SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
(Mark One)
X ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
------- EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 2001
OR
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
------- EXCHANGE ACT OF 1934
Commission File Number 0-23972
AMERICAN MORTGAGE ACCEPTANCE COMPANY
(FORMERLY AMERICAN MORTGAGE INVESTORS TRUST)
(Exact name of registrant as specified in its charter)
Massachusetts 13-6972380
----------------------------------------- ----------------------
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
625 Madison Avenue, New York, New York 10022
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(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code (212) 421-5333
Securities registered pursuant to Section 12(b) of the Act:
None
Securities registered pursuant to Section 12(g) of the Act:
Shares of Beneficial Interest, par value $.10 per share
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes X No ___
Indicate by check mark if disclosure of delinquent filers pursuant to
Item 405 of Regulation S-K is not contained herein, and will not be contained,
to the best of registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. [X]
The approximate market value of the voting and non-voting common equity
held by non-affiliates of the Registrant as of March 14, 2002 was $84,620,711,
based on a price of $13.35 per share, the closing sales price for the
Registrant's shares of beneficial interest on the American Stock Exchange on
that date.
As of March 14, 2002 there were 6,338,630 outstanding shares of the
Registrant's shares of beneficial interest.
DOCUMENTS INCORPORATED BY REFERENCE
Part III: Those portions of the Registrant's Proxy Statement for the Annual
Meeting of Shareholders to be held on June 11, 2002, which are incorporated into
Items 10, 11, 12 and 13.
Index to exhibits may be found on page 42
Page 1 of 72
1
CAUTIONARY STATEMENT FOR PURPOSES OF
THE "SAFE HARBOR" PROVISIONS OF
THE PRIVATE SECURITIES LITIGATION REFORM ACT OF 1995
WHEN USED IN THIS ANNUAL REPORT ON FORM 10-K, THE WORDS "BELIEVES,"
"ANTICIPATES," "EXPECTS" AND SIMILAR EXPRESSIONS ARE INTENDED TO IDENTIFY
FORWARD-LOOKING STATEMENTS. STATEMENTS LOOKING FORWARD IN TIME ARE INCLUDED IN
THIS ANNUAL REPORT ON FORM 10-K PURSUANT TO THE "SAFE HARBOR" PROVISION OF THE
PRIVATE SECURITIES LITIGATION REFORM ACT OF 1995. SUCH STATEMENTS ARE SUBJECT TO
CERTAIN RISKS AND UNCERTAINTIES WHICH COULD CAUSE ACTUAL RESULTS TO DIFFER
MATERIALLY, INCLUDING, BUT NOT LIMITED TO, THOSE SET FORTH IN "MANAGEMENT'S
DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS."
READERS ARE CAUTIONED NOT TO PLACE UNDUE RELIANCE ON THESE FORWARD-LOOKING
STATEMENTS, WHICH SPEAK ONLY AS OF THE DATE HEREOF.
2
PART I
Item 1. Business.
GENERAL
American Mortgage Acceptance Company (formerly American Mortgage Investors Trust
together with its consolidated subsidiaries, the "Company") was formed on June
11, 1991 as a Massachusetts business trust for the primary purpose of investing
in government-insured mortgages and guaranteed mortgage-backed certificates. The
Company elected to be treated as a real estate investment trust ("REIT") under
the Internal Revenue Code of 1986, as amended (the "Code").
On April 6, 1999, the Company received the necessary consent from its
shareholders to approve proposals (the "Proposals") to, among other things,
restructure the Company from a closed-ended, finite-life REIT to a publicly
traded, open-ended, infinite-life operating REIT. In addition to restructuring
the Company, the Proposals, among other matters, permit the Company to modify
its investment objectives, to incur a specified amount of indebtedness and to
list the Company's shares on a national exchange.
In February 2002, the Company sold to the public 2.5 million common shares at a
price of $13.50 per share. The net proceeds from this offering, approximately
$31 million, net of underwriter's discount and expenses, will be used to make
additional investments.
Effective April 26, 1999, upon authorization by the Board of Trustees, the
Company's name was changed from American Mortgage Investors Trust to American
Mortgage Acceptance Company. The Company's shares of beneficial interest (the
"Shares") commenced trading on the American Stock Exchange on July 1, 1999 under
the symbol "AMC". As of December 31, 2001, there were 3,838,630 Shares
outstanding.
The Company's business plan focuses on government insured and uninsured
mortgages secured by multifamily properties, which may take the form of
government insured first mortgages and uninsured mezzanine loans, construction
loans, and bridge loans. Additionally, the Company has indirectly invested in
subordinate commercial mortgage-backed securities and may invest in other real
estate assets, including non-multifamily mortgages.
The Company was governed by a board of trustees comprised of two independent
trustees and one trustee who is affiliated with Related Capital Company
("Related"). Effective June 12, 2001, at its annual meeting, the Company added
two additional trustees, one an independent trustee, the other an affiliate of
Related, bringing the total number of trustees to five. The Company has engaged
Related AMI Associates, Inc. (the "Advisor"), an affiliate of Related, to manage
its day-to-day affairs. The Advisor has subcontracted with Related to provide
the services contemplated. Through the Advisor, Related offers the Company a
core group of experienced staff and executive management providing the Company
with services on both a full and part-time basis. These services include, among
other things, acquisition, financial, accounting, capital markets, asset
monitoring, portfolio management, investor relations and public relations
services. The Company believes that it benefits significantly from its
relationship with Related, since Related provides the Company with resources
that are not generally available to smaller-capitalized, self-managed companies.
The Company has entered into an agreement with the Federal National Mortgage
Association ("Fannie Mae") whereby the company will provide first loss
protection ("First Loss Obligation") on certain loans originated by Fannie Mae
pursuant to a Master Financing and Loss Sharing Agreement (See Note 12 of the
Company's financial statements). Through a subsidiary, AMAC/FM Corporation
("AMAC/FM"), and pursuant to a Guaranty and Security Agreement with Fannie Mae,
the payment of the First Loss Obligation is guaranteed and secured by AMAC/FM's
pledge and grant to Fannie Mae of a security interest on certain assets of
AMAC/FM. The Company has not acquired an interest in any of the loans originated
on Fannie Mae's behalf. Subsequent to creating this program, the level of
loan origination competition has increased, reducing the Company's projected
financing volume and profitability. As a result, the Company is
de-emphasizing this program and evaluating the possibility of transfering the
Company's rights and obligations in this program to a third party.
During January 2001, all of the voting common stock of AMAC/FM, previously owned
by the Advisor, was purchased by the Company, the effect of which is to make
AMAC/FM a wholly owned subsidiary of the Company. This change was possible due
to a change in federal REIT legislation passed in December 1999, allowing REITs
to directly own taxable subsidiaries, beginning after the year 2000.
INVESTMENT STRATEGY
Since the Company's 1999 reorganization, the Company's goal has been to increase
the return on the Company's asset base by investing in higher yielding assets
while balancing risk by maintaining a portion of investments in government
agency guaranteed or insured assets and maintaining a conservative capital
structure.
The Company invests in the following types of assets:
GOVERNMENT INSURED AND GUARANTEED INVESTMENTS
Generally, the Company seeks to maintain approximately 40% of its mortgage
investments in government insured or guaranteed investments, primarily through
the acquisition or origination of mortgage loans on multifamily properties, the
principal of which is insured by the Federal Housing Authority ("FHA"), and the
acquisition of Government National Mortgage Association ("GNMA" )
mortgage-backed securities and pass-through certificates. The Company may also
acquire mortgage-backed securities insured by Fannie Mae or the Federal Loan
Mortgage Corporation ("Freddie Mac"). The Company believes that government
agency insured lending offers safety, liquidity and moderate yields, while also
providing a strong asset base for collateralized borrowing on favorable terms.
3
MEZZANINE LOANS
Mezzanine loans are subordinate to senior mortgages and generally include a
participating component, such as a right to a portion of the cash flow and
refinancing and sale proceeds from the underlying properties.
The Company seeks to capitalize on attractive yields available through the
funding of mezzanine debt in combination with origination of government insured
multifamily first mortgages. The Company believes that it is one of the few
lenders in the country who offer mezzanine loans in conjunction with
agency-insured first mortgage loans.
The Company's mezzanine loans typically finance newly constructed or
rehabilitated market-rate multifamily properties and generally have terms of 40
years with an option to call the loan on 12 months notice at any time after the
10th anniversary of the mezzanine loan closing. These loans are typically in a
subordinated mortgage position, are also secured by equity interests in the
borrower and have limited recourse to the borrower for the three years from the
date of loan. The Company seeks properties in growing real estate markets with
well capitalized developers or guarantors. The Company leverages the expertise
of its Advisor and its affiliates in both the initial underwriting of the
property, as well as in the ongoing monitoring of the property through
construction, lease-up and stabilization.
BRIDGE LOANS
The Company's bridge loans are typically funded in connection with the
development of multifamily properties which benefit from the LIHTC program. Due
to the equity payment schedule typically associated with LIHTC investment
programs, there can be periods in a construction cycle where a developer needs
short term capital. To capitalize on this demand, the Company will offer bridge
loans to developers with typical terms of approximately 12 months and which are
collateralized by the equity interests in the property owner. The Company may
also provide bridge loans for properties undergoing rehabilitation by new owners
when the rehabilitation process will add significant value to the property and
reduce the effective loan-to-value ratio and risk of loss. The Company's loans
may finance the initial purchase or the subsequent rehabilitation of a property.
COMMERCIAL MORTGAGE-BACKED SECURITIES
The Company may invest in subordinated CMBS, which offer the advantage of
significantly higher yields than government insured and guaranteed investments.
The market values of subordinated interest in CMBS and other subordinated
securities tend to be more sensitive to changes in economic conditions than
senior, rated classes. As a result of these and other factors, subordinated
interest generally are not actively traded and may not provide holders with
liquidity of investment.
The Company currently invests indirectly in CMBS through a convertible preferred
equity investment in ARCap Investors L.L.C. ("ARCap"). ARCap specializes in, and
is a recognized industry leader in investing in, non-investment grade and
unrated subordinated CMBS. The CMBS which comprise ARCap's portfolio are
collateralized by a diverse range of underlying properties including
multifamily, retail, office and hotel.
LOAN ORIGINATION PROGRAM WITH FANNIE MAE
In March 2000, the Company entered into a loan origination program with Fannie
Mae in which the Company originates, on Fannie Mae's behalf, construction and
permanent loans for multifamily properties and receive loss sharing and loan
origination fees. Under this program, the Company may originate up to $250
million in loans of no more than $6 million each over a two year period, which
may be extended for up to two additional one year periods. In the event the
Company was to originate $250 million in loans pursuant to this program, the
Company would guarantee a first loss position on these loans equal to the amount
lost on the loans of up to a maximum of $21.25 million. Under this program, the
Company may also guarantee construction loans for which the Company issued a
forward commitment to originate a loan under the Fannie Mae program, with
respect to which the Company would guarantee repayment of 100% of such
construction loans. As of December 31, 2001, the Company originated one loan, on
Fannie Mae's behalf, totaling approximately $2.2 million and made forward
commitments for an additional approximate $6.8 million. The maximum exposure
under the Fannie Mae program and the forward commitments at December 31, 2001
was $5.9 million. The Company has not acquired an interest in any of the loans
the Company has originated on Fannie Mae's behalf.
PORTFOLIO
At December 31, 2001, the Company had total assets of approximately $102 million
of which approximately $99.5 million represented mortgage or mortgage-related
investments. At December 31, 2001, approximately 57% of the Company's assets
consisted of mortgages guaranteed or insured by a United States government
agency such as the FHA or the GNMA, or by Fannie Mae. At December 31, 2001, the
Company owned $50.1 million in GNMA Certificates and had invested $8.3 million
in FHA insured first mortgage loans. The Company generally seeks to maintain 40%
of its mortgage investments in government insured or guaranteed investments.
At December 31, 2001, the Company owned $9.5 million in mezzanine loans and
$11.4 million in bridge loans funded in connection with the development of
multifamily properties which benefit from the Low Income Housing Tax Credit
("LIHTC") program under Section 42 of the Internal Revenue Code. The Company
also owned an indirect investment in commercial mortgage-backed securities
("CMBS") through the Company's $20.2 million preferred equity interest in ARCap.
4
GNMA CERTIFICATES
As of December 31, 2001, the Company's portfolio included six GNMA Certificates.
GNMA is a wholly owned United States government corporation within the
Department of Housing and Urban Development created to support a secondary
market in government-insured and guaranteed mortgage loans. GNMA guarantees the
timely payment of principal and interest on its securities, which are backed by
pools of FHA and other government agency insured or guaranteed mortgages. GNMA
Certificates are backed by the full faith and credit of the United States
government. GNMA's are widely held and traded mortgage-backed securities and
therfore provide a high degree of liquidity.
The yield on the GNMA Certificates will depend, in part, upon the rate and
timing of principal prepayments on the underlying mortgages in the asset pool.
Generally, as market interest rates decrease, mortgage prepayment rates increase
and the market value of interest rate sensitive obligations like the GNMA
Certificates increases. As market interest rates increase, mortgage prepayment
rates tend to decrease and the relative market value of interest rate sensitive
obligations like the GNMAs tends to decrease. The effect of prepayments on yield
is greater the earlier a prepayment of principal is received. Certain of the
Company's GNMAs that are collateralized by mortgage loans on multifamily
properties are generally less subject to prepayment because they have prepayment
lockout periods and prepayment penalties.
5
GNMA CERTIFICATES
Information relating to the Company's investments in GNMA Certificates as of
December 31, 2001 is as follows:
Amortized Unrealized
Date Purchased/ Principal at Cost at Gain (Loss) at Balance at Interest Income
Certificate Final Payment Stated December December December December Earned Applicable
Name Number Payment Date Interest Rate 31, 2001 31, 2001 31, 2001 31, 2001 to the Period
---- ----------- --------------- ------------- ------------ --------- -------------- ---------- -----------------
Western Manor 0355540 7/27/94 7.125% $2,489,348 $2,480,484 $ 12,983 $2,493,467 $197,887
3/15/29
Copper Commons 0382486 7/28/94 8.500% 2,107,392 2,176,236 (18,865) 2,157,371 180,562
8/15/29
SunCoast Capital G22412 6/23/97 7.000% 892,315 892,315 15,300 907,615 74,394
Group, Ltd. 4/20/27
Hollows Apts. 511908 5/29/01 7.620% 8,481,092 8,481,092 90,086 8,571,178 412,729
7/15/02
Elmhurst Village 549390 6/28/01 7.745% 20,844,888 20,844,888 270,729 21,115,617 866,192
4/15/04
Reserve at Autumn 448747 6/28/01 7.745% 14,624,253 14,624,253 190,154 14,814,407 562,522
Creek 7/15/02
------------------------------------------------------------------
Total $49,439,288 $49,499,268 $560,387 $50,059,655 $2,294,286
==================================================================
All GNMA Certificates are pledged as collateral for borrowings under repurchase
facilities.
FHA INSURED FIRST MORTGAGE LOANS
As of December 31, 2001, the Company's portfolio included one FHA insured first
mortgage loan. The FHA is part of the United States Department of Housing and
Urban Development created in 1934 under the National Housing Act to insure
mortgages made to finance the construction, rehabilitation, purchase and
refinancing of multifamily residential housing and other developments. Mortgage
loans insured by the FHA generally have 40 year terms, not including any
construction period, and are backed by the full faith and credit of the United
States. The details of the Company's mortgage loan is as follows:
Outstanding Effective
Carrying Principal Interest
Property Location Amount Balance Rate(2) Maturity
-------------------------------------------------------------------------------------
Stony Brooks
Village II East Haven, CT $8,331,560 $8,331,560 7.525% June 2037
MEZZANINE FINANCING
Mezzanine loans are subordinate to senior mortgages and may include a
participating component, such as a right to a portion of the cash flow and
refinancing and sale proceeds from the underlying properties.
The portfolio of mezzanine loans as of December 31, 2001, is summarized in the
table below:
Number of Outstanding Effective
Apartment Carrying Principal Interest
Property Location Units Occupancy Amount Balance Rate(2) Maturity
---------------- ------------------ ----------- ------------ ----------- ------------- ----------- -------------------
Elmhurst
Village Oveido, FL 313 44.70%(4) $2,423,556 $2,874,000 10.00% January 2042
Hollows
Apartments Greenville, NC 184 66.98%(4) 1,381,131 1,549,200 10.00% January 2042
Plaza at San
Jacinto(1) Houston, TX 132 95.50% 1,219,800 1,250,000 11.00% January 2043
Reserve at
Autumn
Creek Friendswood, TX 212 30.00%(4) 1,884,715 1,987,000 10.00% January 2042
Stony Brook
Village II East Haven, CT 125 99.40% 675,715 763,909 15.33% June 2037
Club at
Brazos Rosenberg, TX 200 (4) 1,882,840 1,962,000 10.00% May 2043
----------- ----------- ------------- ----------- -------------------
Total/
Weighted
Average 1,166 $9,467,757 $10,386,109 10.51%(3) November 2041(3)
=========== =========== ============= =========== ===================
(1) Funded on an earn-out basis based on property performance. Remaining
committed balance is $100,000.
(2) Interest on the mezzanine loans is based on a fixed percentage of the
unpaid principal balance of the related first mortgage loan. The amount
shown is the approximate effective rate earned on the balance of the
mezzanine loan. The mezzanine loans also provide for payments of
additional interest based on a percentage of cash flow remaining after
debt service (generally 50%) and participation in sale or refinancing
proceeds (generally 25%) and certain provisions that cap the Company's
total yield, including additional interest and participations, over the
term of the loan.
(3) Weighted average based on outstanding mortgage balance.
(4) Construction not complete and occupancy figure reflects current occupancy
as a ratio of total planned units.
7
BRIDGE LOANS
The Company's bridge loans are typically funded in connection with the
development of multifamily properties which benefit from the LIHTC program. The
Company may also provide bridge loans for properties undergoing rehabilitation
by new owners when the rehabilitation process will add significant value to the
property and reduce the effective loan-to-value ratio and risk of loss. The
Company's loans may finance the initial purchase or the subsequent
rehabilitation. From time to time, the Company may make bridge loans to
properties that do not benefit from the LIHTC program.
The portfolio of bridge loans as of December 31, 2001 is summarized in the table
below:
Remaining
Number of Outstanding Committed
Apartment Carrying Principal Balance to Interest
Property Location Units Amount Balance Fund Rate Maturity
------------------------------------------------------------------------------------------------------------------
Alexandrine Detroit, MI 30 $ 375,234 $ 378,000 (1) $ -- 12.50% August 2002
Coronado
Terrace San Diego, CA 312 551,853 581,360 (1) 1,418,640 11.00% December 2002
Miami Sunset
Bay Miami, FL 308 1,444,180 1,450,000 (1) -- 12.50% May 2002
Plaza Manor National 372 766,193 777,279 722,721 11.00% September 2002
City, CA
Rancho
Verde San Jose, CA 700 2,789,780 2,803,157 1,696,843 11.00% August 2002
Vista Terrace
Hills San Ysidro, 262 1,891,649 1,900,000 -- 11.00% March 2002
CA
Concorde at
Palm Houston, TX 360 3,554,050 3,589,743 260,257 12.00% December 2003
-------------------------------------------------------
Total 2,344 $11,372,939 $11,479,539 $4,098,461
=======================================================
(1) Funded on an as needed basis.
Additional information regarding the Company's FHA and Mezzanine loans is
summarized in the following table:
8
MORTGAGE LOANS
Information relating to the Company's investments in Mortgage Loans as of
December 31, 2001 is as follows:
Periodic Payment
Property Description Final Maturity Date Call Date (F) Interest Rate (C) Terms
-------- ----------- ------------------- ------------- ----------------- ----------------
FIRST MORTGAGE LOANS (D):
STABILIZED PROPERTIES
Columbiana Lakes
Columbia, SC (J) 204 Units 11/35 7.25%
Stony Brook II
East Haven, CT 125 Units 6/37 12/06 7.625% (A)
Subtotal First Mortgage Loans
MEZZANINE LOANS (E):
STABILIZED PROPERTIES
Columbiana Lakes
Columbia, SC (J) 204 Units 11/35 4/99 20.67%
Stony Brook II
East Haven, CT 125 Units 6/37 12/06 15.33% (B)
Plaza at San Jacinto
Houston, TX (G) 132 Units 1/43 6/11 11.00% (B)
Subtotal Stabilized Mezzanine Loans
PROPERTIES IN CONSTRUCTION
The Hollows
Greenville, NC 184 Units 1/42 TBD 10.00% (B)
Elmhurst Village
Oveido, FL 313 Units 1/42 TBD 10.00% (B)
The Reserve at Autmn Creek
Friendswood, TX 212 Units 1/42 TBD 10.00% (B)
Club at Brazos (G)
Rosenberg, TX 200 Units 5/43 TBD 10.00% (B)
Subtotal Construction Mezzanine Loans
Subtotal Mezzanine Loans
Total Mortgage Loans
Outstanding Interest Income
Face Amount of Carrying Amount Earned Applicable
Property Prior Liens Mortgages (k) of Mortgages (I) to the Period
-------- ----------- -------------- ---------------- -----------------
FIRST MORTGAGE LOANS (D):
STABILIZED PROPERTIES
Columbiana Lakes
Columbia, SC (J) $ -- $ -- $ -- $ 432,127
Stony Brook II
East Haven, CT -- 8,331,560 8,331,560 636,793
-------------------------------------------------
Subtotal First Mortgage Loans 8,331,560 8,331,560 1,068,920
-------------------------------------------------
MEZZANINE LOANS (E):
STABILIZED PROPERTIES
Columbiana Lakes
Columbia, SC (J) -- -- -- 169,402
Stony Brook II
East Haven, CT 8,331,560 763,909 675,715 43,816
Plaza at San Jacinto
Houston, TX (G) 6,638,300 1,250,000 1,219,800 73,879
-------------------------------------------------
Subtotal Stabilized Mezzanine Loans 2,013,909 1,895,515 287,097
-------------------------------------------------
PROPERTIES IN CONSTRUCTION
The Hollows
Greenville, NC 8,481,092 (H) 1,549,200 1,381,131 294,764
Elmhurst Village
Oveido, FL 20,844,888 (H) 2,874,000 2,423,556 695,924
The Reserve at Autmn Creek
Friendswood, TX 14,624,253 (H) 1,987,000 1,884,715 419,189
Club at Brazos (G)
Rosenberg, TX 14,363,800 1,962,000 1,882,840 7,154
-------------------------------------------------
Subtotal Construction Mezzanine Loans 8,372,200 7,572,242 1,417,031
-------------------------------------------------
Subtotal Mezzanine Loans 10,386,109 9,467,757 1,704,128
-------------------------------------------------
Total Mortgage Loans $18,717,669 $17,799,317 $2,773,048
=================================================
(A) Requires monthly payments of principal and interest based on a 40 year
amortization period. Loans are subject to 5-year lockouts against prepayments,
as well as a prepayment penalty structure during the second 5-year term of the
loans.
