10-Q: Quarterly report pursuant to Section 13 or 15(d)
Published on April 23, 2003
UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
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FORM 10-Q
|X| QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended March 31, 2003
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
MFA MORTGAGE INVESTMENTS, INC.
(Exact name of registrant as specified in its charter)
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Maryland 13-3974868
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
350 Park Avenue, 21st Floor, New York, New York 10022
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (212) 207-6400
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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 whether the registrant is an accelerated filer (as
defined in Rule 12b-2 of the Securities Exchange Act of 1934). Yes |X| No |_|
46,354,605 shares of the registrant's Common Stock, $0.01 par value, were
outstanding as of April 21, 2003.
INDEX
MFA MORTGAGE INVESTMENTS, INC.
CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION
The accompanying notes are an integral part of the financial statements.
1
MFA MORTGAGE INVESTMENTS, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
The accompanying notes are an integral part of the financial statements.
2
MFA MORTGAGE INVESTMENTS, INC.
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
Three Months Ended
March 31, 2003
------------------
(Unaudited)
(In Thousands, Except per Share Amounts)
Common Stock (Par Value $.01):
Balance at December 31, 2002 $ 463
Issuance of common stock for option exercises and
stock based compensation 1
---------
Balance at March 31, 2003 464
---------
Additional Paid-in Capital:
Balance at December 31, 2002 359,359
Exercise of common stock options 408
---------
Balance at March 31, 2003 359,767
---------
Accumulated Deficit:
Balance at December 31, 2002 (12,417)
Net income 15,344
Cash dividends declared ($.28 per share) (13,105)
---------
Balance at March 31, 2003 (10,178)
---------
Accumulated Other Comprehensive Income:
Balance at December 31, 2002 23,795
Unrealized loss on MBS during period, net (1,447)
Unrealized loss on interest rate cap agreements (329)
---------
Balance at March 31, 2003 22,019
---------
Total Stockholders' Equity $ 372,072
=========
The accompanying notes are an integral part of the financial statements.
3
MFA MORTGAGE INVESTMENTS, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
The accompanying notes are an integral part of the financial statements.
4
MFA MORTGAGE INVESTMENTS, INC.
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
The accompanying notes are an integral part of the financial statements.
5
MFA MORTGAGE INVESTMENTS, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
1. Organization
MFA 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 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"), and America
First PREP Fund 2 Pension Series Limited Partnership ("Pension Fund"),
consummated a merger transaction whereby the pre-existing net assets and
operations of PREP Fund 1 and PREP Fund 2 and a majority interest in the Pension
Fund were contributed to the Company in exchange for 9,035,084 shares of the
Company's common stock (the "1998 Merger"). The 1998 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 PREP Fund 2
and Pension Fund under the purchase method. Accordingly, the 1998 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 99%
of the BUCs of Pension Fund. In December 1999, Pension Fund was liquidated and
dissolved and, as a result, the Company directly acquired 99% of the assets of
Pension Fund. The remaining assets, consisting solely of cash, were distributed
to the holders of Pension Fund BUCs who elected to remain in place following the
1998 Merger. 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 the common stock
issued over the fair value of net assets acquired was recorded as goodwill.
From the time of its inception, the Company was externally managed by
America First Mortgage Advisory Corporation (the "Advisor"), pursuant to an
agreement between the parties. As an externally managed company, the Company had
no employees of its own and relied on the Advisor to conduct its business and
operations.
Pursuant to consummation of the stockholder approved merger between the
Company and the Advisor (the "Advisor Merger"), the Company and the Advisor
merged effective 12:01 a.m. on January 1, 2002. As a result, the Company became
self-advised and commencing January 1, 2002. For accounting purposes, the
Advisor Merger is not considered the acquisition of a "business" for purposes of
applying Accounting Principles Board ("APB") Opinion No. 16, "Business
Combinations" as superceded by Financial Accounting Standards ("FAS") 141,
"Business Combinations" and, therefore, the market value of the common stock
issued, valued as of the consummation of the Advisor Merger, in excess of the
fair value of the net tangible assets acquired was charged to operating income
rather than capitalized as goodwill.
On August 13, 2002, the Company changed its name from America First
Mortgage Investments, Inc. to MFA Mortgage Investments, Inc.
2. Summary of Significant Accounting Policies
(a) Basis of Presentation
The accompanying interim unaudited financial statements have been prepared
according to the rules and regulations of the Securities and Exchange
Commission. Certain information and footnote disclosures normally included in
financial statements prepared in accordance with generally accepted accounting
principles have been condensed or omitted according to such rules and
regulations, although management believes that the disclosures are adequate to
make the information presented not misleading. The financial statements should
be read in conjunction with the financial statements and notes thereto included
in the Company's Annual Report on Form 10-K for the year ended December 31,
2002. In the opinion of management, all normal and recurring adjustments
necessary to present fairly the financial position at March 31, 2003 and results
of operations for all periods presented have been made. The results of
operations for the three month period ended March 31, 2003 should not be
construed as indicative of the results to be expected for the full year.
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
6
MFA MORTGAGE INVESTMENTS, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
amounts of revenues and expenses during the reporting period. Actual results
could differ from those estimates.
(b) MBS, Corporate Debt Securities and Corporate Equity Securities
Statement of FAS No. 115, "Accounting for Certain Investments in Debt and
Equity Securities", requires that investments in securities be designated as
either "held-to-maturity", "available-for-sale" or "trading" at the time of
acquisition. Securities that are designated as held-to-maturity are carried at
their amortized cost. Securities designated as available-for-sale are carried at
fair value with unrealized gains and losses excluded from earnings and reported
in other comprehensive income.
Although the Company generally intends to hold most of its MBS until
maturity, it may, from time to time, sell any of its MBS as part of the overall
management of its business. The available-for-sale designation provides the
flexibility to sell its MBS in order to act on potential future market
opportunities, changes in economic conditions and to ensure future liquidity.
(See Note 2e.)
Gains or losses on the sale of investment securities are based on the
specific identification method.
The Company's adjustable rate assets are comprised primarily of adjustable
rate MBS ("ARM-MBS") issued or guaranteed as to principal or interest by Ginnie
Mae, Fannie Mae or Freddie Mac. Included in these ARM-MBS are hybrid MBS that
have a fixed interest rate for an initial period, generally three years for
those purchased by the Company, then convert to an adjustable rate for their
remaining term to maturity.
Interest income is accrued based on the outstanding principal balance 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, adjusted for actual prepayment activity.
During 2002, the Company liquidated its remaining portfolio of corporate
debt and equity securities. The corporate debt securities were comprised of
non-investment grade, high yield bonds. The Company had taken an impairment
charge of $3,474,000 on certain of its corporate debt securities during the
first quarter of 2002. The Company had no investments in corporate debt
securities at March 31, 2003 or December 31, 2002. (See Note 3d.)
(c) 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.
(d) Restricted Cash
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.
(e) Credit Risk
The Company limits its exposure to credit losses on its investment
portfolio by requiring that at least 50% of its investment portfolio consist of
MBS that are issued or guaranteed as to principal or interest by an agency or
federally chartered corporation of the U.S. Government, such as Ginnie Mae,
Fannie Mae and Freddie Mac ("Agency MBS"). The remainder of the Company's assets
may be investments in: (i) multi-family apartment properties; (ii) investments
in limited partnerships, real estate investment trusts or a preferred stock of a
real estate related corporation or (iii) other fixed-income instruments. As of
March 31, 2003, 94.3% of the Company's assets consisted of Agency MBS, 3.2% were
MBS rated "AAA" and 1.0% were of cash and cash equivalents; combined these
assets comprised 98.5% of the Company's total assets.
Other-than-temporary losses on investment securities, whether designated
as available-for-sale or held-to-maturity, as measured by the amount of decline
in fair value attributable to factors that are considered to be
other-than-temporary, are charged against income resulting in an adjustment of
the cost basis of such securities. The following are among, but not all, the
factors considered in determining whether and to what extent an
other-than-temporary impairment exists: (i) the expected cash flow from the
investments; (ii) whether there has been an other-than-temporary deterioration
of the credit quality of the underlying mortgages, debtor, or the company in
which equity interests are held; (iii) the credit protection available to the
related mortgage pool for MBS; (iv) any other market information available,
including analysts assessments and statements, public statements and filings
made by
7
MFA MORTGAGE INVESTMENTS, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
the debtor, counterparty or other relevant party issuing or otherwise securing
the particular security; (v) management's internal analysis of the security
considering all known relevant information at the time of assessment; and (vi)
the magnitude and duration of historical decline in market prices. Because
management's assessments are based on factual information as well as subjective
information available at the time of assessment, the determination as to whether
an other-than-temporary decline exists and, if so, the amount considered
impaired is also subjective and, therefore, constitutes material estimates, that
are susceptible to a significant change. (See Note 4.)
