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, 2002
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
---------------------------------------- -------------------
(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]
Indicate by check mark whether the registrant is an accelerated filer (as
defined in Exchange Act Rule 12b-2). Yes X No
--- ---
The approximate aggregate market value of the voting and non-voting common
equity held by non-affiliates of the Registrant as of June 28, 2002 was
$83,580,115, based on a price of $13.40 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, 2003 there were 6,363,630 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, 2003, which are incorporated into
Items 10, 11, 12 and 13.
Index to exhibits may be found on page 42
Page 1 of 72
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 (the "Company") was formed on June 11, 1991
as a Massachusetts business trust. The Company elected to be treated as a real
estate investment trust ("REIT") under the Internal Revenue Code of 1986, as
amended (the "Code").
Effective April 26, 1999, upon authorization by the Company's 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, 2002, there were 6,363,630
Shares outstanding.
The Company's business plan focuses on originating and acquiring mortgages
secured by multi-family 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-multi-family mortgages, issues guarantees of construction
and permanent financing, and makes standby and forward loan commitments.
The Company is governed by a board of trustees comprised of three independent
trustees and two trustees who are affiliated with Related Capital Company
("Related"). 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, tax, 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 consolidated financial statements include the accounts of the Company and
three wholly-owned subsidiaries which it controls: AMAC Repo Seller, AMAC/FM
Corporation ("AMAC/FM") and AMAC Credit Facility, LLC. All intercompany accounts
and transactions have been eliminated in consolidation, unless otherwise
indicated. The "Company" as hereinafter used, refers to American Mortgage
Acceptance Company and its subsidiaries.
Investment Strategy
-------------------
Since the Company's 1999 listing on the American Stock Exchange, the Company's
goal has been to attempt to maximize the return on the Company's asset base by
investing in higher yielding assets while managing risk by maintaining a portion
of its investments in government agency guaranteed or insured assets and by
maintaining a conservative capital structure.
The Company seeks asset diversification, capital appreciation and income for
distribution to its shareholders primarily through the acquisition and
origination of mortgages secured by multifamily properties. These investments
may take the form of first mortgages, mezzanine loans, construction loans and
bridge loans. The Company also indirectly invests in subordinate commercial
mortgage-backed securities and may invest in other real estate assets.
The Company invests in the following types of assets:
Government Insured and Guaranteed Investments
Generally, the Company seeks to maintain a minimum of 40% of its mortgage
investments in government insured or guaranteed investments, primarily through
the acquisition or origination of mortgage loans on multi-family 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 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.
Mezzanine Loans
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
proceeds generated from the refinancing and sale of 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,
multi-family 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.
3
The Company's mezzanine loans typically finance newly constructed or
rehabilitated market-rate multi-family properties and generally have terms of 40
years with an option to call the loan on 12 months notice at any time after the
tenth anniversary of the completion of the construction or rehabilitation. 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 has two bridge loan programs. In the first, the Company's bridge
loans are typically funded in connection with the development of multi-family
properties which benefit from the Low Income Housing Tax Credit program under
Section 42 of the Internal Revenue Code ("LIHTC program"). Due to the equity
payment schedule typically associated with the LIHTC program, 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. In the second program, the Company
provides 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 and/or the subsequent rehabilitation of a
property.
During October 2002, the Company entered into a mortgage warehouse line of
credit (the "Fleet Warehouse Facility") with Fleet National Bank ("Fleet"), in
the amount of $40 million. Advances under the Fleet Warehouse Facility, up to
83% of the total loan package, will be used to fund first mortgage loans, which
the Company will make for the acquisition/refinancing and minor renovation of
existing, lender-approved multi-family properties located in stable sub-markets.
As of December 31, 2002, the Company had approximately $8.8 million in loans
outstanding under this program.
Commercial Mortgage-Backed Securities ("CMBS")
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, LLC ("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
multi-family, retail, office and hotel.
Standby Loan Commitments
The Company issues standby bridge loan and permanent loan commitments for
projects involved with the construction or rehabilitation of multi-family
apartment complexes in various locations. In return, the Company receives a fee
for issuing these commitments.
Construction Guarantees
The Company has entered into an agreement with Wachovia Bank, National
Association ("Wachovia"), to provide stabilization guarantees for the benefit of
Wachovia for new construction of multi-family properties under the LIHTC
program. Wachovia already provides construction and stabilization guarantees to
Fannie Mae, for loans Wachovia originates under the Fannie Mae LIHTC forward
commitment loan program, but only for loans within regions of the country
Wachovia has designated to be within its territory. For loans outside Wachovia's
territory, the Company has agreed to issue a stabilization guarantee, for the
benefit of Wachovia. The Company is guarantying that properties which have
completed construction will stabilize and will convert to permanent Fannie Mae
loans. The Company receives origination and guarantee fees from the developers
for providing the guarantees. If the properties do not stabilize with enough Net
Operating Income for Fannie Mae to fully fund their commitment, AMAC may be
required to purchase the construction loan from Wachovia or to fund the
difference between the construction loan amount and the reduced Fannie Mae
Permanent Loan Amount.