(B) Interest only payments are due monthly, with loan balance due at maturity.
(C) Interest on the mezzanine loans is based on a fixed percentage of the unpaid
principal balance of the related first mortgage loan (prior liens). The amount
shown is the approximate effective rate earned on the balance of the mezzanine
loan. The mezzanine loans also provide for payments of additional interest based
on a percentage of cash flow remaining after debt service (generally 50%) and
participation in sale or refinancing proceeds (generally 25%) and certain
provision that cap the Company's total yield including additional interest and
participation over the term of the loan.
(D) Interest and principal payments on first mortgage loans are insured by the
U.S. Department of Housing and Urban Development.
(E) The principal balance of the mezzanine loans is secured by the partnership
interests of the entity that owns the underlying property and a third mortgage
deed of trust. Interest payments on the mezzanine loans are secured by a second
mortgage deed of trust and are guaranteed for the first thirty six months after
construction completion by an entity related to the general partner of the
entity that owns the underlying property.
(F) Loans are subject to mandatory prepayment at the option of the Company 10
years after construction completion, with one year's notice.
(G) The funding of this mezzanine loan is based on property level operational
achievements. The Company does not hold the first mortgage loan relating to
this mezzanine loan.
(H) The first mortgage loans related to those properties were converted into
GNMA Certificates and are held by the Company.
(I) Carrying amounts of the mezzanine loans include unamortized origination
costs and fees.
(J) During the third quarter of 2001, the Company arrived at a negotiated
settlement with the borrower under the Columbiana Lakes loans. Under this
agreement, the Company received approximately $9.3 million on October 1, 2001,
in full settlement of the first mortgage loan and mezzanine loan, resulting in a
loss on repayment of approximately $251,000, which was recorded during the year
ended 2001.
(K) No principal amounts of mortgage loans are subject to delinquent interest as
of December 31, 2001.
10
COMMERCIAL MORTGAGE-BACKED SECURITY-RELATED INVESTMENT AND SHORT SALE;
INVESTMENT IN ARCAP
On September 30, 1999, the Company acquired from ARCap, a "BB+" rated
subordinated CMBS from a Chase Manhattan Bank-First Union Nation Bank commercial
mortgage trust. The CMBS investment, which was purchased for $35,622,358, had a
face amount of $50,399,711 and an annual coupon rate of 6.4%. The Company
purchased the CMBS investment using cash and debt provided through the Bear
Stearns repurchase facility (see Repurchase Facilities below). In connection
with this acquisition, the Company entered into an agreement (the "Agreement")
with ARCap. Under the Agreement, the Company had the right to sell the CMBS
investment to ARCap and purchase a preferred equity position in ARCap, all based
on the then fair value of the CMBS investment. ARCap invests primarily in
subordinated CMBS. As of December 31, 2001, ARCap had over $596 million in
assets.
On September 30, 1999, in order to mitigate the potential income statement
effect of changes in the fair value of its CMBS investment caused by changes in
interest rates, the Company entered into a short sale involving the sale of a
U.S. Treasury Note with a face amount of $39,327,000 and an annual coupon rate
of 5.625% borrowed from Bear Stearns & Co., Inc. ("Bear Stearns"). On March 16,
2000, the Company replaced the borrowed security by purchasing such security
through Bear Stearns, and entered into an additional short sale contract
involving the sale of a U.S. Treasury Note with a face amount of $34,512,000 and
an annual coupon rate of 6.0% borrowed from Bear Stearns. On November 1, 2000,
the Company terminated the short sale in connection with its sale of the
associated CMBS investment.
On November 1, 2000, the Company, in accordance with the Agreement, sold the
CMBS investment to ARCap and repaid its borrowing under the Bear Stearns
repurchase facility, closed out its short sale position (see below), and
purchased a preferred equity interest in ARCap in the face amount of
$20,000,000, with a preferred dividend rate of 12%. This preferred equity
interest was recorded at $19,640,637, representing the fair value of the CMBS
investment at the date of the transaction, less the Bear Stearns repurchase
facility repayment plus approximately $3.5 million in cash paid to ARCap.
Through the Company's convertible preferred membership interests in ARCap
Investors L.L.C., it has a substantial indirect investment in CMBS owned by
ARCap. ARCap was formed in January 1999 by REMICap, an experienced CMBS
investment manager, and Apollo Real Estate Investors, the real estate arm of one
of the country's largest private equity investors. In conjunction with a
preferred equity offering, REMICap and ARCap merged, making ARCap the only
internally-managed investment vehicle exclusively investing in subordinated
CMBS. As of December 31, 2001, ARCap had $596 million in assets, including
investments in $565 million of CMBS. Multifamily properties underlie
approximately one-third of ARCap's CMBS.
The Company's equity in the earnings of ARCap will generally be equal to the
preferred equity rate of 12% , unless ARCap does not have earnings and cash
flows adequate to meet this distribution requirement. ARCap has met its
distribution requirements to the Company to date. Yields on CMBS depend, among
other things, on the rate and timing of principal payments, the pass-through
rate, interest rate fluctuations and defaults on the underlying mortgages. The
Company's interest in ARCap is illiquid and the Company would need to obtain the
consent of the board of managers of ARCap before it could transfer its interest
in ARCap to any party other than a current member. The carrying amount of the
investment in ARCap is not necessarily representative of the amount the Company
would receive upon a sale of the interest.
ARCap has informed its members that it intends to shift its focus to CMBS fund
management, whereby ARCap will manage CMBS investment funds raised from
third-party investors. ARCap will generally be a minority investor in these
funds. ARCap thereby intends to diversify its revenue base by increasing its
proportion of revenue derived from fees as opposed to interest income.
LOAN ORIGINATION PROGRAM WITH FANNIE MAE
In March 2000, the Company entered into a loan origination program with Fannie
Mae in which the Company originates, on Fannie Mae's behalf, construction and
permanent loans for multifamily properties and receive loss sharing and loan
origination fees. Fannie Mae is the United States' largest source of financing
for residential mortgages and the largest investor in multifamily mortgages.
Under this program, the Company may originate up to $250 million in loans of no
more than $6 million each over a two year period, which may be extended for up
to two additional one year periods. In the event the Company was to originate
$250 million in loans pursuant to this program, the Company would guarantee a
first loss position on these loans equal to the amount lost on the loans of up
to a maximum of $21.25 million. Under this program, the Company may also
guarantee construction loans for which the Company issued a forward commitment
to originate a loan under the Fannie Mae program, with respect to which the
Company would guarantee repayment of 100% of such construction loans. As of
December 31, 2001, the Company originated one loan, on Fannie Mae's behalf,
totaling approximately $2.2 million and made forward commitments for an
additional approximate $6.8 million. The maximum exposure under the Fannie Mae
program and the forward commitments at December 31, 2001 was $5.9 million. The
Company has not acquired an interest in any of the loans the Company has
originated on Fannie Mae's behalf.
Since entering into the loan program, the level of loan origination competition
has increased, reducing the Company's projected financing volume and
profitability. As a result, the Company is de-emphasizing this program and
evaluating the possibility of transferring its rights and obligations in the
loan program to a third party.
In order to conduct the program, the Company organized AMAC/FM Corporation,
which, as of January 1, 2001, was a wholly owned Delaware corporation. From time
to time, the Company expects to make capital contributions or loans to AMAC/FM
in order to ensure that it has sufficient net worth to satisfy its obligations
under the Fannie Mae program. On April 4, 2000, the Company transferred the
Stony Brook Village II Apartments FHA first mortgage loan with a principal
balance at December 31, 2001 of $8.3 million to AMAC/FM. As of January 1, 2001,
AMAC/FM is treated, for federal income tax purposes, as a taxable REIT
subsidiary.
11
The following table provides information relating to the loans originated on
Fannie Mae's behalf.
Number of Loss
Apartment Sharing Fee
Property Location Units Loan Amount (annual rate)
------------------------------ --------------------- ------------- ---------------- -------------
Valley View Cedar Rapids, IA 96 $2,187,000 0.36%
Hillside Apartments(1) Minden, LA 60 1,278,000 0.28%
Alexandrine Square(1) Detroit, MI 30 342,000 0.40%
Maple Ridge Apartments(1) Jackson, MI 69 1,137,000 0.52%
Cameron Creek Apartments Dade Country, FL 148 3,000,000 0.35%
Desert View Apartments(1) Coolidge, AZ 372 1,011,000 0.52%
------------- ----------------
775 $8,955,000
============= ================
(1) Currently a construction loan with First Union National Bank, which AMAC has
fully guaranteed. Once the underlying prop erty achieves 90% occupancy for a
period of 90 days and net income of 1.15x debt service, this construction
loan will be re placed by permanent financing through the Company's loan
program with Fannie Mae.
REPURCHASE FACILITIES
On September 30, 1999, the Company entered into a repurchase facility with Bear
Stearns (the "Bear Stearns Repurchase Facility"), whereby Bear Stearns advanced
$19,568,000 in cash towards the purchase of the CMBS-related investment. The
Bear Stearns Repurchase Facility had a variable interest rate based on the
one-month LIBOR rate plus 1.5%, which is adjusted on the first day of each
month. The Bear Stearns Repurchase Facility was repaid November 1, 2000 in
connection with the CMBS sale discussed above.
Effective February 15, 2000, the Company entered into a $60 million FHA
repurchase facility (the "Nomura Repurchase Facility") with Nomura Asset Capital
Corporation. This facility enables the Company to borrow up to 90% with a
qualified hedge or 80% without a qualified hedge of the fair market value of FHA
loans owned by the Company. The Nomura Repurchase Facility has a term of 364
days and bears interest at LIBOR plus 1.25%. As of December 31, 2001, there was
no balance outstanding under this facility. This repurchase facility was not
renewed in 2002.
Effective February 15, 2000, the Company entered into a repurchase facility with
Nomura Securities International, Inc. (the "Nomura Securities Repurchase
Facility"). This facility enables the Company to borrow up to 95% of the fair
market value of qualified mortgage securities owned by the Company. Generally,
borrowings bear interest at LIBOR plus 0.50%. As of December 31, 2001, the
amount outstanding under this facility was $43,610,000, the interest rate was
2.58%. All amounts outstanding at December 31, 2001 had 30 day settlement terms.
COMPETITION
The Company competes with various financial institutions in each of its lines of
business. For CMBS investments, competitors include major financial institutions
that sponsor CMBS conduits, pension funds, REITs and finance companies that
specialize in CMBS investment management. The Company competes with banks and
quasi-governmental agencies such as Fannie Mae, Freddie Mac and HUD, as well as
their designated mortgagees, for multifamily loan product.
The Company's business is also affected by competition to the extent that
Underlying Properties from which it derives interest and, ultimately, principal
payments may be subject to rental rates and relative levels of amenities from
comparable neighboring properties.
EMPLOYEES AND MANAGEMENT
The Company does not directly employ anyone. All services are performed for the
Company by the Advisor and its affiliates. The Advisor receives compensation in
connection with such activities as set forth in Item 8, Financial Statements and
Supplementary Data, Item 11, Executive Compensation and Item 13, Certain
Relationships and Related Transactions. In addition, the Company reimburses the
Advisor and certain of its affiliates for expenses incurred in connection with
the performance by their employees of services for the Company in accordance
with the Declaration of Trust.
12
Item 2. Properties.
The Company does not own or lease any properties.
Item 3. Legal Proceedings.
The Company is not a party to any material pending legal proceedings.
Item 4. Submission of Matters to a Vote of Shareholders.
None.
13
PART II
Item 5. Market for the Registrant's Common Stock and Related Shareholder
Matters.
As of March 14, 2002, there were 249 registered shareholders owning 6,338,630
Shares. The Company's Shares have been listed on the American Stock Exchange
since July 1, 1999 under the symbol "AMC". Prior to July 1, 1999, there was no
established public trading market for the Company's Shares.
The high and low prices for each quarterly periods in which the Shares were
traded is as follows:
2001 2001 2000 2000
Quarter Ended Low High Low High
------------- ------- ------- ------ ------
March 31 $ 7.500 $11.250 $7.875 $9.000
June 30 $ 9.600 $12.000 $8.125 $9.688
September 30 $10.930 $15.500 $7.875 $8.938
December 31 $12.600 $14.800 $7.250 $8.938
The last reported sale price of Shares on the American Stock Exchange on March
14, 2002 was $13.35.
In February 2002, the Company sold to the public 2.5 million common shares at a
price of $13.50 per share. The net proceeds from this offering, approximately
$31 million, net of underwriter's discount and expenses, will be used to make
additional investments.
INCENTIVE SHARE OPTION PLAN
The Company adopted an incentive share option plan (the "Incentive Share Option
Plan") to attract and retain qualified persons as trustees and officers and to
provide incentive to and more closely align the financial interests of the
Advisor and its employees and officers with the interests of the Company's
shareholders by providing the Advisor with substantial financial interest in the
Company's success. The compensation committee (the "Compensation Committee"),
which is comprised of Messrs. Allen and Fisch, administers the Incentive Share
Option Plan. Pursuant to the Incentive Share Option Plan, if the Company's
distributions per share in the immediately preceding calendar year exceed $1.45
per share, the Compensation Committee has the authority to issue options to
purchase, in the aggregate, that number of shares which is equal to three
percent of the shares outstanding as of December 31 of the immediately preceding
calendar year, provided that the Compensation Committee may only issue, in the
aggregate, options to purchase a maximum number of shares over the life of the
Incentive Share Option Plan equal to 383,863 shares (10% of the shares
outstanding on December 31, 2001). If the Compensation Committee does not grant
the maximum number of options in any year, then the excess of the number of
authorized options over the number of options granted in such year will be added
to the number of authorized options in the succeeding year and will be available
for grant by the Compensation Committee in such succeeding year. All options
granted by the Compensation Committee will have an exercise price equal to or
grater than the fair market value of the share on the date of the grant. The
maximum option term is ten years from the date of grant. All share options
granted pursuant to the Incentive Share Option Plan may vest immediately upon
issuance or in accordance with the determination of the Compensation Committee.
No options were granted for the years ended December 31, 2000 and 2001.
DISTRIBUTION INFORMATION
Cash distributions per share for the years ended December 31, 2001 and 2000 are
as set forth in the following table:
Cash Distribution Total Amount
for Quarter Ended Date Paid Per Share Distributed
----------------- --------- --------- ------------
March 31, 2001 5/15/01 $ .3625 $1,391,504
June 30, 2001 8/14/01 .3625 1,391,504
September 30, 2001 11/14/01 .3625 1,391,504
December 31, 2001 2/14/02 .3625 1,391,503
------- ----------
Total for 2001 $1.4500 $5,566,015
======= ==========
March 31, 2000 5/15/00 $ .3625 $1,391,504
June 30, 2000 8/14/00 .3625 1,391,504
September 30, 2000 11/14/00 .3625 1,391,504
December 31, 2000 2/14/01 .3625 1,391,503
------- ----------
Total for 2000 $1.4500 $5,566,015
======= ==========
There are no material legal restrictions upon the Company's present or future
ability to make distributions in accordance with the provisions of the
Declaration of Trust. Future distributions paid by the Company will be at the
discretion of the Trustees and will depend on the actual cash flow of the
Company, its financial condition, capital requirements and such other factors as
the Trustees deem relevant.
14
In order to qualify as a REIT under the Internal Revenue Code, as amended, the
Company must, among other things, distribute at least 90% of its taxable income.
The Company believes that it is in compliance with the REIT-related provisions
of the Code.
Of the total distributions of $5,566,015 for each of the years ended December
31, 2001 and 2000 $378,952 ($.10 per share or 6.81%) and $2,248,259 ($.59 per
share or 40%), respectively, represented a return of capital determined in
accordance with generally accepted accounting principles. As of December 31,
2001, the aggregate amount of the distributions made since the commencement of
the initial public offering representing a return of capital, in accordance with
generally accepted accounting principles, totaled $14,496,679. The portion of
the distributions which constituted a return of capital was made in order to
maintain level distributions to shareholders.
Item 6. Selected Financial Data.
The information set forth below presents selected financial data of the Company.
Additional financial information is set forth in the audited financial
statements and footnotes thereto contained in Item 8, Financial Statements and
Supplementary Data.
Year Ended December 31,
---------------------------------------------------------------------
OPERATIONS 2001 2000 1999 1998 1997
------------ ----------- ------------ ----------- -----------
Total revenues $ 8,097,856 $ 8,311,139 $ 5,507,582 $ 4,031,515 $ 4,244,854
Total expenses 2,660,003 4,765,841 2,301,293 647,047 632,304
------------ ----------- ------------ ----------- -----------
Income before other gain (loss) 5,437,853 3,545,298 3,206,289 3,384,468 3,612,550
Total other gain (loss) (250,789) (227,541) 3,054,011 12,144 (66,735)
------------ ----------- ------------ ----------- -----------
Net income $ 5,187,064 $ 3,317,757 $ 6,260,300 $ 3,396,612 $ 3,545,815
============ =========== ============ =========== ===========
Net income per share (basic and diluted) $ 1.35 $ .86 $ 1.63 $ .88 $ .92
============ =========== ============ =========== ===========
Weighted average shares outstanding
(basic and diluted) 3,838,630 3,838,630 3,841,931 3,845,101 3,851,029
============ =========== ============ =========== ===========
December 31,
---------------------------------------------------------------------
FINANCIAL POSITION 2001 2000 1999 1998 1997
------------ ----------- ------------ ----------- -----------
Total assets $101,981,560 $70,438,313 $115,565,441 $59,993,040 $61,645,922
============ =========== ============ =========== ===========
Repurchase facility payable $ 43,610,000 $12,655,940 $ 19,127,000 $ 0 $ 0
============ =========== ============ =========== ===========
Total liabilities $ 46,702,078 $15,362,440 $ 58,474,076 $ 1,788,466 $ 1,259,997
============ =========== ============ =========== ===========
Total shareholders' equity $ 55,279,482 $55,075,873 $ 57,091,365 $58,204,574 $60,385,925
============ =========== ============ =========== ===========
DISTRIBUTIONS
Distributions to shareholders $ 5,566,015 $ 5,566,015 $ 5,543,580 $ 5,566,903 $ 5,574,932
============ =========== ============ =========== ===========
Distribution per share $ 1.450 $ 1.450 $ 1.444 $ 1.450 $ 1.450
============ =========== ============ =========== ===========
The results for the year ended December 31, 1999 reflect a gain on repayment of
two mortgage loans.
Item 7. Management's Discussion and Analysis of Financial Condition and
Results of Operations.
LIQUIDITY AND CAPITAL RESOURCES
Effective April 26, 1999, upon authorization by the Board of Trustees, the
Company's name was changed from American Mortgage Investors Trust to American
Mortgage Acceptance Company. The Company's shares of beneficial interest (the
"Shares") commenced trading on the American Stock Exchange on July 1, 1999 under
the symbol "AMC". As of December 31, 2001, there were 3,838,630 Shares
outstanding.
The Company's business plan focuses on government insured and uninsured
mortgages secured by multifamily properties, which may take the form of
government insured first mortgages and uninsured mezzanine loans, construction
loans, and bridge loans. Additionally, the Company has indirectly invested in
subordinate commercial mortgage-backed securities and may invest in other real
estate assets, including non-multifamily mortgages.
During the year ended December 31, 2001, cash and cash equivalents decreased
approximately $615,000 primarily due to proceeds from repayments of mortgage
loans, $9,246,000, distributions from ARCap, $2,196,000 and proceeds from
repurchase facilities, $62,030,000, which was less than cash used for funding of
notes receivable $9,959,000, distributions paid to shareholders $5,566,000, an
increase in investment in GNMA Certificates $6,506,000, an increase in
investment in mortgage loans $24,661,000 and an increase in repayments of
repurchase facilities payable, $31,076,000.
15
The net unrealized gains on GNMA investments included in shareholders' equity
aggregated $560,387 at December 31, 2001 consisted of gross unrealized gains and
losses of $579,252 and $18,865, respectively. This represents an increase of
$582,560 from the unrealized loss of $22,173 in December 31, 2000.
The yield on the GNMA Certificates will depend, in part, upon the rate and
timing of principal prepayments on the underlying mortgages in the asset pool.
Generally, as market interest rates decrease, mortgage prepayment rates increase
and the market value of interest rate sensitive obligations like the GNMA
Certificates increases. As market interest rates increase, mortgage prepayment
rates tend to decrease and the market value of interest rate sensitive
obligations like the GNMA Certificates tends to decrease. The effect of
prepayments on yield is greater the earlier a prepayment of principal is
received.
The yield on the mortgage loans will depend, in part, on when, and if, the
Company disposes of the mortgage loans prior to maturity or the obligor fully
repays the outstanding debt. The first mortgage loans have fixed interest rates,
the base amount of which is insured by HUD, resulting in a minimal amount of
interest rate risk. The effects of prepayment on yield is greater the earlier a
prepayment of principal is received. Due to the uncertainty of future economic
and other factors that affect interest rates and mortgage prepayments, it is not
possible to predict the effects of future events upon the yield to maturity or
the market value of the mortgage loans upon any sale or other disposition or
whether the Company, if it chose to, would be able to reinvest proceeds from
prepayments at favorable rates relative to the current mortgage loan rates.
The Company finances the acquisition of the Company's assets primarily through
borrowing at short-term rates using demand repurchase agreements. Under the
Company's declaration of trust, the Company may incur permanent indebtedness of
up to 50% of total market value calculated at the time the debt is incurred.
Permanent indebtedness and working capital indebtedness may not exceed 100% of
the Company's total market value. In February of 2002, the Company sold 2.5
million common shares at a price of $13.50 per share, raising net proceeds of
approximately $31 million. The Company expects to raise additional funds for
investment through further common offerings in 2002.
Effective February 15, 2000, the Company entered into a $60 million FHA
repurchase facility (the "Nomura Repurchase Facility") with Nomura Asset Capital
Corporation. This agreement enables the Company to borrow up to 90% with a
qualified hedge or 80% without a qualified hedge of the fair market value of FHA
loans owned by the Company. The Nomura Repurchase Facility has a term of 364
days and bears interest at LIBOR plus 1.25%. As of December 31, 2001, there was
no balance outstanding under this facility. This repurchase facility was renewed
for $40 million in February 2001, with a one time option to increase the
facility to $60 million for a term of one year. This facility was not renewed.
Effective February 15, 2000, the Company entered into a repurchase facility with
Nomura Securities International, Inc. (the "Nomura Securities Repurchase
Facility"). This agreement enables the Company to borrow up to 95% of the fair
market value of qualified mortgage securities owned by the Company. Borrowings
bear interest at LIBOR plus 0.50%. During 2001, the Company converted $37.4
million of its FHA mortgage loans into GNMA certificates in order to use such
assets as collateral under this financing program. As of December 31, 2001, the
amount outstanding under this facility was $43,610,000, the interest rate was
2.58%. All amounts outstanding at December 31, 2001, had 30 day settlement
terms.
In order to qualify as a REIT under the Internal Revenue Code, as amended, the
Company must, among other things, distribute at least 90% of its taxable income.