(f) Equity Interests in Real Estate
Equity interest in real estate consists of certain non-consolidated
investments accounted for under the equity method, which are comprised of
investments in limited partnerships owning real estate. The Company acquired
these investments as part of the 1998 Merger. Certain of the properties
underlying the equity interests in the limited partnerships that the Company
received in the 1998 Merger were subsequently exchanged for other properties
through non-taxable exchanges, known for tax purposes as a "Section 1031
exchange".
Certain of the investments have a zero carrying value and are generating
operating losses after depreciation. On these investments, 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. As of March 31, 2003, the
Company had investments in four such limited partnerships, which had mortgage
loans secured by the underlying investment properties; however, the Company has
no liability for the mortgage loans, since (1) the Company's investment is as a
limited partner and (2) the mortgages have non-recourse provisions, such that
they are secured only to the extent of the collateral which is comprised of the
mortgaged property.
(g) Real Estate
Real estate is comprised of two multi-family real estate properties owned
by the Company's wholly-owned subsidiary Retirement Centers Corporation ("RCC").
On October 1, 2002, the Company purchased 100% of the voting common stock of
RCC. (See Note 3c.) Prior to the Company's October 1, 2002 purchase of RCC's
voting common stock, the Company held only the preferred stock of RCC and
accounted for its investment in RCC under the equity method of accounting.
Subsequent to October 1, 2002, RCC became a wholly-owned subsidiary of the
Company and, as such, was consolidated on a prospective basis. RCC is
consolidated with its subsidiaries, which hold properties known as "The
Greenhouse" and "Lealand Place". The Greenhouse is a 127-unit muti-family
apartment building located in Omaha, Nebraska; Lealand Place is a 192-unit
garden-style apartment complex located in Lawrenceville, Georgia.
The properties, capital improvements and other assets held in connection
with the properties are carried at cost, net of accumulated depreciation and
amortization, not to exceed fair value. Depreciation and amortization are
computed using the straight line method over the useful life of the related
asset. Maintenance, repairs and minor improvements are charged to expense in the
period incurred, while capital improvements are capitalized and depreciated over
their useful life.
(h) Repurchase Agreements
The Company finances the acquisition of its MBS at short-term borrowing
rates through the use of repurchase agreements. Under repurchase agreements, the
Company sells securities to a lender and agrees to repurchase those securities
in the future for a price that is higher than the original sales price. The
difference between the sale price the Company receives and the repurchase price
the Company pays represents interest paid to the lender. Although structured as
a sale and repurchase obligation, a repurchase agreement operates as a financing
under which the Company effectively pledges its securities as collateral to
secure a loan which is equal in value to a specified percentage of the market
value of the pledged collateral. The Company retains beneficial ownership of the
pledged collateral, including the right to distributions. At the maturity of a
repurchase agreement, the Company is required to repay the loan and concurrently
receives back its pledged collateral from the lender or, upon mutual consent
with the lender, the Company may renew 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 the existing
pledged collateral declines. Through March 31, 2003, the Company did not have
any margin calls on its repurchase agreements that it was not able to satisfy
with either cash or additional pledged collateral.
8
MFA MORTGAGE INVESTMENTS, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
The Company's repurchase agreements have typically ranged from one month
to 18 months; however, future repurchase agreements may have longer maturities.
Should the counterparty to repurchase agreements decide not to renew the
agreement at maturity, the Company must either refinance elsewhere or be in a
position to satisfy the obligation. 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 this risk, the Company enters into repurchase
agreements only with financially sound institutions whose holding or parent
company's long-term debt rating is "A" or better as determined by two of the
Rating Agencies, where applicable. The Company will not enter into repurchase
agreements with a lender without the specific approval of the Company's Board of
Directors, if the minimum criterion is not met. In the event an existing lender
is downgraded below "A", the Company will seek board approval before entering
into additional repurchase agreements with that lender. The Company generally
aims to diversify its exposure by entering into repurchase agreements with at
least four separate lenders with a maximum loan from any lender of no more than
three times the Company's stockholders' equity. As of March 31, 2003, the
Company had repurchase agreements with 12 separate lenders with a maximum net
exposure (the difference between the amount loaned to the Company and the fair
value of the security pledged by the Company as collateral) to a single lender
of $51.2 million. (See Note 7.)
(i) Earnings per Common Share ("EPS")
Basic EPS is computed by dividing net income by the weighted average
number of shares of common stock outstanding during the period. Diluted EPS is
computed by dividing net income by the weighted-average common shares and common
equivalent shares outstanding during the period. For the diluted EPS
calculation, the weighted average common shares and common equivalent shares
outstanding include the average number of shares of common stock outstanding
adjusted for the dilutive effect of unexercised stock options using the treasury
stock method. Under the treasury stock method, common equivalent shares are
calculated assuming that all dilutive common stock equivalents are exercised and
the proceeds are used to buy back shares of the Company's outstanding common
stock at the average market price during the reported period. No common share
equivalents are included in the computation of any diluted per share amount for
a period in which a net operating loss is reported. (See Note 10.)
(j) Comprehensive Income
Statement of FAS No. 130, "Reporting Comprehensive Income" requires the
Company to display and report comprehensive income, which includes all changes
in Stockholders' Equity with the exception of additional investments by or
dividends to stockholders. Comprehensive income for the Company includes net
income and the change in net unrealized holding gains (losses) on investments
and certain derivative instruments. (See Note 11.)
(k) 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 of 1986, as amended
(the "Code"), and the corresponding provisions of state law. The Company expects
to operate in a manner that will enable it to continue to be taxed as a REIT. As
such, no provision for current or deferred income taxes has been made in the
accompanying consolidated financial statements.
(l) Derivative Financial Instruments - Interest Rate Cap Agreements
On January 1, 2001, the Company adopted FAS No. 133, "Accounting for
Derivative Instruments and Hedging Activities," ("FAS 133") as amended by FAS
No. 138, "Accounting for Certain Derivative Instruments and Certain Hedging
Activities" ("FAS 138"). Since the Company had no derivative instruments nor any
embedded derivatives that required bifurcation and separate accounting; there
was no cumulative effect of an accounting change upon the adoption of FAS 133,
as amended.
In accordance with FAS 133, a derivative which is designated as a hedge is
recognized as an asset/liability and measured at fair value. In order for the
Company's interest rate cap agreements ("Cap Agreement/s" or "Cap/s") to qualify
for hedge accounting, upon entering into the Cap Agreement, the Company must
anticipate that the hedge will be highly effective in limiting the Company's
cost beyond the Cap threshold on its matching (on an aggregate basis)
anticipated repurchase agreements during the active period of the Cap. As long
as the hedge remains effective, changes in fair value are included in the
accumulated other comprehensive income portion of stockholders' equity. Upon the
Cap Agreement active period commencing, the premium paid to enter into the Cap
Agreement is amortized and reflected in interest expense. The periodic
amortization of the premium expense is based on an estimated allocation of the
premium, determined at inception of the hedge, for the monthly components
9
MFA MORTGAGE INVESTMENTS, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
on a fair value basis. Payments received in connection with the Cap Agreement
will be reported a reduction to interest expense, net of the amortization
recognized for the premium. If it is determined that a Cap Agreement is not
effective, the premium would be reduced and a corresponding charge made to
interest expense, for the ineffective portion of the Cap Agreement. The maximum
cost related to the Company's Caps is limited to the original purchase price of
the derivative. In order to limit credit risk associated with purchased Caps,
the Company only purchases caps from financial institutions rated "A" or better
by one of the Rating Agencies. Income generated by purchased caps, if any, would
be presented as an off-set to interest expense on the hedged liabilities.
In order to continue to qualify for and to apply hedge accounting, Caps
are monitored on a quarterly basis to determine whether they continue to be
effective or, if prior to the commencement of the active period, whether the Cap
expects to continue to be effective. If during the term of the Cap agreement the
Company determines that a Cap is not effective or that a Cap is not expected to
be effective, the ineffective portion of the Cap will no longer qualify for
hedge accounting and, accordingly subsequent changes in its fair value will be
reflected in earnings.
