10-Q: Quarterly report pursuant to Section 13 or 15(d)
Published on August 13, 1999
FORM 10-Q
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
X Quarterly report pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934
For the quarterly period ended June 30, 1999 or
Transition report pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934
For the transition period from to
Commission File Number: 1-13991
AMERICA FIRST MORTGAGE INVESTMENTS, INC.
(Exact name of registrant as specified in its charter)
Maryland 13-3974868
(State or other jurisdiction (IRS Employer
of incorporation or organization) Identification No.)
399 Park Avenue, 36th Floor, New York, New York 10022
(Address of principal executive offices) (Zip Code)
(212) 935-8760
(Registrant's telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to
such filing requirements for the past 90 days.
YES X NO
APPLICABLE ONLY TO CORPORATE ISSUERS:
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the last practicable date.
Common Stock ($.01 par value) 9,055,142 as of August 11, 1999
Part I. Financial Information
Item 1. Financial Statements
AMERICA FIRST MORTGAGE INVESTMENTS, INC.
CONSOLIDATED BALANCE SHEETS
AMERICA FIRST MORTGAGE INVESTMENTS, INC.
CONSOLIDATED AND COMBINED STATEMENTS OF INCOME
(UNAUDITED)
AMERICA FIRST MORTGAGE INVESTMENTS, INC.
CONSOLIDATED AND COMBINED STATEMENTS OF INCOME
(UNAUDITED)
AMERICA FIRST MORTGAGE INVESTMENTS, INC.
CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY
FOR THE SIX MONTHS ENDED JUNE 30, 1999
(UNAUDITED)
AMERICA FIRST MORTGAGE INVESTMENTS, INC.
CONSOLIDATED AND COMBINED STATEMENTS OF CASH FLOWS
(UNAUDITED)
AMERICA FIRST MORTGAGE INVESTMENTS, INC.
NOTES TO CONSOLIDATED AND COMBINED FINANCIAL STATEMENTS
JUNE 30, 1999
(UNAUDITED)
1. Organization
America First Mortgage Investments, Inc. (the Company) was incorporated in
Maryland on July 24, 1997, but had no operations prior to April 10, 1998.
On April 10, 1998, (the Merger Date) the Company and three partnerships:
America First Participating/Preferred Equity Mortgage Fund Limited Partnership
(Prep Fund 1), America First Prep Fund 2 Limited Partnership (Prep Fund 2),
America First Prep Fund 2 Pension Series Limited Partnership (Pension Fund),
consummated a merger transaction whereby their pre-existing net assets and
operations or majority interest in the preexisting partnership were
contributed to the Company in exchange for 9,035,084 shares of the Company's
common stock. For financial accounting purposes, Prep Fund 1, the largest of
the three partnerships, was considered the Predecessor entity (the
Predecessor) and its historical operating results are presented in the
financial statements contained herein. The Merger was accounted for using the
purchase method of accounting in accordance with generally accepted accounting
principles. Prep Fund 1 was deemed to be the acquirer of the other
partnerships under the purchase method. Accordingly, the Merger resulted, for
financial accounting purposes, in the effective purchase by Prep Fund 1 of all
the Beneficial Unit Certificates (BUCs) of Prep Fund 2 and approximately 99%
of the BUCs of Pension Fund. As the surviving entity for financial accounting
purposes, the assets and liabilities of Prep Fund 1 were recorded by the
Company at their historical cost and the assets and liabilities of Prep Fund 2
and Pension Fund were adjusted to fair value. The excess of the fair value of
stock issued over the fair value of net assets acquired has been recorded as
goodwill in the accompanying balance sheet.
The Company has entered into an advisory agreement with America First Mortgage
Advisory Company (the Advisor) which provides advisor services in connection
with the conduct of the Company's business activities.
2. Summary of Significant Accounting Policies
A) Method of Accounting
The accompanying 1999 consolidated financial statements include the
accounts of the Company and its subsidiaries, Pension Fund and America
First Capital Associates Limited Partnership Six (the general partner of
Pension Fund). All significant intercompany transactions and accounts have
been eliminated in consolidation. In addition, as more fully discussed in
Note 5, the Company has an investment in a corporation and investments in
five real estate limited partnerships, none of which are controlled by the
Company. These investments are accounted for under the equity method.
Neither the corporation nor the real estate limited partnerships are
consolidated for income tax purposes.
The accompanying 1998 consolidated and combined financial statements
include the consolidated accounts of the Company from April 10, 1998,
through December 31, 1998, and the combined accounts of the Company, Prep
Fund 1 and America First Participating/Preferred Equity Mortgage Fund
(the managing general partner of Prep Fund 1) (together referred to as the
Predecessor) for periods prior to the Merger.
The financial statements are prepared on the accrual basis of accounting
in accordance with generally accepted accounting principles.