The Company believes that it is in compliance with the REIT-related provisions
of the Code.
The Company expects that cash generated from the Company's investments will meet
its needs for short-term liquidity, and will be sufficient to pay all of the
Company's expenses and to make distributions to its shareholders in amounts
sufficient to retain the Company's REIT status in the foreseeable future.
Pursuant to the Redemption Plan which became effective November 30, 1994, the
Company was required to redeem eligible shares presented for redemption for cash
to the extent it had sufficient net proceeds from the sale of shares under the
Reinvestment Plan. As a result of the adoption of the Proposals, the Company's
Reinvestment Plan and Redemption Plan have been terminated, effective with the
distribution for the quarter ended March 31, 1999. The final reinvestment of
shares occurred on May 15, 1999. The final redemption of shares occurred on May
24, 1999.
ACQUISITIONS
During the year ended December 31, 2001, the Company acquired the following
investments:
MEZZANINE LOANS
On May 24, 2001, the Company funded an original advance of $975,000 on a total
potential mezzanine loan of $1,250,000 secured by a 132 unit apartment unit
project known as The Plaza at San Jacinto Park located in La Porte, Texas. On
November 20, 2001, the Company funded the balance of this loan. The loan is
subordinate to a first mortgage loan of approximately $6.6 million. The interest
on the mezzanine loan is based on a fixed percentage of unpaid principal balance
of the first mortgage loan, which for this loan is an effective interest rate of
11%.
On December 19, 2001, the Company funded an original advance of $1,962,000 on a
total potential mezzanine loan of $2,523,000 secured by a 200 unit apartment
complex located in Rosenberg, Texas, known as the Club at Brazos. The loan is
subordinate to a first mortgage loan of approximately $14.4 million. The
interest on the mezzanine loan is based on a fixed percentage of unpaid
principal balance of the first mortgage loan, which for this loan is
approximately 10%.
16
Additionally, during 2001, the Company converted three FHA mortgage loans to
GNMA Certificates. Doing so allowed the Company to finance these assets at a
lower interest rate and higher leverage available under the Nomura Securities
Repurchase Agreement. This conversion resulted in an additional $11 million in
borrowings of which approximately $6.5 million was used to repay borrowings
under the Nomura Repurchase Facility and $4.5 million was used for further
investments.
BRIDGE LOANS
On July 30, 2001, the Company entered into a commitment to fund a maximum bridge
loan of $2,000,000 secured by a 312 unit apartment complex located in San Diego,
CA. known as Coronado Terrace. At December 31, 2001, the Company had funded
$581,360. The loan bears an interest rate of 11% and matures in December 2002.
On September 28, 2001, the Company fully funded a bridge loan of $378,000,
secured by a 30 unit apartment complex located in Detroit, MI, known as
Alexandrine Square. The loan bears an interest rate of 12.5% and matures in
August 2002.
On December 28, 2001, the Company funded an initial advance of approximately
$3,590,000 on a total potential bridge loan of $3,850,000, secured by a 360 unit
apartment complex located in Houston, Texas, known as the Concord at Palm
Center. The loan has a maximum term of 24 months and bears interest at 12% per
annum.
COMMITMENTS AND CONTINGENCIES
The Company completed a loan program with Fannie Mae which has agreed to fully
fund the origination of $250 million of Delegated Underwriter and Servicer loans
for apartment properties that qualify for low income housing tax credits under
Section 42 of the Internal Revenue Code. Under the terms of the loan program,
the Company will originate and contract for individual loans of up to $6 million
dollars each over a two-year period, which may be extended for up to two
additional one year periods. In the event the Company was to originate $250
million in loans pursuant to this program, the Company would be required to
guarantee a first loss position equal to the amount lost on the loans up to a
maximum of $21.25 million depending on the aggregate principal amount of the
loans the Company originates. In connection with this program, the Company has
also guaranteed construction loans for which it has issued a forward commitment
to originate a loan under the Fannie Mae program, with respect to which it
guarantees repayment of 100% of such construction loans. As of December 31,
2001, the Company has originated one loan totaling approximately $2.2 million
under the Fannie Mae program and has made forward commitments for an additional
approximate $6.8 million. The Company's maximum guarantee at December 31, 2001
was $5.9 million. The Company has not acquired an interest in any of the loans
the Company originated in Fannie Mae's behalf.
Since entering into the loan program, the level of loan origination competition
has increased, reducing the Company's projected financing volume and
profitability. As a result, the Company is de-emphasizing this program and
evaluating the possibility of transferring its rights and obligations in the
loan program to a third party.
Management is not aware of any trends or events, commitments or uncertainties,
which have not otherwise been disclosed that will or are likely to impact
liquidity in a material way.
CRITICAL ACCOUNTING POLICIES
The Company has several accounting policies that require significant judgments
to be made by Company management.
The Company's portfolio of mortgage loans and notes must be periodically
evaluated for possible impairment, and appropriate loan loss reserves
established. As of December 31, 2001, all mortgage loans and notes are current
and management has determined that none of the Company's loans or notes are
impaired, and no loan loss reserve is necessary.
The Company's GNMA Certificates are carried at estimated fair values. Changes in
these valuations do not impact the Company's income or cash flows, but affect
shareholders' equity. GNMA Certificates are relatively liquid investments, and
Company management estimates their values by reference to the valuations
assigned by the Company's repurchase lender.
The Company has a loan program with Fannie Mae, under which the Company
guarantees a first loss position on loans originated by the Company and funded
by Fannie Mae. Company management must evaluate the Company's exposure to
probable losses under this guarantee and record reserves, if necessary. At
December 31, 2001, the Company's maximum guarantee under this program was $5.9
million. The Company has experienced no losses under this program to date and no
reserves for probable losses were deemed necessary as of December 31, 2001.
The Company's mezzanine investments include provisions that allow the Company to
participate in a percentage of the underlying property's excess cash flows from
operations and upon sale or refinancing. At the inception of each such loan,
Company management must determine whether such investment should be accounted
for as a loan, joint venture or as real estate. Considerable judgement is
involved in making this determination, which affects the balance sheet
classification of the investment as well as recognition of revenues derived
therefrom. The Company considers the borrower's equity, the amount of the
Company's participation, the contractual cap, if any, on total yield to the
Company over the term of the loan, market yields on comparable loans, borrower
guarantees, and other factors in making its assessment of the proper accounting.
To date, the Company has determined that all mezzanine investments are properly
accounted for as loans.
17
RESULTS OF OPERATIONS
COMPARISON OF YEARS ENDED DECEMBER 31, 2001 AND 2000
Interest income from mortgage loans increased approximately $1,208,000 for the
year ended December 31, 2001 as compared to 2000 primarily due to the interest
earned by Stonybrook while held by AMAC/FM (which was consolidated in 2001 but
not in 2000) and the additional principal advances to the Hollows, Elmhurst
Village and Autumn Creek prior to the conversion to GNMA Certificates offset by
the repayment of the Town and Country mortgage loan in March 2000.
Interest income from GNMA Certificates increased approximately $1,822,000 for
the year ended December 31, 2001 as compared to 2000 primarily due to the
conversion of three mortgage loans to GNMA Certificates.
Interest income from commercial mortgage-backed security-related investment in
the amount of approximately $3,189,000 was recorded for the year ended December
31, 2000; such investment was sold October 2000.
Interest income from notes receivable decreased approximately $79,000 for the
year ended December 31, 2001 as compared to 2000 primarily due to AMAC/FM
becoming consolidated in 2001 partially offset by investments in additional
notes in 2000 and 2001.
Interest income from temporary investments decreased approximately $2,012,000
for the year ended December 31, 2001 as compared to 2000 of which approximately
$353,000 was due to the reduced balances of temporary investments and $1,659,000
was due to termination of the deposits with brokers held as collateral for short
sales.
Equity in earnings of ARCap increased approximately $1,999,000 for the year
ended December 31, 2001 as compared to 2000 due to the investment being acquired
in October 2000.
Other income increased approximately $38,000 for the year ended December 31,
2001 as compared to 2000 primarily due to the guaranty and extension fees on
loans in the Fannie Mae program.
Interest expense decreased approximately $1,966,000 for the year ended December
31, 2001 as compared to 2000 primarily due to the termination of the Bear
Stearns Repurchase Facility and closing out of government securities sold short
positions partially offset by higher interest expense related to Nomura
Securities repurchase facilities due to higher outstanding balance.
Fees to the manager decreased approximately $168,000 for the year ended December
31, 2001 as compared to 2000 primarily due to a decrease in asset management
fees payable to the Advisor due to the sale of commercial mortgage-backed
security-related investment and a decrease in the public funds allocation.
Amortization increased approximately $28,000 due to acceleration of the
amortization of deferred costs relating to the Nomura Repurchase Facility.
A gain on the repayment of mortgage loans in the amount of approximately $14,000
was recorded for the year ended December 31, 2000 relating to the repayment of
the Town and Country mezzanine loan and FHA insured mortgage loan on January 21,
2000. A loss in the amount of approximately $251,000 was recognized during the
year ended December 31, 2001 relating to the repayment of the Columbiana loans.
A net loss on the commercial mortgage-backed security-related investment and
government securities sold short in the amount of approximately $300,000 was
recorded for the year ended December 31, 2000. These positions were liquidated
in October 2000.
COMPARISON OF YEARS ENDED DECEMBER 31, 2000 AND 1999
Interest income from mortgage loans decreased approximately $1,005,000 for the
year ended December 31, 2000 as compared to 1999 primarily due to the repayment
of the Town and Country mortgage loan, contribution of Stonybrook FHA Loan to an
unconsolidated subsidiary and the recognition in 1999 of additional interest
income related to the Columbiana loan, which had been reserved in 1998. This was
partially offset by increases due to the three new loans acquired during 2000.
Interest income from GNMA Certificates decreased approximately $313,000 for the
year ended December 31, 2000 as compared to 1999 primarily due to the repayment
of one of the GNMA Certificates in January 2000.
Interest income from commercial mortgage-backed security-related investment
increased approximately $2,239,000 for the year ended December 31, 2000 due to a
longer holding period for the investment.
Interest income from note receivable increased approximately $361,000 for the
year ended December 31, 2000 primarily due to a loan made to an unconsolidated
subsidiary in March 2000.
Interest income from temporary investments increased $992,000 for the year ended
December 31, 2000 as compared to 1999 due to an increase in the amounts invested
which was $2,084,000 and $1,093,000, respectively.
Dividend income in the amount of $401,000 was reported for the year ended
December 31, 2000 due to the investment in ARCap preferred stock which was
purchased in October 2000.
18
Other income increased approximately $128,000 for the year ended December 31,
2000 as compared to 1999 due to a loan origination fee and the interest income
of a bridge loan.
Interest expense increased $2,465,000 for the year ended December 31, 2000 as
compared to 1999 due to the repurchase facilities and the US treasury note
transactions.
General and administrative expenses increased approximately $280,000 for the
year ended December 31, 2000 as compared to 1999 due to a usage fee for the
Nomura repurchase facilities, increased asset management fees and increased
advertising. This was partially offset by a decrease in the incentive management
fee.
Amortization costs in the amount of $85,000 were expensed for the year ended
December 31, 2000 relating to Nomura deferred costs of the Nomura repurchase
facilities.
A net loss on the commercial mortgage-backed security-related investment and
government security sold short position in the amount of approximately $300,000
was recorded for the year ended December 31, 2000, as opposed to $218,000 for
1999. This was due to fluctuations in the market values of those positions
during 1999 and 2000, until their sale on October 31, 2000.
DISTRIBUTIONS
Of the total distributions of $5,566,015 for the years ended December 31, 2001
and 2000, $378,952 ($.10 per share or 6.81%) and, $2,248,259 ($.59 per share or
40%), respectively, represented a return of capital determined in accordance
with generally accepted accounting principles. As of December 31, 2001, the
aggregate amount of the distributions made since the commencement of the initial
public offering representing a return of capital, in accordance with generally
accepted accounting principles, totaled $14,496,679. The portion of the
distributions which constituted a return of capital was made in order to
maintain level distributions to shareholders.
RECENTLY ISSUED ACCOUNTING STANDARDS
SFAS No. 133, "Accounting for Derivative Instruments and Hedging Activities"
establishes accounting and reporting standards for derivative instruments,
including certain derivative instruments embedded in other contracts, and for
hedging activities. It was implemented by the Company on January 1, 2001.
Because the Company does not currently utilize derivatives, implementation of
this statement did not have a material effect on the Company's financial
statements.
In June 2001, the Financial Accounting Standards Board issued Statement No. 141,
"Business Combinations (SFAS 141) and Statement No. 142, "Goodwill and Other
Intangible Assets" (SFAS 142). These statements establish new standards for
accounting and reporting for business combinations and for goodwill and
intangible assets resulting from business combinations. SFAS 141 applies to all
business combinations initiated after June 30, 2001; the Company is required to
implement SFAS 142 on January 1, 2002. Implementation of these statements did
not have a material impact on the Company's financial statements.
In June of 2001, the FASB issued SFAS No, 143, "Accounting for Asset Retirement
Obligations" (effective January 1, 2003) and, in August of 2001, SFAS No. 144,
"Accounting for the Impairment or Disposal of Long Lived Assets" (effective
January 1, 2002). SFAS No. 143 requires the recording of the fair value of a
liability for an asset retirement obligation in the period in which it is
incurred. SFAS No. 144 supercedes existing accounting literature dealing with
impairment and disposal of long-lived assets, including discontinued operations.
It addresses financial accounting and reporting for the impairment of long-lived
assets and for long-lived assets to be disposed of, and expands current
reporting for discontinued operations to include disposals of a "component" of
an entity that has been disposed of or is classified as held for sale. The
Company is in the process of evaluating the financial statement impact of the
adoption these two standards.
FORWARD-LOOKING STATEMENTS
Certain statements made in this report may constitute "forward-looking
statements" within the meaning of Section 27A of the Securities Act of 1933, as
amended and Section 21E of the Securities Exchange Act of 1934, as amended. Such
forward-looking statements include statements regarding the intent, belief or
current expectations of the Company and its management and involve known and
unknown risks, uncertainties and other factors which may cause the actual
results, performance or achievements of the Company to be materially different
from any future results, performance or achievements expressed or implied by
such forward-looking statements. Such factors include, among other things, the
following: general economic and business conditions, which will, among other
things, affect the availability and creditworthiness of prospective tenants,
lease rents and the terms and availability of financing; adverse changes in the
real estate markets including, among other things, competition with other
companies; risks of real estate development and acquisition; governmental
actions and initiatives; and environment/safety requirements. Readers are
cautioned not to place undue reliance on these forward-looking statements, which
speak only as of the date hereof.
INFLATION
Inflation did not have a material effect on the Company's results for the
periods presented.
Item 7A. Quantitative and Qualitative Disclosures About Market Risk
Market risk is the exposure to loss resulting from changes in interest rates,
foreign currency exchange rates, commodity prices and equity prices. The primary
market risk to which the investments of the Company is exposed is interest rate
risk, which is highly
19
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.
INTEREST RATE RISK
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. Interest
rate fluctuations can adversely affect the Company's income and value of its
common shares in many ways and present a variety of risks, including the risk of
mismatch between asset yields and borrowing rates, variances in the yield curve
and changing prepayment rates.
The Company's operating results will depend in large part on differences between
the income from its assets (net of credit losses) and its borrowing costs. Most
of the Company's assets, consisting primarily of mortgage loans, GNMA
Certificates, and notes receivable, or generate fixed returns and will have
terms in excess of five years. The Company funds the origination and acquisition
of a significant portion of these assets with borrowings which have interest
rates that reset relatively rapidly, such as monthly or quarterly. In most
cases, the income from assets will respond more slowly to interest rate
fluctuations than the cost of borrowings, creating a mismatch between asset
yields and borrowing rates. Consequently, changes in interest rates,
particularly short-term interest rates, may influence the Company's net income.
The Company's borrowings under repurchase agreements bear interest at rates that
fluctuate with LIBOR. Based on the $43.6 million of borrowings outstanding under
these facilities at December 31, 2001, a 1% change in LIBOR would impact the
Company's annual net income and cash flows by approximately $436,000. Increases
in these rates will tend to decrease the net income and market value of the
Company's net assets. Interest rate fluctuations that result in interest expense
exceeding interest income would result in operating losses.
The value of the Company's assets may be affected by prepayment rates on
investments. Prepayment rates are influenced by changes in current interest
rates and a variety of economic, geographic and other factors beyond the
Company's control, and consequently, such prepayment rates cannot be predicted
with certainty. When the Company originates mortgage loans, it expects that such
mortgage loans will have a measure of protection from prepayment in the form of
prepayment lock-out periods or prepayment penalties. However, such protection
may not be available with respect to investments which the Company acquires, but
does not originate. In periods of declining mortgage interest rates, prepayments
on mortgages generally increase. If general interest rates decline as well, the
proceeds of such prepayments received during such periods are likely to be
reinvested by the Company in assets yielding less than the yields on the
investments that were prepaid. In addition, the market value of mortgage
investments may, because of the risk of prepayment, benefit less from declining
interest rates than from other fixed-income securities. Conversely, in periods
of rising interest rates, prepayments on mortgages generally decrease, in which
case the Company would not have the prepayment proceeds available to invest in
assets with higher yields. Under certain interest rate and prepayment scenarios
the Company may fail to recoup fully its cost of acquisition of certain
investments.
REAL ESTATE RISK
Multifamily and commercial property values and net operating income derived from
such properties are subject to volatility and may be affected adversely by a
number of factors, including, but not limited to, national, regional and local
economic conditions (which may be adversely affected by industry slowdowns and
other factors); local real estate conditions (such as an oversupply of housing,
retail, industrial, office or other commercial space); changes or continued
weakness in specific industry segments; construction quality, age and design;
demographic factors; retroactive changes to building or similar codes; and
increases in operating expenses (such as energy costs). In the event net
operating income decreases, a borrower may have difficulty paying the Company's
mortgage loan, which could result in losses to the Company. In addition,
decreases in property values reduce the value of the collateral and the
potential proceeds available to a borrower to repay the Company's mortgage
loans, which could also cause the Company to suffer losses.
RISK IN OWNING SUBORDINATED INTERESTS
The Company has invested indirectly in subordinated CMBS through its ownership
of a preferred membership interest in ARCap. Subordinated CMBS of the type in
which ARCap invests include "first loss" and non-investment grade subordinated
interests. A first loss security is the most subordinate class in a structure
and accordingly is the first to bear the loss upon a default on restructuring or
liquidation of the underlying collateral and the last to receive payment of
interest and principal. Such classes are subject to special risks, including a
greater risk of loss of principal and non-payment of interest than more senior,
rated classes. The market values of subordinated interests in CMBS and other
subordinated securities tend to be more sensitive to changes in economic
conditions than more senior, rated classes. As a result of these and other
factors, subordinated interests generally are not actively traded and may not
provide holders with liquidity of investment. With respect to the Company's
investment in ARCap, the ability to transfer the membership interest in ARCap is
further limited by the terms of ARCap's operating agreement.
PARTICIPATING INTEREST
In connection with the acquisition and origination of mortgages, the Company
has, on occasion, obtained and may continue to obtain participating interests
that may entitle it to payments based upon a development's cash flow, profits or
any increase in the value of the development that would be realized upon a
refinancing or sale of the development. Competition for participating interests
is dependent to a large degree upon market conditions. Participating interests
are more difficult to obtain when mortgage financing is available at relatively
low interest rates. In the current interest rate environment, the Company may
have greater difficulty obtaining participating interest. Participating
interests are not government insured or guaranteed and are therefore subject to
the general risks inherent in real estate investments. Therefore, even if the
Company is successful in investing in mortgage investments which provide for
participating interests, there can be no assurance that such interests will
result in additional payments.
20
REPURCHASE FACILITY COLLATERAL RISK
Repurchase agreements involve the risk that the market value of the securities
sold by the Company may decline and that the Company will be required to post
additional collateral, reduce the amount borrowed or suffer forced sales of the
collateral. If forced sales were made at prices lower than the carrying value of
the collateral, the Company would experience additional losses. If the Company
is forced to liquidate these assets to repay borrowings, there can be no
assurance that the Company will be able to maintain compliance with the REIT
asset and source of income requirements.
21
Item 8. Financial Statements and Supplementary Data.
Page
------
(a) 1. FINANCIAL STATEMENTS
Independent Auditors' Report 23
Consolidated Balance Sheets as of December 31, 2001 and 2000 24
Consolidated Statements of Income for the years ended
December 31, 2001, 2000 and 1999 25
Consolidated Statements of Changes in Shareholders' Equity
for the years ended December 31, 2001, 2000 and 1999 26
Consolidated Statements of Cash Flows for the years ended
December 31, 2001, 2000 and 1999 27
Notes to Consolidated Financial Statements 29
(a) 2. FINANCIAL STATEMENT SCHEDULES
All schedules have been omitted because they are not required or
because the required information is contained in the financial
statements or notes thereto.
22
INDEPENDENT AUDITORS' REPORT
To the Board of Trustees
And Shareholders of
American Mortgage Acceptance Company
New York, New York
We have audited the accompanying consolidated balance sheets of American
Mortgage Acceptance Company and subsidiaries (the "Company") as of December 31,
2001 and 2000, and the related consolidated statements of income, changes in
shareholders' equity and cash flows for each of the three years in the period
ended December 31, 2001. These financial statements are the responsibility of
the Company's management. Our responsibility is to express an opinion on these
financial statements based on our audits.
We conducted our audits in accordance with auditing standards generally accepted
in the United States of America. Those standards require that we plan and
perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, such consolidated financial statements present fairly, in all
material respects, the financial position of American Mortgage Acceptance
Company and subsidiaries as of December 31, 2001 and 2000, and the results of
their operations and their cash flows for each of the three years in the period
ended December 31, 2001, in conformity with accounting principles generally
accepted in the United States of America.
/s/ DELOITTE & TOUCHE LLP
New York, New York
March 25, 2002
23
AMERICAN MORTGAGE ACCEPTANCE COMPANY AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
ASSETS
December 31,
--------------------------
2001 2000
------------ -----------
Investments in mortgage loans $ 17,799,317 $31,828,733
Investments in GNMA Certificates-available for sale 50,059,655 5,851,219
Investment in ARCap 20,245,637 20,041,733
Investment in unconsolidated subsidiary -- 1,149,182
Cash and cash equivalents 1,017,904 1,632,652
Notes receivable 11,372,939 8,677,843
Accrued interest receivable 570,136 680,728
Other assets 915,972 576,223
------------ -----------
Total assets $101,981,560 $70,438,313
============ ===========
LIABILITIES AND SHAREHOLDERS' EQUITY
Liabilities:
Repurchase facilities payable $ 43,610,000 $12,655,940
Accrued interest payable 21,624 27,850
Accounts payable and accrued expenses 1,347,643 278,760
Due to Advisor and affiliates 331,308 1,008,387
Distributions payable 1,391,503 1,391,503
------------ -----------
Total liabilities 46,702,078 15,362,440
------------ -----------
Commitments and contingencies
Shareholders' equity:
Shares of beneficial interest; $.10 par value;
12,500,000 shares authorized; 4,213,826 issued
and 3,838,630 outstanding 421,383 421,383
Treasury shares of beneficial interest;
375,196 shares (37,520) (37,520)
Additional paid-in capital 68,840,500 68,840,500
Distributions in excess of net income (14,505,268) (14,126,317)
Accumulated other comprehensive income (loss) 560,387 (22,173)
------------ -----------
Total shareholders' equity 55,279,482 55,075,873
------------ -----------
Total liabilities and shareholders' equity $101,981,560 $70,438,313
============ ===========
See accompanying notes to the financial statements.