The Company has Caps, which are derivative instruments, as defined by FAS
133 and FAS 138. At March 31, 2003, the Company had 11 Cap Agreements, with an
aggregate notional amount of $310.0 million. The Company utilizes Caps for the
purpose of managing interest rate risk and does not anticipate entering into
derivative transactions for speculative or trading purposes. There were
unrealized losses of $3.3 million on the Company's Caps. (See Note 5.)
(m) Adoption of New Accounting Standards
On January 1, 2003, the Company adopted Financial Accounting Standards No.
148, "Accounting for Stock-Based Compensation - Transition and Disclosure" ("FAS
148"). FAS 148, amends FAS No. 123, "Accounting for Stock-Based Compensation,"
("FAS 123") by providing alternative methods of transition for a voluntary
change to the fair value based method of accounting for stock-based employee
compensation. In addition, FAS 148 amends the disclosure requirements of
Statement 123 to require prominent disclosures in both annual and interim
financial statements about the method of accounting for stock-based employee
compensation and the effect of the method used on reported results. The Company
will record option expense for options granted subsequent to January 1, 2003, in
accordance with FAS 123, as amended by FAS 148. The adoption of FAS 148 did not
have a significant impact on the Company; however, the future effect of FAS 148
will be based on, among other things, the underlying terms of future grants of
stock based on compensation.
(n) New Accounting Pronouncements
In January 2003, the FASB issued Interpretation No. 46 "Consolidation of
Variable Interest Entities" ("FIN 46"), which requires consolidation by the
primary beneficiary of all variable interest entities. FIN 46 is effective
immediately for investments in all variable interest entities acquired after
February 1, 2003 and for previously held investments beginning with the first
interim period beginning after June 15, 2003. It is anticipated that this will
apply to certain of the Company's equity investments in real estate in which it
has a majority interest as a limited partner but has not historically
consolidated because it does not have effective control under the terms of the
respective partnership agreements (see Note 6). Accordingly, the Company will
consolidate such investments as required by FIN 46 effective for its third
quarter of calendar 2003. It is not anticipated that the application of FIN 46
will have a material impact on the Company's financial statements.
(o) Reclassifications
Certain prior period amounts have been reclassified to conform to the
current period presentation.
3. Advisor Merger/Related Parties and Other Related Parties
(a) Advisor Fees and Advisor Merger
From the time of the 1998 Merger through December 31, 2001, the Advisor
managed the operations and investments of the Company and performed
administrative services for the Company. Prior to the Advisor Merger, the
Advisor was owned directly and indirectly by certain of the Company's directors
and executive officers (see discussion below). For the services and functions
provided to the Company, the Advisor received a formula based monthly management
fee plus an incentive fee for each calendar quarter equal to 20% of the dollar
amount by which the annualized return on equity for such quarter exceeded the
amount necessary to provide an annualized return on equity equal to the Ten-Year
U.S. Treasury rate plus 1%.
10
MFA MORTGAGE INVESTMENTS, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
The Company entered into an Agreement and Plan of Merger, dated September
24, 2001 (the "Advisor Merger Agreement"), with the Advisor, America First
Companies L.L.C. ("AFC") and the stockholders of the Advisor. In December 2001,
the Company's stockholders approved the terms of the Advisor Merger Agreement,
which provided for the Merger of the Advisor into the Company on January 1,
2002. The Company issued 1,287,501 shares of its common stock to the
stockholders of the Advisor as merger consideration. As a result, the Company
became self-advised on January 1, 2002.
Certain of the Company's directors and executive officers who were
involved in discussions and negotiations relating to the Advisor Merger had, and
continue to have, interests that are affected by the Advisor Merger. At the time
of the Advisor Merger, AFC owned 80% of the outstanding capital stock of the
Advisor. At that time, Michael Yanney, who retired from the Board during the
first quarter of 2003, was the Chairman of the Company's Board of Directors, and
George H. Krauss, one of the Company's directors, beneficially owned
approximately 57% and 17%, respectively, of AFC. In addition, Stewart Zimmerman,
the Company's President and Chief Executive Officer, and William S. Gorin, the
Company's Executive Vice President, Chief Financial Officer and Treasurer,
collectively owned approximately 3% of AFC. At the time of the Advisor Merger,
Messrs. Zimmerman, Gorin and Ronald A. Freydberg, the Company's Executive Vice
President and Secretary, also owned, in the aggregate, the remaining 20% of the
Advisor. Accordingly, the Advisor Merger resulted in these individuals
receiving, in the aggregate, beneficial ownership of an additional 1,287,501
shares of the Company's common stock valued at approximately $11.3 million at
the time of the Advisor Merger.
Because the Advisor Merger was between affiliated parties and may not be
considered to have been negotiated in a completely arm's-length manner, the
Company's Board of Directors established a special committee of the Board, which
consisted of three of the Company's independent directors who had no personal
interest in the Advisor Merger, to direct the negotiations relating to the
Advisor Merger on the Company's behalf and to consider and make recommendations
to the Board relating to the Advisor Merger.
(b) Property Management
America First Properties Management Company L.L.C. (the "Property
Manager"), is a wholly owned subsidiary of AFC, provides property management
services for certain of the multi-family properties in which the Company has an
interest. The Property Manager receives a management fee equal to a stated
percentage of the gross revenues generated by the Company's properties under
management, ranging from 3.5% to 4% of gross revenues, which are considered in
line with market terms for such services. The Property Manager was paid fees
totaling $98,000 and $109,000 for the quarters ended March 31, 2003 and 2002,
respectively for managing the properties in which the Company has interests.
(c) Investment in Retirement Centers Corporation
From 1998 thorough September 30, 2002, the Company has held all of the
non-voting preferred stock, representing 95% of the ownership and economic
interest, in RCC, an entity formed following the 1998 Merger, which indirectly
holds two rental income properties. Through September 30, 2002, Mr. Gorin, the
Company's Executive Vice President, Chief Financial Officer and Treasurer, held
all of the voting common stock of RCC, representing 5% of the ownership and
economic interest in RCC.
On October 1, 2002, the Company purchased 100% of the voting common stock
held by Mr. Gorin, representing a 5% economic interest and 100% controlling
interest in RCC, for $260,000. The purchase price was based on the estimated
value of the underlying properties, as determined by independent appraisers, net
of the related mortgage indebtedness. As a result of the purchase of common
shares, RCC become a wholly-owned subsidiary of the Company. (See Note 6.)
(d) Investments in Certain Corporate Debt Securities
Prior to the Company liquidating its corporate debt securities portfolio
during 2002, the Company held the corporate debt securities of RCN Corporation
("RCN"), which were purchased between February 1999 and August 2000 and Level 3
Corporation ("Level 3"), which were purchased between August 1998 and August
2000. At December 31, 2001, the Company's investment in (i) the RCN debt
securities had a carrying value of $2,147,000 and (ii) the Level 3 debt
securities had a carrying value of $6,553,000 and an estimated fair value of
$3,360,000. Mr. Yanney, who retired as Chairman and as a member of the Company's
Board of Directors on March 6, 2003, was on the board of directors of both RCN
and Level 3 at the time the Company purchased and sold these securities.
11
MFA MORTGAGE INVESTMENTS, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
One of the Company's Directors, W. David Scott, is the son of the Chairman of
both Level 3 and RCN.
4. Mortgage Backed Securities
As of March 31, 2003 and December 31, 2002, all of the Company's MBS were
classified as available-for-sale and, as such, were carried at their estimated
fair value. The following table presents the carrying value of the Company's MBS
as of March 31, 2003 and December 31, 2002.
March 31, December 31,
2003 2002
---------- ------------
(In Thousands)
Fannie Mae Certificates $1,844,866 $1,901,621
Ginnie Mae Certificates 4,646 5,577
Freddie Mac Certificates 1,571,263 1,450,675
Non-agency AAA 114,947 127,446
---------- ----------
$3,535,722 $3,485,319
========== ==========
At March 31, 2003 and December 31, 2002, the Company's portfolio of MBS
consisted of pools of ARM-MBS with carrying values of approximately $3.53
billion and $3.47 billion respectively, and fixed rate MBS with carrying values
of approximately $6.7 million and $6.8 million respectively.
Agency MBS: Although not rated, Agency MBS carry an implied "AAA" rating.
Agency MBS are issued or guaranteed as to principal or interest by a government
agency or federally chartered corporation, such as Fannie Mae, Ginnie Mae or
Freddie Mac.
