this support.
6. Repurchase Agreements
As of December 31, 1999, the Company had outstanding balances of $452,101,803
under 38 repurchase agreements with a weighted average borrowing rate of 5.72%
and a weighted average remaining maturity of one month. As of December 31,
1999, all of the Company's borrowings were fixed-rate term repurchase
agreements with original maturities that range from two 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%
As of December 31, 1999 and 1998, the repurchase agreements had the following
remaining maturities:
<TABLE>
<CAPTION>
As of As of
December 31, 1999 December 31, 1998
----------------- -----------------
<S> <C> <C>
Within 30 days $ 287,416,803 $ 40,641,585
30 to 90 days 164,685,000 57,296,499
90 days to one year - 92,312,000
------------- -------------
$ 452,101,803 $ 190,250,084
============= =============
</TABLE>
The repurchase agreements are collateralized by the Company's mortgage
securities with a principal balance of $468,466,921 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.
On April 6, 1998, 500,000 ISOs were granted to buy common shares at an
exercise price of $9.375 per share (the 1998 Grant). In addition, 20,000
NQSOs were issued at an exercise price of $9.375 per share. On August 13,
1999, 300,000 ISOs were granted to buy common shares at an exercise price of
$4.875 per share (the 1999 Grant). Prior to the 1998 Grant, no other options
were outstanding. As of December 31, 1999 and 1998, respectively,
325,000 and 125,000 ISOs were vested and exercisable. As of December 31, 1999
and 1998, respectively, 10,000 and 5,000 NQSOs were vested and
exercisable. As of December 31, 1999, no options had been exercised.
<PAGE> - 33 -
In addition to the options granted on April 6, 1998, 500,000 and 20,000 DERs
were also granted on the ISOs and NQSOs, respectively, based on the provisions
of the Plan. No DERs were granted on the ISOs granted on August 13, 1999.
DERs vest on the same basis as the options and payments are made on vested
DERs only. Vested DERs are paid only to the extent of ordinary income and not
on returns of capital. Dividends paid on ISOs are charged to stockholders'
equity when declared and dividends paid on NQSOs are charged to earnings when
declared. For the years ended December 31, 1999 and 1998, the Company
recorded charges of $117,500 and $42,500, respectively, to stockholders'
equity (included in dividends paid or accrued) associated with the DERs on
ISOs and charges of $4,700 and $1,700, respectively, to earnings associated
with DERs on NQSOs.
The options and related DERs issued were accounted for under the provisions of
SFAS 123, "Accounting for Stock Based Compensation". Because the ISOs were
not issued to officers who are direct employees of the Company, ISOs granted
were accounted for under the option value method as variable grants and a
periodic charge will be recognized based on the vesting schedule. The charge
for options which vested immediately with the 1998 Grant was included as
capitalized transaction costs in connection with the Merger. Until fixed and
determinable, management estimates the value of the ISOs granted as of each
balance sheet date using a Black-Scholes valuation model, as adjusted for the
discounted value of dividends not to be received under the unvested DERs. In
the absence of comparable historical market information for the Company,
management originally utilized assumptions consistent with activity of a
comparable peer group of companies including an estimated option life, a
volatility rate, a risk-free rate and a current dividend yield (or 0% if the
related DERs are issued). For the years ended December 31, 1999 and 1998, as
part of operations, the Company reflected earnings charges of $42,707 and
$170,154, respectively, representing the value of ISOs/DERs granted over their
vesting period. NQSOs granted were accounted for using the intrinsic method
and, accordingly, no earnings charge was reflected since the exercise price
was equal to the fair market value of the common stock at the date of the
grant.
Dividends/Distributions
- -----------------------
The Company declared the following distributions during 1999 and 1998:
<TABLE>
<CAPTION>
Declaration Date Record Date Payment Date Amount per Share
- ---------------- ----------- ------------ ----------------
<S> <C> <C> <C>
During 1999:
March 24, 1999 April 5, 1999 May 17, 1999 $ .265
June 14, 1999 June 30, 1999 August 17, 1999 $ .125
September 21, 1999 September 30, 1999 November 17, 1999 $ .140
December 16, 1999 January 3, 2000 February 18, 2000 $ .140
During 1998:
June 18, 1998 June 30, 1998 August 14, 1998 $ .265
September 9, 1998 September 30, 1998 November 16, 1998 $ .265
December 15, 1998 December 31, 1998 February 19, 1999 $ .265
</TABLE>
For tax purposes, a portion of the dividend declared on December 16, 1999, and
paid on February 18, 2000, will be treated as a 2000 event for shareholders.
Similarly, the dividend declared on December 15, 1998, and paid February 19,
1999, was treated as a 1999 event for shareholders. As part of the Merger
transaction, the Company made quarterly distributions of $.265 per common
share ($1.06 per common share per year) in the first year following the Merger
(i.e. through the first quarter of 1999.) Accordingly, cash distributions
paid by the Company in 1998 consisted in part of a dividend and in part of a
cash merger payment. Cash distributions paid or accrued by the Predecessor
were $.2649 per Unit prior to the Merger in 1998 and $1.0596 per Unit in
1997.
<PAGE> - 34 -
Stock Repurchases
- -----------------
On September 21, 1999, the Company's Board of Directors approved the
repurchase of up to 200,000 shares of its common stock. Pursuant to this
repurchase program, the Company repurchased 84,600 shares of its common stock
for $412,208 during 1999. The repurchased shares were then legally retired
and, as such, are no longer issued or outstanding. See Note 12 - Subsequent
Events.
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 year ended December 31, 1999 and the period
from April 10, 1998, (Merger Date) to December 31, 1998, the Advisor earned a
base management fee of $761,646 and $590,875, respectively. The Advisor
earned incentive compensation of $741,233 in 1999 and $2,807 in
1998. Approximately $433,000 of the incentive fee earned in 1999 was
attributable to the sale of undivided interests in the net assets of four
assisted living centers held by RCC as described in Note 5.
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 3.5% to 4% of gross revenues.
Such fees paid by the Company for the year ended December 31, 1999, and in 1998
for periods after the Merger Date amounted to $325,213 and $250,912,
respectively. Such fees paid by the three Partnerships which merged amounted
to $83,017 (including $45,527 paid by the Predecessor) for the period in 1998
prior to the Merger Date and $355,077 in 1997 (including $222,682 paid by the
Predecessor).
Prior to the Merger Date, the general partner of the Predecessor (AFCA 3) was
entitled to an administrative fee of .35% per annum of the outstanding amount
of investments of the Predecessor to be paid by the Predecessor to the extent
such amount is not paid by property owners. AFCA 3 earned administrative fees
of $53,617 and $225,813 in 1998 and 1997, respectively. Of such amounts,
$38,659 and $195,816 in 1998 and 1997, respectively, were paid by the
Predecessor and the remainder was paid by owners of real properties financed
by the Predecessor. During 1997, AFCA 3 also received administrative fees of
$88,780 in conjunction with the payoff of one of the Predecessor's investments
in participating loans.
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 amounts
of such expenses reimbursed to AFCA 3 or an affiliate were $165,439 in 1998
and $1,935,423 in 1997. The capitalized costs consist of transaction costs
incurred in conjunction with the merger described in Note 1.
<PAGE> - 35 -
9. Fair Value of Financial Instruments
The following methods and assumptions were used by the Company in estimating
the fair value of its financial instruments:
Investments in mortgage securities, corporate securities and preferred
stock: Fair values are based on broker quotes or amounts obtained from
independent pricing sources.
Cash and cash equivalents: Fair value approximates the carrying value of
such assets.