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the
financial statements and the reported amounts of revenues and expenses
during the reporting period. Actual results could differ from those
estimates.
B) Cash and Cash Equivalents
Cash and cash equivalents include cash on hand and highly liquid
investments with original maturities of three months or less. The
carrying amount of cash equivalents approximates their fair value.
C) Mortgage Securities and Corporate Securities
Statement of Financial Accounting Standards No. 115, "Accounting for
Certain Investments in Debt and Equity Securities" (SFAS 115), requires
the Company to classify its investments in mortgage securities and
corporate securities (collectively referred to as investment securities)
as either held-to-maturity, available-for-sale or trading.
Although the Company generally intends to hold most of its mortgage
securities until maturity, it may, from time to time, sell any of its
mortgage securities as part of its overall management of its business. In
order to be prepared to respond to potential future opportunities in the
market, to sell mortgage securities in order to optimize the portfolio's
total return and to retain its ability to respond to economic conditions
that require the Company to sell assets in order to maintain an appropriate
level of liquidity, the Company has classified all its mortgage securities
as available-for-sale. Mortgage securities classified as
available-for-sale are reported at fair value, with unrealized gains and
losses excluded from earnings and reported in other comprehensive income.
Corporate securities are classified as held-to-maturity and are carried at
amortized cost.
Unrealized losses on mortgage securities that are considered
other-than-temporary, as measured by the amount of decline in fair value
attributable to factors other than temporary, are recognized in income and
the cost basis of the mortgage security is adjusted. Other-than-temporary
unrealized losses are based on management's assessment of various factors
affecting the expected cash flow from the mortgage securities, including
an other-than-temporary deterioration of the credit quality of the
underlying mortgages and/or the credit protection available to the
related mortgage pool.
Gains or losses on the sale of investment securities are based on the
specific identification method.
Interest income is accrued based on the outstanding principal amount of
the investment securities and their contractual terms. Premiums and
discounts associated with the purchase of investment securities are
amortized into interest income over the lives of the securities using the
effective yield method based on, among other things, anticipated estimated
prepayments. Such calculations are periodically adjusted for actual
prepayment activity.
D) Credit Risk
The Company limits its exposure to credit losses on its investment
portfolio by requiring that at least 70% of its investment portfolio
consist of mortgage securities or mortgage loans that are either
(i) insured or guaranteed as to principal and interest by an agency of
the U.S. government, such as Government National Mortgage Association
(GNMA), Federal National Mortgage Association (FNMA), or Federal Home Loan
Mortgage Corporation (FHLMC), (ii) rated in one of the two highest rating
categories by either Standard & Poor's or Moody's, or (iii) considered to
be of equivalent credit quality as determined by the Advisor and approved
by the Company's investment committee. The remainder of the Company's
assets may be either: (i) mortgage assets rated at least investment grade
or considered to be of equivalent credit quality by the Advisor with
approval from the Company's investment committee; (ii) direct investment
(mezzanine or equity) in multifamily projects collateralizing mortgage
loans owned by the Company; (iii) investments in limited partnerships,
real estate investment trusts or closed-end funds owning a portfolio of
mortgage assets; or (iv) other fixed income instruments (corporate or
government) that provide increased call protection relative to the
Company's mortgage securities. Corporate debt that is rated below
investment grade will be limited to less than 5% of the Company's total
assets. As of June 30, 1999, approximately 84% of the Company's
investment portfolio consisted of mortgage securities insured or
guaranteed by the U.S. government or an agency thereof. At June 30, 1999,
management determined no allowance for credit losses was necessary.
E) Other Investments
Other investments consist of: (i) non-voting preferred stock of a
corporation owning interests in real estate limited partnerships,
(ii) investments in limited partnerships owning real estate,
(iii) direct investments in multifamily projects collateralizing mortgage
loans owned by the Company, and (iv) other real estate investments.
F) Net income per Share
Net income per share is based on the weighted average number of common
shares and common equivalent shares (e.g., stock options), if dilutive,
outstanding during the period. Basic net income per share is computed by
dividing net income available to shareholders by the weighted average
number of common shares outstanding during the period. Diluted net
income per share is computed by dividing the diluted net income available
to common shareholders by the weighted average number of common shares and
common equivalent shares outstanding during the period. The common
equivalent shares are calculated using the treasury stock method which
assumes that all dilutive common stock equivalents are exercised and the
funds generated by the exercise are used to buy back outstanding common
stock at the average market price during the reported period.
As more fully discussed in Note 7, options to purchase 520,000 shares of
common stock were issued during the three months ended June 30, 1998.
Because the average stock price during the quarter during which such
options were issued was less than the exercise price, exercise of such
options under the treasury stock method would be anti-dilutive.
Accordingly, these potentially dilutive securities were not considered in
fully diluted earnings per share and, as a result, basic and fully diluted
net income per share are the same for the three and six months ended June
30, 1999. With regard to the Predecessor, no options were issued. As such,
basic and diluted net income per Unit of the Predecessor were the same for
the three and six months ended June 30, 1998, as no dilutive equivalent
units existed.