Non-Agency "AAA": Non-Agency "AAA" MBS are privately issued certificates
that are backed by pools of single-family and multi-family mortgage loans.
Non-Agency "AAA" MBS are rated as such by one of the Rating Agencies. "AAA" is
the highest rating given by bond rating agencies and indicates the relative
security of the investment. These securities are not guaranteed by the U.S.
Government or any of its agencies.
The following table presents the amortized cost, gross unrealized gains,
gross unrealized losses and fair value of MBS as of March 31, 2003 and December
31, 2002:
March 31, December 31,
2003 2002
----------- ------------
(In Thousands)
Current face cost $ 3,431,541 $ 3,382,275
Premium 78,898 76,333
Discount (2) (20)
Gross unrealized gains 25,974 27,154
Gross unrealized losses (689) (423)
----------- -----------
Carrying value/fair value $ 3,535,722 $ 3,485,319
=========== ===========
5. Interest Rate Cap Agreements
As of March 31, 2003, the Company had 11 interest rate Caps with an
aggregate notional amount of $310.0 million purchased to hedge against increases
in interest rates on $310.0 million of its anticipated future 30-day term
repurchase agreements. The Caps had an amortized cost of $4,036,000 and a fair
value of $770,000 at March 31, 2003, resulting in an unrealized loss of
$3,266,000, which is included as a component of accumulated other comprehensive
income. If the 30-day London Interbank Offered Rate ("LIBOR") were to increase
above the rate specified in the Cap Agreement during the effective term of the
Cap, the Company would receive monthly payments from its counterparty.
12
MFA MORTGAGE INVESTMENTS, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
The Company's counterparties for the Cap Agreements are financial
institutions whose holding or parent company's long-term debt rating is "A" or
better, as determined by two of the Rating Agencies, where applicable. In the
unlikely event of a default by the counterparty, the Company would not receive
payments provided for under the terms of the Cap Agreement and could incur a
loss for the initial cost of entering into the Cap Agreement.
(1) The rate at which payments would become due to the Company under the terms
of the cap agreement.
6. Equity Interests in Real Estate Investments and Real Estate
Equity interests in real estate investments and real estate consisted of
the following as of March 31, 2003 and December 31, 2002:
March 31, December 31,
2003 2002
--------- ------------
(In Thousands)
Real estate $21,825 $21,986
Investments in and advances to real estate limited
partnerships 3,721 3,806
------- -------
$25,546 $25,972
======= =======
On October 1, 2002, the Company purchased the voting common stock of RCC.
Prior to this purchase, the Company held the non-voting preferred stock and
accounted for its investment in RCC under the equity method. Upon acquiring the
controlling interest in RCC, the Company changed from the equity method of
accounting for this investment to consolidating RCC, reflecting the assets and
liabilities and results of operations of RCC on a prospective basis.
(a) Real Estate /Retirement Center Corporation
RCC was formed as a separate taxable corporation to hold certain
properties acquired in the 1998 Merger, primarily retirement/assisted living
properties, the operations of which, if held directly would be incompatible with
the Company's maintaining compliance with the REIT provisions of the Code. Such
assets have since been sold and the proceeds reinvested in the properties
currently held by RCC. As noted above, on October 1, 2002, the Company acquired
100% of the voting common stock of RCC, resulting in a change in the accounting
for RCC from that of an equity interest to a wholly-owned consolidated
subsidiary.
As of March 31, 2003 and December 31, 2002, RCC owned (i) The Greenhouse,
which was acquired on January 12, 2000, and (ii) an 88.3% undivided interest in
a 192-unit apartment property located in Lawrenceville, Georgia, which was
acquired on January 18, 2001. The Company also owned the remaining 11.7%
undivided interest in the Georgia property, which was purchased on January 18,
2001. In December 2000, the Company loaned Greenhouse Holding LLC (which holds
The Greenhouse) $437,000 to fund building renovations.
13
MFA MORTGAGE INVESTMENTS, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
The summary results of real estate, reflects the operations of RCC as
consolidated with its two apartment properties for the quarter ended March 31,
2003, were as follows:
(In Thousands)
Revenue from operations of real estate $ 427
Interest expense for mortgages on real estate (203)
Other real estate operations expense (347)
-----
$(123)
=====
(b) Equity Interests in Real Estate
As of March 31, 2003, the Company had investments in four limited
partnerships, which had an aggregate of $31.3 million of non-recourse mortgage
loans secured by the underlying investment properties. These mortgages have
non-recourse provisions, such that they are generally secured to the extent of
the collateral, which is comprised of the mortgaged property. Prior to October
1, 2002, the Company held 100% of the non-voting preferred stock of RCC which
represented a 95% economic interest, as such the net assets of RCC were included
in equity interests in real estate and income recognized under the equity
method. On October 1, 2002, the Company acquired 100% of RCC's voting common
stock, thereby gaining full ownership of RCC. Therefore, the Company changed its
accounting for RCC from that of an equity investment to a consolidated
subsidiary effective October 1, 2002.
7. Repurchase Agreements
As of March 31, 2003, the Company had outstanding balances of $3.2 billion
under 195 repurchase agreements with a weighted average borrowing rate of 1.75%
and a weighted average remaining maturity of 6.4 months. As of March 31, 2003,
the repurchase agreements had the following remaining maturities:
March 31,
2003
----------
(In Thousands)
Within 30 days $ 151,510
31 to 60 days 300,060
61 to 90 days 560,460
3 to 6 months 888,311
6 to 9 months 535,250
9 to 12 months 393,546
12 to 18 months 382,440
----------
$3,211,577
==========
The repurchase agreements are collateralized by the Company's MBS which
had a carrying value of approximately $3.5 billion. The Company's repurchase
agreements generally bear interest at rates that are LIBOR-based.
8. Commitments and Contingencies
At March 31, 2003, there were no commitments to purchase any investment
securities or enter into any repurchase agreements.
14
MFA MORTGAGE INVESTMENTS, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
9. Stockholders' Equity
(a) Dividends/Distributions
The following presents dividends declared by the Company from January 1,
2002 through March 31, 2003:
Dividend
Declaration Date Record Date Payment Date per Share
- ------------------ ------------------ --------------- ----------
2003
March 13, 2003 March 28, 2003 April 30, 2003 $ 0.280
2002
December 19, 2002 December 30, 2002 January 24, 2003 0.320 (2)
September 12, 2002 September 30, 2002 October 30, 2002 0.320 (2)
June 12, 2002 June 28, 2002 July 30, 2002 0.300 (1)
March 12, 2002 March 28, 2002 April 30, 2002 0.300 (1)
(1) Includes a special dividend of $0.02 per share.
(2) Includes a special dividend of $0.04 per share.
(b) Shelf Registration
On September 25, 2001, the Company filed a registration statement on Form
S-3 with the Securities and Exchange Commission under the Securities Act of
1933, as amended, (the "Act"), with respect to an aggregate of $300,000,000 of
common stock and/or preferred stock that may be sold by the Company from time to
time pursuant to Rule 415 under the Act. On October 5, 2001, the Commission
declared the registration statement effective. As of March 31, 2003, the Company
had $80.1 million remaining under this shelf registration statement.
(c) Stock Repurchase Plan
The Company did not repurchase any of its Common Stock during the quarter
ended March 31, 2003. Since implementing the stock repurchase program during the
fourth quarter of 1999, through March 31, 2003, the Company had repurchased and
retired 378,221 shares at an aggregate cost of $1,924,000.
10. EPS Calculation
The following table presents the reconciliation between basic and diluted
shares outstanding used in calculating basic and diluted EPS for the three
months ended March 31, 2003 and 2002:
Three Months Ended
March 31,
2003 2002
------ ------
(In Thousands)
Weighted average shares outstanding - basic 46,316 34,329
Add effect of assumed shares issued under
treasury stock method for stock options 62 124
------ ------
Weighted average shares outstanding - diluted 46,378 34,453
====== ======
15
MFA MORTGAGE INVESTMENTS, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
11. Accumulated Other Comprehensive Income
Accumulated other comprehensive income at March 31, 2003 and December 31,
2002 was as follows:
March 31, December 31,
2003 2002
--------- ------------
(In Thousands)
Unrealized gains on available-for-sale:
MBS $ 25,974 $ 27,155
Unrealized losses on available for sale:
MBS (689) (423)
-------- --------
25,285 26,732
-------- --------
Hedging Instruments:
Unrealized depreciation on interest
rate cap agreements (3,266) (2,937)
-------- --------
Accumulated other comprehensive income $ 22,019 $ 23,795
======== ========
12. 1997 Stock Option Plan and Employment Agreements
(a) 1997 Stock Option Plan
The Company's Second Amended and Restated 1997 Stock Option Plan (the
"1997 Plan") authorizes the granting of options to purchase an aggregate of up
to 1,400,000 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 Code, non-qualified
stock options ("NQSOs") and dividend equivalent rights ("DERs") to eligible
persons. The exercise price for any options granted to eligible persons under
the 1997 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 from the
date of grant or upon certain other conditions.