24
AMERICAN MORTGAGE ACCEPTANCE COMPANY AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
Years Ended December 31,
-----------------------------------------
2001 2000 1999
----------- ----------- -----------
Revenues:
Interest income:
Mortgage loans $ 2,773,048 $ 1,565,219 $ 2,569,901
GNMA certificates 2,294,286 472,693 785,591
Commercial mortgage-backed
security-related investment -- 3,189,407 950,456
Notes receivable 450,312 529,125 85,786
Temporary investments 72,892 2,084,417 1,092,617
Equity in earnings of ARCap 2,400,069 401,096 --
Other income 107,249 69,182 23,231
----------- ----------- -----------
Total revenues 8,097,856 8,311,139 5,507,582
----------- ----------- -----------
Expenses:
Interest 1,406,254 3,371,906 906,581
General and administrative 548,258 548,535 316,272
Fees to Advisor 592,522 760,863 713,568
Amortization 112,969 84,537 --
Organization costs -- -- 364,872
----------- ----------- -----------
Total expenses 2,660,003 4,765,841 2,301,293
----------- ----------- -----------
Other gain (loss):
Net loss on commercial
mortgage-backed security-
related investment and
government security sold short -- (299,555) (217,699)
Net gain (loss) on repayment of
mortgage loans and GNMA
certificiates (250,789) 72,014 3,271,710
----------- ----------- -----------
Total other gain (loss) (250,789) (227,541) 3,054,011
----------- ----------- -----------
Net income $ 5,187,064 $ 3,317,757 $ 6,260,300
=========== =========== ===========
Net income per share
(basic and diluted) $ 1.35 $ .86 $ 1.63
=========== =========== ===========
Weighted average
shares outstanding
(basic and diluted) 3,838,630 3,838,630 3,841,931
=========== =========== ===========
See accompanying notes to the financial statements.
25
AMERICAN MORTGAGE ACCEPTANCE COMPANY AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY
FOR THE YEARS ENDED DECEMBER 31, 2001, 2000 AND 1999
Shares of Beneficial Treasury Shares of
Interest Beneficial Interest Additional
-------------------- -------------------- Paid-in
Shares Amount Shares Amount Capital
--------- -------- -------- -------- -----------
Balance at January 1, 1999 4,172,790 $417,280 (333,545) $(33,355) $68,849,730
Comprehensive income:
Net income
Other comprehensive loss:
Net unrealized holding loss
arising during the period
Add: reclassification adjustment
for losses included in net income
Other comprehensive loss
Comprehensive income
Issuance of shares of beneficial 41,036 4,103 629,834
interest
Purchase of treasury shares (41,651) (4,165) (639,064)
Distributions
--------- -------- -------- -------- -----------
Balance at December 31, 1999 4,213,826 421,383 (375,196) (37,520) 68,840,500
Comprehensive income:
Net income
Other comprehensive income:
Net unrealized holding gain
arising during the period
Less: reclassification adjustment
for gains included in net income
Other comprehensive income
Comprehensive income
Distributions
--------- -------- -------- -------- -----------
Balance at December 31, 2000 4,213,826 421,383 (375,196) (37,520) 68,840,500
Comprehensive income:
Net income
Other comprehensive income:
Net unrealized holding gain arising
during the period
Comprehensive income
Distributions
--------- -------- -------- -------- -----------
Balance at December 31, 2001 4,213,826 $421,383 (375,196) $(37,520) $68,840,500
========= ======== ======== ======== ===========
Accumulated
Distributions Other
in Excess Comprehensive Comprehensive
of Net Income Income Income Total
------------- ------------- ------------- -----------
Balance at January 1, 1999 $(11,191,614) $162,533 $58,204,574
Comprehensive income:
Net income 6,260,300 $6,260,300 6,260,300
Other comprehensive loss:
Net unrealized holding loss
arising during the period (418,964)
Add: reclassification adjustment
for losses included in net income 1,492
----------
Other comprehensive loss (417,472) (417,472) (417,472)
----------
Comprehensive income $5,842,828 633,937
==========
Issuance of shares of beneficial 633,937
interest
Purchase of treasury shares (643,229)
Distributions (6,946,745) (6,946,745)
------------ -------- -----------
Balance at December 31, 1999 (11,878,059) (254,939) 57,091,365
Comprehensive income:
Net income 3,317,757 $3,317,757 3,317,757
Other comprehensive income:
Net unrealized holding gain
arising during the period 291,175
Less: reclassification adjustment
for gains included in net income (58,409)
----------
Other comprehensive income 232,766 232,766 232,766
----------
Comprehensive income $3,550,523
==========
Distributions (5,566,015) (5,566,015)
------------ -------- -----------
Balance at December 31, 2000 (14,126,317) (22,173) 55,075,873
Comprehensive income:
Net income 5,187,064 $5,187,064
Other comprehensive income: 5,187,064
Net unrealized holding gain arising
during the period 582,560 582,560
----------
Comprehensive income $5,769,624
==========
Distributions (5,566,015) (5,566,015)
------------ -------- -----------
Balance at December 31, 2001 $(14,505,268) $560,387 $55,279,482
============ ======== ===========
See accompanying notes to financial statements.
AMERICAN MORTGAGE ACCEPTANCE COMPANY AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
Years Ended December 31,
--------------------------------------------------
2001 2000 1999
-------------- -------------- --------------
Cash flows from operating activities:
Net income $ 5,187,064 $ 3,317,757 $ 6,260,300
Adjustments to reconcile net income to net
cash provided by (used in) operating
activities:
Unrealized (gain) loss on commercial
mortgage-backed security-related
investment -- (1,496,017) 1,419,016
Unrealized (gain) loss on government
security sold short -- 1,795,572 (1,201,317)
Net loss (gain) on repayment of GNMA
certificates and mortgage loans 250,789 (72,014) (3,271,710)
Equity in earnings of ARCap (2,400,069) (401,096) --
Equity in income of unconsolidated
subsidiary -- (9,182) --
Amortization - deferred financing costs 112,969 92,022 --
Amortization expense-loan premium and
origination costs 79,030 163,371 337,590
Accretion of GNMA discount (21,801) (22,356) (23,145)
Accretion of discount on commercial
mortgage-backed security-related
investment -- (652,968) (144,061)
Government security sold short -- 33,541,350 38,193,276
Purchase of government securities sold
short -- (72,328,881) --
Changes in operating assets and liabilities:
Investment in commercial mortgage-
backed security-related investment -- 36,764,227 (35,622,358)
Deposit with broker as collateral for security
sold short -- 37,733,101 (37,733,101)
Accrued interest receivable 110,592 499,388 (413,413)
Other assets (49,718) 18,863 (33,159)
Due to Advisor and affiliates (638,009) 575,122 (1,281,829)
Accounts payable and
accrued expenses 1,068,883 240,402 49,025
Accrued interest payable (6,226) (380,102) 407,952
-------------- -------------- --------------
Net cash provided by (used in) operating
activities 3,693,504 39,378,559 (33,056,934)
-------------- -------------- --------------
Cash flows from investing activities:
Increase in investment in mortgage loans (24,660,912) (21,486,788) (829,204)
Proceeds from repayments of mortgage loans 9,245,562 9,995,170 20,841,545
Periodic principal payments of mortgage loans 84,628 62,069 --
Funding of notes receivable (9,959,189) (7,413,750) (1,900,000)
Repayment of note receivable -- 6,000,000 1,900,000
Investment in ARCap preferred stock -- (20,000,000) --
Distribution from ARCap 2,196,165 -- --
Increase in other assets (359,746) (375,178) (111,446)
Principal repayments of GNMA certificates 346,026 3,926,772 442,746
Increase in investment in GNMA certificates (6,506,492) -- --
Costs relating to repayment of mortgage loan (39,085) (59,583) --
-------------- -------------- --------------
Net cash provided by (used in) investing activities (29,653,043) (29,351,288) 20,343,641
============== -------------- --------------
(continued)
27
AMERICAN MORTGAGE ACCEPTANCE COMPANY AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(continued)
Years Ended December 31,
--------------------------------------------------
2001 2000 1999
--------------- -------------- --------------
Cash flows from financing activities:
Proceeds from repurchase facilities payable 62,030,000 13,698,940 19,568,000
Repayments of repurchase facilities payable (31,075,940) (20,170,000) (441,000)
Increase in deferred loan costs (43,254) (159,842) --
Distributions paid to shareholders (5,566,015) (5,566,015) (5,555,242)
Proceeds from issuance of shares of
beneficial interest -- -- 633,937
Purchase of treasury shares -- -- (643,229)
-------------- -------------- --------------
Net cash provided by (used in)
financing activities 25,344,791 (12,196,917) 13,562,466
-------------- -------------- --------------
Net increase (decrease) in cash and cash
equivalents (614,748) (2,169,646) 849,173
Cash and cash equivalents at the beginning
of the year 1,632,652 3,802,298 2,953,125
-------------- -------------- --------------
Cash and cash equivalents at the end of
the year $ 1,017,904 $ 1,632,652 $ 3,802,298
============== ============== ==============
Supplemental information:
Interest paid $ 1,412,480 $ 3,752,008 $ 498,629
============== ============== ==============
Adjustments due to contribution of mortgage loan to unconsolidated subsidiary:
Increase in investment in unconsolidated
subsidiary $ 1,140,000
Increase in note receivable 7,264,092
Decrease in investment in mortgage loans (8,404,092)
-------------
$ 0
-------------
Conversion of mortgage loans to GNMA
Certificates
Increases in GNMA Certificates $ 37,443,741
Decrease in mortgage loans (37,443,741)
--------------
$ 0
--------------
Consolidation of former unconsolidated subsidiary:
Increase in investment in mortgage loans $ 8,374,205
Decrease in notes receivable (7,264,092)
Decrease in investment in unconsolidated
subsidiary (1,110,113)
--------------
$ 0
--------------
See accompanying notes to financial statements.
28
AMERICAN MORTGAGE ACCEPTANCE COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1 - General
American Mortgage Acceptance Company (formerly American Mortgage Investors
Trust) (the "Company") was formed on June 11, 1991 as a Massachusetts business
trust for the primary purpose of investing in government-insured mortgages and
guaranteed mortgage-backed certificates. The Company elected to be treated as a
real estate investment trust ("REIT") under the Internal Revenue Code of 1986,
as amended (the "Code").
On April 6, 1999, the Company received the necessary consent from its
shareholders to approve proposals (the "Proposals") to, among other things,
restructure the Company from a closed-ended, finite-life REIT to a publicly
traded, open-ended, infinite-life operating REIT. In addition to restructuring
the Company, the Proposals, among other matters, permit the Company to modify
its investment objectives, to incur a specified amount of indebtedness and to
list the Company's shares on a national exchange.
Effective April 26, 1999, upon authorization by the Board of Trustees, the
Company's name was changed from American Mortgage Investors Trust to American
Mortgage Acceptance Company.
The Company's business plan focuses on government insured and uninsured
mortgages secured by multifamily properties, which may take the form of
government insured first mortgages and uninsured mezzanine loans, construction
loans and bridge loans. Additionally, the Company has indirectly invested in
subordinate commercial mortgage-backed securities and may invest in other real
estate assets, including non-multifamily mortgages.
The Company had been governed by a board of trustees comprised of two
independent trustees and one trustee who is affiliated with Related Capital
Company ("Related"), a nationwide, fully integrated real estate financial
services firm. Effective June 12, 2001, at its annual meeting, the Company added
two additional trustees, one an independent trustee, the other an affiliate of
Related, bringing the total number of trustees to five. The Company has engaged
Related AMI Associates, Inc. (the "Advisor"), an affiliate of Related, to manage
its day-to-day affairs.
NOTE 2 - Significant Accounting Policies
a) Basis of Presentation
The consolidated financial statements of the Company are prepared on the accrual
basis of accounting in accordance with accounting principles generally accepted
in the United States of America ("GAAP"). The preparation of financial
statements in conformity with GAAP requires the Advisor to make estimates and
assumptions that affect the reported amounts of assets and liabilities and the
disclosure of amortized assets and liabilities at the date of the financial
statements as well as the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates. The
consolidated financial statements include the accounts of the Company and two
wholly owned subsidiaries, AMAC RepoSeller and AMAC/FM Corporation. All
intercompany accounts and transactions have been eliminated in consolidation.
Unless otherwise indicated, the "Company" as herein after used, refers to
American Mortgage Acceptance Company and its subsidiaries.
b) Investments in Mortgage Loans and Notes Receivable
The Company accounts for its investments in mortgage loans and notes receivable
under the provisions of Statement of Financial Accounting Standards No. 114,
"Accounting by Creditors for Impairment of a Loan" ("SFAS 114"). Under SFAS 114,
a loan is impaired when, based on current information and events, it is probable
that a creditor will be unable to collect all amounts due according to the
contractual terms of the loan agreement. SFAS No. 114 requires lenders to
measure impaired loans based on: (i) the present value of expected future cash
flows discounted at the loans' effective interest rate; (ii) the loan's
observable market price; or (iii) the fair value of the collateral if the loan
is collateral-dependent. An allowance for loan losses is maintained if the
measure of an impaired loan is less than its recorded investment. Adjustments to
the allowance are made through corresponding charges or credits to the provision
for loan losses.
Interest on mortgage loans and notes receivable is recognized on the accrual
basis. Interest which was accrued but not received is reversed from income if
deemed to be uncollectible.
The Company's mezzanine investments include provisions that allow the Company to
participate in a percentage of the underlying property's excess cash flows from
operations and upon sale or refinancing. At the inception of each such loan, the
Company considers the provisions of the Third Notice to Practitioners issued by
the AICPA (the "Third Notice"), to determine whether such investment should be
accounted for as a loan, joint venture or as real estate. The Third Notice
addresses those real estate loans where the lender has virtually the same risks
and potential rewards as those of real estate owners or joint venturers, and
provides guidance on determining the appropriate accounting classification.
Considerable judgment is involved in making this determination, which affects
the balance sheet classification of the investment as well as recognition of
revenues derived therefrom. The Company considers the borrower's equity, the
amount of the Company's participation, the contractual cap, if any, on total
yield to the Company over the term of the loan, market yields on comparable
loans, borrower guarantees, and other factors in making its assessment of the
proper accounting. To date, the Company has determined that all mezzanine
investments are properly accounted for as loans.
29
AMERICAN MORTGAGE ACCEPTANCE COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
c) Investments in GNMA Certificates
The Company accounts for its investments in GNMA Certificates under the
provisions of SFAS No. 115 "Accounting for Certain Investments in Debt and
Equity Securities".
At the date of acquisition, the Company elected to designate its GNMA
Certificates as available-for-sale securities. Available-for-sale securities are
carried at fair value with net unrealized gain (loss) reported as a separate
component of other comprehensive income until realized. Fair value for the GNMA
Certificates is estimated by Company management by reference to valuations
assigned by the Company's repurchase lender. A decline in the market value of
any available-for-sale security below cost that is deemed other than temporary
is charged to earnings resulting in the establishment of a new cost basis for
the security. Premiums and discounts are amortized or accreted over the life of
the related security as an adjustment to interest income using the effective
yield method. Dividend and interest income are recognized when earned. Realized
gains and losses on securities are included in earnings and are derived using
the specific identification method for determining the cost of the securities
sold.
d) Investment in ARCap
The Company's preferred equity investment in ARCap Investors, L.L.C. ("ARCap")
is accounted for using the equity method because the Company has the ability to
exercise significant influence, but not control, over ARCap's operating and
financial policies.
e) Cash and Cash Equivalents
Cash and cash equivalents include cash in banks and temporary investments in
short-term instruments with original maturity dates equal to or less than three
months.
f) Loan Origination Costs and Fees
Acquisition fees and other direct expenses incurred for activities performed to
originate or acquire mortgage loans have been capitalized and are included in
Investment in Mortgage Loans in the balance sheets, along with any fees received
from borrowers for loan originations. Loan origination costs and fees are being
amortized to interest income using the effective yield method over the lives of
the respective mortgages.
g) Fair Value of Financial Instruments
As described above, the Company's GNMA Certificates are carried at estimated
fair values. The Company has determined that the fair value of its remaining
financial instruments, including its mortgage loans and cash and cash
equivalents, notes receivable, investment in ARCap, and secured borrowings
approximate their carrying values at December 31, 2001 and 2000. The fair value
of investments in mortgage loans, ARCap and GNMA Certificates are based on
actual market price quotes or by determining the present value of the projected
future cash flows using appropriate discount rates, credit losses and prepayment
assumptions. Other financial instruments carry interest rates which are deemed
to approximate market rates.
h) Income Taxes
The Company has qualified as a REIT under the Code. A REIT is generally not
subject to federal income tax on that portion of its REIT taxable income
("Taxable Income") which is distributed to its shareholders provided that at
least 90% of Taxable Income is distributed and provided that such income meets
certain other conditions. Accordingly, no provision for federal income taxes is
required. The Company may be subject to state taxes in certain jurisdictions.
During 2001, the Company declared distributions of $1.45 per share. For federal
income tax purposes, $1.36 and $.09 of the distributions were reported as
ordinary income and return of capital, respectively, to shareholders for 2001.
i) Comprehensive Income
SFAS No. 130, "Reporting Comprehensive Income," requires the Company to classify
items of "other comprehensive income", such as unrealized gains and losses on
its investment in GNMA Certificates, by their nature in the financial statements
and display the accumulated balance of other comprehensive income (loss)
separately from shareholders' equity in the shareholders' equity section of the
balance sheets. In accordance with SFAS No. 130, cumulative unrealized gains and
losses on securities available-for-sale are classified as accumulated other
comprehensive income in shareholders' equity and current period unrealized gains
and losses are included as a component of comprehensive income.
j) Segment Information
SFAS No. 131, "Disclosures About Segments of an Enterprise and Related
Information", requires enterprises to report certain financial and descriptive
information about their reportable operating segments, and certain
enterprise-wide disclosures regarding products and services, geographic areas
and major customers. The Company is an investor in mortgage products and
operates in only one reportable segment. The Company does not have or rely upon
any major customers. All of the Company's investments are secured by real estate
properties located in the United States; accordingly, all of its revenues were
derived from U.S. operations.
k) New Pronouncements
SFAS No. 133, "Accounting for Derivative Instruments and Hedging Activities"
establishes accounting and reporting standards for derivative instruments,
including certain derivative instruments embedded in other contracts, and for
hedging activities. It was implemented by the Company on January 1, 2001.
Because the Company does not currently utilize derivatives, implementation of
this statement did not have a material effect on the Company's financial
statements.
30
AMERICAN MORTGAGE ACCEPTANCE COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
In June 2001, the Financial Accounting Standards Board issued Statement No. 141,
"Business Combinations (SFAS 141) and Statement No. 142, "Goodwill and Other
Intangible Assets" (SFAS 142). These statements establish new standards for
accounting and reporting for business combinations and for goodwill and
intangible assets resulting from business combinations. SFAS 141 applies to all
business combinations initiated after June 30, 2001; the Company implemented
SFAS 142 on January 1, 2002. Implementation of these statements did not have a
material impact on the Company's financial statements.
In June of 2001, the FASB issued SFAS No, 143, "Accounting for Asset Retirement
Obligations" (effective January 1, 2003), and in August of 2001, SFAS No. 144,
"Accounting for the Impairment or Disposal of Long Lived Assets" (effective
January 1, 2002). SFAS No. 143 requires the recording of the fair value of a
liability for an asset retirement obligation in the period in which it is
incurred. SFAS No. 144 supercedes existing accounting literature dealing with
impairment and disposal of long-lived assets, including discontinued operations.
It addresses financial accounting and reporting for the impairment of long-lived
assets and for long-lived assets to be disposed of, and expands current
reporting for discontinued operations to include disposals of a "component" of
an entity that has been disposed of or is classified as held for sale.
Management does not believe that implementation of these statements will have a
material impact on the Company's financial statements.
l) Reclassifications
Certain amounts in the 2000 and 1999 financial statements have been reclassified
to conform to the 2001 presentation.
31
AMERICAN MORTGAGE ACCEPTANCE COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 3 - Investments in Mortgage Loans
Information relating to the Company's investments in Mortgage Loans as of
December 31, 2001 is as follows:
Property Description Final Maturity Date Call Date (F) Interest Rate (C)
-------- ----------- ------------------- ------------- -----------------
FIRST MORTGAGE LOANS (D):
STABILIZED PROPERTIES
Columbiana Lakes
Columbia, SC (J) 204 Units 11/35 7.25%
Stony Brook II
East Haven, CT 125 Units 6/37 12/06 7.625%
Subtotal First Mortgage Loans
MEZZANINE LOANS (E):
STABILIZED PROPERTIES
Columbiana Lakes
Columbia, SC (J) 204 Units 11/35 4/99 20.67%
Stony Brook II
East Haven, CT 125 Units 6/37 12/06 15.33%
Plaza at San Jacinto
Houston, TX (G) 132 Units 1/43 6/11 11.00%
Subtotal Stabilized Mezzanine Loans
PROPERTIES IN CONSTRUCTION
The Hollows
Greenville, NC 184 Units 1/42 TBD 10.00%
Elmhurst Village
Oveido, FL 313 Units 1/42 TBD 10.00%
The Reserve at Autmn Creek
Friendswood, TX 212 Units 1/42 TBD 10.00%
Club at Brazos (G)
Rosenberg, TX 2 5/43 TBD 10.00%
Subtotal Construction Mezzanine Loans
Subtotal Mezzanine Loans
Total Mortgage Loans
Outstanding Interest Income
Periodic Payment Face Amount of Carrying Amount Earned Applicable
Property Terms Prior Liens Mortgages (k) of Mortgages (I) to the Period
-------- ---------------- ----------- -------------- ---------------- -----------------
FIRST MORTGAGE LOANS (D):
STABILIZED PROPERTIES
Columbiana Lakes
Columbia, SC (J) $ -- $ -- $ -- $ 432,127
Stony Brook II
East Haven, CT (A) -- 8,331,560 8,331,560 636,793
-----------------------------------------------------
Subtotal First Mortgage Loans 8,331,560 8,331,560 1,068,920
-----------------------------------------------------
MEZZANINE LOANS (E):
STABILIZED PROPERTIES
Columbiana Lakes
Columbia, SC (J) -- -- -- 169,402
Stony Brook II
East Haven, CT (B) 8,331,560 763,909 675,715 43,816
Plaza at San Jacinto
Houston, TX (G) (B) 6,638,300 1,250,000 1,219,800 73,879
-----------------------------------------------------
Subtotal Stabilized Mezzanine Loans 2,013,909 1,895,515 287,097
-----------------------------------------------------
PROPERTIES IN CONSTRUCTION
The Hollows
Greenville, NC (B) 8,481,092(H) 1,549,200 1,381,131 294,764
Elmhurst Village
Oveido, FL (B) 20,844,888(H) 2,874,000 2,423,556 695,924
The Reserve at Autmn Creek
Friendswood, TX (B) 14,624,253(H) 1,987,000 1,884,715 419,189
Club at Brazos (G)
Rosenberg, TX 2 (B) 14,363,800 1,962,000 1,882,840 7,154
-----------------------------------------------------
Subtotal Construction Mezzanine Loans 8,372,200 7,572,242 1,417,031
-----------------------------------------------------
Subtotal Mezzanine Loans 10,386,109 9,467,757 1,704,128
-----------------------------------------------------
Total Mortgage Loans $18,717,669 $17,799,317 $2,773,048
=====================================================
32
AMERICAN MORTGAGE ACCEPTANCE COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(A) Requires monthly payments of principal and interest based on a 40 year
amortization period. Loans are subject to 5-year lockouts against prepayments,
as well as a prepayment penalty structure during the second 5-year term of the
loans.