G) Comprehensive Income
Statement of Financial Accounting Standards No. 130, "Reporting
Comprehensive Income" requires the Company and the Predecessor to display
and report comprehensive income, which includes all changes in
Stockholders' Equity or Partners' Capital with the exception of additional
investments by or dividends to shareholders of the Company or additional
investments by or distributions to partners of the Predecessor.
Comprehensive income for the Company and the Predecessor includes net
income and the change in net unrealized holding gains (losses) on
investments. Comprehensive income for the three and six months ended June
30, 1999 and 1998 was as follows:
H) Reclassifications
Certain prior period amounts have been reclassified to conform with the
current period classification.
3. Mortgage Securities
The following table presents the Company's mortgage securities as of June 30,
1999, and December 31, 1998.
At June 30, 1999, mortgage securities consisted of pools of adjustable-rate
mortgage securities with a carrying value of $372,218,608 and fixed-rate
mortgage securities with a carrying value of $43,000,601. At December 31,
1998, mortgage securities consisted of pools of adjustable-rate mortgage
securities with a carrying value of $194,542,316 and fixed-rate mortgage
securities with a carrying value of $47,353,146.
The Government National Mortgage Association (GNMA) Certificates are backed by
first mortgage loans on multifamily residential properties and pools of
single-family properties. The GNMA Certificates are debt securities issued
by a private mortgage lender and are guaranteed by GNMA as to the full and
timely payment of principal and interest on the underlying loans.
The Federal National Mortgage Association (FNMA) Certificates are backed by
first mortgage loans on pools of single-family properties. The FNMA
Certificates are debt securities issued by FNMA and are guaranteed by FNMA as
to the full and timely payment of principal and interest on the underlying
loans.
The Federal Home Loan Mortgage Corporation (FHLMC) Certificates are backed by
first mortgage loans on pools of single-family properties. The FHLMC
Certificates are debt securities issued by FHLMC and are guaranteed by FHLMC
as to the full and timely payment of principal and interest on the underlying
loans.
The commercial mortgage securities are rated AA or A by Standard and Poor's.
The private label CMOs (collateralized mortgage obligations) are rated AAA by
Standard and Poor's.
At June 30, 1999, and December 31, 1998, all mortgage securities were
classified as available-for-sale and as such are carried at their fair value.
The following table presents the amortized cost, gross unrealized gains, gross
unrealized losses and fair value of mortgage securities as of June 30, 1999
and December 31, 1998 respectively:
As of June 30, 1999, the Company had a commitment to purchase one mortgage
security with a current face value totaling approximately $7.4 million.
4. Corporate Securities
Corporate securities are classified as held-to-maturity. At June 30, 1999,
and December 31, 1998, the total amortized cost, gross unrealized gains and
fair value of the corporate securities were $5,740,933, $352,067, and
$6,093,000 and $4,673,127, $273,123 and $4,946,250, respectively.
5. Other Investments
Other investments consisted of the following as of June 30, 1999 and December
31, 1998:
The Company's investment in Retirement Centers Corporation (RCC) represents a
95% ownership interest in such corporation. The Company owns 100% of the
non-voting preferred stock of RCC and a third party owns 100% of the common
stock. RCC owns limited partnership interests in five real estate limited
partnerships which operate assisted living centers. The Company accounts for
its investment in RCC on the equity method.
Investments in and advances to real estate limited partnerships consist of
investments in or advances made to five limited partnerships which own the
properties underlying certain mortgage securities owned by the Company. These
investments are not insured or guaranteed but rather are collateralized by the
value of the real estate underlying the real estate owned by such limited
partnerships. They are accounted for under the equity method of accounting.
Certain of the investments have a zero carrying value and, as such, earnings
are recorded only to the extent distributions are received. Such investments
have not been reduced below zero through recognition of allocated investment
losses since the Company has no legal obligation to provide additional cash
support to the underlying property partnerships as it is not the general
partner, nor has it indicated any commitment to provide this support.
6. Repurchase Agreements
As of June 30, 1999, the Company had outstanding balances of $370,668,890
under 31 repurchase agreements with a weighted average borrowing rate of 4.97%
and a weighted average remaining maturity of 2.8 months. As of June 30,
1999, all of the Company's borrowings were fixed-rate term repurchase
agreements with original maturities that range from one to twelve months. As
of December 31, 1998, the Company had outstanding balances of $190,250,084
under 13 repurchase agreements with a weighted average borrowing rate of
5.04%.
At June 30, 1999, the repurchase agreements had the following remaining
maturities:
The repurchase agreements are collateralized by the Company's mortgage
securities with a principal balance of approximately $380.1 million and bear
interest at rates that are LIBOR based.