DERs on the ISOs vest on the same basis as the options and DERs on NQSOs
become fully vested one year following the date of grant. Dividends are paid on
vested DERs only to the extent of ordinary income. DERs are not entitled to
distributions representing a return of capital. Dividends paid on ISOs are
charged to stockholders' equity when declared and dividends paid on NQSOs are
charged to earnings when declared. For the three months ended March 31, 2003 and
2002, the Company recorded charges of $126,000 and $150,000, respectively, to
stockholders' equity (included in dividends paid or accrued) associated with the
DERs on ISOs and charges of $700 and $1,125, respectively, to earnings
associated with DERs on NQSOs. At March 31, 2003, the Company had 452,500 DERs,
all of which were fully vested.
The ISOs granted to the executive officers of the Company, who were also
employees of the Advisor, were accounted for under the fair value method
established under FAS 123, resulting in option related expenses recognized over
the vesting period. Management used the Black-Scholes valuation model to
determine the option expense. Since the Company commenced operations in 1998,
management used 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 for the 1998 and 1999 grants (or 0% if the
related DERs are issued).
Effective January 1, 2002, the status of the employees of the Advisor
changed such that they became employees of the Company, resulting in a change in
status of these individuals. Accordingly, the unvested options outstanding as of
January 1, 2002 were treated as newly granted options to employees and accounted
for under the APB 25, with the difference between the fair market value of the
company's common stock and option price expensed over the remaining vesting
period of approximately seven months. The Company did not incur any expense for
stock options during the quarter ended March 31, 2003; for the quarter ended
March 31, 2002, the Company recognized $24,000 of employee related compensation
expense for stock options.
16
MFA MORTGAGE INVESTMENTS, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
NQSOs were granted to the Company's directors as consideration for the
performance of their duties as directors. The Company treated the directors as
employees for purposes of applying FAS 123 and, in accordance with its policy,
accounted for the NQSOs under APB 25, as described earlier, with no expense
recognized for the NQSOs, as the exercise price at the time of grant was equal
to the market value of the stock.
(b) Employment Agreements
On March 12, 2002, the Board of Directors adopted new compensation plans
for Messrs. Zimmerman, Gorin and Freydberg that took effect on August 1, 2002.
Under their employment agreements, salaries to be paid to Messrs. Zimmerman,
Gorin, and Freydberg will be equal to 0.25%, 0.20% and 0.20%, respectively, of
the Company's tangible net worth, which will be calculated on a semi-annual
basis on each June 30 and December 31. In the event that the Company's
annualized return on equity for any given six-month period were to fall below
10%, the salaries to be paid to Messrs. Zimmerman, Gorin and Freydberg with
respect to the following six-month period would be adjusted downward to equal
(i) 0.2375%, 0.19% and 0.19%, respectively, of the Company's tangible net worth
if its annualized return on equity was between 10% and 5% and (ii) 0.225%, 0.18%
and 0.18%, respectively, of the Company's tangible net worth if its annualized
return on equity was less than 5%. Notwithstanding the foregoing, the annual
base salaries payable to Messrs. Zimmerman, Gorin and Freydberg pursuant to the
new compensation plan will in no event exceed $1,000,000, $750,000 and $750,000,
respectively. On October 1, 2002, the Company entered into an employment
agreement with Ms. Teresa Covello, the Company's Senior Vice
President/Controller, and effective March 13, 2003 was named the Company's Chief
Accounting Officer, that provides for, among other things, a base salary of
$140,000.
(c) Deferred Compensation Plans
On December 19, 2002, the Company's Board of Directors adopted the MFA
Mortgage Investments, Inc. 2003 Nonemployee Directors' Deferred Compensation
Plan and the MFA Mortgage Investments, Inc. Senior Officers Deferred Bonus Plan
(collectively, the "Deferred Plans"). Directors and senior officers of the
Company may elect to defer a percentage of their compensation under the Deferred
Plans for compensation earned subsequent to December 31, 2002. The Deferred
Plans are intended to provide non-employee Directors and Senior Officers of the
Company with an opportunity to defer up to 100% of certain compensation, as
defined in the Deferred Plans, while at the same time aligning their interests
with the interests of the stockholders. Amounts deferred are considered to be
converted into "stock units" of the Company, which do not represent stock of the
Company, but rather the right to receive a cash payment equal to the fair market
value of an equivalent number of shares of the Common Stock. Deferred accounts
increase or decrease in value as would equivalent shares of the Common Stock and
are settled in cash at the termination of the deferral period, based on the
value of the stock units at that time. The Deferred Plans are non-qualified
plans under the Employee Retirement Income Security Act ("ERISA") and are not
funded. Prior to the time that the deferred accounts are settled, participants
are unsecured creditors of the Company.
The Deferred Plans are intended to be non-qualified deferred compensation
plans under the provisions of the Code. At the time a participant's deferral of
compensation is made, it is intended that such participant will not recognize
income for federal income tax purposes, nor will the Company receive a deduction
until such time that the compensation is actually distributed to the
participant.
17
Item 2.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
The following discussion should be read in conjunction with the financial
statements and notes thereto included in Item 1 of this Quarterly Report on Form
10-Q as well as in the Company's Annual Report on Form 10-K for the year ended
December 31, 2002.
GENERAL
MFA Mortgage Investments, Inc. is a self-advised mortgage REIT, which is
primarily engaged in the business of investing in adjustable rate MBS. The
Company's investment portfolio consists primarily of MBS issued or guaranteed as
to principal or interest by a U.S. Government agency or federally chartered
corporation, such as Ginnie Mae, Fannie Mae or Freddie Mac (collectively
referred to as "Agency Securities"), and, to a lesser extent, high quality MBS,
rated in one of the two highest rating categories by at least one nationally
recognized rating agency. The Company's investment strategy also provides for
the acquisition of multi-family housing properties, investments in REIT
securities and other securities. The Company's principal business objective is
to generate net income for distribution to its stockholders, resulting from the
spread between the interest and other income it earns on its investments and the
cost of financing such investments.
The Company has elected to be taxed as a REIT for federal income tax
purposes. Pursuant to the current federal tax regulations, one of the
requirements of maintaining its status as a REIT is that the Company must
distribute at least 90% of its annual taxable net income to its stockholders,
subject to certain adjustments.
The Company was incorporated in Maryland on July 24, 1997 and began
operations on April 10, 1998 when it merged with the Prep Funds. As a result of
the 1998 Merger, Prep Fund 1 and Prep Fund 2 were merged directly into the
Company and Pension Fund became a partnership subsidiary of the Company. In
December 1999, Pension Fund was liquidated and dissolved 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 holders of Pension
Fund securities who elected to remain in place following the 1998 Merger. As a
result of the 1998 Merger, the Company issued a total of 9,035,084 shares of its
Common Stock to the former partners of the Prep Funds.
Following the completion of the 1998 Merger through December 31, 2001, the
Company was externally advised and managed REIT. As such, the Company had no
employees and relied entirely on the Advisor to perform all of the duties that
are generally performed by internal management. Pursuant the an agreement with
the Advisor, the Advisor provided the day-to-day management and administrative
functions for the Company's operations for a fee, which was calculated on a
quarterly basis. The Advisor was a subsidiary of AFC.
On December 12, 2001, the Company's stockholders approved the terms of the
Advisor Merger Agreement, dated September 24, 2001, among the Company, the
Advisor, AFC and the stockholders of the Advisor which provided for the Advisor
Merger. The Advisor Merger became effective on January 1, 2002. As a result of
the Advisor Merger, the Company became a self-advised REIT. In connection with
the Advisor Merger, the employees of the Advisor became employees of the Company
and the Company assumed the employment contracts of these individuals. The
Company also acquired all of the tangible and intangible business assets of the
Advisor.