Repurchase agreements: Fair value approximates the carrying value of such
liabilities.
<TABLE>
<CAPTION>
As of December 31, 1999 As of December 31, 1998
------------------------------------- --------------------------------
Carrying Estimated Carrying Estimated
Amount Fair Value Amount Fair Value
------------ --------------- ------------- --------------
<S> <C> <C> <C> <C>
Investment in mortgage securities $ 475,719,711 $ 475,719,711 $ 241,895,462 $ 241,895,462
Investment in corporate securities 8,020,026 7,937,750 4,673,127 4,946,250
Investment in preferred stock 3,130,823 3,130,823 1,153,800 1,153,800
Cash and cash equivalents
Unrestricted 19,895,833 19,895,833 6,045,956 6,045,956
Restricted 3,709,577 3,709,577 - -
Repurchase agreements 452,101,803 452,101,803 190,250,084 190,250,084
</TABLE>
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
Year Ended
Dec. 31, 1998
---------------
<S> <C>
Mortgage securities income $ 8,982,060
Corporate securities income 164,738
Interest income on temporary cash investments 727,889
---------------
Total interest income 9,874,687
Interest expense on borrowed funds 4,619,500
---------------
Net interest income 5,255,187
---------------
Income from other investments 801,076
Gain on sale of investments 426,607
---------------
1,227,683
---------------
General and administrative expenses (1) 2,655,216
Minority interest 3,353
---------------
2,658,569
---------------
Net income $ 3,824,301
===============
Net income, basic and fully diluted, per share $ 0.42
===============
Weighted average number of shares outstanding 9,043,172
(1) Excludes transaction costs of $364,924 incurred by Prep Fund 2 and Pension Fund.
The pro forma financial information is not necessarily indicative of what the consolidated results of operations of the Company
would have been for the periods indicated, nor does it purport to represent the results of operations for future periods.
</TABLE>
<PAGE> - 36 -
11. Summary of Quarterly Results of Operations (Unaudited)
<TABLE>
<CAPTION>
First Second Third Fourth
From January 1, 1999, to December 31, 1999 Quarter Quarter Quarter Quarter
-------------- -------------- -------------- --------------
<S> <C> <C> <C> <C>
Total income $ 1,869,081 $ 2,146,590 $ 4,223,361 $ 2,037,399
Total expenses (616,193) (628,400) (1,052,855) (374,885)
Minority interest (490) (4,230) 327 175
-------------- -------------- -------------- --------------
Net income $ 1,252,398 $ 1,513,960 $ 3,170,833 (1) $ 1,662,689
============== ============== ============== ==============
Net income, basic and diluted,
per share $ 0.14 $ 0.17 $ 0.35 (1) $ 0.18
============== ============== ============== ==============
(1) Includes income of approximately $1.7 million (net of the incentive fee of $433,000)
or approximately $0.19 per share related to the sale described in Note 5.
</TABLE>
<TABLE>
<CAPTION>
Predecessor Predecessor Company Company Company
First Second Second Third Fourth
From January 1, 1998, to Quarter Quarter Quarter Quarter Quarter
December 31, 1998 Through April 9 From April 10
(Company and Predecessor) -------------- -------------- -------------- -------------- ------------
<S> <C> <C> <C> <C> <C>
Total income $ 907,759 $ - $ 1,773,422 $ 1,409,413 $ 1,425,701
Total expenses (421,293) - (540,392) (532,741) (600,982)
Minority interest - - 7,977 (10,124) (1,206)
-------------- -------------- -------------- -------------- ------------
Net income $ 486,466 $ - $ 1,241,007 $ 866,548 $ 823,513
============== ============== ============== ============== ============
Net income, basic and diluted,
per share or exchangeable unit $ 0.08 $ - $ 0.13 $ 0.10 $ 0.09
============== ============== ============== ============== ============
</TABLE>
12. Subsequent Events
On January 12, 2000, Retirement Centers Corporation (RCC) acquired a 127-unit
multifamily apartment property located in Omaha, Nebraska for approximately
$8.7 million. This acquisition was financed with net loan proceeds of
approximately $6.2 million and cash of approximately $2.5 million.
On January 26, 2000, the Company acquired a FNMA whole-pool mortgage-backed
certificate with a remaining principal balance of approximately $34.9 million
(FNMA Certificate). The FNMA Certificate bears interest at a rate of 7.292%
per annum. The total purchase price paid for the FNMA Certificate, including
accrued interest, was approximately $35.9 million. The acquisition was
financed in part with the proceeds of a LIBOR-based repurchase agreement of
approximately $34.3 million and the remainder from cash reserves of the
Company.
Pursuant to the Company's stock repurchase program described in Note 7, the
Company purchased 60,800 shares of its common stock at an aggregate cost of
$298,342 from January 1, 2000 through March 10, 2000. Such shares are
currently held as treasury stock pending expected retirement on or about March
31, 2000.
<PAGE> - 37 -
Item 9. Changes in and Disagreements With Accountants on Accounting and
Financial Disclosure. There were no disagreements with the Company's or its
Predecessor's independent accountants on accounting principles and practices
or financial disclosure during the fiscal years ended December 31, 1999 and
1998.
PART III
Item 10. Directors and Executive Officers of Registrant. The information
about directors required to be furnished pursuant to this Item 10 is
incorporated by reference to the Company's definitive proxy statement for its
2000 Annual Meeting of Stockholders to be filed with the Securities and
Exchange Commission pursuant to Regulation 14A within 120 days after December
31, 1999 (the "Proxy Statement") under the heading "Election of Directors."
Information about the executive officers of the Company is shown under Item 4
of this filing.
Section 16(a) Beneficial Ownership Reporting Compliance.
Section 16(a) of the Securities and Exchange Act of 1934 requires the
Company's directors and executive officers, and certain persons who own more
than ten percent of the Company's common stock, to file with the Securities
and Exchange Commission (the "SEC") reports of their ownership of Company
common stock. Officers, directors and greater-than-ten-percent beneficial
owners are required by SEC regulation to furnish the Company with copies of
all Section 16(a) reports they file. Based solely upon review of the copies
of such reports received by the Company and written representations from each
such person who did not file an annual report with the SEC (Form 5) that no
other reports were required, the Company believes that there was compliance
for the year ended December 31, 1999, with all Section 16(a) filing
requirements applicable to the Company's officers, directors and
greater-than-ten-percent beneficial owners.
Item 11. Executive Compensation. The information required to be furnished
pursuant to this Item 11 is incorporated by reference to the Proxy Statement.
Item 12. Security Ownership of Certain Beneficial Owners and Management.
The information required to be furnished pursuant to this Item 12 is
incorporated by reference to the Proxy Statement under the heading "Voting
Securities and Beneficial Ownership Thereof by Principal Stockholders,
Directors and Officers" and "Long-Term Incentive Plans and Other Matters."
Item 13. Certain Relationships and Related Transactions. The information
required to be furnished pursuant to this Item 13 is incorporated by reference
to the Proxy Statement under the heading "Certain Relationships and Related
Transactions."
PART IV
Item 14. Exhibits, Financial Statement Schedules and Reports on Form 8-K.
(a) The following documents are filed as part of this report:
1. Consolidated and Combined Financial Statements. The consolidated and
combined financial statements of the Company and the Predecessor, together
with the Independent Accountants' Report thereon, are set forth on pages 21
through 37 of this Form 10-K and are incorporated herein by
reference.
2. Financial Statement Schedules. The information required to be set forth in
the financial statement schedules is shown in the Notes to Consolidated and
Combined Financial Statements filed in response to Item 8 hereof.