7. Stockholders' Equity
1997 Stock Option Plan
- ---------------------
The Company has a 1997 Stock Option Plan (the Plan) which authorizes the
granting of options to purchase an aggregate of up to 1,000,000 shares of the
Company's common stock, but not more than 10% of the total outstanding shares
of the Company's common stock. The Plan authorizes the Board of Directors, or
a committee of the Board of Directors, to grant Incentive Stock Options (ISOs)
as defined under section 422 of the Internal Revenue Code, Non-Qualified Stock
Options (NQSOs) and Dividend Equivalent Rights (DERs) to eligible persons,
other than non-employee directors. Non-employee directors are eligible to
receive grants of NQSOs with DERs pursuant to the provisions of the Plan. The
exercise price for any options granted to eligible persons under the Plan
shall not be less than the fair market value of the common stock on the day of
the grant. The options expire if not exercised ten years after the date
granted.
During the three months ended June 30, 1998, there were 500,000 ISOs granted
to buy common shares at an exercise price of $9.375 per share. In addition,
there were 20,000 NQSOs issued at an exercise price of $9.375 per share.
Prior to this grant, no other options were outstanding and no additional
options were granted through June 30, 1999. At June 30, 1999 and December 31,
1998, respectively, 10,000 and 5,000 NQSOs were vested and exercisable. At
June 30, 1999 and December 31, 1998, respectively, 250,000 and 125,000 ISOs
were vested and exercisable. As of June 30, 1999, no options had been
exercised.
In addition to options, 500,000 and 20,000 DERs were granted on the ISOs and
NQSOs, respectively, during the three months ended June 30, 1998, based on the
provisions of the Plan. DERs vest on the same basis as the options and
payments are made on vested DERs only. Vested DERs are paid only to the
extent of ordinary income and not on returns of capital. Dividends paid on
ISOs are charged to stockholders' equity when declared and dividends paid on
NQSOs are charged to earnings when declared. For the three and six months
ended June 30, 1999, respectively, the Company recorded a $31,250 and
$47,500 charge to stockholders' equity (included in dividends paid or accrued)
associated with the DERs on ISOs and a $1,250 and $1,900 charge to earnings
associated with DERs on NQSOs.
The options and related DERs issued were accounted for under the provisions of
SFAS 123, "Accounting for Stock Based Compensation". Because the ISOs were
not issued to officers who are direct employees of the Company, ISOs granted
were accounted for under the option value method and a periodic charge will be
recognized based on the vesting schedule. The charge of options which vested
at date of grant were included as capitalized transaction costs in connection
with the Merger. Management estimated the value of the ISOs at the date of
grant to be approximately $1.88 per share using a Black-Scholes valuation
model, as adjusted for the discounted value of dividends not to be received
under the unvested DERs. In the absence of comparable historical market
information for the Company, management utilized assumptions consistent with
activity of a comparable peer group of companies including an estimated option
life of five years, a 25% volatility rate and a risk-free rate of 5.5% and a
dividend yield of 0% (because of the DERs). During the three and six months
ended June 30, 1999, respectively, as part of operations, the Company
reflected an earnings charge of approximately $58,899 and $117,798,
representing the value of ISOs/DERs granted over their vesting period. NQSOs
granted were accounted for using the intrinsic method and, accordingly, no
earnings charge was reflected since the exercise price was equal to the fair
market value of the common stock at the date of the grant.
Dividends/Distributions
- -----------------------
The Company declared the following distributions through June 30, 1999:
Declaration Date Record Date Payment Date Amount per share
- ---------------- -------------- -------------- ------------------
March 24, 1999 April 5, 1999 May 17, 1999 $.265
June 14, 1999 June 30, 1999 August 17, 1999 .125
For tax purposes, the distribution of $.265 per share declared on December 15,
1998, but payable on February 19, 1999, will be treated as a 1999 distribution
for shareholders and partially taxable in 1999. Cash distributions paid by the
Company during the year consist in part of a dividend paid from earnings and
in part of a return of capital.
8. Related Party Transactions
The Advisor manages the operations and investments of the Company and performs
administrative services for the Company. In turn, the Advisor receives a
management fee payable monthly in arrears in an amount equal to 1.10% per
annum of the first $300 million of Stockholders' Equity of the Company, plus
.80% per annum of the portion of Stockholders' Equity of the Company above
$300 million. The Company also pays the Advisor, as incentive compensation
for each fiscal quarter, an amount equal to 20% of the dollar amount by which
the annualized Return on Equity for such fiscal quarter exceeds the amount
necessary to provide an annualized Return on Equity equal to the Ten-Year U.S.
Treasury Rate plus 1%. For the three and six months ended June 30, 1999, the
Advisor earned a base management fee of $192,964 and $382,786, respectively,
and incentive compensation of approximately $89,689 and $134,607,
respectively. Subsequent to the Merger Date and through June 30, 1998, the
Advisor earned a base management fee of $181,376 and incentive compensation of
approximately $8,400.