(B) Interest only payments are due monthly, with loan balance due at maturity.
(C) Interest on the mezzanine loans is based on a fixed percentage of the unpaid
principal balance of the related first mortgage loan (prior liens). The amount
shown is the approximate effective rate earned on the balance of the mezzanine
loan. The mezzanine loans also provide for payments of additional interest based
on a percentage of cash flow remaining after debt service (generally 50%) and
participation in sale or refinancing proceeds (generally 25%) and certain
provisions that cap the Company's total yield, including additional interest and
participations, over the term of the loan.
(D) Interest and principal payments on first mortgage loans are insured by the
U.S. Department of Housing and Urban Development.
(E) The principal balance of the mezzanine loans is secured by the partnership
interests of the entity that owns the underlying property and a third mortgage
deed of trust. Interest payments on the mezzanine loans are secured by a second
mortgage deed of trust and are guaranteed for the first thirty six months after
construction completion by an entity related to the general partner of the
entity that owns the underlying property.
(F) Loans are subject to mandatory prepayment at the option of the Company 10
years after construction completion, with one year's notice.
(G) The funding of this mezzanine loan is based on property level operational
achievements. The Company does not hold the first mortgage loan relating to this
mezzanine loan.
(H) The first mortgage loans related to those properties were converted into
GNMA Certificates and are held by the Company.
(I) Carrying amounts of the mezzanine loans include unamortized origination
costs and fees.
(J) During the third quarter of 2001, the Company arrived at a negotiated
settlement with the borrower under the Columbiana Lakes loans. Under this
agreement, the Company received approximately $9.3 million on October 1, 2001,
in full settlement of the first mortgage loan and mezzanine loan, resulting in a
loss on repayment of approximately $251,000.
(K) No principal amounts of mortgage loans are subject to delinquent interest as
of December 31, 2001.
Further information relating to investments in mortgage loans for the years
ended December 31, 2001, 2000 and 1999 is as follows:
2001 2000 1999
------------- ------------- -------------
Reconciliation of mortgage loans:
Balance at beginning of period $ 31,828,733 $ 28,893,482 $ 45,965,488
Advances made during the period 24,813,428 22,252,512 829,204
Conversion of mortgage loans to GNMA certificates (37,443,741) -- --
Loan origination fees (net of acquisition
expenses) (152,516) (765,724) 4,723
Proceeds from repayment of mortgage loans (9,245,562) (9,995,170) (20,841,545)
Periodic principal payments of mortgage loans (84,628) (62,069) --
Loan contributed to unconsolidated subsidiary -- (8,404,092) --
Consolidation of previously unconsolidated subsidiary 8,374,205 -- --
Excess(deficiency) of proceeds over carrying value of
mortgage loans (250,657) 13,582 3,273,202
Amortization and accretion -- net (39,945) (103,788) (337,590)
------------- ------------- -------------
Investments in mortgage loans - December 31, $ 17,799,317 $ 31,828,733 $ 28,893,482
============= ============= =============
33
AMERICAN MORTGAGE ACCEPTANCE COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 4 - Investments in GNMA Certificates-Available for Sale
Information relating to investments in GNMA Certificates as of December 31, 2001
is as follows:
Amortized
Date Purchased/ Principal at Cost at
Certificate Final Payment Stated December December
Name Number Payment Date Interest Rate 31, 2001 31, 2001
---- ----------- --------------- ------------- ------------ ----------
Western Manor 0355540 7/27/94 7.125% $2,489,348 $2,480,484
3/15/29
Copper Commons 0382486 7/28/94 8.500% 2,107,392 2,176,236
8/15/29
SunCoast Capital Group, Ltd. G22412 6/23/97 7.000% 892,315 892,315
4/20/27
Hollows Apts. 511908 5/29/01 7.620% 8,481,092 8,481,092
7/15/02
Elmhurst Village 549390 6/28/01 7.745% 20,844,888 20,844,888
4/15/04
Reserve at Autumn Creek 448747 6/28/01 7.745% 14,624,253 14,624,253
7/15/02
------------ ----------
Total $49,439,288 $49,499,268
============ ===========
Unrealized
Gain (Loss) at Balance at Interest Income
December December Earned Applicable
Name 31, 2001 31, 2001 to the Period
---- -------------- ---------- -----------------
Western Manor $ 12,983 $2,493,467 $197,887
Copper Commons (18,865) 2,157,371 180,562
SunCoast Capital Group, Ltd. 15,300 907,615 74,394
Hollows Apts. 90,086 8,571,178 412,729
Elmhurst Village 270,729 21,115,617 866,192
Reserve at Autumn Creek 190,154 14,814,407 562,522
-------------- ----------- --------------
Total $560,387 $50,059,655 $2,294,286
============== =========== =============
All GNMA Certificates are pledged as collateral for borrowings under repurchase
facilities.
34
AMERICAN MORTGAGE ACCEPTANCE COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The amortized cost, unrealized gain and fair value for the investment in GNMA
Certificates at December 31, 2001 and 2000 were as follows:
December 31,
---------------------------
2001 2000
------------ ------------
Amortized cost $ 49,499,268 $ 5,873,392
Net unrealized gain (loss) 560,387 (22,173)
------------ ------------
Fair value $ 50,059,655 $ 5,851,219
============ ============
For the year ended December 31, 2001, there were gross unrealized gains and
losses of $579,252 and $18,865, respectively, on GNMA Certificates. For the year
ended December 31, 2000, there were gross unrealized gains and losses of $11,343
and $33,516, respectively, on GNMA Certificates.
Due to the complexity of the GNMA structure and the uncertainty of future
economic and other factors that affect interest rates and mortgage prepayments,
it is not possible to predict the effect of future events upon the yield to
maturity or the market value of the GNMA Certificates upon any sale or other
disposition or whether the Company, if it chose to, would be able to reinvest
proceeds from prepayments at favorable rates relative to the coupon rate.
NOTE 5 - Commercial Mortgage-Backed Security-Related Investment and Short Sale;
Investment in ARCap
On September 30, 1999, the Company acquired from ARCap a "BB+" rated
subordinated commercial mortgage-backed security ("CMBS") from a Chase Manhattan
Bank-First Union Nation Bank Commercial Mortgage Trust. The CMBS investment,
which was purchased for $35,622,358, had a face amount of $50,399,711 and an
annual coupon rate of 6.4%. The Company purchased the CMBS investment using cash
and debt provided through a Bear Stearns Repurchase Facility (see Note 7). In
connection with this acquisition, the Company entered into an agreement with
ARCap. Under the agreement, the Company had the right to sell the CMBS
investment to ARCap and purchase a preferred equity position in ARCap, all based
on the then fair value of the CMBS investment.
This investment was accounted for as a trading asset and carried at estimated
fair value, with changes in fair value included in earnings. Interest income was
accrued as it became receivable, and included accretion of discounts, computed
using the effective yield method, after considering estimated prepayments and
credit losses. The Company recognized gains on this investment totaling
$1,496,017 in 2000 and losses of $1,419,016 in 1999, due to mark-to-market
adjustments.
On September 30, 1999, in order to mitigate the potential income statement
effect of changes in the fair value of its CMBS investment caused by changes in
interest rates, the Company entered into a short sale involving the sale of a
U.S. Treasury Note with a face amount of $39,327,000 and an annual coupon rate
of 5.625% borrowed from Bear Stearns & Co., Inc. ("Bear Stearns"). On March 16,
2000, the Company replaced the borrowed security by purchasing such security
through Bear Stearns, and entered into an additional short sale contract
involving the sale of a U.S. Treasury Note with a face amount of $34,512,000 and
an annual coupon rate of 6.0% borrowed from Bear Stearns. Short sale positions
were carried at estimated fair value, with changes in fair value included in
earnings. The Company recognized losses on these positions totaling $1,795,572
in 2000 and gains of $1,201,317 in 1999 due to mark-to-market adjustments.
On November 1, 2000, the Company, in accordance with the agreement with ARCap,
sold the CMBS investment to ARCap and repaid its borrowing under the repurchase
facility (see Note 7), closed out its short sale position and purchased a
preferred equity interest in ARCap in the face amount of $20,000,000, with a
preferred dividend rate of 12%. This preferred equity interest was recorded at
$19,640,637, representing the fair value of the CMBS investment at the date of
the transaction, less the Bear Stearns Repurchase Facility repayment plus
approximately $3.5 million in cash paid to ARCap.
Summarized information for ARCap as of December 31, 2001 and 2000 and the years
then ended is as follows:
2001 2000
----------------- -----------------
($'s in millions) ($'s in millions)
Investment securities - trading $565 $214
Investment securities - available for sale -- 76
Other assets 31 20
---- ----
Total assets $596 $310
==== ====
Repurchase agreements and long-term debt $322 $133
Other liabilities 50 --
Members' equity 224 177
---- ----
Total liabilities and equity $596 $310
==== ====
Total revenues $ 63 $ 20
Total expenses 50 8
---- ----
Net income $ 13 $ 12
==== ====
35
AMERICAN MORTGAGE ACCEPTANCE COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 6 - Notes Receivable
The Company's notes receivable are collateralized by equity interest in the
owner of the related property and consists of the following as of December 31,
2001:
Remaining
Number of Outstanding Committed
Apartment Carrying Principal Balance to Interest
Property Location Units Amount Balance Fund Rate Maturity
---------------- -------------- ------------- ------------ ---------------- ----------- --------- ----------------
Alexandrine Detroit, MI 30 $ 375,234 $ 378,000 (1) $ -- 12.50% August 2002
Coronado
Terrace San Diego, CA 312 551,853 581,360 (1) 1,418,640 11.00% December 2002
Miami Sunset
Bay Miami, FL 308 1,444,180 1,450,000 (1) -- 12.50% May 2002
Plaza Manor National 372 766,193 777,279 722,721 11.00% September 2002
City, CA
Rancho
Verde San Jose, CA 700 2,789,780 2,803,157 1,696,843 11.00% August 2002
Vista Terrace
Hills San Ysidro, 262 1,891,649 1,900,000 -- 11.00% March 2002
CA
Concorde at
Palm Houston, TX 360 3,554,050 3,589,743 260,257 12.00% December 2003
------------- ------------ ---------------- -----------
Total 2,344 $11,372,939 $11,479,539 $4,098,461
============= ============ ================ ===========
(1) Funded on an as needed basis.
NOTE 7- Repurchase Facilities
On September 30, 1999, the Company entered into a repurchase facility with Bear
Stearns, whereby Bear Stearns advanced $19,568,000 in cash towards the purchase
of the CMBS-related investment (see Note 5). The Bear Stearns Repurchase
Facility had a variable interest rate based on the one-month LIBOR rate plus
1.5%, which was adjusted on the first day of each month. The Bear Stearns
Repurchase Facility was repaid November 1, 2000 in connection with the CMBS sale
discussed above (see Note 5).
Effective February 15, 2000, the Company entered into a $60 million FHA
repurchase facility with Nomura Asset Capital Corporation (the "Nomura
Repurchase Facility") with a term of one year. This facility enables the Company
to borrow up to 90% with a qualified hedge or 80% without a qualified hedge of
the fair market value of FHA loans owned by the Company. The Nomura Repurchase
Facility was renewed February 15, 2001 for $40 million, with a one time option
to increase to $60 million, for a one year term and interest at LIBOR plus
1.25%. As of December 31, 2001, there was no outstanding balance. As of December
31, 2000, $7,138,940 was outstanding under the Nomura Repurchase Facility and
the interest rate was 7.87%. Deferred costs relating to the Nomura Repurchase
Facility have been fully amortized. This Repurchase Facility has not been
renewed.
Effective February 15, 2000, the Company also entered into a repurchase facility
with Nomura Securities International Inc. (the "Nomura Securities Repurchase
Facility"). This facility enables the Company to borrow up to 95% of the fair
market value of GNMA Certificates and other qualified mortgage securities owned
by the Company. Borrowings bear interest at LIBOR plus 0.50%. As of December 31,
2001 and December 31, 2000, the amount outstanding under this facility was
$43,610,000 and $5,517,000 and interest rates were 2.58% and 7.12%,
respectively. Deferred costs relating to the Nomura Securities Repurchase
Facility have been fully amortized. All amounts outstanding at December 31,
2001, had 30 day settlement terms. As of December 31, 2001, all GNMA
Certificates owned by the Company were pledged as collateral.
NOTE 8- Related Party Transactions
Prior to the adoption of the Proposals on April 6, 1999, the Company had an
agreement with the Advisor pursuant to which the Advisor received compensation
consisting primarily of (i) asset management fees calculated as .625% of total
assets invested by the Company; (ii) a subordinated incentive fee based on the
economic gain on the sale of Mortgage Investments; (iii) reimbursement of
certain administrative and other costs incurred by the Advisor on behalf of the
Company; and (iv) certain other fees. In addition,
36
AMERICAN MORTGAGE ACCEPTANCE COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
with respect to Mortgage Loans acquired by the Company, the Advisor was
entitled to receive loan placement fees paid by borrowers equal to up to 1.5%
of the principal amount of each mortgage loan.
As a result of the adoption of the Proposals (see Note 1), the Board of Trustees
amended the Advisory Agreement between the Company and the Advisor to, among
other matters, reflect the Proposals and change the Advisory Agreement's fee
structure to (a) eliminate the acquisition and disposition fees payable to the
Advisor; (b) modify the annual asset management fee payable to the Advisor as
set forth below; and (c) include an annual incentive fee payable to the Advisor
as also set forth below. The modified annual asset management fee is calculated
as follows: (i) .355% for investments in Mortgage Loans; (ii) .355% for certain
investment grade investments; (iii) .750% for certain non-investment grade
investments; (iv) 1.000% for unrated investments; and (v) .625% for investments
held prior to the adoption of the Proposals. The annual incentive fee is equal
to the product of:
A) 25% of the dollar amount by which
(1) (a) funds from operations (before the annual incentive fee) per
share (based on the weighted average number of shares
outstanding), plus
(b) gains (or minus losses) from debt restructuring and sales of
property per share (based on the weighted average number of
shares outstanding), exceed
(2) an amount equal to the greater of:
(a) (i) the weighted average of (x) $20 (the price per share in
the Company's initial public offering) and (y) the
prices per share of any secondary offerings by the
Company multiplied by
(ii) the ten year U.S. Treasury Rate plus 2% per annum; and;
(b) $1.45 multiplied by
B) the weighted average number of shares outstanding during such year.
The Advisor will not receive an annual incentive fee in any fiscal year unless
shareholders have received a minimum annual distribution of $1.45 per share for
that fiscal year.
In addition, the Advisory Agreement's fee structure was also changed so that
with respect to the first $100 million of new mortgage loans acquired by the
Company, the Advisor will receive origination points paid by borrowers equal to
up to 1% of the principal amount of each mortgage loan and the Company will
receive origination points paid by borrowers in excess of 1%. After the first
$100 million of additional mortgage loan is acquired, the Company will retain
100% of the origination points paid by borrowers. As of December 31, 2001, the
$100 million threshold had not been met.
The costs incurred to related parties for the years ended December 31, 2001,
2000 and 1999 were as follows:
Years Ended December 31,
-------------------------------
2001 2000 1999
-------- -------- --------
Expense reimbursement $344,534 $374,751 $255,616
Asset management fees 247,988 386,112 335,682
Incentive fee -- -- 122,270
-------- -------- --------
$592,522 $760,863 $713,568
======== ======== ========
Asset management fees, the incentive management fee and expense reimbursements
owed to the Advisor and its affiliates amounting to approximately $318,000 and
$243,000 were accrued and unpaid at December 31, 2001 and 2000, respectively.
On May 19, 1999, the Company made a loan in the amount of $1,900,000 to
Patterson Hope '98 Urban Renewal L.L.C. (the "Borrower"), an entity in which an
affiliate of the Advisor is a member. The note bore interest at 12% which was
payable, along with the principal, at maturity on September 15, 1999. The note
was secured by all of the membership interest in the Borrower, was guaranteed by
Related and could be prepaid in whole or in part at any time. In September 1999,
the loan was repaid and the Advisor and the Company each received origination
points in the amount of $19,000. The Company earned interest income of
approximately $86,000 from this loan.
As of December 31, 2001, the Company has seven mortgage investments, totaling
approximately $11,480,000, to borrowers that are affiliates of Related.
Typically, these affiliate borrowers are limited partnerships where the general
partner is either an affiliate of Related or an unaffiliated third party with a
1% general partnership interest and the 99% limited partner is a limited
partnership in which an affiliate of Related owns a 1% general partnership
interest and one or more Fortune 500 companies own a 99% limited partnership
interest.
37
AMERICAN MORTGAGE ACCEPTANCE COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 9 - Earnings Per Share
Basic net income per share in the amount of $1.35, $.86 and $1.63 for the years
ended December 31, 2001, 2000 and 1999, respectively, equals net income for the
periods ($5,187,064, $3,317,757 and $6,260,300, respectively), divided by the
weighted average number of shares outstanding for the periods (3,838,630,
3,838,630 and 3,841,931, respectively).
Because the Company had no dilutive securities outstanding during 2001, 2000 and
1999, diluted net income per share is the same as basic net income per share for
all periods presented.
NOTE 10 - Capital Shares
In December 1992, the Company issued 10,000 shares of beneficial interest at $20
per share in exchange for $200,000 cash from the Advisor.
On March 29, 1993, the Company commenced a public offering (the "Offering")
through Related Equities Corporation, an Affiliate of the Advisor, and other
broker-dealers on a "best efforts" basis, for up to 10,000,000 of its shares of
beneficial interest, at an initial offering price of $20 per share. The Offering
terminated November 30, 1994, with a total of 3,809,601 shares sold to the
public, either through the Offering or the Company's dividend reinvestment plan
(the "Reinvestment Plan"), representing Gross Proceeds ("the "Gross Proceeds")
of $76,192,021 (before volume discounts of $40,575).
The Reinvestment Plan became effective March 29, 1993. During the offering
period, the price per share purchased pursuant to the Reinvestment Plan equaled
$20. From November 30, 1994 (the termination of the offering period) until
November 30, 1997, the price per share under the Reinvestment Plan was lowered
to $19. Effective November 30, 1997, the Board adopted a policy to adjust the
reinvestment price annually to reflect the net asset value of a share of the
Company's shares of beneficial interest. Since November 30, 1994, 355,744 shares
have been sold through the Reinvestment Plan, the proceeds of which (the
"Reinvestment Proceeds") were restricted for use in connection with the
Company's redemption plan and were not included in Gross Proceeds.
The Redemption Plan became effective on November 30, 1994. Under the Redemption
Plan, Eligible Shares could not be presented to the Company for redemption.
Eligible Shares were shares acquired directly from the Company or through the
Reinvestment Plan owned by the original holder. The Company was required to
redeem such Eligible Shares presented from redemption for cash to the extent it
had sufficient Reinvestment Proceeds.
Through the quarter ended March 31, 1997, the redemption price pursuant to the
Redemption Plan was $19 per Eligible Share. For the quarter ended June 30, 1997,
the Board of Trustees reduced the $19 redemption price to $17.47 to reflect that
shareholders had received, through that date, $1.53 in return of capital
distributions. The Board subsequently adopted a policy to adjust the redemption
price annually to reflect the then net asset value of a share of the Company's
shares of beneficial interest.
Pursuant to the Redemption Plan, 375,916 shares have been redeemed for an
aggregate price of $6,575,799.
During the Offering, the Advisor received 38,481 restricted shares (including
717 from the Reinvestment Plan) in addition to the 10,000 purchased which the
Advisor (pursuant to the terms of the Offering) valued at $14.75 per share. As a
result of shares being redeemed, the Advisor was required to return 172 shares
as of December 31, 1994; no additional shares were required to be returned since
then.
As a result of the adoption of the Proposals (see Note 1), the Company's
Reinvestment Plan and Redemption Plan have been terminated, effective with the
distribution for the quarter ended March 31, 1999. The final reinvestment of
shares occurred on May 15, 1999. The final redemption of shares occurred on May
24, 1999. In addition, in connection with the listing of the Company's Shares on
the American Stock Exchange, fractional shares totaling approximately 612 were
redeemed on July 1, 1999.
In February 2002, the Company sold to the public 2.5 million common shares at a
price of $13.50 per share. The net proceeds from this offering, approximately
$31 million, net of underwriter's discount and expenses, will be used to make
additional investments.
38
AMERICAN MORTGAGE ACCEPTANCE COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 11 - Selected Quarterly Financial Data (unaudited)
2001 Quarter Ended
--------------------------------------------------------
March 31 June 30 September 30 December 31
---------- ---------- ------------ -----------
Revenues:
Interest income:
Mortgage loans $ 888,252 $1,018,687 $ 349,575(1) $ 516,534(1)
GNMA certificates 115,624 378,929 859,754 939,979
Notes receivable 45,313 61,626 126,943 216,430
Temporary investments 16,979 9,782 19,783 26,348
Equity earnings of ARCap 592,000 591,781 604,356 611,932
Other income 6,067 24,719 39,677 36,786
---------- ---------- ---------- ----------
Total revenues 1,664,235 2,085,524 2,000,088 2,348,009
---------- ---------- ---------- ----------
Expenses:
Interest 275,625 361,382 462,600 306,647
General and administrative 237,795 289,756 230,583 382,646
Amortization 19,684 10,357 5,187 77,741
---------- ---------- ---------- ----------
Total expenses 533,104 661,495 698,370 767,034
---------- ---------- ---------- ----------
Other gain (loss):
Net gain (loss) on repayment of mortgage loans
and GNMA certificates 17 -- (211,611) (39,195)
---------- ---------- ---------- ----------
Total other gain (loss) 17 -- (211,611) (39,195)
---------- ---------- ---------- ----------
Net income $1,131,148 $1,424,029 $1,090,107 $1,541,780
========== ========== ========== ==========
Net income per share
(basic and diluted) $ 0.29 $ 0.37 $ 0.28 $ 0.40
========== ========== ========== ==========
(1) Interest income from mortgage loans and GNMA certificates in the third
quarter of 2001 reflects the impact of the conversion of three mortgage
loans into GNMA certificates during the second quarter 2001.