3. Exhibits.
2.1 Agreement and Plan of Merger by and among the Company,
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 Company pursuant to the
Securities Act of 1933 (Commission File No. 333-46179)).
<PAGE> - 38 -
3.1 Amended and Restated Articles of Incorporation 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)).
3.2 Amended and Restated Bylaws 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)).
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 Company 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 Company 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 Company 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 Company pursuant to the Securities Act of 1933
(Commission File No. 333-46179)).
10.5 Amended and Restated 1997 Stock Option Plan of the Company.
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 Company
pursuant to the Securities Act of 1933 (Commission File No.
333-46179)).
24. Power of Attorney
27. Financial Data Schedule
(b) Reports on Form 8-K
The Registrant did not file any reports on Form 8-K during the
fourth quarter of the year for which this report is filed.
<PAGE> - 39 -
SIGNATURES
Pursuant to the requirements of Section 13 or 15 (d) of the Securities
Exchange Act of 1934, the Company has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized.
Date: March 16, 2000 America First Mortgage Investments, Inc.
By /s/ Stewart Zimmerman
Stewart Zimmerman
Chief Executive Officer
<PAGE> - 40 -
Pursuant to the requirements of the Securities Act of 1934, this report has
been signed below by the following persons on behalf of the Company and in
the capacities and on the dates indicated.
Date: March 16, 2000 By /s/ Michael B. Yanney*
Michael B. Yanney
Chairman of the Board
Date: March 16, 2000 By /s/ Stewart Zimmerman
Stewart Zimmerman
Chief Executive Officer and Director
Date: March 16, 2000 By /s/ Gary Thompson
Gary Thompson
Chief Financial Officer
Date: March 16, 2000 By /s/ Michael L. Dahir*
Michael L. Dahir
Director
Date: March 16, 2000 By /s/ George V. Janzen*
George V. Janzen
Director
Date: March 16, 2000 By /s/ George H. Krauss*
George H. Krauss
Director
Date: March 16, 2000 By /s/ Gregor Medinger*
Gregor Medinger
Director
Date: March 16, 2000 By /s/ W. David Scott*
W. David Scott
Director
* By Stewart Zimmerman, Attorney-in-fact
/s/ Stewart Zimmerman
Stewart Zimmerman
<PAGE> - 41 -
EXHIBIT 10.5
AMENDED AND RESTATED 1997 STOCK OPTION PLAN OF THE COMPANY
<PAGE> - 42 -
AMERICA FIRST MORTGAGE INVESTMENTS, INC.
AMENDED AND RESTATED
1997 STOCK OPTION PLAN
1. PURPOSE. The Plan is intended to provide incentive to key employees,
officers, directors and others expected to provide significant services to the
Company, including the employees, officers and directors of the Participating
Companies, to encourage proprietary interest in the Company, to encourage such
key employees to remain in the employ of the Company and the other
Participating Companies, to attract new employees with outstanding
qualifications, and to afford additional incentive to others to increase their
efforts in providing significant services to the Company and the other
Participating Companies. In furtherance thereof, the Plan permits awards of
equity-based incentives to key employees, officers and directors of, and
certain other providers of services to, the Participating Companies.
2. DEFINITIONS.
a. "Act" shall mean the Securities Act of 1933, as amended.
b. "Advisor" shall mean American First Mortgage Advisor Corporation, a
Maryland Corporation.
c. "Agreement" shall mean a written agreement entered into between the
Company and the recipient of a Grant pursuant to section 7(b)(i) hereof.
d. "Board" shall mean the Board of Directors of the Company.
e. "Cause" shall mean, unless otherwise provided in the Optionee's
Agreement, (i) engaging in (A) willful or gross misconduct or (B) willful or
gross neglect, (ii) repeatedly failing to adhere to the directions of
superiors or the Board or the written policies and practices of the Company,
(iii) the commission of a felony or a crime of moral turpitude, or any crime
involving the Company, (iv) fraud, misappropriation, embezzlement or material
or repeated insubordination, (v) a material breach of the Optionee's
employment agreement (if any) with the Company (other than a termination of
employment by the Optionee), or (vi) any illegal act detrimental to the
Company; all as determined by the Committee.
f. "Code" shall mean the Internal Revenue Code of 1986, as amended.
g. "Committee" shall mean the Compensation Committee of the Company as
appointed by the Board in accordance with Section 4 of the Plan; provided that
the Committee shall at all times consist solely of persons who, at the time of
their appointment, each qualified as a "Non-Employee Director" under Rule
16b-3(b)(3)(i) promulgated under the Exchange Act and, to the extent that
relief from the limitation of Section 162(m) of the Code is sought, as an
"Outside Director" under Section 1.162-27(e)(3)(i) of the Treasury Regulations.
h. "Common Stock" shall mean the Company's Common Stock, par value $0.01,
either currently existing or authorized hereafter.
i. "Company" shall mean America First Mortgage Investments, Inc., a
Maryland corporation.
j. "DER" shall mean a dividend equivalent right consisting of the right
to receive, as specified by the Committee or the Board at the time of Grant,
cash in an amount equal to the dividend distributions paid on a share of
Common Stock subject to an option.
k. "Disability" shall mean the occurrence of an event which would
entitle an employee of the Company to the payment of disability income under
one of the Company's approved long-term disability income plans or a long-term
disability as determined by the Committee in its absolute discretion pursuant
to any other standard as may be adopted by the Committee.
l. "Eligible Persons" shall mean officers, directors and employees of
the Participating Companies and other persons expected to provide significant
services (of a type expressly approved by the Committee as covered services
for these purposes) to the Company. For purposes of the Plan, a director, in
his or her capacity as such, or a consultant, vendor, customer, or other
provider of significant services to the Company shall be deemed to be an
Eligible Person, but will be eligible to receive Non-qualified Stock Options,
<PAGE> - 43 -
or DERs, only after a finding by the Committee or Board in its discretion that
the value of the services rendered or to be rendered to the Participating
Company is at least equal to the value of the Grants being awarded.
m. "Employee" shall mean an individual, including an officer of a
Participating Company, who is employed (within the meaning of Code Section
3401and the regulations thereunder) by the Participating Company.
n. "Exchange Act" shall mean the Securities Exchange Act of 1934,
as amended.
o. "Exercise Price" shall mean the price per Share of Common Stock,
determined by the Board or the Committee, at which an Option may be exercised.
p. "Fair Market Value" shall mean the value of one share of Common Stock,
determined as follows:
i. If the Shares are then listed on a national stock exchange, the
closing sales price per Share on the exchange for the last
preceding date on which there was a sale of Shares on such
exchange, as determined by the Committee.
ii. If the Shares are not then listed on a national stock exchange
but are then traded on an over-the-counter market, the average
of the closing bid and asked prices for the Shares in such
over-the-counter market for the last preceding date on which
there was a sale of such Shares in such market, as determined
by the Committee.
iii. If neither (i) nor (ii) applies, such value as the Committee
in its discretion may in good faith determine. Notwithstanding
the foregoing, where the Shares are listed or traded, the
Committee may make discretionary determinations in good faith
where the Shares have not been traded for 10 trading days.
q. "Grant" shall mean the issuance of an Incentive Stock Option,
Non-qualified Stock Option, DER or any combination thereof to an Eligible
Person. The Committee will determine the eligibility of employees, officers,
directors and others expected to provide significant services to the
Participating Companies based on, among other factors, the position and
responsibilities of such individuals, the nature and value to the
Participating Company of such individuals' accomplishments and potential
contribution to the success of the Participating Company whether directly or
through its subsidiaries.