America First Properties Management Company L.L.C., (the Manager), provides
property management services for certain of the multifamily properties in
which the Company has an interest. The Manager also provided property
management services to certain properties previously associated with the
Predecessor which were acquired in the Merger. The Manager receives a
management fee equal to a stated percentage of the gross revenues generated by
the properties under management, ranging from 4.5% to 5% of gross revenues.
Such fees paid by the Company for the three and six months ended June 30, 1999,
amounted to $82,082 and $167,445, respectively. Such fees paid by the
Company subsequent to the Merger Date and through June 30, 1998, amounted to
$70,583 and such fees paid by the Predecessor in 1998 for periods prior to the
Merger Date amounted to $71,125.
Prior to the Merger Date, the general partner of the Predecessor (AFCA 3) was
entitled to an administrative fee of .35% per annum of the outstanding amount
of investments of the Predecessor to be paid by the Predecessor to the extent
such amount is not paid by property owners. Prior to the Merger Date, AFCA 3
earned administrative fees of $53,617 in 1998 of which $38,659 was paid by the
Predecessor and the remainder was paid by owners of real estate properties
financed by the Predecessor.
Prior to the Merger Date, substantially all of Predecessor's general and
administrative expenses and certain costs capitalized by the Predecessor were
paid by AFCA 3 or an affiliate and reimbursed by the Predecessor. Prior to
the Merger Date, the amount of such expenses reimbursed to AFCA 3 or an
affiliate was $165,439. The capitalized costs consist of transaction costs
incurred in conjunction with the merger described in Note 1.
9. Pro Forma Financial Statements (Unaudited)
The following summary pro forma information includes the effects of the
Merger as if the Merger had been completed on January 1, 1998.
Pro Forma Statement of Operations
(1) Excludes transaction costs incurred by Prep Fund 2 and Pension Fund.
The pro forma financial information is not necessarily indicative of what the
consolidated results of operations of the Company would have been as of and
for the period indicated, nor does it purport to represent the results of
operations for future periods.
Item 2.
AMERICA FIRST MORTGAGE INVESTMENTS, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
General
The Company was incorporated in Maryland on July 24, 1997, but did not begin
operations until April 10, 1998.
On April 10, 1998, the Company and three partnerships: America First
Participating/Preferred Equity Mortgage Fund Limited Partnership (Prep Fund
1), America First Prep Fund 2 Limited Partnership (Prep Fund 2), America First
Prep Fund 2 Pension Series Limited Partnership (Pension Fund), consummated a
merger transaction whereby their pre-existing net assets and operations or
majority interest in the pre-existing partnership were contributed to the
Company in exchange for 9,035,084 shares of the Company's common stock. For
financial accounting purposes, Prep Fund 1, the largest of the three
Partnerships, was considered the Predecessor entity (the Predecessor) and its
historical operating results are presented in the financial statements
contained herein. The Merger was accounted for using the purchase method of
accounting in accordance with generally accepted accounting principles. Prep
Fund 1 was deemed to be the acquirer of the other Partnerships under the
purchase method. Accordingly, the Merger resulted, for financial accounting
purposes, in the effective purchase by Prep Fund 1 of all the Beneficial Unit
Certificates (BUCs) of Prep Fund 2 and approximately 99% (98% on the date of
the Merger and 1% since the Merger) of the BUCs of Pension Fund. As the
surviving entity for financial accounting purposes, the assets and liabilities
of Prep Fund 1 were recorded by the Company at their historical cost and the
assets and liabilities of Prep Fund 2 and Pension Fund were adjusted to fair
value. The excess of the fair value of stock issued over the fair value of
net assets acquired has been recorded as goodwill in the accompanying balance
sheet of the Company.
Concurrently with the Merger, the Company entered into an Advisory Agreement
with America First Mortgage Advisory Corporation (the "Advisor") and adopted
an investment policy which significantly differed from that pursued by the
predecessor partnerships. This strategy includes leveraged investing in
adjustable rate mortgage securities and mortgage loans. The Company began
implementing this investment strategy in the second quarter of 1998. During
the period from the consummation of the Merger through June 30, 1999, the
Company purchased mortgage securities with a face value at the time of
purchase of $455.3 million (mortgage securities with a face value of
approximately $222.7 million were purchased during the six months ended June
30, 1999).
The Company has elected to become subject to tax as a real estate investment
trust (REIT) under the Code beginning with its 1998 taxable year and, as such,
anticipates distributing annually at least 95% of its taxable income, subject
to certain adjustments. Generally, cash for such distributions is expected to
be largely generated from the Company's operations, although the Company may
borrow funds to make distributions. Further, as part of the Merger
transaction, the Company committed to make distributions in the first year
following the Merger of at least $1.06 per common share, to be paid in four
equal quarterly installments, which is expected to significantly exceed
taxable income. Accordingly, a portion of distributions received by
shareholders in 1998 and 1999 consisted in part of a dividend paid from
earnings and in part of a cash merger payment representing non-taxable return
of capital. There is no commitment by the Company to distribute amounts in
excess of taxable income beyond the first year of operations. For tax
purposes, the dividend declared on December 15, 1998, and paid on February 19,
1999, was treated as a 1999 event for shareholders.