The Company's core business strategy is to invest on a leveraged basis in
a portfolio of high-grade adjustable rate MBS, which primarily consist of Agency
MBS. Beginning in June 2001, the Company began to significantly increase its
asset base by leveraging equity raised through public offerings of the Company's
common stock. As a result, the Company has experienced significant growth in
interest income, interest expense and net interest income. The Company's total
assets were $3.6 billion at March 31, 2003 and December 31, 2002. As of March
31, 2003, 98.5% of the Company's assets consisted of Agency MBS, AAA rated MBS
and cash. The Company also has indirect interests in four apartment properties
and a controlling indirect interest in two apartment properties, these six
properties contain a total of 1,473 rental units. Four of these apartment
properties are located in Georgia, one is located in North Carolina and one is
located in Nebraska.
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 primarily depend on, among other things, the level of its
net interest income, the market value of its assets and the supply of and demand
for such assets. The Company's net interest income, which reflects the
amortization of purchase premiums, 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
18
uncertainties. Prepayment rates, as reflected by the constant prepayment rate
("CPR"), and interest rates vary according to the type of investment, conditions
in financial markets, competition and other factors, none of which can be
predicted with any certainty. The CPR on the Company's MBS portfolio averaged
33% for the quarter ended March 31, 2003. In addition to these factors,
borrowing costs are further affected by the creditworthiness of the borrower.
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. The Company also has risks
inherent in its other investments, comprised of interests in multi-family real
estate properties and hedging instruments. Because these investments represented
less than 1.0% of the Company's total assets at March 31, 2003, the risk related
to these assets is limited; nonetheless, these investments have the potential of
causing a material impact on the Company's operating performance in future
periods.
RESULTS OF OPERATIONS
Three Month Period Ended March 31, 2003 Compared to the Three Month Period Ended
March 31, 2002
Net income increased to $15.3 million for the three months ended March 31,
2003, reflecting basic and diluted earnings per share of $0.33, from $9.6
million, or basic and diluted earnings per share of $0.28, for the three months
ended March 31, 2002. Comparing the first quarter of 2003 to the first quarter
of 2002, the Company's core net revenue, comprised of net interest income,
increased by $3.5 million, or 25%, to $17.2 million for the 2003 period from
$13.8 million for the 2002 period. During the quarter ended March 31, 2002, the
Company had a non-recurring $3.5 million charge for an other-than-temporary
impairment against an investment in corporate debt securities.
During the three months ended March 31, 2003, total interest and dividend
income increased $4.9 million, or 18.1%, to $32.2 million from $27.3 million for
the three months ended March 31, 2002. The Company's average interest-earning
assets for the three months ended March 31, 2003 were $3.52 billion, compared to
$2.38 billion for the first quarter of 2002. The increase in interest income
generated by the growth in interest-earning assets, which growth was facilitated
by leveraging equity raised through public offerings of the Company's common
stock, was partially offset by a decrease in the yield on interest-earning
assets to 3.66% from 4.65% for the first quarter of 2002.
The Company's interest expense on its repurchase agreements increased by
$1.5 million, or 11.0%, to $15.0 million, for the three months ended March 31,
2003, compared to $13.5 million for the first quarter of 2002. The overall
increase in interest expense reflects the significant increase in borrowings,
reflecting the leveraging of proceeds received from the Company's common stock
offerings, partially offset by a 64 basis point (i.e., one basis point equals
1/100 of 1%) decrease in the cost of borrowings, which decreased to 1.91% for
the quarter ended March 31, 2003 from 2.55% for the quarter ended March 31,
2002. (See Liquidity and Capital Resources.)
Total other income increased to $327,000 for the first quarter of 2003,
from a loss of $3.0 million for the first quarter of 2002. This $3.3 million
increase primarily reflects the impact of a non-recurring $3.5 million charge
taken in the first quarter of 2002 for an other-than-temporary impairment on
investment corporate debt securities. This loss was entirely attributable to an
investment in the corporate debt securities of Level 3 Corporation. The Company
liquidated all of its corporate debt and equity portfolios during 2002, and
currently has no plans to resume investing in such instruments.
Prior to October 1, 2002, the Company accounted for its non-controlling
interest in the preferred stock of RCC under the equity method, whereby RCC's
results of operations were reported net, relative the Company's equity interest.
On October 1, 2002, the Company acquired 100% of the voting common stock in RCC,
and commenced accounting for such subsidiary on a consolidated basis,
prospectively. (See Notes 3c and 6 to the accompanying consolidated financial
statements.) This change in ownership and resulting change in accounting for RCC
caused certain line items of the Company's statement of operations for the
quarter ended March 31, 2003 to be non-comparable to the results of operations
for the quarter ended March 31, 2002 presentation. As of March 31, 2003, the
Company had indirect interests in six multi-family properties consisting of a
total of 1,473 rental units, through investments in four limited partnerships
and one corporation as a common stockholder. In the aggregate, real estate
equity interests and real estate, which is owned through a consolidated
subsidiary, comprised less than 1.0% of the Company's total assets at March 31,
2003.
19
The Company did not sell any of its investments during the quarter ended
March 31, 2003; during the quarter ended March 31, 2002, the Company realized
gains of $595,000 and losses of $181,000 on the sale of equity and MBS.
During the first quarter of 2003, the Company had operating and other
expenses of $2.2 million, compared to $1.2 million for the first quarter of
2002. This $1.0 million increase reflects $550,000 of mortgage interest and
other expenses related to the real estate properties held by RCC, which prior to
October 1, 2002 were accounted for under the equity method and reported as a net
component of income from equity interests in real estate. Compensation and
benefits increased by $132,000 from $819,000 to $951,000, primarily reflecting
the additional staff hired to operate as an internally managed Company.
Other general and administrative expense increased by $310,000 to $703,000
for the quarter ended March 31, 2003, compared to $393,000 for the quarter ended
March 31, 2002, primarily reflecting the cost of the new headquarters that the
Company began occupying during the third quarter of 2002. In addition, market
based increases for the cost of corporate insurance have been experienced by the
Company. Management expects other operating expenses to increase over the
remainder of 2003, as costs will be incurred to comply with new rules
promulgated by the Securities and Exchange Commission and New York Stock
Exchange in connection with the Sarbanes-Oxley Act.
Liquidity and Capital Resources
The Company's principal sources of liquidity consist of borrowings under
repurchase agreements, principal payments received on its portfolio of MBS, cash
flows generated by operations and proceeds from capital market transactions. The
Company's principal uses of cash include purchases of MBS and, to a lesser
extent, may include purchases of hedge instruments; payments for operating
expenses and dividends on the Company's Common Stock; and investments in real
estate assets.
Borrowings under repurchase agreements were $3.2 billon as of March 31,
2003, and December 31, 2002. At March 31, 2003, the Company's repurchase
agreements had a weighted average borrowing rate of 1.75%, on loan balances of
between $350,000 and $77.0 million. These agreements generally have original
terms to maturity ranging from one month to 18 months and interest rates that
are typically based off of LIBOR. However, management has recently noted the
increased availability of repurchase agreements extending as long as 36 months,
and expects to extend a portion of the maturing agreements into such longer term
agreements. In addition, management may also purchase hybrid MBS that have a
fixed rate for up to five years (i.e., 5/1 MBS) and adjust annually thereafter,
compared to the present three year fixed term limit. To date, the Company has
not had any margin calls on its repurchase agreements that it was unable to
satisfy with either cash or additional pledged collateral.
To the extent the Company raises additional equity capital from future
capital market transactions, the Company anticipates using the net proceeds
primarily to acquire additional ARM-MBS on a leveraged basis. Management may
also consider additional interests in multi-family apartment properties and
other investments consistent with its operating policies. There can be no
assurance, however, that the Company will be able to raise additional equity
capital at any particular time or on any particular terms.
During the quarter ended March 31, 2003, principal payments on MBS
generated cash of $421.5 million and operations provided $22.4 million in cash.
As part of its core investing activities, during the first quarter of 2003, the
Company acquired $482.1 million of MBS, all of which were either Agency or AAA
rated adjustable rate or hybrid MBS. Other uses of funds during the quarter
included payments of $14.9 million for dividends on the Company's outstanding
common stock and DERs.
The Company's restricted cash balance represents cash held on deposit with
certain counterparties (i.e., lenders) to satisfy margin calls on repurchase
agreements. The margin calls result from the decline in the value of the MBS
securing repurchase agreements, generally due to principal reduction in the MBS
from scheduled amortization and prepayments. At the time a repurchase agreement
rolls (i.e., matures), the Company will apply the restricted cash against the
repurchase agreement, thereby reducing the borrowing.