39
AMERICAN MORTGAGE ACCEPTANCE COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
2000 Quarter Ended
---------------------------------------------------------------
March 31 June 30 September 30 December 31
--------- --------- ------------ -----------
Revenues:
Interest income:
Mortgage loans $ 491,400 $ 196,326 $ 500,295 $ 377,315
GNMA certificates 119,631 118,630 117,701 116,731
Commercial mortgage-backed
security-related investment 950,662 956,530 960,467 321,748
Note receivable -- 146,168 131,381 169,076
Temporary investments 547,104 674,520 624,146 238,647
Equity earnings of ARCap -- -- -- 401,096
Other income -- -- 167,279 (15,597)
--------- --------- --------- ---------
Total revenues 2,108,797 2,092,174 2,501,269 1,609,016
--------- --------- --------- ---------
Expenses:
Interest 909,107 903,614 1,044,215 514,970
General and administrative 332,220 257,970 425,520 293,688
Amortization 13,651 20,350 26,227 24,309
--------- --------- --------- ---------
Total expenses 1,254,978 1,181,934 1,495,962 832,967
--------- --------- --------- ----------
Other gain (loss):
Net gain (loss) on commercial
mortgage-backed security-related
investment and government
security sold short (457,042) (253,735) 246,341 164,881
Gain (loss) on repayment of mortgage loans
and GNMA certificates 86,439 (6,077) (8,371) 23
--------- --------- --------- ----------
Total other gain (loss) (370,603) (259,812) 237,970 164,904
--------- --------- --------- ----------
Net income $ 483,216 $ 650,428 $1,243,277 $ 940,953
========= ========= ========== =========
Net income per share
(basic and diluted) $ .13 $ .17 $ .32 $ .25
========= ========= ========== =========
NOTE 12 - Commitments and Contingencies
The Company has completed a loan program with Fannie Mae which has agreed to
fully fund the origination of $250 million of Delegated Underwriter and
Servicer loans for apartment properties that qualify for low income housing
tax credits under Section 42 of the Internal Revenue Code. Under the terms of
the loan program, the Company will originate and contract for individual loans
of up to $6 million dollars each over a two-year period, which may be extended
for up to two additional one year periods. In the advent the Company was to
originate $250 million in loans pursuant to this program, the Company would
guarantee a first loss position equal to the amount lost on the loans up to a
maximum $21.25 million depending on the aggregate principal amount of the
loans the Company originates and other fees. The Company has also guaranteed
construction loans for which it has issued a forward commitment to originate a
loan under the Fannie Mae program, with respect to which it guarantees
repayment of 100% of such construction loans. As of December 31, 2001, the
Company has originated one loan totaling approximately $2.2 million under the
Fannie Mae program and has made forward commitments for an additional
approximate $6.8 million. The Company's maximum guarantee at December 31, 2001
was $5.9 million. The Company has not acquired an interest in any of the loans
the Company originated in Fannie Mae's behalf. Subsequent to creating this
program, the level of loan origination competition has increased, reducing the
Company's projected financing volume and profitability. As a result, the
Company is de-emphasizing this program and evaluating the possibility of
transfering the Company's rights and obligations in this program to a third
party.
NOTE 13 - Investment in Unconsolidated Subsidiary
As discussed in Note 12, the Company has entered into an agreement with Fannie
Mae whereby the Company will provide first loss protection ("First Loss
Obligation") on certain loans funded by Fannie Mae pursuant to a Master
Financing and Loss Sharing Agreement. Through a consolidated subsidiary, AMAC/FM
Corporation ("AMAC/FM"), and pursuant to a Guaranty and Security Agreement with
Fannie Mae, the payment of the First Loss Obligation is guaranteed and secured
by AMAC/FM's pledge and grant to Fannie Mae of a security interest on certain
assets of AMAC/FM.
40
AMERICAN MORTGAGE ACCEPTANCE COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
AMAC/FM was capitalized by a contribution by the Company to AMAC/FM of the
mortgage loan secured by Stony Brook Village II Apartments with a principal
amount of $8,404,092. This contribution was recorded by AMAC/FM as a $7,264,092
loan from the Company via a subordinated promissory note, with a stated interest
rate of 7.75% and a $1,140,000 capital contribution through the issuance of
AMAC/FM non-voting common stock. During 2000, the Company accounted for its
$1,140,000 investment in AMAC/FM under the equity method of accounting, because
all of AMAC/FM's voting common shares were held by the Advisor and, therefore,
the Company did not control AMAC/FM.
During January 2001, all of the voting common stock of AMAC/FM, previously owned
by the Advisor, was purchased by the Company, the effect of which is to make
AMAC/FM a wholly owned, consolidated subsidiary of the Company. This change was
implemented as a result of the REIT Modernization Act of 1999, which allows
REITs to directly own taxable REIT subsidiaries, beginning after the year 2000.
NOTE 14 - Subsequent Events
In February 2002, a distribution of $1,391,503 ($.3625 per share) which was
declared in December 2001, was paid to shareholders for the quarter ended
December 31, 2001.
In January 2002, the Company closed a bridge loan secured by a 528 unit
apartment complex located in Long Beach, California called Parwood Apartments in
the amount of $4,600,000. The loan has a term of 24 months, with three 90-day
extensions exercisable at the borrower's election for a fee of 1.00% of the then
outstanding balance. The loan carries an interest rate of 11.00%.
In February 2002, the Company sold to the public 2.5 million common shares at a
price of $13.50 per share. The net proceeds from this offering, approximately
$31 million, net of underwriter's discount and expenses, will be used to make
additional investments.
On March 1, 2002, the Company purchased four GNMA construction loan certificates
with current face amount of approximately $34.4 million for approximately $29.8
million. Approximately $27.7 million of the total face amount of these
construction loans has already been funded, earning a balance of approximately
$6.7 million to be funded on a when, if and as needed basis, at the same prices
as the initial purchases. The interest rates on the four certificates range from
6.5% to 7.475%. The Company anticipates these investments will be used as
collateral for future financing.
On March 13, 2002, the Company renewed the Advisory Agreement with the Advisor
for a term of one year commencing on March 29, 2002.
On February 15, 2002, the Company purchased a GNMA Certificate with a total face
amount of approximately $13.9 million. The first draw on this certificate is
scheduled for April 15, 2002. The Company will earn an interest rate of 7.075%
on this certificate.
On March 25, 2002, the Company sold the Hollows Apartments GNMA certificate for
approximately $8.9 million. The amortized cost basis of the Hollows Apartments
GNMA certificate at December 31, 2001 was approximately $8.5 million. The trade
is scheduled to settle on April 15, 2002.
41
Item 9. Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure.
None.
PART III
Item 10. Directors and Executive Officers of the Company.
Incorporated by reference to the Company's definitive proxy statement to be
filed pursuant to Regulation 14A under the Securities Exchange Act of 1934, as
amended (the "Exchange Act").
Item 11. Executive Compensation.
Incorporated by reference to the Company's definitive proxy statement to be
filed pursuant to Regulation 14A under the Exchange Act.
Item 12. Security Ownership of Certain Beneficial Owners and Management.
Incorporated by reference to the Company's definitive proxy statement to be
filed pursuant to Regulation 14A under the Exchange Act.
Item 13. Certain Relationships and Related Transactions.
Incorporated by reference to the Company's definitive proxy statement to be
filed pursuant to Regulation 14A under the Exchange Act.
PART IV
Item 14. Exhibits, Financial Statement Schedules, and Reports on Form 8-K.
Sequential
Page
----------
(a) 1. FINANCIAL STATEMENTS
AMERICAN MORTGAGE ACCEPTANCE COMPANY
Independent Auditors' Report 23
Consolidated Balance Sheets as of December 31, 2001 and 2000 24
Consolidated Statements of Income for the years ended Decem-
ber 31, 2001, 2000 and 1999 25
Consolidated Statements of Changes in Shareholders' Equity for
the years ended December 31, 2001, 2000 and 1999 26
Consolidated Statements of Cash Flows for the years ended De-
cember 31, 2001, 2000 and 1999 27
Notes to Consolidated Financial Statements 29
ARCAP INVESTORS, L.L.C.
Consolidated 2001 financial statements for ARCap Investors, L.L.C.
(see Exhibit 99) 99(a)
Consolidated 2000 financial statements for ARCap Investors, L.L.C. 99(b)
(see Exhibit 99)
(a) 2. FINANCIAL STATEMENT SCHEDULES
All schedules have been omitted because they are not required or
because the required information is contained in the financial
statements or notes thereto.
(a) 3. EXHIBITS
1(a) Dealer Manager Agreement, dated March 29, 1993 as previously filed as
an Exhibit to Amendment No. 3 dated March 23, 1993 to Registrant's
Registration Statement No. 33-42481.
42
Item 14. Exhibits, Financial Statement Schedules, and Reports on Form 8-K
(continued)
Sequential
Page
----------
1(b) Form of Soliciting Dealer Agreement as previously filed as an Exhibit
to Amendment No. 3 dated March 23, 1993 to Registrant's Registration
Statement No. 33-42481.
3.4 Amended and Restated Declaration of Trust, dated as of March 29, 1993,
as amended as of July 1, 1993 as previously filed as an Exhibit to
Post-Effective Amendment No. 1 dated November 9, 1993.
Amendment No. 2 to Amended and Restated Declaration of Trust, dated as
of April 5, 1994 as previously filed as an Exhibit to Annual Report on
Form 10-K for the year ended December 31, 1993.
3.4(c) Second Amended and Restated Declaration of Trust, dated as of April 6,
1999 (incorporated by reference to Exhibit 3.4(c) in the Company's
March 31, 1999 Quarterly Report on Form 10-Q).
10(a) Rockport Mortgage Corporation Mortgage Note in the principal amount of
$8,500,000 dated December 15, 1995 (incorporated herein by reference to
Exhibit 10(a) to Form 8-K dated December 15, 1995 filed with the
Securities and Exchange Commission pursuant to the Securities Exchange
Act of 1934 (Commission File No. 0-23972)).
10(b) Equity Loan Note in the principal amount of $1,039,000 dated December
15, 1995 (incorporated herein by reference to Exhibit 10(b) to Form 8-K
dated December 15, 1995 filed with the Securities and Exchange
Commission pursuant to the Securities Exchange Act of 1934 (Commission
File No. 0-23972)).
10(c) Subordinated Promissory Note by SCI-ROEV East Haven Land Limited
Partnership, dated December 15, 1995 (incorporated herein by reference
to Exhibit 10(c) to Form 8-K dated December 15,1995 filed with the
Securities and Exchange Commission pursuant to the Securities Exchange
Act of 1934 (Commission File No. 0-23972)).
10(d) Limited Operating Guaranty between SCI Real Estate Development, Ltd.,
and Euro General East Haven, Inc., and the Company dated December 15,
1995 (incorporated herein Exhibit 10(d) to Form 8-K dated December 15,
1995 filed with the Securities and Exchange Commission pursuant to the
securities Exchange Act of 1934 (Commission File No. 0-23972)).
10(e) Amended and Restated Advisory Services Agreement, effective as of April
6, 1999 (incorporated herein by reference to Exhibit 10(z) to Form 10-Q
dated September 30, 1999 filed with the Securities and Exchange
Commission pursuant to the Securities Exchange Act of 1934 (Commission
File No. 0-23972)).
10(f) First Amendment to Amended and Restated Advisory Services Agreement
between Related AMI Associates, Inc. and the Company dated November 29,
2001 (incorporated by reference to Exhibit 10-6 to the Company's
Registration Statement on Form S-2, file number 333-74288 as filed on
November 30, 2001).
43
Item 14. Exhibits, Financial Statement Schedules, and Reports on Form 8-K
(continued)
Sequential
Page
----------
10(g) Settlement and Escrow Agreement between Related Mortgage Corporation,
Columbiana Lakes Limited Partnership, the Company, et al. dated June 7,
2001 (incorporated by reference to Exhibit 10-7 to the Company's
Registration Statement on Form S-2, file number 333-74288 as filed on
November 30, 2001).
23(b) Consent of Deloitte & Touche LLP with respect to incorporation by
reference of its report in the Company's Registration Statement on Form
S-3 (filed herewith). 49
23(c) Consent of Deloitte & Touche LLP with respect to incorporation by
reference of its report relating to the financial statements of ARCap
Investors L.L.C. in the Company's Registration Statement on form S-3
(filed herewith). 50
99. ADDITIONAL EXHIBITS
99(a) The 2001 Financial Statements of ARCap Investors, L.L.C. which invests
primarily in subordinated commercial mortgage-backed securities, as
required by Regulation S-X, Rule 3-09 (filed herewith). 51
99(b) The 2000 Financial Statements of ARCap Investors, L.L.C. which invests
primarily in subordinated commercial mortgage-backed securities, as
required by Regulation S-X, Rule 3-09 (filed herewith). 63
44
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) 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.
AMERICAN MORTGAGE ACCEPTANCE COMPANY
(Registrant)
Date: March 29, 2002 By: /s/ Stuart J. Boesky
--------------------
Stuart J. Boesky
Trustee, Chairman of the Board,
President and Chief Executive Officer
45
Pursuant to the requirements of the Securities Exchange Act of 1934, as amended,
this report has been signed by the following persons on behalf of the registrant
and in the capacities and on the dates indicated:
Signature Title Date
-------------------- ------------------------------------- --------------
/s/ Stuart J. Boesky
-------------------- Trustee, Chairman of the Board,
Stuart J. Boesky President and Chief Executive Officer March 29, 2002
/s/ Peter T. Allen
-------------------
Peter T. Allen Trustee March 29, 2002
/s/ Arthur P. Fisch
-------------------
Arthur P. Fisch Trustee March 29, 2002
/s/ Michael I. Wirth
-------------------- Senior Vice President and
Michael I. Wirth Chief Financial Officer March 29, 2002
46
EXHIBIT 23(b)
INDEPENDENT AUDITORS' CONSENT
We consent to the incorporation by reference in Registration Statement No.
33-42481 of American Mortgage Acceptance Company on Form S-3 of our report
relating to the financial statements of American Mortgage Acceptance Company as
of December 31, 2001 and 2000 and for each of the three years in the period
ended December 31, 2001 dated March 25, 2002, appearing in this Annual Report on
Form 10-K of American Mortgage Acceptance Company for the year ended December
31, 2001.
/s/ DELOITTE & TOUCHE LLP
New York, New York
April 1, 2002
47
Exhibit 23(c)
INDEPENDENT AUDITORS' CONSENT
We consent to the incorporation by reference in Registration Statement No.
33-42481 of American Mortgage Acceptance Company on Form S-3 of our report
relating to the consolidated financial statements of ARCap Investors, L.L.C. as
of December 31, 2001 and for the year then ended, dated January 31, 2002, and of
our report relating to the consolidated financial statements of ARCap Investors,
L.L.C. as of December 31, 2000 and for the year then ended, dated January 22,
2001, both appearing in this Annual Report on Form 10-K of American Mortgage
Acceptance Company for the year ended December 31, 2001.
/s/ DELOITTE & TOUCHE LLP
Dallas, Texas
April 1, 2002
48
Exhibit 99(a)
INDEPENDENT AUDITORS' REPORT
To the Members of
ARCap Investors, L.L.C.:
We have audited the accompanying consolidated balance sheet of ARCap Investors,
L.L.C. and subsidiaries (the "Company") as of December 31, 2001, and the related
consolidated statements of income, members' equity and cash flows for the year
then ended. These financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these financial
statements based on our audit.
We conducted our audit in accordance with auditing standards generally accepted
in the United States of America. Those standards require that we plan and
perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audit provides a
reasonable basis for our opinion.
In our opinion, such consolidated financial statements present fairly, in all
material respects, the financial position of ARCap Investors, L.L.C. and
subsidiaries as of December 31, 2001, and the results of their operations and
their cash flows for the year then ended in conformity with accounting
principles generally accepted in the United States of America.
/s/ DELOITTE & TOUCHE LLP
Dallas, Texas
January 31, 2002
49
ARCap INVESTORS, L.L.C. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEET
ASSETS
DECEMBER 31, 2001
-----------------
Investment securities - trading (Notes 3 and 5) $ 564,877,324
Borrowed investment securities and interest rate swap, net (Note 4) 1,763,811
Cash and cash equivalents 13,447,035
Restricted cash - CBO swap (Note 5) 4,252,731
Accrued interest receivable 5,832,691
Deferred borrowing costs, net (Note 5) 5,134,680
Other assets 628,880
-------------
Total $ 595,937,152
=============
LIABILITIES AND MEMBERS' EQUITY
Liabilities:
Long-term debt (Note 5) $ 236,000,000
Repurchase agreements (Note 6) 86,102,000
CBO swap liability (Note 5) 2,716,600
Accrued interest payable 3,237,032
Accrued expenses 499,447
-------------
Total liabilities 328,555,079
-------------
Commitments and contingencies
Minority Interests in consolidated entities 43,398,548
Members' equity 223,983,525
-------------
Total $ 595,937,152
=============
See notes to consolidated financial statements.
50
ARCap INVESTORS, L.L.C. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF INCOME
DECEMBER 31, 2001
-----------------
Revenues:
Interest income - CMBS $ 51,730,450
Accretion of purchase discount 10,172,033
Other investment income 882,160
Gain on sale of real estate 224,482
------------
Total revenues 63,009,125
------------
Expenses:
Loss on trading securities, net (Note 7) 24,281,841
Interest - long-term debt and repurchase agreements 17,151,723
Interest - borrowed investment securities and interest
rate swap, net 2,079,629
Financing fee 1,015,054
General and administrative 3,616,430
Salaries and employee benefits 3,286,376
------------
Total expenses 51,431,053
------------
Income before minority interests 11,578,072
Minority interests 1,781,987
------------
Net income $ 13,360,059
============
See notes to consolidated financial statements.
51
ARCap INVESTORS, L.L.C. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF MEMBERS' EQUITY
YEAR ENDED DECEMBER 31, 2001
----------------------------------------------------------------
ACCUMULATED
SERIES A OTHER
COMMON PREFERRED COMPREHENSIVE
MEMBERS MEMBERS INCOME TOTAL
----------------------------------------------------------------
Balance, January 1, 2001 $ 88,219,621 $ 85,703,753 $ 3,103,845 $ 177,027,219
Proceeds from issuance of
membership units -- 61,743,525 -- 61,743,525
Costs to raise capital (71,856) (1,620,153) -- (1,692,009)
Distributions (10,873,542) (12,462,367) -- (23,335,909)
Repurchase of members'
equity (Note 9) (15,515) -- -- (15,515)
Net income 897,692 12,462,367 -- 13,360,059
Transfer of available for sale
to trading securities (Note 3) -- -- (3,103,845) (3,103,845)
------------- ------------- ------------- -------------
Balance, December 31, 2001 $ 78,156,400 $ 145,827,125 $ 0 $ 223,983,525
============= ============= ============= =============
See notes to consolidated financial statements.
52
ARCap INVESTORS, L.L.C. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF CASH FLOWS
DECEMBER 31, 2001
-----------------
OPERATING ACTIVITIES:
Net income $ 13,360,059
Adjustments to reconcile net income to net cash used in
operating activities:
Loss on trading securities, net 24,281,841
Accretion of purchase discount (10,172,033)
Gain on sale of real estate (224,482)
Amortization of deferred borrowing costs 532,900
Minority interest (1,781,987)
Increase (decrease) in
cash for changes in operating assets
and liabilities:
Restricted cash (3,569,211)
Investment securities - trading, net (292,096,310)
Securities purchased under agreement to resell and proceeds
from borrowed
security, net (5,028,069)
Accrued interest receivable (2,667,514)
Other assets (5,944,087)
Accrued expenses (47,259)
Accrued interest payable 33,600
Receivable for sold security 13,372,667
-------------
Net cash used in operating activities (269,949,885)
-------------
INVESTING ACTIVITIES - Proceeds from sale of real estate and
net cash provided by investing activities 224,482
-------------
FINANCING ACTIVITIES:
Contributions from members 61,743,525
Distributions to members (23,335,909)
Contributions from minority interest members 45,355,985
Distributions to minority interest members (2,721)
Repurchase of members' equity (15,515)
Payment of issuance costs (1,692,009)
Payment of issuance costs by minority interest members (174,950)
Proceeds from issuance of long-term debt 236,000,000
Payment of repurchase agreements (37,381,443)
-------------
Net cash provided by financing activities 280,496,963
-------------
NET INCREASE IN CASH AND CASH EQUIVALENTS 10,771,560
CASH AND CASH EQUIVALENTS, BEGINNING OF YEAR 2,675,475
-------------
CASH AND CASH EQUIVALENTS, END OF YEAR $ 13,447,035
=============
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION -
Cash payments for interest $ 16,816,163
=============
SUPPLEMENTAL DISCLOSURE OF NONCASH INVESTING
AND FINANCING ACTIVITIES - Transfer of securities from
available for sale to trading $ 76,092,175
=============
See notes to consolidated financial statements.
53
ARCap INVESTORS, L.L.C. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEAR ENDED DECEMBER 31, 2001
NOTE 1. ORGANIZATION AND SIGNIFICANT ACCOUNTING AND REPORTING POLICIES
A) Organization - ARCap Investors, L.L.C. (the "Company") was incorporated in
January 1999 and commenced its operations on March 17, 1999. The Company was
organized to invest primarily in subordinated commercial mortgage-backed
securities ("CMBS").
B) Principles of Consolidation - The consolidated financial statements include
the accounts of:
- The Company;
- ARCap REIT, Inc., its majority-owned subsidiary;
- ARCap Resecuritization Corporation ("ARCap Resecuritization"), a wholly
owned subsidiary of ARCap REIT, Inc.;
- Commercial Resecuritization Trust 2001 ABC-2 (the "Trust"), in which
ARCap Resecuritization owns all of the residual interest; and
- ARCap High Yield CMBS Fund, L.L.C. (the "Fund"), of which ARCap REIT,
Inc. owned approximately 48% as of December 31, 2001. The Fund is the
majority-owner of ARCap CMBS Fund REIT, Inc. (the "Fund REIT").
Minority interests primarily represent outside members' approximate 52%
ownership in the Fund. The Company has consolidated this entity as it exercises
control (through ARCap REIT, Inc.) over the operations of the Fund REIT (subject
to provisions of the Fund Limited Liability Company Agreement). The Company
records minority interest income (expense) that reflects the portion of the
earnings (losses) of the operations which are applicable to the minority
interest members.