The Company's operations for any period may be affected by a number of factors
including the investment assets held, general economic conditions affecting
underlying borrowers and, most significantly, factors which affect the
interest rate market. Interest rates are highly sensitive to many factors,
including governmental monetary and tax policies, domestic and international
economic and political considerations, and other factors beyond the control of
the Company.
Income from other investments decreased $109,784 during the six months ended
June 30, 1999, compared to the six months ended June 30, 1998. Approximately
$56,000 of such decrease is due to a decrease in the amount of income realized
on the Company's investments in real estate limited partnerships and
approximately $54,000 of such decrease is due to interest income recorded in
1998 on a participating loan which was paid off in May of 1998.
The Company recorded a gain of $55,994 on the sale of investments during the
six months ended June 30, 1999 compared to a gain of $414,710 for the
comparable period of 1998. The gain recorded for the six months ended June
30, 1998 was due primarily to the payoff of the Company's only participating
loan in the amount of $385,000.
General and administrative expenses for the Company for the six months ended
June 30, 1999 increased $282,908 as compared to that of the Predecessor and
the Company for the six months ended June 30, 1998. This increase is
primarily a result of the increased scope of operations resulting from the
Merger and an increase of approximately $126,000 in incentive compensation
payable to the Advisor for the six months ended June 30, 1999 compared to the
same period in 1998.
Year 2000
The Company does not own or operate its own computer system and owns no
business or other equipment. However, the operation of the Company's business
relies on the computer system and other equipment maintained by America First
Companies L.L.C., the principal shareholder of the Company's Advisor ("America
First"). In addition, the Company has business relationships with a number of
third parties whose ability to perform their obligations to the Company depend
on such systems and equipment. Some or all of these systems and equipment may
be affected by the inability of certain computer programs and embedded
circuitry to correctly recognize dates occurring after December 31, 1999.
America First has adopted a plan to deal with this so-called "Year 2000
problem" with respect to its information technology ("IT") systems, non-IT
systems and third party business relationships.
State of Readiness
The IT system maintained by America First consists primarily of personal
computers, most of which are connected by a local area network. All
accounting and other record keeping functions relating to the Company that are
conducted in house by America First are performed on this PC-LAN system.
America First does not own or operate any "mainframe" computer systems. The
PC-LAN system runs software programs that America First believes are
compatible with dates after December 31, 1999. America First has engaged a
third party computer consulting firm to review and test its PC-LAN system to
ensure that it will function correctly after that date and expects that this
process, along with any necessary remediation, will be completed by early in
the final quarter of 1999. America First believes any Year 2000 problems
relating to its IT systems will be resolved without significant operational
difficulties. However, there can be no assurance that testing will discover
all potential Year 2000 problems or that it will not reveal unanticipated
material problems with the America First IT systems that will need to be
resolved.
Non-IT systems include embedded circuitry such as microcontrollers found in
telephone equipment, security and alarm systems, copiers, fax machines, mail
room equipment, heating and air conditioning systems and other infrastructure
systems that are used by America First in connection with the operation of the
Company's business. America First is reviewing its non-IT systems along with
the providers that service and maintain these systems, with initial emphasis
being placed on those, such as telephone systems, which have been identified
as necessary to America First's ability to conduct the operation of the
Company's business activities. America First expects that any necessary
modification or replacement of such "mission critical" systems will be
accomplished by early in the final quarter of 1999.
The Company has no control over the remediation efforts of third parties with
which it has material business relationships and the failure of certain of
these third parties to successfully remediate their Year 2000 issues could
have a material adverse effect on the Company. Accordingly, America First has
undertaken the process of contacting each such third party to determine the
state of their readiness for Year 2000. Such parties include, but are not
limited to, the obligors on the Company's mortgage securities, the Company's
transfer and paying agent and the financial institutions with which the
Company maintains accounts. America First has received initial assurances
from certain of these third parties that their ability to perform their
obligations to the Company are not expected to be materially adversely
affected by the Year 2000 problem. America First will continue to request
updated information from these material third parties in order to assess their
Year 2000 readiness. If a material third party vendor is unable to provide
assurance to America First that it is, or will be, ready for Year 2000,
America First intends to seek an alternative vendor to the extent practical.