The Company believes it has adequate financial resources to meet its
obligations as they come due and to fund committed dividends as well as to
actively pursue its investment policies. However, should market interest rates
20
suddenly spike, margin calls due to a decline in the market value of the MBS
collateralizing the Company's repurchase agreements could result, causing an
adverse change in the Company's liquidity position.
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, as amended (the "Investment Company Act"). 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 interest in real estate"
(i.e., "Qualifying Interest"). Under the current interpretation of the staff of
the Securities and Exchange Commission, 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 and, thus, may not be
considered Qualifying Interests for purposes of the 55% exemption requirement.
Accordingly, the Company monitors its compliance with this requirement in order
to maintain its exempt status. As of March 31, 2003, the Company determined that
it is in and has maintained compliance with this requirement.
INFLATION
Virtually all of the Company's assets and liabilities are financial in
nature. As a result, changes in interest rates and other factors impact our
performance far more than does inflation. Changes in interest rates do not
necessarily correlate with inflation rates and changes in inflation rates. Our
financial statements are prepared in accordance with Generally Accepted
Accounting Principles and our dividends are based upon net income as calculated
for tax purposes; in each case, our activities and balance sheet are measured
with reference to historical cost or fair market value without considering
inflation.
FORWARD LOOKING STATEMENTS
When used in this Quarterly Report on Form 10-Q, in future filings with
the Securities and Exchange Commission, 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" for purposes
of Section 27A if the Securities Act of 1933, as amended, and Section 21E of the
Securities Exchange Act of 1934, as amended, and as such may involve know and
unknown risks, uncertainties and assumptions.
These forward-looking statements are subject to various risks and
uncertainties, including, but not limited to, those relating to: increases in
the prepayment rates on the mortgage loans securing the Company's MBS; changes
in short-term interest rates; the Company's ability to use borrowings to finance
its assets; risks associated with investing in real estate, including changes in
business conditions and the general economy; changes in government regulations
affecting the Company's business; and the Company's ability to maintain its
qualification as a REIT for federal income tax purposes. These risks,
uncertainties and factors could cause the Company's actual results to differ
materially from those projected in any forward-looking statements it makes.
All forward-looking statements speak only as the date they are made and
the Company does not undertake, and specifically disclaims, any obligation to
update any forward-looking statement to reflect events or circumstances after
the date of such statements. Readers are cautioned that the Company's actual
results could differ materially from those set forth in such forward-looking
statements.
21
Item 3. 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 stockholders 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 adjustable rate and hybrid MBS. The
hybrid-MBS represent fixed rate coupons for a specified period, generally three
years, and thereafter converts to a variable rate coupon. The Company's debt
obligations are generally repurchase agreements of limited duration, which are
periodically refinanced at new market rates. The Company expects to extend the
terms on its hybrid-MBS to include 5/1 ARM-MBS, which will have a fixed rate for
five years and adjust annually thereafter. In addition, the Company would also
expect to extend the terms on its repurchase agreements to include three year
fixed rate obligations.
The interest rates for most of the Company's adjustable rate assets are
dependent on the one-year constant maturity treasury ("CMT") rate, while debt
obligations, in the form of repurchase agreements, 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 adjustable rate investment assets and debt obligations reset
on various dates that differ for the specific asset or obligation. In general,
the repricing of the Company's debt obligations occurs more quickly than the
repricing of 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 12-month interest rate varies.
The following table presents the Company's interest rate risk using the
static gap methodology. The table presents the difference between the carrying
value of the Company's interest rate sensitive assets and liabilities at March
31, 2003, based on the earlier of term to repricing or the term to repayment of
the asset or liability, scheduled principal amortization is not reflected in the
table. Further, MBS can be prepaid before contractual amortization and/or
maturity, which is also not reflected in the table. The table does not include
assets and liabilities that are not interest rate sensitive.
As of March 31, 2003, the Company's investment assets and debt obligations
will prospectively reprice based on the following time frames:
The difference between assets and liabilities repricing or maturing in a
given period is one approximate measure of interest rate sensitivity. When more
assets than liabilities reprice during a period, the gap is considered positive
and it is anticipated that earnings will increase as interest rates rise and
earnings will decrease as interest rates
22
decline. When more liabilities reprice than assets during a given period,
as is the case with respect to the Company for periods less than one year, the
gap is considered negative. With a negative gap it is anticipated that income
will decline as interest rates increase and income will increase as interest
rates decline. The static gap analysis does not reflect the constraints on the
repricing of adjustable rate MBS in a given period resulting from periodic and
life time cap features on these securities, nor the behavior of various indexes
applicable to the Company's assets and liabilities.
To a limited extent, the Company uses Cap Agreements as part of its
interest rate risk management. The notional amounts of these instruments are not
reflected in the Company's balance sheet. The Cap Agreements that hedge against
increases in interest rates on the Company's LIBOR-based repurchase agreements
are not considered in the static gap analysis, as they do not effect the timing
of the repricing of the instruments they hedge, but rather to the extent of the
notional amount, cap the limit on the amount of interest rate change that can
occur relative to the applicable of the hedged liability. The Company's Caps are
intended to serve as a hedge against future interest rate increases on the
Company's repurchase agreements, which are typically priced off of LIBOR. As of
March 31, 2003, the Company had $310.0 million of notional amount of Caps, with
a weighted average strike rate for the one-month LIBOR of 4.54%. (See Note 5 to
the accompanying Consolidated Financial Statements.)
MARKET VALUE RISK
Substantially all of the Company's investments are designated as
"available-for-sale" assets. As such, they are reflected at their estimated fair
value, with the difference between amortized cost and fair value reflected in
accumulated other comprehensive income, a component of stockholders' equity.
(See the Consolidated Statements of Comprehensive Income and Note 11 to the
accompanying Consolidated Financial Statements.) The market value of the
Company's MBS assets fluctuate primarily due to changes in interest rates and
other factors; however, given that these securities are issued or guaranteed as
to principal or interest by an agency or federally chartered corporation of the
U.S. Government or "AAA" rated, such fluctuations are generally not based on the
underlying credit worthiness.
LIQUIDITY RISK
The primary liquidity risk of the Company arises from financing
long-maturity assets with short-term debt in the form of repurchase agreements.
The Company had no long-term debt at March 31, 2003. Although the interest rate
adjustments of these assets and liabilities are matched within the Company's
operating policies, maturities are not required to be nor are they 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 (i.e., renewing) its short-term debt as it matures. However, the
Company cannot give assurances that it will always be able to roll over its
short-term debt. At March 31, 2003, the Company had cash and cash equivalents of
$34.9 million available to meet margin calls on repurchase agreements and for
other corporate purposes.
PREPAYMENT AND REINVESTMENT RISK
As the Company receives repayments of principal on its MBS, premiums on
the corresponding securities are amortized against interest income, discounts on
MBS are accreted to income and increase interest income reported. Premiums arise
when the Company acquires a MBS at a price in excess of the principal value of
the mortgages or par value if purchased at the original issue. Conversely,
discounts arise when the Company acquires a MBS at a price below the principal
value of the mortgages, or par, if purchased at original issue. For financial
accounting purposes, the premium is amortized using the effective yield method,
which reflects the effect of prepayments on amortization of premium and
accretion of discounts. In general, an increase in the prepayment rate will
accelerate the amortization of premiums, thereby reducing interest income.
For tax accounting purposes, the premium is amortized based on the asset
yield at the purchase date. Therefore, on a tax basis, amortization of premiums
will differ from those reported for financial purposes. At March 31, 2003, the
gross unamortized premium for adjustable rate MBS for financial accounting
purposes was $78.9 million (2.2% of the carrying value of MBS) while the amount
for federal tax purposes was estimated at $72.1 million.
In general, the Company believes it will be able to reinvest proceeds from
scheduled principal payments and
23
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.
Item 4. Controls and Procedures
A review and evaluation was performed by the Company's management,
including the Company's Chief Executive Officer (the "CEO") and Chief Financial
Officer (the "CFO"), of the effectiveness of the design and operation of the
Company's disclosure controls and procedures as of a date within 90 days prior
to the filing of this quarterly report. Based on that review and evaluation, the
CEO and CFO have concluded that the Company's current disclosure controls and
procedures, as designed and implemented, were effective. There have been no
significant changes in the Company's internal controls or in other factors that
could significantly affect the Company's internal controls subsequent to the
date of their evaluation. There were no significant material weaknesses
identified in the course of such review and evaluation and, therefore, no
corrective measures were taken by the Company.