Portfolio
---------
At December 31, 2002, the Company had total assets of approximately $195.1
million of which approximately $22.4 million represented mortgage or
mortgage-related investments. At December 31, 2002, the Company owned
approximately $114 million in GNMA certificates and had invested approximately
$8.3 million in a FHA insured first mortgage loan (repaid subsequent to year
end) aggregating approximately $122.3 million, or approximately 62.7% of the
Company's assets. The Company generally seeks to maintain at least 40% of its
mortgage investments in government insured or guaranteed investments.
At December 31, 2002, the Company owned approximately $12.4 million in mezzanine
loans and approximately $26 million in bridge loans funded in connection with
the development of multi-family properties which benefit from the LIHTC program.
The Company also owned an indirect investment in CMBS through the Company's
$20.2 million preferred equity interest in ARCap.
4
GNMA Certificates
As of December 31, 2002, the Company's portfolio included twelve GNMA
certificates.
GNMA is a wholly owned United States government corporation within the
Department of Housing and Urban Development ("HUD") 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. GNMAs are widely held and traded mortgage-backed
securities and therefore 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. 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
GNMAs tend to decrease. The effect of prepayments on yield is greater the
earlier a prepayment of principal is received. Certain of the Company's GNMAs
are collateralized by mortgage loans on multi-family properties.
5
Investments in GNMA Certificates - Available for Sale
--------------------------------
Information relating to GNMA certificates owned by the Company as of December
31, 2002 is as follows:
(Dollars in thousands)
Interest
Income
Earned
Unrealized Applicable
Date Principal Amortized Gain (Loss) Balance to the Year
Final Purchased/ Stated at Cost at at at Ended
Certificate Payment Interest December December December December December
Number Date Rate 31,2002 31,2002 31,2002 31,2002 31,2002
----------- -------- -------- --------- --------- ---------- -------- ----------
Western Manor (1) 0355540 7/27/94 7.125% $ 2,460 $ 2,470 $39 $ 2,509 $ 196
3/15/29
Copper Commons (1) 0382486 7/28/94 8.500% 2,088 2,158 (28) 2,130 179
8/15/29
SunCoast Capital Group, Ltd. (1) G002412 6/23/97 7.000% 546 547 32 579 50
4/20/27
Hollows Apts. (2) 511909 5/29/01 -- -- -- -- -- 197
Elmhurst Village (1) 549391 6/28/01 7.745% 21,677 21,677 922 22,599 1,659
1/1/42
Reserve at Autumn Creek (1) 448748 6/28/01 7.745% 16,023 16,023 2,574 18,597 1,200
1/1/42
Casitas at Montecito (1)(3) 519289 3/11/02 7.300% 5,787 6,178 458 6,636 321
10/15/42
Village at Marshfield (1) 519281 3/11/02 7.475% 19,869 21,493 1,331 22,824 1,140
1/15/42
Cantera Crossing (1) 532662 3/28/02 6.500% 5,555 5,489 592 6,081 210
6/1/29
Fillmore Park (1) 536739 3/28/02 6.700% 1,189 1,203 116 1,319 48
10/15/42
Northbrooke (1) 548972 5/24/02 7.080% 10,475 10,625 1,231 11,856 244
8/1/43
Ellington Plaza (1) 585494 7/26/02 6.835% 10,501 10,559 1,159 11,718 258
6/1/44
Burlington (1) 595515 11/1/02 5.900% 6,824 6,909 277 7,186 67
4/15/31
-------- -------- -------- -------- --------
Total $102,994 $105,331 $ 8,703 $114,034 $ 5,769
======== ======== ======== ======== ========
(1) These GNMA certificates are partially or wholly pledged as collateral for
borrowings under the repurchase facility - See Note 7.
(2) This GNMA certificate was sold March 25, 2002, resulting in a gain of
approximately $614,000.
(3) This GNMA certificate was repaid in March 2003.