r. "Incentive Stock Option" shall mean an Option of the type described in
Section 422(b) of the Code issued to an Employee.
s. "Non-qualified Stock Option" shall mean an Option not described in
Section 422(b) of the Code.
t. "Option" shall mean any option, whether an Incentive Stock Option or
a Non-qualified Stock Option, to purchase, at a price and for the term fixed
by the Committee in accordance with the Plan, and subject to such other
limitations and restrictions in the Plan and the applicable Agreement, a
number of Shares determined by the Committee.
u. "Optionee" shall mean any Eligible Person to whom an Option is
granted, or the Successors of the Optionee, as the context so requires.
v. "Participating Companies" shall mean the Company, Advisor and any
subsidiary of any of them which with the consent of the Board participates in
the Plan.
w. "Plan" shall mean the Company's 1997 Stock Option Plan, as set forth
herein, and as the same may from time to time be amended.
x. "Purchase Price" shall mean the Exercise Price times the number of
Shares with respect to which an Option is exercised.
y. "Retirement" shall mean, unless otherwise provided by the Committee
in the Optionee's Agreement,
<PAGE> - 44 -
(i) the Termination (other than for Cause) of Service of an
Optionee on or after the Optionee's attainment of age 65;
(ii) on or after the Optionee's attainment of age 55 with five
consecutive years of service with the Participating Companies
or
(iii) as determined by the Committee in its absolute discretion
pursuant to such other standard as may be adopted by the
Committee.
z. "Shares" shall mean shares of Common Stock of the Company, adjusted in
accordance with Section 10 of the Plan (if applicable).
aa. "Subsidiary" shall mean any corporation, partnership, or other entity
at least 50% of the economic interest in the equity of which is owned by the
Company or by another Subsidiary.
bb. "Successors of the Optionee" shall mean the legal representative of
the estate of a deceased Optionee or the person or persons who shall acquire
the right to exercise an Option by bequest or inheritance or by reason of the
death of the Optionee.
cc. "Termination of Service" shall mean the time when the
employee-employer relationship or directorship, or other service relationship
(sufficient to constitute service as an Eligible Person) between the Optionee
and the Participating Companies is terminated for any reason, with or without
Cause, including but not limited to any termination by resignation, discharge,
death or Retirement; provided, however, Termination of Service shall not
include a termination where there is a simultaneous reemployment of the
Optionee by a Participating Company or other continuation of service
(sufficient to constitute service as an Eligible Person) for a Participating
Company. The Committee, in its absolute discretion, shall determine the
effects of all matters and questions relating to Termination of Service,
including but not limited to the question of whether any Termination of
Service was for Cause and all questions of whether particular leaves of
absence constitute Terminations of Employment.
3. EFFECTIVE DATE. Unless already approved by shareholders, the Plan
will be submitted to shareholders for their approval within twelve months
after receipt of Board approval. Any Grants awarded before approval of the
Plan by the Company's shareholders shall be accrued for the benefit of the
participant until the Plan has been approved by the shareholders.
4. ADMINISTRATION.
a. Membership on Committee. The Plan shall be administered by the
Committee appointed by the Board. If no Committee is designated by the Board
to act for those purposes, the full Board shall have the rights and
responsibilities of the Committee hereunder.
b. Committee Meetings. The acts of a majority of the members present at
any meeting of the Committee at which a quorum is present, or acts approved in
writing by a majority of the entire Committee, shall be the acts of the
Committee for purposes of the Plan. If and to the extent applicable, no member
of the Committee may act as to matters under the Plan specifically relating to
such member.
c. Grant Awards. (i) The Committee shall from time to time at its
discretion select the Eligible Persons who are to be issued Grants, determine
the number of Shares to be optioned or with respect to which the Grant is to
be issued to each Eligible Person and designate any Options granted as
Incentive Stock Options or Non-qualified Stock Options, or both, except that
no Incentive Stock Options may be granted to an Eligible Person who is not an
Employee of the Company. The Committee shall (A) determine the terms and
conditions, not inconsistent with the terms of the Plan, of any Grants awarded
hereunder, (including, but not limited to the performance goals and periods
applicable to the award of Grants); (B) determine the time or times when and
the manner and condition in which each Option shall be exercisable and the
duration of the exercise period; and (C) determine or impose other conditions
to the Grant or exercise of Options under the Plan as it may deem
appropriate. The Committee shall cause each Option to be designated as an
Incentive Stock Option or a Non-qualified Stock Option. The Optionee shall
take whatever additional actions and execute whatever additional documents the
<PAGE> - 45 -
Committee may in its reasonable judgment deem necessary or advisable in order
to carry or effect one or more of the obligations or restrictions imposed on
the Optionee pursuant to the express provisions of the Plan and the
Agreement. DERs will be exercisable separately or together with Options, and
paid in cash or other consideration at such times and in accordance with such
rules, as the Committee shall determine in its discretion. Unless expressly
provided hereunder, the Committee, with respect to any Grant, may exercise its
discretion hereunder at the time of the award or thereafter. The
interpretation and construction by the Committee of any provision of the Plan
or of any Option granted thereunder shall be final. Without limiting the
generality of Section 18, no member of the Committee shall be liable for any
action or determination made in good faith with respect to the Plan or any
Grant hereunder.
(ii) Notwithstanding paragraph (i) of this Section 4(c), any award under
the Plan to an Eligible Person who is a member of the Committee, shall be made
by a majority of the directors of the Corporation who are not on the Committee.
5. PARTICIPATION.
a. Eligibility. Only Eligible Persons shall be eligible to receive
Grants under the Plan.
b. Limitation of Ownership. No Options shall be granted under the Plan
to any person who after such Grant would beneficially own more than 9.8% of
the outstanding shares of Common Stock of the Company, unless expressly and
specifically waived by action of the independent Directors of the Board.
c. Stock Ownership. For purposes of (b) above, in determining
stock ownership an Optionee shall be considered as owning the stock owned,
directly or indirectly, by or for his brothers, sisters, spouses, ancestors
and lineal descendants. Stock owned, directly or indirectly, by or for a
corporation, partnership, estate or trust shall be considered as being owned
proportionately by or for its shareholders, partners or beneficiaries. Stock
with respect to which any person holds an Option shall be considered to be
owned by such person.
d. Outstanding Stock. For purposes of (b) above, "outstanding shares"
shall include all stock actually issued and outstanding immediately after the
grant of the Option to the Optionee. With respect to the Stock Ownership of
any Optionee, "outstanding shares" shall include shares authorized for issue
under outstanding Options held by such Optionee, but not options held by any
other person.
6. STOCK. Subject to adjustments pursuant to Section 10, Options with
respect to an aggregate of no more than 1,000,000 Shares may be granted under
the Plan, nor may the number of Shares subject to Options outstanding at any
time exceed 10% of the total outstanding shares of the Company's Common
Stock. In no event may any Optionee receive Options for more than 100,000
Shares of Common Stock over the life of the Plan; provided, however, that this
sentence shall not apply to Options granted prior to the first meeting of the
Company's shareholders at which directors are to be elected that occurs after
December 31, 1999, and such Options shall not be taken into account in
determining whether the limitation of this sentence has been satisfied.
Notwithstanding the foregoing provisions of this Section 6, Shares as to which
an Option is granted under the Plan that remains unexercised at the
expiration, forfeiture or other termination of such Option may be the subject
of the grant of further Options. Shares of Common Stock issued hereunder may
consist, in whole or in part, of authorized and unissued shares or treasury
shares. The certificates for Shares issued hereunder may include any legend
which the Committee deems appropriate to reflect any restrictions on transfer
hereunder or under the Agreement, or as the Committee may otherwise deem
appropriate.