Costs
All of the IT systems and non-IT systems used to conduct the Company's
business operations are owned or leased by America First. The
Company will bear its proportionate share of the costs associated with
surveying the Year 2000 readiness of third parties and with the
identification, remediation and testing of America First's IT and non-IT
systems. However, the Company's share of the costs associated with these
activities is expected to be insignificant. Accordingly, the costs
associated with addressing the Company's Year 2000 issues are not expected to
have a material effect on the Company's results of operations, financial
position or cash flow.
Year 2000 Risks
The Company's Advisor believes that the most reasonably likely worst-case
scenario will be that one or more of the third parties with which it has a
material business relationship will not have successfully dealt with its Year
2000 issues and, as a result, is unable to provide services or otherwise
perform its obligations to the Company. For example, if an obligor on the
Company's mortgage securities encounters a serious and unexpected Year 2000
issue, it may be unable to make a timely payment of principal and interest to
the Company. This, in turn, could cause a delay in dividend payments to
shareholders. In addition, if the Company's transfer and paying agent
experiences Year 2000-related difficulties, it may cause delays in making
dividend payments to shareholders or in the processing of trading of shares.
It is also possible that one or more of the IT and non-IT systems of America
First will not function correctly, and that such problems may make it
difficult to conduct necessary accounting and other record keeping functions
for the Company. However, based on currently available information, the
Company's Advisor does not believe that there will be any protracted systemic
failures of the IT or non-IT systems utilized by America First in connection
with the operation of the Company's business.
Contingency Plans
Because of the progress which America First has made toward achieving Year
2000 readiness, the Company has not made any specific contingency plans with
respect to the IT and non-IT systems of America First. In the event of a Year
2000 problem with its IT system, America First may be required to manually
perform certain accounting and other record-keeping functions. America First
plans to terminate the Company's relationships with material third party
service providers that are not able to represent to America First that they
will be able to successfully resolve their material Year 2000 issues in a
timely manner. However, the Company will not be able to readily terminate its
relationships with all third parties, such as the obligors on its mortgage
securities, who may experience Year 2000 problems. The Company has no
specific contingency plans for dealing with Year 2000 problems experienced
with these third parties.
All forecasts, estimates or other statements in this report relating to the
Year 2000 readiness of the Company and its affiliates are based on
information and assumptions about future events. Such "forward-looking
statements" are subject to various known and unknown risks and uncertainties
that may cause actual events to differ from such statements. Important
factors upon which the Company's Year 2000 forward-looking statements are
based include, but are not limited to, (a) the belief of America First that
the software used in IT systems is already able to correctly read and
interpret dates after December 31, 1999 and will require little or any
remediation; (b) the ability to identify, repair or replace mission critical
non-IT equipment in a timely manner, (c) third parties' remediation of their
internal systems to be Year 2000 ready and their willingness to test their
systems interfaces with those of America First, (d) no third party system
failures causing material disruption of telecommunications, data transmission,
payment networks, government services, utilities or other infrastructure, (e)
no unexpected failures by third parties with which the Company has a
material business relationship and (f) no material undiscovered flaws in
America First's Year 2000 testing process.
Other Matters
The Company at all times intends to conduct its business so as to not become
regulated as an investment company under the Investment Company Act of 1940.
If the Company were to become regulated as an investment company, then, among
other things, the Company's ability to use leverage would be substantially
reduced. The Investment Company Act exempts entities that are "primarily
engaged in the business of purchasing or otherwise acquiring mortgages and
other liens on and interests in real estate" (i.e. "Qualifying Interests").
Under the current interpretation of the staff of the SEC, in order to qualify
for this exemption, the Company must maintain at least 55% of its assets
directly in Qualifying Interests. In addition, unless certain mortgage
securities represent an undivided interest in the entire pool backing such
mortgage securities (i.e. "whole pool" mortgage securities), such mortgage
securities may be treated as securities separate from the underlying mortgage
loan, thus, may not be considered Qualifying Interests for purposes of the 55%
exemption requirement. Accordingly, the Company monitors its compliance with
this requirement in order to maintain its exempt status. As of June 30,
1999, the Company determined that it is in and has maintained compliance with
this requirement.
Forward Looking Statements
When used in this Form 10-Q, in future SEC filings or in press releases or
other written or oral communications, the words or phrases "will likely
result", "are expected to", "will continue", "is anticipated", "estimate",
"project" or similar expressions are intended to identify "forward looking
statements" within the meaning of the Private Securities Litigation Reform
Act of 1995. The Company cautions that such forward looking statements
speak only as of the date made and that various factors including regional
and national economic conditions, changes in levels of market interest
rates, credit and other risks of lending and investment activities, and
competitive and regulatory factors could affect the Company's financial
performance and could cause actual results for future periods to differ
materially from those anticipated or projected.
The Company does not undertake and specifically disclaims any obligation to
update any forward-looking statements to reflect events or circumstances after
the date of such statements.
Item 3. Quantitative and Qualitative Disclosures About Market Risk.
There have been no material changes in the Company's market risk since
December 31, 1998.