24
PART II. OTHER INFORMATION
Item 1. Legal Proceedings
There are no material pending legal proceedings to which the Company is a
party or any of its assets are subject.
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)).
2.2 Agreement and Plan of Merger by and among the Registrant, America
First Mortgage Advisory Corporation ("AFMAC") and the shareholders of
AFMAC, dated September 24, 2001 (incorporated herein by reference to
Exhibit A of the Preliminary Proxy Statement dated October 9, 2001, filed
by the Registrant pursuant to the Securities Exchange Act of 1934
(Commission File No. 1-13991)).
3.1 Amended and Restated Articles of Incorporation of the Registrant
(incorporated herein by reference to 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 Registrant (incorporated herein by
reference to Form 8-K dated August 13, 2002, filed by the Registrant
pursuant to the Securities Exchange Act of 1934 (Commission File No.
1-13991)).
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 Employment Agreement of Stewart Zimmerman, dated August 1, 2002
(incorporated herein by reference to Exhibit 10.1 of the Form 10-Q, dated
September 30, 2002, filed by the Registrant pursuant to the 1934 Act
(Commission File No. 1-13991)).
10.2 Employment Agreement of William S. Gorin, dated August 1, 2002
(incorporated herein by reference to Exhibit 10.2 of the Form 10-Q, dated
September 30, 2002, filed by the Registrant pursuant to the 1934 Act
(Commission File No. 1-13991)).
10.3 Employment Agreement of Ronald A. Freydberg, dated August 1, 2002
(incorporated herein by reference to Exhibit 10.3 of the Form 10-Q dated
September 30, 2002, filed by the Registrant pursuant to the 1934 Act
(Commission File No. 1-13991)).
10.4 Employment Agreement of Teresa D. Covello, dated October 1, 2002
(incorporated herein by reference to Exhibit 10.4 of the Form 10-K, dated
December 31, 2002, filed by the Registrant pursuant to the 1934 Act
(Commission File No. 1-13991)).
10.5 Amended and Restated 1997 Stock Option Plan of the Company
(incorporated herein by reference to the Form 10-K, dated December 31,
1999, filed with the Securities and Exchange Commission pursuant to the
Securities Exchange Act of 1934 (Commission File No. 1-13991)).
10.6 Second Amended and Restated 1997 Stock Option Plan of the Company
(incorporated herein by reference to the Form 10-Q, dated August 10, 2001,
filed with the Securities and Exchange Commission pursuant to the
Securities Exchange Act of 1934 (Commission File No. 1-13991)).
10.7 MFA Mortgage Investments, Inc. Senior Officers Deferred Compensation
Plan, adopted December 19, 2002 (incorporated herein by reference to
Exhibit 10.7 of the Form 10-K, dated December 31, 2002, filed by the
Registrant pursuant to the 1934 Act (Commission File No. 1-13991)).
25
10.8 MFA Mortgage Investments, Inc. 2003 Non-Employee Directors Deferred
Compensation Plan, adopted December 19, 2002 (incorporated herein by
reference to Exhibit 10.8 of the Form 10-K, dated December 31, 2002, filed
by the Registrant pursuant to the 1934 Act (Commission File No. 1-13991)).
99.1 Certification of the Chief Executive Officer pursuant to Section 906
of the Sarbanes-Oxley Act of 2002.
99.2 Certification of the Chief Financial Officer pursuant to Section 906
of the Sarbanes-Oxley Act of 2002.
Reports on Form 8-K
The Company filed a Current Report on Form 8-K on March 11, 2003,
reporting under Item 5 "Other Events" the retirement of Michael B. Yanney
and the appointment of Stewart Zimmerman as the Company's new Chairman of
the Board effective as of March 6, 2003.
The Company filed a Current Report on Form 8-K on March 19, 2003
reporting under Item 4, "Changes in Registrant's Certifying Accountant"
the Company's dismissal of PricewaterhouseCoopers LLP as its independent
public accountants on March 13, 2003; and the Company's engagement of
Ernst & Young LLP, as its independent auditors, to replace
PricewaterhouseCoopers LLP.
26
SIGNATURES
Pursuant to the requirements 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.
Date: April 21, 2003 MFA MORTGAGE INVESTMENTS, INC.
By: /s/ Stewart Zimmerman
----------------------------------------
Stewart Zimmerman
President and Chief Executive Officer
By: /s/ William S. Gorin
----------------------------------------
William S. Gorin
Executive Vice President Chief Financial
Officer/Treasurer
(Principal Accounting Officer)
27
CERTIFICATIONS
I, Stewart Zimmerman, certify that:
1. I have reviewed this quarterly report on Form 10-Q of MFA Mortgage
Investments, Inc. (the "registrant");
2. Based on my knowledge, this quarterly report does not contain any untrue
statement of a material fact or omit to state a material fact necessary in
order to make the statements made, in light of the circumstances under
which such statements were made, not misleading with respect to the period
covered by this quarterly report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all
material respects the financial condition, results of operations and cash
flows of the registrant as of, and for, the periods presented in this
quarterly report;
4. The registrant's other certifying officer and I are responsible for
establishing and maintaining disclosure controls and procedures (as
defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and we
have:
a) designed such disclosure controls and procedures to ensure that
material information relating to the registrant, including its
consolidated subsidiaries, is made known to us by others within
those entities, particularly during the period in which this
quarterly report is being prepared;
b) evaluated the effectiveness of the registrant's disclosure controls
and procedures as of a date within 90 days prior to the filing date
of this quarterly report (the "Evaluation Date"); and
c) presented in this quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures based on our
evaluation as of the Evaluation Date;
5. The registrant's other certifying officer and I have disclosed, based on
our most recent evaluation, to the registrant's auditors and the audit
committee of the registrant's board of directors (or persons performing
the equivalent function):
a) all significant deficiencies in the design or operation of internal
controls which could adversely affect the registrant's ability to
record, process, summarize and report financial data and have
identified for the registrant's auditors any material weaknesses in
internal controls; and
b) any fraud, whether or not material, that involves management or
other employees who have a significant role in the registrant's
internal controls; and
6. The registrant's other certifying officer and I have indicated in this
quarterly report whether or not there were significant changes in internal
controls or in other factors that could significantly affect internal
controls subsequent to the date of our most recent evaluation, including
any corrective actions with regard to significant deficiencies and
material weaknesses.
Date: April 21, 2003
/s/ Stewart Zimmerman
---------------------
Name: Stewart Zimmerman
Title: President and Chief Executive Officer
28
I, William S. Gorin, certify that:
1. I have reviewed this quarterly report on Form 10-Q of MFA Mortgage
Investments, Inc. (the "registrant");
2. Based on my knowledge, this quarterly report does not contain any untrue
statement of a material fact or omit to state a material fact necessary in
order to make the statements made, in light of the circumstances under
which such statements were made, not misleading with respect to the period
covered by this quarterly report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all
material respects the financial condition, results of operations and cash
flows of the registrant as of, and for, the periods presented in this
quarterly report;
4. The registrant's other certifying officer and I are responsible for
establishing and maintaining disclosure controls and procedures (as
defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and we
have:
a) designed such disclosure controls and procedures to ensure that
material information relating to the registrant, including its
consolidated subsidiaries, is made known to us by others within
those entities, particularly during the period in which this
quarterly report is being prepared;
b) evaluated the effectiveness of the registrant's disclosure controls
and procedures as of a date within 90 days prior to the filing date
of this quarterly report (the "Evaluation Date"); and
c) presented in this quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures based on our
evaluation as of the Evaluation Date;
5. The registrant's other certifying officer and I have disclosed, based on
our most recent evaluation, to the registrant's auditors and the audit
committee of the registrant's board of directors (or persons performing
the equivalent function):
a) all significant deficiencies in the design or operation of internal
controls which could adversely affect the registrant's ability to
record, process, summarize and report financial data and have
identified for the registrant's auditors any material weaknesses in
internal controls; and
b) any fraud, whether or not material, that involves management or
other employees who have a significant role in the registrant's
internal controls; and
6. The registrant's other certifying officer and I have indicated in this
quarterly report whether or not there were significant changes in internal
controls or in other factors that could significantly affect internal
controls subsequent to the date of our most recent evaluation, including
any corrective actions with regard to significant deficiencies and
material weaknesses.
Date: April 21, 2003
/s/ William S. Gorin
--------------------
Name: William S. Gorin
Title: Executive Vice President and Chief Financial Officer
29