7. TERMS AND CONDITIONS OF OPTIONS.
a. Initial Awards to Compensation Committee Members. Each member of the
Committee shall automatically be granted a Non-qualified Stock Option to
purchase 5,000 shares of Common Stock and 1,250 DERs upon the date such person
is initially appointed to the Committee. Each Option granted to a Committee
member under this Section 7(a) shall become exercisable commencing one year
after the date of Grant (unless otherwise provided in the applicable
Agreement) and shall expire 10 years thereafter. Such Options shall be
subject to adjustment as provided in Section 10 provided that such adjustment
<PAGE> - 46 -
and any action by the Board or the Committee with respect to the Plan and such
Options satisfies the requirements for exemption under Rule 16b-3 and does not
cause any member of the Committee to be disqualified as a Non-Employee
Director under such Rule. Notwithstanding the foregoing, the Board may
prospectively, from time to time, discontinue, reduce or increase the amount
of any or all of the Grants otherwise to be made under this Section 7(a).
b. Awards.
(i) Agreements. Grants to Eligible Persons shall be evidenced by
written Agreements in such form as the Committee shall from time to
time determine. Such Agreements shall comply with and be subject to
the terms and conditions set forth below.
(ii) Number of Shares. Each Option or other Grant granted to an
Eligible Person shall state the number of Shares to which it pertains
and shall provide for the adjustment thereof in accordance with the
provisions of Section 10 hereof.
(iii) Grants. Subject to the terms and conditions of the Plan and
consistent with the Company's intention for the Committee to exercise
the greatest permissible flexibility under Rule 16b-3 in awarding
Grants, the Committee shall have the power:
(1) to determine from time to time the Grants to be granted to
Eligible Persons under the Plan and to prescribe the terms and
provisions (which need not be identical) of Grants granted under
the Plan to such persons;
(2) to construe and interpret the Plan and Grants thereunder and to
establish, amend, and revoke rules and regulations for
administration of the Plan. In this connection, the Committee
may correct any defect or supply any omission, or reconcile any
inconsistency in the Plan, in any Agreement, or in any related
agreements, in the manner and to the extent it shall deem
necessary or expedient to make the Plan fully effective. All
decisions and determinations by the Committee in the exercise
of this power shall be final and binding upon the Participating
Companies and the Optionees and Grantees;
(3) to amend any outstanding Grant, subject to Section 12, and to
accelerate or extend the vesting or exercisability of any
Grant and to waive conditions or restrictions on any Grants, to
the extent it shall deem appropriate; and
(4) generally to exercise such powers and to perform such acts as are
deemed necessary or expedient to promote the best interests of
the Company with respect to the Plan.
c. Each Agreement with an Eligible Person shall state the Exercise Price.
The Exercise Price for any Option shall not be less than the Fair Market Value
on the date of Grant.
d. Medium and Time of Payment. Except as may otherwise be provided
below, the Purchase Price for each Option granted to an Eligible Person shall
be payable in full in United States dollars upon the exercise of the Option.
In the event the Company determines that it is required to withhold taxes as a
result of the exercise of an Option, as a condition to the exercise thereof,
an Employee may be required to make arrangements satisfactory to the Company
to enable it to satisfy such withholding requirements in accordance with
Section 15. If the applicable Agreement so provides, and the Committee
otherwise so permits, the Purchase Price may be paid in one or a combination
of the following:
(i) by a certified or bank cashier's check;
(ii) by the surrender of Shares in good form for transfer, owned by
the person exercising the Option and having a Fair Market Value
on the date of exercise equal to the Purchase Price, or in any
combination of cash and Shares, as long as the sum of the cash
so paid and the Fair Market Value of the Shares so surrendered
equals the Purchase Price;
(iii) by cancellation of indebtedness owed by the Company to the
<PAGE> - 47 -
Optionee;
(iv) by a loan or extension of credit from the Company evidenced by
a full recourse promissory note executed by the Optionee. The
interest rate and other terms and conditions of such note shall
be determined by the Committee (in which case the Committee may
require that the Optionee pledge his or her Shares to the
Company for the purpose of securing the payment of such note,
and in no event shall the stock certificate(s) representing
such Shares be released to the Optionee until such note shall
have been paid in full); or
(v) by any combination of such methods of payment or any other
method acceptable to the Committee in its discretion.
Except in the case of Options exercised by certified or bank
cashier's check, the Committee may impose limitations and
prohibitions on the exercise of Options as it deems
appropriate, including, without limitation, any limitation or
prohibition designed to avoid accounting consequences which
may result from the use of Common Stock as payment upon
exercise of an Option. Any fractional Shares resulting from
an Optionee's election that are accepted by the Company shall
in the discretion of the Committee be paid in cash.
e. Term and Nontransferability of Grants and Options.
(i) Each Grant shall state the time or times which all or part
thereof becomes exercisable, subject to the following
restrictions.
(ii) No Grant shall be exercisable except by the Optionee or a
transferee permitted hereunder.
(iii) No Option shall be assignable or transferable, except by will
or the laws of descent and distribution of the state wherein
the Optionee is domiciled at the time of his death; provided,
however, that the Committee may (but need not) permit other
transfers, where the Committee concludes that such
transferability (i) does not result in accelerated taxation,
(ii) does not cause any Option intended to be an Incentive
Stock Option to fail to be described in Section 422(b) of the
Code and (iii) is otherwise appropriate and desirable.
(iv) No Option shall be exercisable until such time as set forth in
the applicable Agreement (but in no event after the expiration
of such Grant).
(v) Unless otherwise provided in the Agreement, no DERs shall be
exercisable (i) until such time as set forth in the applicable
agreement or (ii) the expiration of such Grant.
(vi) The Committee may not modify, extend or renew any Option
granted to any Eligible Person unless such modification,
extension or renewal shall satisfy any and all applicable
requirements of Rule 16b-3. The foregoing notwithstanding,
no modification of an Option shall, without the consent of
the Optionee, alter or impair any rights or obligations under
any Option previously granted.
f. Termination of Service, Except by Death, Retirement or Disability.
Unless otherwise provided in the applicable Agreement, upon any Termination of
Service for any reason other than his or her death, Retirement or Disability,
an Optionee shall have the right, subject to the restrictions of subsection
(c) above, to exercise his or her Grant at any time within three months after
Termination of Service, but only to the extent that, at the date of
Termination of Service, the Optionee's right to exercise such Grant had
accrued pursuant to the terms of the Agreement and had not previously been
exercised; provided, however, that, unless otherwise provided in the
Agreement, if there occurs a Termination of Service by a Participating Company
for Cause or a termination of Service by the Optionee (other than on account
of death, Retirement or Disability), any Grant not exercised in full prior to
such termination shall be canceled. For this purpose, the service
relationship shall be treated as continuing intact while the Optionee is on
<PAGE> - 48 -
military leave, sick leave or other bona fide leave of absence (to be
determined in the discretion of the Committee).
g. Death of Optionee. Unless otherwise provided in the applicable
Agreement, if the Optionee dies while an Eligible Person or within three
months after any Termination of Service other than for Cause or a termination
of Service by the Optionee (other than on account of death, Retirement or
Disability), and has not fully exercised the Grant, then the Grant may be
exercised in full, subject to the restrictions of subsection (c) above, at
anytime within 12 months after the Optionee's death, by the Successor of the
Optionee, but only to the extent that, at the date of death, the Optionee's
right to exercise such Grant had accrued and had not been forfeited pursuant
to the terms of the Agreement and had not previously been exercised.