Separate books of accounts are maintained for ARCap REIT, Inc.; ARCap
Resecuritization; the Trust; the Fund; and the Fund REIT and are reflected in
the accompanying consolidated financial statements of the Company. All material
intercompany transactions and account balances have been eliminated in
consolidation.
C) Investment Securities - The Company's investment security transactions are
recorded on the trade date. CMBS are designated as trading assets since the
Company is holding the securities for possible sales or other dispositions in
the near term. Such securities are carried at their estimated fair value,
with unrealized gains or losses included in earnings.
Interest income is recognized as earned and includes amortization of premiums
and accretion of discounts, computed using the effective yield method over
the expected life of the underlying assets.
D) Derivative Financial Instruments - Derivative financial instruments are
utilized by the Company to reduce interest rate risk. The Company utilizes
interest rate swap, cap and floor agreements as a means of hedging the
potential financial statement impact of changes in the fair value of its
portfolio of CMBS and variable rate long-term debt due to changes in interest
rates. Risks in these contracts arise from the movements in interest rates
and from the possible inability of counterparties to meet the terms of their
contracts. The Company carries its derivative financial instruments at fair
value with any unrealized gain or loss included in earnings.
E) Resale and Repurchase Agreements and Securities Lending Agreements
-Transactions involving purchases of securities under agreements to resell
(reverse repurchase agreements or reverse repos) or sales of securities under
agreements to repurchase (repurchase agreements or repos) are accounted for
as collateralized financings, except where the Company does not have an
agreement to sell (or purchase) the same or substantially the same securities
before maturity at a fixed or determinable price.
F) Cash and Cash Equivalents - Cash and cash equivalents include all highly
liquid investments with original maturities of three Months or less.
G) Restricted Cash - Restricted cash represents amounts required to be
pledged under an interest rate swap agreement and amounts required to be
pledged under the interest rate cap and floor agreements (see Notes 4 and 5).
H) Deferred Borrowing Costs - Deferred borrowing costs represent costs
incurred in connection with the issuance of long-term debt. Such amounts are
amortized using the effective interest method over the term of the related
debt (see Note 5).
I) Financing Fee - The Company pays an annual rate of 0.50% of the face of
its existing long-term debt to a financier to provide credit enhancement of
such debt.
J) Income Taxes - The Company has elected to be taxed as a partnership,
whereby all income is taxed at the member level.
54
K) Use of Estimates - The preparation of consolidated financial statements in
conformity with accounting principles generally accepted in the United States
of America requires management to make estimates and assumptions that affect
reported amounts of certain assets, liabilities, revenues and expenses.
Actual results could differ from those estimates.
L) Fair Value of Financial Instruments - The estimated fair value amounts
herein have been determined by the Company using available market information
and appropriate valuation methodologies. However, considerable judgment is
required to interpret market data to develop the estimates of fair value.
Accordingly, the estimates presented herein are not necessarily indicative of
the amounts that the Company could realize in a current market exchange. The
use of different market assumptions and/or estimation methodologies could
have a material effect on the estimated fair value amounts.
The Company's portfolio of CMBS and securities borrowed are carried at their
estimated fair values. The Company's management believes that the fair values
of its cash and cash equivalents, restricted cash and repurchase agreements
approximate their carrying values due to the nature of the instruments or the
fact that their terms approximate current market terms.
M) Change in Accounting Standard - Statement of Financial Accounting
Standards ("SFAS") No. 133, Accounting for Derivative Instruments and Hedging
Activities, as amended, was adopted by the Company on January 1, 2001. This
standard requires that all derivative financial instruments be recognized as
either assets or liabilities on the balance sheet at their fair values and
that accounting for the changes in fair values is dependent upon the intended
use of the derivatives and their resulting designations. The adoption of this
standard did not have a material effect on the Company's consolidated
financial statements.
N) New Accounting Standards - In September 2000, the Financial Accounting
Standards Board ("FASB") issued SFAS No. 140, ("SFAS 140") Accounting for
Transfers and Servicing of Financial Assets and Extinguishments of
Liabilities. SFAS 140 replaces SFAS No. 125 ("SFAS 125") Accounting for
Transfers and Servicing of Financial Assets and Extinguishments of
Liabilities. It revises the standards for accounting for securitizations and
other transfers of financial assets and collateral and requires certain
disclosures, but it carries over most of SFAS 125's provisions without
reconsideration. The statement is effective for transfers and servicing of
financial assets and extinguishments of liabilities occurring after March 31,
2001. The Company has made the required disclosures relating to
securitization transactions and collateral for the year ended December 31,
2000. The Company adopted the remaining requirements of SFAS 140 on April 1,
2001, as required.
During 1999, the FASB issued Emerging Issues Task Force ("EITF") No. 99-20,
Recognition of Interest Income and Impairment on Purchased and Retained
Beneficial Interests in Securitized Financial Assets. Effective the second
quarter of 2001, EITF No. 99-20 provides guidance on the recognition of
interest income from, and measurement of retained beneficial interests. The
implementation of EITF No. 99-20 did not have a material effect on the
Company's consolidated financial statements.
O) Reclassifications - Certain reclassifications have been made to the
prior-year amounts to conform to the current-year presentation.
NOTE 2. MEMBERS' EQUITY
On August 4, 2000, the Company amended and restated its Limited Liability
Company Agreement (the "LLC Agreement"). Capitalized terms in this footnote
are defined in the LLC Agreement.
The LLC Agreement established two classes of membership: Series A Preferred
members and Common members. The LLC Agreement calls for distributions of Cash
Flows as follows:
- To the Series A Preferred members in an amount equal to the accrued and
unpaid Preferred Distributions (12% per annum of the $25.00 price per
Unit).
- To the Common members in an amount equal to (a) during the 18-month period
that ends February 4, 2002, the amount determined by the Board of Managers,
but no more than a cumulative return on the Common Units at the rate of 10%
per annum, and (b) subsequent to such 18-month period, the amount determined
by the Board of Managers, provided that if the amount distributable to the
Common members shall exceed a cumulative annual return on the Common Units
of 12% per annum, the Board of Managers shall notify the Series A Preferred
members 30 days in advance of the record date for distribution of Cash Flow.
- To the extent that any remaining Cash Flow received during such tax period
is not includable in the income of the Company, to members that have been
allocated Net Profits in excess of amounts actually distributed to such
members, in proportion to such amounts.
Net Profits of the Company are allocated as follows:
55
- To the Series A Preferred members to the extent of amounts distributed or
distributable to them in such taxable year.
- To the Series A Preferred members to the extent Net Losses previously
allocated to such members exceed undistributed Net Profits previously
allocated to them.
- To the Common members to the extent of amounts distributed or distributable
to them in such taxable year.
- To the Common members to the extent Net Losses previously allocated to such
members exceed undistributed Net Profits previously allocated to them.
- To the members in proportion to their Percentage Interests.
Net Losses of the Company are allocated as follows:
- To the members in an amount equal to undistributed Net Profits allocated to
such member.
- To the Common members pro rata to the extent of their Capital Accounts.
- To the Series A Preferred members pro rata to the extent of their Capital
Accounts.
SERIES A PREFERRED UNITS
Series A Preferred Units are convertible into Common Units at the Conversion
Price in effect on the Conversion Date. If the Series A Preferred Units have
not been converted within five years of August 4, 2000, Series A Preferred
Units may, at the holder's option, be converted to a note equal to $25.00 per
Unit, plus accrued and unpaid Preferred Distributions.
Eighteen months after the First Closing Date (February 4, 2002), but no later
than the fifth anniversary of the First Closing Date (August 4, 2005), the
Company may redeem the Series A Preferred Units for $25.00 per unit, plus
accrued and unpaid Preferred Distributions, plus a premium that will provide
the Series A Preferred members with a total pretax internal rate of return of
17.50%.
In addition, upon either a change in control or sale or transfer of all or
substantially all of the assets of the Company, Series A Preferred Units may,
at the holder's option, be redeemed at $25.00 per unit, plus accrued and
unpaid Preferred Distributions.
Subsequent to the Company's amendment and restatement of its LLC Agreement,
the Company circulated an amended Private Placement Memorandum (the "PPM")
for 5,739,741 units of Series A Preferred Membership Interests representing
the balance of such interests available for subscription in the Company's
offering. As of December 31, 2001, 5,739,741 units have been issued pursuant
to the Company's offering for total capital contributions of $143,493,525.
At December 31, 2001, there were a total of 6,000,000 and 4,999,382 Series A
Preferred Units and Common Units, respectively, issued and outstanding.
56
NOTE 3. INVESTMENT SECURITIES
The Company's trading securities are carried at estimated fair value and
comprise the following at December 31, 2001:
FACE COST FAIR VALUE PERCENTAGE
----------- ------------ ------------ ------------
Subordinated CMBS:
Security rating:
BB+ $ 70,399,711 $ 54,261,102 $ 55,566,874 9.84%
BB 88,938,033 65,393,924 66,145,766 11.71
BB- 99,764,931 67,278,474 67,543,265 11.96
B+ 172,749,308 102,104,976 100,908,791 17.86
B 219,851,296 129,013,634 124,843,334 22.10
B- 141,994,347 71,886,492 66,223,972 11.72
NR 339,813,225 83,926,063 83,645,322 14.81
-------------- -------------- -------------- --------------
$1,133,510,851 $ 573,864,665 $ 564,877,324 100.00%
============== ============== ============== ==============
The fair value of the Company's portfolio of CMBS is generally estimated by
management based on market prices provided by certain dealers who make a
market in these financial instruments. The market for the Company's CMBS may
lack liquidity and have limited market volume. Accordingly, the fair values
reported reflect estimates and may not necessarily be indicative of the
amounts that the Company could realize in a current market exchange.
The Company accretes purchase discounts using the effective yield method over
the life of the CMBS. The accumulated accretion of purchase discounts at
December 31, 2001, was approximately $13,491,000.
The yield to maturity on the Company's CMBS depends on, among other things,
the rate and timing of principal payments, the pass-through rate and interest
rate fluctuations. The subordinated CMBS interests owned by the Company
provide credit support to the more senior interests of the related commercial
securitization. Cash flow from the mortgages underlying the CMBS interests
generally is allocated first to the senior interests, with the most senior
interest having a priority entitlement to cash flow. Remaining cash flow is
allocated generally among the other CMBS interests in order of their relative
seniority. To the extent that there are defaults and unrecoverable losses on
the underlying mortgages that result in reduced cash flows, the most
subordinated CMBS interest will bear this loss first. To the extent that
there are losses in excess of the most subordinated interest's stated
entitlement to principal and interest, then the remaining CMBS interests will
bear such losses in order of their relative subordination.
The gross cumulative unrealized gains and losses on the Company's trading
investment securities at December 31, 2001, were approximately $6,900,000 and
$29,378,000, respectively.
On January 1, 2001, the Company transferred all of its available for sale
CMBS to the trading category. This resulted in the reclassification of the
related $3,103,845 unrealized gain in accumulated other comprehensive income
to loss on trading securities, net in the accompanying statement of income.
57
NOTE 4. BORROWED INVESTMENT SECURITIES AND INTEREST RATE SWAP, NET
The Company's borrowed investment securities and interest rate swap are
carried at estimated fair value and are comprised of the following at
December 31, 2001:
SECURITY COUPON COST FAIR UNREALIZED
DESCRIPTION RATE FACE BASIS VALUE GAIN (LOSS)
------------------------ ------ ------------- ------------- ------------ -------------
U.S. Treasury (08-15-09) 6.000% $ 11,239,000 $ 10,974,728 $ 11,981,828 $ (1,007,100)
U.S. Treasury (02-15-11) 5.000 17,818,000 17,523,195 17,765,103 (241,908)
U.S. Treasury (08-15-11) 5.000 97,378,000 98,609,087 97,119,363 1,489,724
------------- ------------- ------------ -------------
$ 126,435,000 $ 127,107,010 126,866,294 $ 240,716
============= ============= =============
Reverse repurchase agreements 129,304,395
------------
Borrowed investment securities, net 2,438,101
Interest rate swap (674,290)
-------------
Borrowed investment securities and interest rate swap, net $ 1,763,811
=============
As of December 31, 2001, the Company had borrowed agency and U.S. Treasury
securities with face amounts totaling $126,435,000. The fair value of these
borrowed agency and U.S. Treasury securities at December 31, 2001, was
$126,866,294. The U.S. Treasury securities were sold in the open market
(i.e., a "short" security sale). The Company is obligated to return the
securities in the future and is therefore exposed to price risk until it
repurchases the securities for delivery to the lender. Short security sales
are used by the Company to modify its interest rate risk. The Company must
pay the security lender the interest earned by the underlying security. Short
security sales are recorded at the estimated fair value of the borrowed
securities, and any unrealized gains (losses) are included in earnings. The
cumulative unrealized loss on the short securities at December 31, 2001, was
$240,716, which is included in borrowed investment securities and interest
rate swap, net, in the accompanying consolidated financial statements.
Proceeds from short security sales are used to purchase reverse repurchase
agreements of the same security. The transactions are governed by one master
repurchase agreement with rights of offset, and therefore, the values of the
short security sales and reverse repurchase agreements have been offset and
shown as one line item in the accompanying consolidated financial statements.
It has been the Company's practice to settle these transactions on a net
basis.
In April 2001, the Company entered into an interest rate swap agreement with
Bear Stearns Capital Markets ("Bear Stearns") with a notional amount of
$30,956,000, on which the Company pays a fixed rate of 6.015% and receives a
variable rate based upon a six-month LIBOR for a term of 10 years ending
April 27, 2011. In December 2001, the Company terminated $3,956,000 of the
original notional amount, which resulted in a realized loss of approximately
$82,000. The swap agreement with Bear Stearns has a notional amount of
$27,000,000 at December 31, 2001. The swap agreement calls for interest to be
paid semiannually in arrears. The Company carries the swap agreement at its
estimated fair value, with all periodic changes in estimated fair value
recognized in earnings. The Company was required under the swap agreement to
pledge collateral valued at 1% of the notional amount of the swap to ensure
its performance in the event that the swap declines in value. At December 31,
2001, the Company pledged CMBS valued at approximately $1,107,000. The fair
value and cumulative unrealized loss on this interest rate swap agreement at
December 31, 2001, was $674,290, which is included in borrowed investment
securities and interest rate swap, net, in the accompanying consolidated
financial statements.
In February 2001, the Company terminated an interest rate swap agreement with
Bear Stearns with a notional amount of $31,321,000, on which the Company paid
a fixed rate of 5.952% and received a variable rate based upon a six-month
LIBOR for a term of 10 years ending April 9, 2009. The termination resulted
in a realized loss of approximately $145,000.
NOTE 5. LONG-TERM DEBT
On February 22, 2001, the Company entered into an agreement to sell its
interests in 50 CMBS passthrough certificates (the "Pooled Certificates") to
its subsidiary, the Trust.
The Trust resecuritized the Pooled Certificates and offered $98,500,000 Class
A-1 Senior Notes with a fixed coupon rate of 7.17% ("Fixed Rate Notes") and
$137,500,000 Class A-2 Senior Notes with a variable coupon rate based on
one-month LIBOR plus 115 basis points ("Variable Rate Notes") (together, the
"Notes"). The Notes are secured by the investment securities of the Company
with a carrying value of approximately $349,855,000 at December 31, 2001. The
Company capitalized $5,667,580 of deferred borrowing costs related to the
issuance of the Notes. The deferred borrowing costs are being amortized,
using the effective interest
58
method, over the life of the debt, which is seven years (through February 22,
2008). The Company amortized $532,900 of deferred costs in year ended
December 31, 2001.
In conjunction with the issuance of the Variable Rate Notes, the Company
entered into an interest rate cap agreement and an interest rate floor
agreement with Bear Stearns ("CBO Swap") to effectively fix the interest on
its variable rate debt. The notional amount for the CBO Swap is $137,500,000.
With the interest rate cap, the Company receives a variable rate based on
one-month LIBOR plus 115 basis points if it is greater than 7.435%. With the
interest rate floor, the Company pays a variable rate based on one month
LIBOR plus 115 basis points if it is less than 7.435%. The agreements call
for interest to be paid monthly. The Company carries the CBO Swap at its
estimated fair value, with all periodic changes in estimated fair value
recognized in earnings. The Company deposited $4,125,000 of cash to ensure
its performance in the event that the CBO Swap declines in value. If the
market value of the CBO Swap falls below defined thresholds, the Company may
be required to deposit additional restricted cash. Amounts in excess of the
minimum requirements may be withdrawn by the Company. Interest on the Notes
is to be paid monthly. Interest expense on the Notes was approximately
$14,550,000 for the year ended December 31, 2001, and the related accrued
interest payable at December 31, 2001, was approximately $528,000. The LLC
Agreement contains certain restrictive covenants regarding the amount of
variable rate debt, total debt, and certain financial ratios. Management
believes that the Company is in compliance with such covenants.
NOTE 6. REPURCHASE AGREEMENTS
The Company has entered into repurchase agreements to finance a portion of
its CMBS purchases. As of December 31, 2001, the Company had entered into
repurchase obligations in the amount of $86,102,000. The weighted average
maturity of the agreements as of December 31, 2001, was 32 days, and the
weighted average interest rate was 3.90%. The repurchase agreements are
collateralized by a portion of the Company's portfolio of CMBS investments
with a fair value of approximately $206,700,000 at December 31, 2001.
Interest expense on the repurchase agreements was approximately $2,599,000
for the year ended December 31, 2001, and the related accrued interest
payable at December 31, 2001, was approximately $124,000.
NOTE 7. LOSS ON TRADING SECURITIES, NET
The composition of the Company's gain (loss) on trading securities, net for
the year ended December 31, 2001, follows:
Realized gain - borrowed investment security $ 2,965,698
Realized loss - borrowed investment security (719,668)
Realized loss - interest rate swap (227,240)
Realized gain - CMBS sold 1,683,516
Realized loss - CMBS sold (1,238,190)
Unrealized gain - borrowed investment security 1,124,884
Unrealized loss - interest rate swap (674,290)
Unrealized loss - CBO Swap (2,716,600)
Unrealized loss - CMBS (27,583,796)
Unrealized gain - CMBS, transferred from other comprehensive income 3,103,845
$ (24,281,841)
NOTE 8. OPERATING LEASES
The Company leases its office space and certain equipment under operating
leases that expire between October 2002 and December 2005. The office lease
provides for an annual basic rental of $180,504 during the initial lease term
and contains an option to extend the term of the lease for one extension term
of five years, with the basic rental being reset at the then market rate.
Future minimum lease payments under these leases are as follows:
Year ending December 31:
2002 $ 280,977
2003 270,568
2004 199,958
2005 166,602
Lease expense for the year ended December 31, 2001, was approximately
$273,000.
NOTE 9. TRANSACTIONS WITH AFFILIATES AND RELATED PARTIES
At times, the Company purchases investment securities from members of the
Company or their affiliates. These purchases and sales represent transactions
that are in the normal course of business of the Company and the members.
During the year ended
59
December 31, 2001, the Company purchased from such members CMBS with face
values totaling approximately $457,200,000 for a purchase price of
approximately $229,300,000 and sold CMBS to such members with face values
totaling approximately $58,400,000 for proceeds of approximately $25,000,000.
The Company has loaned approximately $310,000 to key executives for funding
of tax liabilities associated with units granted under an incentive
compensation arrangement. As of December 31, 2001, there is approximately
$214,000 outstanding, with approximately $77,000 satisfied through the
transfer of 3,567 Common Units to the Company and approximately $19,000
repaid by the employees. During the year ended December 31, 2001, the Company
purchased 5,343 common units from a key executive for approximately $116,000.
The key executive had members' equity of $15,515 at the date of repurchase.
These loans are classified as other assets in the consolidated balance sheet.
The loans bear interest at a rate of 7% per annum, and payments are due
quarterly on the distribution date for the Common Units. Payments are due
only to the extent that the quarterly distribution is sufficient to pay them.
The loans become due upon termination of the executives' employment with the
Company, and recourse is limited to the Common Units securing the loans.
NOTE 10. EMPLOYEE BENEFITS
During 2001, the Company implemented a contributory defined contribution
401(k) plan that covers substantially all full-time employees. Under the
plan, participants may contribute up to 15% of their total compensation. The
Company matches up to 3% of each participant's total compensation. Matching
contributions totaled $71,000 for year ended December 31, 2001.
Effective January 1, 2001, the Company adopted a deferred compensation plan
for key employees. The Board of Managers approved the availability of
approximately 690,000 phantom appreciation units and 296,000 phantom grant
units for future awards to employees. In order to grant these awards, the
Compensation Committee must recommend that they be granted, and the
Compensation Committee's recommendation must be approved by the Board of
Managers.
As of December 31, 2001, the Company granted approximately 279,000 and
105,000 of appreciation units and grant units, respectively. Prior to
December 31, 2001, the Board of Managers approved the Compensation
Committee's recommendations to grant additional appreciation units and grant
units of approximately 269,000 and 88,000, respectively, effective January 1,
2002.
For the appreciation units, compensation is measured as the amount by which
the cumulative per common unit distribution exceeds the value specified under
the plan and is expensed over the performance of the related services. For
the grant units, compensation is equal to the per common unit distributions
times the number of vested grant units. Compensation is measured at the date
of declared distribution. As of December 31, 2001, the Company has expensed
approximately $57,000 relating to compensation expense for the grant units.
60
EXHIBIT 99 (b)
INDEPENDENT AUDITORS' REPORT
To the Members of
ARCap Investors, L.L.C.:
We have audited the accompanying consolidated balance sheet of ARCap
Investors, L.L.C. and subsidiary (the "Company") as of December 31, 2000, and
the related consolidated statements of income and comprehensive income,
members' equity and cash flows for the year then ended. These financial
statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based
on our audit.
We conducted our audit in accordance with auditing standards generally
accepted in the United States of America. Those standards require that we
plan and perform the audit to obtain reasonable assurance about whether the
financial statements are free of material misstatement. An audit includes
examining, on a test basis, evidence supporting the amounts and disclosures
in the financial statements. An audit also includes assessing the accounting
principles used and significant estimates made by management, as well as
evaluating the overall financial statement presentation. We believe that our
audit provides a reasonable basis for our opinion.
In our opinion, such consolidated financial statements present fairly, in all
material respects, the financial position of the Company and subsidiary as of
December 31, 2000, and the results of their operations and their cash flows
for the year then ended in conformity with accounting principles generally
accepted in the United States of America.
/s/ DELOITTE & TOUCHE LLP
Dallas, Texas
January 22, 2001
61
ARCap Investors, L.L.C.
CONSOLIDATED BALANCE SHEET
DECEMBER 31, 2000
Assets
Investment securities - trading $214,000,516
Investment securuties - available-for-sale 76,092,175
Cash and cash equivalents 2,675,475
Restricted cash 683,520
Receivable for security sold 13,372,667
Accrued interest receivable 3,165,177
Other assets 352,373
--------------
Total $310,341,903
==============
Liabilities and Members' Equity
Liabilities:
Accrued expenses $ 546,712
Accrued interest payable 3,203,432
Securities sold under agreement to repurchase-
repurchase agreements 123,483,443
Borrowed investment security - liability, net 6,078,876
--------------
Total liabilities 133,312,463
Commitments and Contingencies (Note 7)
Minority interests 2,221
Members' Equity 177,027,219
--------------
Total $310,341,903
==============
The accompanying notes are an integral part of these consolidated financial
statements.