Item 4. Submission of Matters to a Vote of Security Holders.
The Company held its Annual Meeting of Stockholders on May 5, 1999 for the
purpose of electing two directors and ratifying the appointment of its
auditors.
The following sets forth the results of the election of officers:
NAME OF NOMINEE FOR WITHHELD
Michael B. Yanney 7,226,637 (80%) 157,978 (2%)
Gregor Medinger 7,226,774 (80%) 147,841 (2%)
There was no solicitation in opposition to the nominees proposed to be elected
by the Stockholders in the Proxy Statement.
The ratification of the appointment of PricewaterhouseCoopers LLP as
independent auditors for the Company for the fiscal year ending December 31,
1999 was approved by the Stockholders with 7,258,567 votes FOR (80%), 64,583
votes AGAINST (1%), and 61,465 votes ABSTAINED OR BROKER NON-VOTES (1%).
Further information regarding these matters is contained in the Company's Proxy
Statement dated April 5, 1999.
PART II. OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
2.1 Agreement and Plan of Merger by and among the Registrant,
America First Participating/Preferred Equity Mortgage Fund
Limited Partnership, America First Prep Fund 2 Limited
Partnership, America First Prep Fund 2 Pension Series
Limited Partnership and certain other parties, dated as of
July 29, 1997 (incorporated herein by reference to Exhibit
2.1 of the Registration Statement on Form S-4 dated
February 12, 1998, filed by the Registrant pursuant to the
Securities Act of 1933 (Commission File No. 333-46179)).
3.1 Amended and Restated Articles of Incorporation of the
Registrant (incorporated herein by reference from Form 8-K
dated April 10, 1998, filed by the Registrant pursuant to
the Securities Exchange Act of 1934 (Commission File No.
1-13991)).
3.2 Amended and Restated Bylaws of the Registrant (incorporated
herein by reference from Form 8-K dated April 10, 1998,
filed by the Registrant pursuant to the Securities Exchange
Act of 1934 (Commission File No. 1-13991)).
3.3 Agreement of Limited Partnership, dated May 25, 1988, of
America First Prep Fund 2 Pension Series Limited
Partnership (incorporated herein by reference to Form
10-K, dated December 31, 1988, filed with the
Securities and Exchange Commission (File No. 33-13407)).
4.1 Specimen of Common Stock Certificate of the Company.
(incorporated herein by reference to Exhibit 4.1 of the
Registration Statement on Form S-4 dated February 12, 1998,
filed by the Registrant pursuant to the Securities Act of
1933 (Commission File No. 333-46179)).
10.1 Advisory Agreement, dated April 9, 1998, by and between
the Company and the Advisor (incorporated herein by
reference from Form 8-K dated April 10, 1998 filed by
the Company pursuant to the Securities Exchange Act of
1934 (Commission File No. 1-13991)).
10.2 Employment Agreement of Stewart Zimmerman (incorporated
herein by reference to Exhibit 10.2 of the Registration
Statement on Form S-4 dated February 12, 1998, filed by
the Registrant pursuant to the Securities Act of 1933
(Commission File No. 333-46179)).
10.3 Employment Agreement of William S. Gorin (incorporated
herein by reference to Exhibit 10.3 of the Registration
Statement on Form S-4 dated February 12, 1998, filed by
the Registrant pursuant to the Securities Act of 1933
(Commission File No. 333-46179)).
10.4 Employment Agreement of Ronald A. Freydberg (incorporated
herein by reference to Exhibit 10.4 of the Registration
Statement on Form S-4 dated February 12, 1998, filed by
the Registrant pursuant to the Securities Act of 1933
(Commission File No. 333-46179)).
10.5 1997 Stock Option Plan of the Company (incorporated herein
by reference from Form 8-K dated April 10, 1998, filed by
the Company pursuant to the Securities Exchange Act of
1934 (Commission File No. 1-13991)).
10.6 Form of Dividend Reinvestment Plan (incorporated herein by
reference to Appendix C of the Registration Statement on
Form S-4 dated February 12, 1998, filed by the Registrant
pursuant to the Securities Act of 1933 (Commission File No.
333-46179)).
21. Subsidiaries of the Registrant
27. Financial Data Schedule
(b) Reports on Form 8-K
The Registrant filed the following reports on Form 8-K during
the quarter for which this report is filed.
Item Reported Financial Statements Filed Date of Report
5. Other Matters No April 26, 1999
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
Dated: August 13, 1999 AMERICA FIRST MORTGAGE INVESTMENTS, INC.
By /s/ Stewart Zimmerman
Stewart Zimmerman
President and Chief Executive Officer
By /s/ Gary Thompson
Gary Thompson
Authorized Officer and Chief Financial Officer
EXHIBIT 21
SUBSIDIARIES OF THE REGISTRANT
America First Prep Fund 2 Pension Series Limited Partnership
America First Capital Associates Limited Partnership Six