h. Disability or Retirement of Grant Recipient. Unless otherwise
provided in the Agreement, upon Termination of Service for reason of
Disability or Retirement, such Grant recipient shall have the right, subject
to the restrictions of subsection (c) above, to exercise the Grant at any time
within24 months after Termination of Service, but only to the extent that, at
the date of Termination of Service, the Grant recipient's right to exercise
such Grant had accrued pursuant to the terms of the applicable Agreement and
had not previously been exercised.
i. Rights as a Shareholder. An Optionee, a Successor of the Optionee, or
the holder of a DER shall have no rights as a shareholder with respect to any
Shares covered by his or her Grant until, in the case of an Optionee, the date
of the issuance of a stock certificate for such Shares. No adjustment shall
be made for dividends (ordinary or extraordinary, whether in cash, securities
or other property), distributions or other rights for which the record date is
prior to the date such stock certificate is issued, except as provided in
Section 10.
j. Modification, Extension and Renewal of Option. Within the limitations
of the Plan, and only with respect to Options granted to Eligible Persons, the
Committee may modify, extend or renew outstanding Options or accept the
cancellation of outstanding Options (to the extent not previously exercised)
for the granting of new Options in substitution therefor. The Committee may
modify, extend or renew any Option granted to any Eligible Person, unless such
modification, extension or renewal would not satisfy any applicable
requirements of Rule 16b-3. The foregoing notwithstanding, no modification of
an Option shall, without the consent of the Optionee, alter or impair any
rights or obligations under any Option previously granted.
k. Other Provisions. The Agreement authorized under the Plan may contain
such other provisions not inconsistent with the terms of the Plan (including,
without limitation, restrictions upon the exercise of the Option) as the
Committee shall deem advisable.
8. SPECIAL RULES FOR INCENTIVE STOCK OPTIONS.
a. In the case of Incentive Stock Options granted hereunder, the
aggregate Fair Market Value (determined as of the date of the Grant thereof)
of the Shares with respect to which Incentive Stock Options become exercisable
by any Optionee for the first time during any calendar year (under the Plan
and all other plans maintained by the Participating Companies, their parent or
Subsidiaries) shall not exceed $100,000.
b. In the case of an individual described in Section 422(b)(6) of the
Code (relating to certain 10% owners), the Exercise Price with respect to an
Incentive Stock Option shall not be less than 110% of the Fair Market Value of
a Share on the day the Option is granted and the term of an Incentive Stock
Option shall be no more than five years from the date of grant.
c. If Shares acquired upon exercise of an Incentive Stock Option are
disposed of in a disqualifying disposition within the meaning of Section 422
of the Code by an Optionee prior to the expiration of either two years from
the date of grant of such Option or one year from the transfer of Shares to
the Optionee pursuant to the exercise of such Option, or in any other
disqualifying disposition within the meaning of Section 422 of the Code, such
Optionee shall notify the Company in writing as soon as practicable thereafter
of the date and terms of such disposition and, if the Company thereupon has a
tax-withholding obligation, shall pay to the Company an amount equal to any
withholding tax the Company is required to pay as a result of the
disqualifying disposition.
<PAGE> - 49 -
9. TERM OF PLAN. Options may be granted pursuant to the Plan until the
expiration of 10 years from the effective date of the Plan.
10. RECAPITALIZATION AND CHANGES OF CONTROL.
a. Subject to any required action by shareholders, if (i) the Company
shall at any time be involved in a merger, consolidation, dissolution,
liquidation, reorganization, exchange of shares, sale of all or substantially
all of the assets or stock of the Company or a transaction similar thereto,
(ii) any stock dividend, stock split, reverse stock split, stock combination,
reclassification, recapitalization or other similar change in the capital
structure of the Company, or any distribution to holders of Common Stock other
than cash dividends, shall occur or (iii) any other event shall occur which in
the judgment of the Committee necessitates action by way of adjusting the
terms of the outstanding Options or rights under the Grant of a DER, then the
Committee shall forthwith take any such action as in its judgment shall be
necessary to preserve to the Optionees rights substantially proportionate to
the rights existing prior to such event, and to maintain the continuing
availability of Shares under Section 6 (if Shares are otherwise then
available) in a manner consistent with the intent hereof, including, without
limitation, adjustments in (x) the number and kind of shares subject to
Options, (y) the Option Price, and (z) the number and kind of shares available
under Section 6; provided that this provision shall not be effective to the
extent that the Company or the Committee determines that the accelerated
vesting of the Options upon the occurrence of a Change of Control as
contemplated hereby would adversely affect the ability of the Company or
acquiror (in the case of a Change of Control in connection with which the
Company is not the surviving corporation) to use the pooling method of
accounting in connection with a Change of Control transaction, if such method
of accounting would otherwise be available and desired by the Company or
acquiror. To the extent that such action shall include an increase or
decrease in the number of shares subject to outstanding Options, the number of
shares available under Section 6 above shall be increased or decreased, as the
case may be, proportionately.
b. Subject to any required action by shareholders, if the Company is the
surviving corporation in any merger or consolidation, each outstanding Option
and the rights under the Grant of a DER shall pertain and apply to the
securities to which a holder of the number of Shares subject to the Option
would have been entitled. In the event of a merger or consolidation in which
the Company is not the surviving corporation, the date of exercisability of
each outstanding Grant shall be accelerated to a date prior to such merger or
consolidation, unless the agreement of merger or consolidation provides for
the assumption of the Grant by the successor to the Company.
c. To the extent that the foregoing adjustment related to securities of
the Company, such adjustments shall be made by the Committee, whose
determination shall be conclusive and binding on all persons.
d. Except as expressly provided in this Section 10, the recipient of the
Grant shall have no rights by reason of subdivision or consolidation of shares
of stock of any class, the payment of any stock dividend or any other increase
or decrease in the number of shares of stock of any class or by reason of any
dissolution, liquidation, merger or consolidation or spin-off of assets or
stock of another corporation, and any issue by the Company of shares of stock
of any class, or securities convertible into shares of stock of any class,
shall not affect, and no adjustment by reason thereof shall be made with
respect to, the number or Exercise Price of Shares subject to an Option.
e. Grants made pursuant to the Plan shall not affect in any way the right
or power to the Company to make adjustments, reclassifications,
reorganizations or changes of its capital or business structure, to merge or
consolidate or to dissolve, liquidate, sell or transfer all or any part of its
business assets.
f. Upon the occurrence of a Change of Control:
(i) The Committee as constituted immediately before the Change of
Control may make such adjustments as it, in its discretion,
determines are necessary or appropriate in light of the Change
of Control (including, without limitation, the substitution of
stock other than stock of the Company as the stock optioned
hereunder, and the acceleration of the exercisability of the
Options), provided that the Committee determines that such
<PAGE> - 50 -
adjustments do not have a substantial adverse economic impact
on the Optionee as determined at the time of the adjustments.