62
ARCap INVESTORS, L.L.C.
CONSOLIDATED STATEMENT OF INCOME AND COMPREHENSIVE INCOME
YEAR ENDED DECEMBER 31, 2000
REVENUES:
Interest and other investment income $26,873,191
Loss on trading securities, net (6,942,136)
------------
Total revenues 19,931,055
EXPENSES:
General and administrative 2,232,077
Interest 5,044,681
Management fee 825,142
Minority interest 3,365
------------
Total expenses 8,105,265
------------
NET INCOME 11,825,790
OTHER COMPREHENSIVE INCOME - Unrealized holding
gain (loss) on investment securities - available-for-sale 4,400,901
------------
COMPREHENSIVE INCOME $16,226,691
============
The accompanying notes are an integral part of these consolidated financial
statements.
63
ARCap INVESTORS, L.L.C.
CONSOLIDATED STATEMENT OF MEMBERS' EQUITY
YEAR ENDED DECEMBER 31, 2000
ACCUMULATED
SERIES A OTHER COM- TOTAL
COMMON PREFERRED PREFERRED PREHENSIVE MEMBERS'
MEMBERS MEMBERS MEMBERS INCOME EQUITY
BALANCE, JANUARY 1, 2000 $60,904,584 $ 34,966,975 $ -- $ (1,297,056) $ 94,574,503
Proceeds from issuance of
membership units -- -- 81,750,000 -- 81,750,000
Costs to raise capital -- -- (4,173,592) -- (4,173,592)
Distributions (7,426,558) (3,277,183) (646,642) -- (11,350,383)
Net income 6,721,605 2,334,498 2,769,687 -- 11,825,790
Other comprehensive
income - unrealized gain
on investment securities -
available-for-sale -- -- -- 4,400,901 4,400,901
Contributions of REMICap
(Note 2)
Recapitalization 28,019,990 (34,024,290) 6,004,300 -- --
------------- ------------- ------------ ------------- -------------
BALANCE, DECEMBER 31, 2000 $88,219,621 $ -- $85,703,753 $ 3,103,845 $177,027,219
============= ============= ============ ============= =============
The accompanying notes are an integral part of these consolidated financial
statements.
64
ARCap INVESTORS, L.L.C.
CONSOLIDATED STATEMENT OF CASH FLOWS
YEAR ENDED DECEMBER 31, 2000
Operating activities:
Net income $ 11,825,790
Adjustments to reconcile net income to net cash
used in operating activities:
Loss on trading securities 6,942,136
Accretion of interest income (3,332,291)
Minority interest 3,365
(Increase) decrease in cash for changes in
operating assets and liabilities:
Restricted cash (57,100)
Investment securities - trading (100,674,955)
Securities purchased under agreement to resell and
proceeds from borrowed security, net (5,664,448)
Receivable for security sold (13,372,667)
Accrued interest receivable (1,247,297)
Other assets 106,468
Accrued expenses and interest payable 3,264,334
--------------
Net cash used in operating activities (102,206,665)
--------------
Investing activities - Purchase of investment securities-
available-for-sale (11,985,869)
--------------
Financing activities:
Contributions from members 81,750,000
Distributions to members (11,350,383)
Payment of issuance costs (4,173,592)
Distributions to minority interest members (1,154)
Proceeds from other borrowings and securities
sold under agreement to repurchase, net 46,194,085
--------------
Net cash provided by financing activities 112,418,956
--------------
Net decrease in cash and cash equivalents (1,773,578)
Cash and cash equivalents, beginning of year 4,449,053
--------------
Cash and cash equivalents, end of year $ 2,675,475
==============
Supplemental disclosure of cash flow information -
Cash payments for interest $ 4,652,352
==============
The accompanying notes are an integral part of these consolidated financial
statements.
65
ARCap INVESTORS, L.L.C.
NOTES TO CONSOLIDATED FINANCIAL STATMENTS
YEAR ENDED DECEMBER 31, 2000
1. ORGANIZATION AND SIGNIFICANT ACCOUNTING POLICIES
Organization - ARCap Investors, L.L.C. (the "Company") was incorporated in
January 1999 and commenced its operations on March 17, 1999. The Company was
organized to invest primarily in subordinated commercial mortgage-backed
securities ("CMBS").
Principles of Consolidation - The consolidated financial statements include
the accounts of the Company and ARCap REIT, Inc., its majority-owned
subsidiary. All material intercompany transactions and account balances have
been eliminated in consolidation.
Investment Securities - The Company's investment security transactions are
recorded on the trade date. CMBS that are designated as trading assets are
securities that the Company is holding for possible sales or other
dispositions in the near term. Such securities are carried at their estimated
fair value, with unrealized gains or losses included in earnings.
The Company's CMBS that are designated as available-for-sale are securities
that the Company considers for possible sales or other dispositions prior to
the maturity of the bond and are generally of a nonrated class. Any
unrealized gains and losses on securities available-for-sale are reported in
other comprehensive income, a separate component of members' equity. Interest
income is recognized as earned and includes amortization of premiums and
accretion of discounts, computed using the effective yield method over the
expected life of these mortgage assets.
Derivative Financial Instruments - Derivative financial instruments are
utilized by the Company to reduce interest rate risk. Derivative financial
instruments include interest rate swaps. The Company utilizes interest rate
swap agreements as a means of hedging the potential financial statement
impact of changes in the fair value of its portfolio of CMBS due to changes
in interest rates. These contracts involve the agreement between two parties
to make periodic payments to each other for an agreed-upon period of time
based upon a notional amount of principal. Under this agreement, a fixed rate
of interest on the notional amount is exchanged for a stream of payments
similarly calculated but using a floating rate of interest. Risks in these
contracts arise from the movements in interest rates and from the possible
inability of counterparties to meet the terms of their contracts. The Company
carries interest rate swaps at market value, and any unrealized gain (loss)
is included in earnings.
Resale and Repurchase Agreements and Securities Lending Agreements
-Transactions involving purchases of securities under agreements to resell
(reverse repurchase agreements or reverse repos) or sales of securities under
agreements to repurchase (repurchase agreements or repos) are accounted for
as collateralized financings, except where the Company does not have an
agreement to sell (or purchase) the same or substantially the same securities
before maturity at a fixed or determinable price.
Cash and Cash Equivalents - Cash and cash equivalents include all highly
liquid investments with original maturities of three months or less.
Restricted Cash - Restricted cash represents amounts required to be pledged
under an interest rate swap agreement (see Note 3).
Income Taxes - The Company has elected to be taxed similar to a partnership,
whereby all income is taxed at the member level.
Use of Estimates - The preparation of consolidated financial statements in
conformity with accounting principles generally accepted in the United States
of America requires management to make estimates and assumptions that affect
reported amounts of certain assets, liabilities, revenues and expenses.
Actual results may differ from those estimates.
Fair Value of Financial Instruments - The estimated fair value amounts herein
have been determined by the Company using available market information and
appropriate valuation methodologies. However, considerable judgment is
required to interpret market data to develop the estimates of fair value.
Accordingly, the estimates presented herein are not necessarily indicative of
the amounts that the Company could realize in a current market exchange. The
use of different market assumptions and/or estimation methodologies may have
a material effect on the estimated fair value amounts.
The Company's portfolio of CMBS and securities borrowed are carried at their
estimated fair values. The Company's management believes that the fair values
of its cash and cash equivalents, restricted cash and repurchase agreements
approximate their carrying values due to the nature of the instruments or the
fact that their terms approximate current market terms.
Change in Accounting Standard - Statement of Financial Accounting Standards
("SFAS") No. 133, "Accounting for Derivative Instruments and Hedging
Activities," as amended, was adopted by the Company on January 1, 2001. This
standard requires that all derivative financial instruments be recognized as
either assets or liabilities on the balance sheet at their fair values and
that accounting for the changes in fair values is dependent upon the intended
use of the derivatives and their resulting designations. The adoption of this
standard did not have a material effect on the Company's consolidated
financial statements.
66
2. MEMBERS' EQUITY
Prior to August 4, 2000, interests in the Company were available in units
requiring commitments of $1 million. There was an aggregate of 100 units each
of common and preferred interests available for subscription. Each member was
required to subscribe for a minimum of five units. However, the Managing
Member may have, at its sole discretion, permitted subscription for a lesser
amount. Member contributions were made upon calls of the required capital
commitments.
Prior to August 4, 2000, distributions of Taxable Cash Flows were made as
follows:
- To the preferred members in an amount equal to the accrued Annual Return.
- To the common members in an amount equal to the accrued Annual Return.
- The remaining Taxable Cash Flows were distributed 20% to the preferred
members and 80% to the common members.
Prior to August 4, 2000, distributions of Nontaxable Cash Flows were made as
follows:
- To the preferred members until they had received an amount equal to their
aggregate capital contributions plus the Excess Income previously allocated
to them.
- To the common members until they had received an amount equal to their
aggregate capital contributions plus the Excess Income previously allocated
to them.
Prior to August 4, 2000, net income of the Company was allocated first to the
members in the amount of Taxable Cash Flow distributed or distributable to
them. Excess income was allocated 20% to the preferred members and 80% to the
common members.
Reorganization - On August 4, 2000, the Company amended and restated its
Limited Liability Company Agreement (the "LLC Agreement"). The LLC Agreement
established two classes of membership: Series A Preferred members and Common
members. Subscriptions for Series A Preferred Units shall be made for no less
than 400,000 units ($10,000,000) unless the Board of Managers, in its sole
discretion, permits subscription for some lesser number of units.
The LLC Agreement gave the existing members holding Preferred Units the
option of converting their Preferred Units into either Series A Preferred
Units at a conversion rate of $25.00 per Series A Preferred Unit or new
Common Units at a conversion rate of $21.74 per new Common Unit. The existing
members' Common Units were converted into new Common Units at a conversion
rate of $21.74 per Common Unit.
The LLC Agreement calls for distributions of Cash Flows as follows:
- To the Series A Preferred members in an amount equal to the accrued and
unpaid Preferred Distributions (12% per annum of the $25.00 price per
Unit).
- To the Common members in an amount equal to (a) during the 18-month period
following the First Closing Date, the amount determined by the Board of
Managers, but no more than a cumulative return on the Common Units at the
rate of 10% per annum, and (b) subsequent to such 18-month period, the
amount determined by the Board of Managers, provided that if the amount
distributable to the Common members shall exceed a cumulative annual return
on the Common Units of 12% per annum, the Board of Managers shall notify
the Series A Preferred members 30 days in advance of the record date for
distribution of Cash Flow.
- To the extent that any remaining Cash Flow received during such tax period
is not includable in the income of the Company, to members that have been
allocated Net Profits in excess of amounts actually distributed to such
members, in proportion to such amounts.
Net Profits of the Company are allocated as follows:
- To the Series A Preferred members to the extent of amounts distributed or
distributable to them in such taxable year.
- To the Series A Preferred members to the extent Net Losses previously
allocated to such members exceed undistributed Net Profits previously
allocated to them.
- To the Common members to the extent of amounts distributed or distributable
to them in such taxable year.
- To the Common members to the extent Net Losses previously allocated to such
members exceed undistributed Net Profits previously allocated to them.
- To the members in proportion to their Percentage Interests.
Net Losses of the Company are allocated as follows:
- To the members in an amount equal to undistributed Net Profits allocated to
such member.
- To the Common members pro rata to the extent of their Capital Accounts.
- To the Series A Preferred members pro rata to the extent of their Capital
Accounts.
Contribution of REMICap, L.L.C. - The Company received select nonmonetary
intangible assets, primarily employees, business processes and the Company's
management agreement, from REMICap, L.L.C. ("REMICap"), an affiliate and
sponsor of the Company, on August 4, 2000. In exchange for these nonmonetary
assets, the Company issued 459,982 of Common Units, with an
67
agreed-upon value of $21.74 per unit, to the members of REMICap. Since the
Company did not receive any tangible assets, the $10,000,000 value of the
Common Units granted to the members of REMICap has been recorded as the
issuance of equity and a distribution to REMICap with no net impact in the
members' equity section of the accompanying consolidated financial statements.
Series A Preferred Units - Series A Preferred Units are convertible into
Common Units at the Conversion Price in effect on the Conversion Date. If the
Series A Preferred Units have not been converted within five years of August
4, 2000, Series A Preferred Units may, at the holder's option, be converted
to a note equal to $25.00 per Unit, plus accrued and unpaid Preferred
Distributions.
Eighteen months after the First Closing Date (February 4, 2002), but no later
than the fifth anniversary of the First Closing Date (August 4, 2005), the
Company may redeem the Series A Preferred Units for $25.00 per Unit, plus
accrued and unpaid Preferred Distributions, plus a premium that will provide
the Series A Preferred members with a total pretax internal rate of return of
17.50%.
In addition, upon either a change in control or sale or transfer of all or
substantially all of the assets of the Company, Series A Preferred Units may,
at the holder's option, be redeemed at $25.00 per Unit, plus accrued and
unpaid Preferred Distributions.
Subsequent to the Company's amendment and restatement of its LLC Agreement,
the Company circulated an amended Private Placement Memorandum (the "PPM")
for 5,739,741 Units of Series A Preferred Membership Interests representing
the balance of such interests available for subscription in the Company's
offering. As of December 31, 2000, 3,270,000 Units have been issued pursuant
to the Company's offering for total capital contributions of $81,750,000.
At December 31, 2000, there were a total of 3,530,259 and 5,008,292 Series A
Preferred Units and Common Units, respectively, issued and outstanding.
3. INVESTMENT SECURITIES
The Company's trading securities are carried at estimated fair value and
comprise the following at December 31, 2000:
FAIR VALUE PERCENTAGE
Subordinated CMBS:
Security rating:
BB $ 29,242,773 13.66%
BB- 33,079,593 15.46
B+ 55,017,330 25.71
B 59,213,811 27.67
B- 37,101,774 17.34
Interest rate swap 345,235 0.16
------------ ------
$214,000,516 100.00%
============
The fair value of the Company's portfolio of CMBS is generally estimated by
management based on market prices provided by certain dealers who make a
market in these financial instruments. The market for the Company's CMBS may
lack liquidity and have limited market volume. Accordingly, the fair values
reported reflect estimates and may not necessarily be indicative of the
amounts that the Company could realize in a current market exchange.
The yield to maturity on the Company's CMBS depends on, among other things,
the rate and timing of principal payments, the pass-through rate and interest
rate fluctuations. The subordinated CMBS interests owned by the Company
provide credit support to the more senior interests of the related commercial
securitization. Cash flow from the mortgages underlying the CMBS interests
generally is allocated first to the senior interests, with the most senior
interest having a priority entitlement to cash flow. Remaining cash flow is
allocated generally among the other CMBS interests in order of their relative
seniority. To the extent that there are defaults and unrecoverable losses on
the underlying mortgages, resulting in reduced cash flows, the most
subordinated CMBS interest will bear this loss first. To the extent that
there are losses in excess of the most subordinated interest's stated
entitlement to principal and interest, then the remaining CMBS interests will
bear such losses in order of their relative subordination.
The gross unrealized gain and loss on the Company's trading investment
securities at December 31, 2000, were $3,456,361 and $1,297,657, respectively.
At December 31, 2000, the Company had one open interest rate swap agreement
with Bear Stearns Capital Markets with a notional amount of $31,321,000, on
which the Company pays a fixed rate of 5.952% and receives a variable rate
based upon a six-month LIBOR for a term of 10 years ending April 9, 2009. The
variable rate in effect as of December 31, 2000, was 6.76%. The swap
agreement calls for interest to be paid semiannually in arrears. The Company
carries the swap agreement at its estimated fair value, with all periodic
changes in estimated fair value recognized in earnings. The Company was
required under the swap agreement to pledge $626,420 of cash to ensure its
performance in the event that the swap declines in value. If the market value
of the swap decreases, the Company may be required to deposit additional
restricted cash.
68
The Company's available-for-sale CMBS are carried at estimated fair value. As
of December 31, 2000, the CMBS have an amortized cost of $72,988,330, gross
unrealized gains of $5,046,518, gross unrealized losses of $1,942,673 and an
estimated fair value of $76,092,175. The nonrated CMBS have maturity dates
ranging from March 2009 to September 2029. The Company reports any unrealized
gains and losses on these assets in accumulated other comprehensive income, a
separate component of members' equity.
4. BORROWED INVESTMENT SECURITIES, NET
At December 31, 2000, the Company had borrowed U.S. Treasury securities with
face amounts totaling $203,135,000. The fair value of these borrowed U.S.
Treasury securities at December 31, 2000, was $213,422,545. The U.S. Treasury
securities were sold in the open market (i.e., a "short" security sale). The
Company is obligated to return the securities in the future and is therefore
exposed to price risk until it repurchases the securities for delivery to the
lender. Short security sales are used by the Company to modify its interest
rate risk. The Company must pay the security lender the interest earned by
the underlying security. Short security sales are recorded at the estimated
fair market value of the borrowed securities, and any unrealized gains
(losses) are included in earnings. The unrealized loss on the short
securities at December 31, 2000, was $12,236,377, which is included in loss
on trading securities in the accompanying consolidated financial statements.
Proceeds from short security sales are used to purchase reverse repurchase
agreements of the same security. The transactions are governed by one master
repurchase agreement with rights of offset, and therefore, the values of the
short security sales and reverse repurchase agreements have been offset and
shown as one line item in the accompanying consolidated financial statements.
It has been the Company's practice to settle these transactions on a net
basis.
5. REPURCHASE AGREEMENTS
The Company has entered into repurchase agreements to finance a portion of
its CMBS purchases. As of December 31, 2000, the Company had entered into
repurchase obligations in the amount of $123,483,443. The weighted average
maturity of the agreements as of December 31, 2000, was 234 days, and the
weighted average interest rate was 8.43%. The repurchase agreements are
collateralized by a portion of the Company's rated portfolio of CMBS
investments.
6. OTHER BORROWINGS
On September 30, 1999, the Company entered into an agreement with American
Mortgage Acceptance Company ("AMAC") regarding the sale of certain CMBS owned
by the Company. The Company sold CMBS with a face value of $50,399,771 for
$35,622,358 to AMAC (the "Bonds"). A portion of the sales price, $21,310,000,
represented a liability that was assumed by AMAC. If at any time through
September 30, 2001, the Company desired to resecuritize its CMBS, the Company
could have notified AMAC of its intent to repurchase the Bonds. At such time,
AMAC could have either:
(a) Resold the Bonds to the Company at a Determination Price as of the Pricing
Date.
(b) Participated and included all of the Bonds in the resecuritization of the
CMBS by the Company on the same terms and condi tions as the Company.
(c) Subscribed for Preferred Membership Interests of the Company in exchange
for all, or a portion of, the Bonds at a Determina tion Price as of a
Pricing Date.
Since AMAC was under obligation to return the Bonds to the Company upon
request by the Company, the transaction was recorded as a secured borrowing
in accordance with SFAS No. 125, "Accounting for Transfers and Servicing of
Financial Assets and Extinguishments of Liabilities." At the time of sale,
the security was transferred from investment securities - trading to
investment securities - available-for-sale.
On October 27, 2000, the Company repurchased the Bonds from AMAC for
$36,764,227. Simultaneous with this transaction, AMAC contributed $20,000,000
to the Company in exchange for 800,000 Units of Series A Preferred Membership
Interests.
7. OPERATING LEASES
In conjunction with the Company's receipt of select assets from REMICap (see
Note 2), the Company consented to the assumption of the leases, which were
previously in the name of REMICap. The Company leases its office space and
certain equipment under operating leases that expire between October 2002 and
December 2005. The office lease provides for an annual basic rental of
$180,504 during the initial lease term and contains an option to extend the
term of the lease for one extension term of five years, with the basic rental
being reset at the then market rate. Future minimum lease payments under
these leases are as follows:
69
Year ending December 31:
2001 $190,692
2002 189,754
2003 185,065
2004 185,065
2005 166,602
--------
Total $917,178
========
Lease expense for the year ended December 31, 2000, was approximately $44,000.
8. TRANSACTIONS WITH AFFILIATES AND RELATED PARTIES
Prior to August 4, 2000, the Company was managed by ARCap Management, L.L.C.
("ARCap Management") and had a management agreement (the "Management
Agreement") with APOLLO ARCap, L.L.C. and REMICap (the "Managers") to provide
the Company's day-to-day operations, subject to the direction and oversight
of ARCap Management. The Managers were direct and indirect members of the
Company. The Company paid the Managers an annual base management fee equal to
1% of the assets of the Company, as further defined in the Company's PPM
dated January 1999. In addition, the Managers were to perform all due
diligence required to make a prudent investment in CMBS. Fees for such due
diligence were $1,650 per asset for desktop evaluations and $500 per asset
for site visits in connection with the Company's investment in CMBS. During
the year ended December 31, 2000, asset management fees totaling
approximately $825,000 under the Management Agreement were incurred. Due
diligence fees totaling approximately $333,000 under the Management Agreement
were incurred and are recorded as general and administrative expenses in the
accompanying consolidated financial statements. In conjunction with the
Company's receipt of select assets from REMICap (see Note 2), the Management
Agreement was effectively terminated on August 4, 2000.
At times, the Company purchases investment securities from members of the
Company or their affiliates. These purchases and sales represent transactions
that are in the normal course of business of the Company and the members.
During the year ended December 31, 2000, the Company purchased CMBS with face
values totaling $188,698,755 for a purchase price of $119,279,530 from such
members.
The Company granted loans to key executives during the year ended December
31, 2000. The loans allow for the executives to borrow up to $293,000. As of
December 31, 2000, approximately $197,000 had been lent to these executives.
These amounts are classified as other assets in the consolidated balance
sheet. The loans bear interest at a rate of 7% per annum, and payments are
due quarterly on the distribution date for the Common Units. Payments are due
only to the extent that the quarterly distribution is sufficient to pay them,
and recourse is limited to the Common Units securing the loans. The loans
become due upon termination of the executives' employment with the Company,
and recourse is limited to the Common Units securing the loans.
9. SUBSEQUENT EVENT (UNAUDITED)
On February 22, 2001, the Company entered into an agreement to sell its
interests in 52 CMBS pass-through certificates (the "Pooled Certificates")
from 10 different series issued from 10 different trusts. The Pooled
Certificates have a maturity date of February 21, 2013 and have stated rates
of interest between 6.73% and 7.17%. The Company received approximately
$236,000,000 in proceeds in exchange for the Pooled Certificates; the
proceeds were used to pay down the securities sold under agreements to
repurchase.
Since the holders of the Pooled Certificates have a redemption right and as
the transaction allows for the right of substitution, the transaction is
recorded as a secured borrowing.
70