(ii) All restrictions and conditions on each DER shall automatically
lapse and all Grants under the Plan shall be deemed fully
vested.
g. "Change of Control" shall mean the occurrence of any one of the
following events:
(i) any "person," as such term is used in Sections 13(d) and 14(d)
of the Act (other than the Company, any of its Affiliates or
any trustee, fiduciary or other person or entity holding
securities under any employee benefit plan or trust of the
Company or any of its Affiliates) together with all
"affiliates" and "associates" (as such terms are defined in
Rule 12b-2 under the Act) of such person, shall become the
"beneficial owner" (as such term is defined in Rule 13d-3 under
the Act), directly or indirectly, of securities of the Company
representing 30% or more of either (A) the combined voting
power of the Company's then outstanding securities having the
right to vote in an election of the Board of Directors ("voting
securities") or (B) the then outstanding Shares (in either such
case other than as a result of an acquisition of securities
directly from the Company); or
(ii) persons who, as of the effective date of the Plan, constitute
the Company's Board of Directors (the "Incumbent Directors")
cease for any reason, including, without limitation, as a
result of a tender offer, proxy contest, merger or similar
transaction, to constitute at least a majority of the Board,
provided that any person becoming a Director of the Company
subsequent to the effective date whose election or nomination
for election was approved by a vote of at least a majority of
the Incumbent Directors shall, for purposes of the Plan, be
considered an Incumbent Director; or
(iii) there shall occur (A) any consolidation or merger of the
Company or any Subsidiary where the shareholders of the
Company, immediately prior to the consolidation or merger,
would not, immediately after the consolidation or merger,
beneficially own (as such term is defined in Rule 13d-3 under
the Act), directly or indirectly, shares representing in the
aggregate 50% or more of the voting securities of the
corporation issuing cash or securities in the consolidation or
merger (or of its ultimate parent corporation, if any), (B)
any sale, lease, exchange or other transfer (in one transaction
or a series of transactions contemplated or arranged by any
party as a single plan) of all or substantially all of the
assets of the Company or (C) any plan or proposal for the
liquidation or dissolution of the Company.
Notwithstanding the foregoing, a "Change of Control" shall not be deemed
to have occurred for purposes of the foregoing clause (i) solely as the result
of an acquisition of securities by the Company which, by reducing the number
of Shares or other voting securities outstanding, increases (x) the
proportionate number of Shares beneficially owned by any person to 30% or more
of the Shares then outstanding or (y) the proportionate voting power
represented by the voting securities beneficially owned by any person to 30%
or more of the combined voting power of all then outstanding voting
securities; provided, however, that, if any person referred to in clause (x)
or (y) of this sentence shall thereafter become the beneficial owner of any
additional Shares or other voting securities (other than pursuant to a stock
split, stock dividend, or similar transaction), then a "Change of Control"
shall be deemed to have occurred for purposes of this subsection (g).
11. EFFECT OF CERTAIN TRANSACTIONS. In the case of (i) the dissolution or
liquidation of the Company, (ii) a merger, consolidation, reorganization or
other business combination in which the Company is acquired by another entity
or in which the Company is not the surviving entity, or (iii) any sale, lease,
exchange or other transfer (in one transaction or a series of transactions
contemplated or arranged by any party as a single plan) of all or
substantially all of the assets of the Company, the Plan and the Grants issued
hereunder shall terminate upon the effectiveness of any such transaction or
event, unless provision is made in connection with such transaction for the
<PAGE> - 51 -
assumption of Grants theretofore granted, or the substitution for such Grants
of new Grants, by the successor entity or parent thereof, with appropriate
adjustment as to the number and kind of shares and the per share exercise
prices, as provided in Section 10. In the event of such termination, all
outstanding Options and Grants shall be exercisable in full for at least
fifteen days prior to the date of such termination whether or not otherwise
exercisable during such period.
12. SECURITIES LAW REQUIREMENTS.
a. Legality of Issuance. The issuance of any Shares upon the exercise of
any Option and the grant of any Option shall be contingent upon the following:
(i) the obligation of the Company to sell Shares with respect to
Options granted under the Plan shall be subject to all
applicable laws, rules and regulations, including all
applicable federal and state securities laws, and the
obtaining of all such approvals by governmental agencies as
may be deemed necessary or appropriate by the Committee;
(ii) the Committee may make such changes to the Plan as may be
necessary or appropriate to comply with the rules and
regulations of any government authority or to obtain tax
benefits applicable to stock options; and
(iii) each Option is subject to the requirement that, if at any
time the Committee determines, in its discretion, that the
listing, registration or qualification of Shares issuable
pursuant to the Plan is required by any securities exchange
or under any state or federal law, or the consent or approval
of any governmental regulatory body is necessary or desirable
as a condition of, or in connection with, the grant of an
Option or the issuance of Shares, no Options shall be granted
or payment made or Shares issued, in whole or in part, unless
listing, registration, qualification, consent or approval
has been effected or obtained free of any conditions in a
manner acceptable to the Committee.
b. Restrictions on Transfer. Regardless of whether the offering and sale
of Shares under the Plan has been registered under the Act or has been
registered or qualified under the securities laws of any state, the Company
may impose restrictions on the sale, pledge or other transfer of such
Shares (including the placement of appropriate legends on stock certificates)
if, in the judgment of the Company and its counsel, such restrictions are
necessary or desirable in order to achieve compliance with the provisions of
the Act, the securities laws of any state or any other law. In the event that
the sale of Shares under the Plan is not registered under the Act but an
exemption is available which requires an investment representation or other
representation, each Optionee shall be required to represent that such Shares
are being acquired for investment, and not with a view to the sale or
distribution thereof, and to make such other representations as are deemed
necessary or appropriate by the Company and its counsel. Any determination by
the Company and its counsel in connection with any of the matters set forth in
this Section 11 shall be conclusive and binding on all persons. Without
limiting the generality of the last sentence of Section 6, stock certificates
evidencing Shares acquired under the Plan pursuant to an unregistered
transaction shall bear the following restrictive legend and such other
restrictive legends as are required or deemed advisable under the provisions
of any applicable law. "THE SALE OF THE SECURITIES REPRESENTED HEREBY HAS NOT
BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933 (THE "ACT"). ANY TRANSFER OF
SUCH SECURITIES WILL BE INVALID UNLESS A REGISTRATION STATEMENT UNDER THE ACT
IS IN EFFECT AS TO SUCH TRANSFER OR IN THE OPINION OF COUNSEL FOR THE ISSUER
SUCH REGISTRATION IS UNNECESSARY IN ORDER FOR SUCH TRANSFER TO COMPLY WITH THE
ACT."
c. Registration or Qualification of Securities. The Company may, but
shall not be obligated to, register or qualify the issuance of Options and/or
the sale of Shares under the Act or any other applicable law. The Company
shall not be obligated to take any affirmative action in order to cause the
issuance of Options or the sale of Shares under the Plan to comply with any
law.
d. Exchange of Certificates. If, in the opinion of the Company and its
counsel, any legend placed on a stock certificate representing Shares sold
<PAGE> - 52 -
under the Plan is no longer required, the holder of such certificate shall be
entitled to exchange such certificate for a certificate representing the same
number of Shares but lacking such legend.
13. AMENDMENT OF THE PLAN. The Board may from time to time, with respect
to any Shares at the time not subject to Options, suspend or discontinue the
Plan or revise or amend it in any respect whatsoever. The Board may amend the
Plan as it shall deem advisable, except that no amendment may adversely affect
an Optionee with respect to Options previously granted unless such amendments
are in connection with compliance with applicable laws; provided that the
Board may not make any amendment in the Plan that would, if such amendment
were not approved by the holders of the Common Stock, cause the Plan to fail
to comply with any requirement or applicable law or regulation, unless and
until the approval of the holders of such Common Stock is obtained.
14. APPLICATION OF FUNDS. The proceeds received by the Company from the
sale of Common Stock pursuant to the exercise of an Option will be used for
general corporate purposes.
15. TAX WITHHOLDING. Each recipient of a Grant shall, no later than the
date as of which the value of any Grant first becomes includable in the gross
income of the recipient for federal income tax purposes, pay to the Company,
or make arrangements satisfactory to the Company regarding payment of any
federal, state or local taxes of any kind that are required by law to be
withheld with respect to such income. An Optionee may elect to have such tax
withholding satisfied, in whole or in part, by (i) authorizing the Company to
withhold a number of Shares to be issued pursuant to a Grant equal to the Fair
Market Value as of the date withholding is effected that would satisfy the
withholding amount due, (ii) transferring to the Company Shares owned by the
Optionee with a Fair Market Value equal to the amount of the required
withholding tax, or (iii) in the case of an Optionee who is an Employee of the
Company at the time such withholding is effected, by withholding from the
Optionee's cash compensation. Notwithstanding anything contained in the Plan
to the contrary, the Optionee's satisfaction of any tax-withholding
requirements imposed by the Committee shall be a condition precedent to the
Company's obligation as may otherwise by provided hereunder to provide Shares
to the Optionee, and the failure of the Optionee to satisfy such requirements
with respect to the exercise of an Option shall cause such Option to be
forfeited.
16. NOTICES. All notices under the Plan shall be in writing, and if to
the Company, shall be delivered to the Board or mailed to its principal
office, addressed to the attention of the Board; and if to the Optionee or
recipient of a Grant, shall be delivered personally or mailed to the Optionee
or recipient of a Grant at the address appearing in the records of the
Participating Company. Such addresses may be changed at any time by written
notice to the other party given in accordance with this Section 16.
17. RIGHTS TO EMPLOYMENT OR OTHER SERVICE. Nothing in the Plan or in any
Option or Grant granted pursuant to the Plan shall confer on any individual
any right to continue in the employ or other service of the Company (if
applicable) or interfere in any way with the right of the Company and its
shareholders to terminate the individual's employment or other service at any
time.
18. EXCULPATION AND INDEMNIFICATION. To the maximum extent permitted
by law, the Company shall indemnify and hold harmless the members of the Board
and the members of the Committee from and against any and all liabilities,
costs and expenses incurred by such persons as a result of any act or omission
to act in connection with the performance of such person's duties,
responsibilities and obligations under the Plan, other than such liabilities,
costs and expenses as may result from the gross negligence, bad faith, willful
misconduct or criminal acts of such persons.
19. NO FUND CREATED. Any and all payments hereunder to recipients of
Grants hereunder shall be made from the general funds of the Company (or, if
applicable, a Participating Company), and no special or separate fund shall be
established or other segregation of assets made to assure such payments;
provided that bookkeeping reserves may be established in connection with the
satisfaction of payment obligations hereunder. The obligations of the Company
under the Plan are unsecured and constitute a mere promise by the Company to
make benefit payments in the future, and, to the extent that any person
acquires a right to receive payments under the Plan from the Company (or, if
applicable, a Participating Company), such right shall be no greater than the
<PAGE> - 53 -
right of a general unsecured creditor of the Company (or, if applicable, a
Participating Company).
20. CAPTIONS. The use of captions in the Plan is for convenience. The
captions are not intended to provide substantive rights.
21. GOVERNING LAW. THE PLAN SHALL BE GOVERNED BY THE LAWS OF MARYLAND,
WITHOUT REFERENCE TO PRINCIPLES OF CONFLICT OF LAWS.
22. EXECUTION. The Company has caused the Plan to be executed in the
name and on behalf of the Company by an officer of the Company thereunto duly
authorized.
AMERICA FIRST MORTGAGE INVESTMENTS, INC.,
a Maryland corporation
By: /s/ Stewart Zimmerman
Name: Stewart Zimmerman
Title: President and Chief Executive Officer
<PAGE> - 54 -
EXHIBIT 24
POWER OF ATTORNEY
<PAGE> - 55 -
POWER OF ATTORNEY
The undersigned hereby appoints Stewart Zimmerman as his agent and
attorney-in-fact for the purpose of executing and filing all reports on Form
10-K relating to the year ending December 31, 1999, and any amendments
thereto, required to be filed with the Securities and Exchange Commission by
America First Mortgage Investments, Inc.
IN WITNESS WHEREOF, the undersigned has executed this Power of Attorney as of
the 1st day of February 2000.
/s/ Michael B. Yanney
Michael B. Yanney
<PAGE> - 56 -
POWER OF ATTORNEY
The undersigned hereby appoints Stewart Zimmerman as his agent and
attorney-in-fact for the purpose of executing and filing all reports on Form
10-K relating to the year ending December 31, 1999, and any amendments
thereto, required to be filed with the Securities and Exchange Commission by
America First Mortgage Investments, Inc.
IN WITNESS WHEREOF, the undersigned has executed this Power of Attorney as of
the 1st day of February 2000.
/s/ Michael L. Dahir
Michael L. Dahir
<PAGE> - 57 -
POWER OF ATTORNEY
The undersigned hereby appoints Stewart Zimmerman as his agent and
attorney-in-fact for the purpose of executing and filing all reports on Form
10-K relating to the year ending December 31, 1999, and any amendments
thereto, required to be filed with the Securities and Exchange Commission by
America First Mortgage Investments, Inc.
IN WITNESS WHEREOF, the undersigned has executed this Power of Attorney as of
the 1st day of February 2000.
/s/ George V. Janzen
George V. Janzen
<PAGE> - 58 -
POWER OF ATTORNEY
The undersigned hereby appoints Stewart Zimmerman as his agent and
attorney-in-fact for the purpose of executing and filing all reports on Form
10-K relating to the year ending December 31, 1999, and any amendments
thereto, required to be filed with the Securities and Exchange Commission by
America First Mortgage Investments, Inc.
IN WITNESS WHEREOF, the undersigned has executed this Power of Attorney as of
the 1st day of February 2000.
/s/ George H. Krauss
George H. Krauss
<PAGE> - 59 -
POWER OF ATTORNEY
The undersigned hereby appoints Stewart Zimmerman as his agent and
attorney-in-fact for the purpose of executing and filing all reports on Form
10-K relating to the year ending December 31, 1999, and any amendments
thereto, required to be filed with the Securities and Exchange Commission by
America First Mortgage Investments, Inc.
IN WITNESS WHEREOF, the undersigned has executed this Power of Attorney as of
the 1st day of February 2000.
/s/ Gregor Medinger
Gregor Medinger
<PAGE> - 60 -
POWER OF ATTORNEY
The undersigned hereby appoints Stewart Zimmerman as his agent and
attorney-in-fact for the purpose of executing and filing all reports on Form
10-K relating to the year ending December 31, 1999, and any amendments
thereto, required to be filed with the Securities and Exchange Commission by
America First Mortgage Investments, Inc.
IN WITNESS WHEREOF, the undersigned has executed this Power of Attorney as of
the 1st day of February 2000.
/s/ W. David Scott
W. David Scott
<PAGE> - 61 -
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<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-END> DEC-31-1999
<CASH> 23,605,410
<SECURITIES> 486,870,560
<RECEIVABLES> 2,855,321
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 23,460,731
<PP&E> 0
<DEPRECIATION> 0
<TOTAL-ASSETS> 524,384,473
<CURRENT-LIABILITIES> 456,769,860
<BONDS> 0
<COMMON> 89,786
0
0
<OTHER-SE> 67,524,827
<TOTAL-LIABILITY-AND-EQUITY> 524,384,473
<SALES> 0
<TOTAL-REVENUES> 10,276,431
<CGS> 0
<TOTAL-COSTS> 0
<OTHER-EXPENSES> 2,676,551
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> 7,599,880
<INCOME-TAX> 0
<INCOME-CONTINUING> 0
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 7,599,880
<EPS-BASIC> .84
<EPS-DILUTED> .84
</TABLE>