6
Bridge Loans
The portfolio of bridge loans as of December 31, 2002 is summarized in the table
below:
(Dollars in thousands)
Remaining
Number of Outstanding Unamortized Committed
Apartment Principal Costs and Carrying Balance Interest
Property Location Units Balance Fees Amount to Fund Rate Maturity
------------------------------------------------------------------------------------------------------------------------------------
Alexandrine (3) Detroit, MI 30 $ 214 $ -- $ 214 $ -- 12.50% November 2002(5)
Concord at
Palm (3)(6) Houston, TX 360 3,850 18 3,832 -- 12.00% December 2003
Parwood (3) Long Beach, CA 528 3,022(1) 25 2,997 1,578 11.00% January 2004
Concord at
Little York Houston, TX 276 3,500 25 3,475 -- 12.00% February 2004
Concord at
Gulfgate Houston, TX 288 3,500 47 3,453 -- 12.00% May 2004
Reserve at
Fox River Yorkville, IL 132 1,350 11 1,339 -- 12.00% May 2003
Del Mar LIBOR +
Villas (4) Dallas, TX 260 5,554 42 5,512 -- 4.625% April 2004
Mountain LIBOR +
Valley (4) Dallas, TX 312 5,242 67 5,175 1,065(2) 4.750% November 2004
------------------------------------------------------------------
Total 2,186 $26,232 $ 235 $25,997 $ 2,643
==================================================================
(1) Funded on an as needed basis.
(2) To be funded for rehabilitation.
(3) These loans are to limited partnerships whose general partners are
affiliates of the Advisor.
(4) Pledged as collateral in connection with warehouse facility with Fleet
National Bank (see Note 8 of the accompanying consolidated financial
statements).
(5) Consists of two notes that mature in November 2002. One note, in the
approximate amount of $207,000, has been repaid January 2003. The remaining
note, in the amount of $6,800, remains unpaid.
(6) The Concord of Palm bridge loan was repaid in full in March 2003.
7
Investments in Mortgage Loans
-----------------------------
Information relating to the Company's investments in mortgage loans as of
December 31, 2002 is as follows:
(Dollars in thousands)
Final Share of
Maturity Lifetime Excess Operating
Property Description Date Call Date(A) Interest Rate(B) Interest Cap Cash Flows
First Mortgage Loans
Stony Brook II (E)(M)(P)
East Haven, CT 125 Units 6/37 12/06 7.625% N/A N/A
Sunset Gardens
Eagle Pass, TX 60 Units 9/03 N/A 11.50% N/A N/A
Northbrooke
Harris County, TX 240 Units 8/43 N/A 7.45% N/A N/A
Alexandrine
Detroit, MI 30 Units 12/03 N/A 11.00% N/A N/A
Subtotal First Mortgage Loans
Mezzanine Loans (G):
Stabilized Properties
---------------------
Stony Brook II (J)(N)(P)
East Haven, CT 125 Units 6/37 12/06 15.33% 16% 40%
Plaza at San Jacinto (K)(N)
Houston, TX 132 Units 1/43 6/11 11.40% 16% 50%
Subtotal Stabilized Mezzanine Loans
Properties in Lease-Up
----------------------
The Hollows (K)(N)
Greenville, NC 184 Units 1/42 1/12 10.00% 16% 50%
Elmhurst Village (J)(N)
Oveido, FL 313 Units 1/42 3/19 10.00% 16% 50%
The Reserve at Autumn Creek (J)(N)
Friendswood, TX 212 Units 1/42 9/14 10.00% 16% 50%
Subtotal Properties in Lease-Up
Properties in Construction
--------------------------
Club at Brazos (I)(N)(K)
Rosenberg, TX 200 Units 5/43 TBD 10.00% 14% 50%
Northbrooke (J)(N)
Harris County, TX 240 Units 8/43 TBD 11.50% 14% 50%
Del Mar Villas
Dallas, TX 260 Units 4/04 N/A LIBOR+4.625% (O) N/A
Mountain Valley
Dallas, TX 312 Units 11/04 N/A LIBOR+4.750% (O) N/A
Subtotal Properties in Construction
Subtotal Mezzanine Loans
Total Mortgage Loans
Interest
Earned
Applicable
to the
Share of Year
Excess Sale or Outstanding Unamortized Carrying Ended
Refinancing Periodic Face Amount of Costs and Amount of December
Property Proceeds Payment Terms Prior Liens Mortgages(C) Fees Mortages(D) 31, 2002
First Mortgage Loans:
Stony Brook II (E)(M)(P)
East Haven, CT N/A (F) -- $ 8,285 $ -- $ 8,285 $ 633
Sunset Gardens
Eagle Pass, TX N/A (H) -- 1,323 (14) 1,309 99
Northbrooke
Harris County, TX N/A (L) -- -- -- -- 16
Alexandrine
Detroit, MI N/A (H) -- 342 -- 342 15
---------------------------------------------
Subtotal First Mortgage Loans 9,950 (14) 9,936 763
---------------------------------------------
Mezzanine Loans (G):
Stabilized Properties
---------------------
Stony Brook II (J)(N)(P)
East Haven, CT 35% (H) $ 8,285 764 (113) 651 90
Plaza at San Jacinto (K)(N)
Houston, TX 50% (H) 6,522 1,250 (24) 1,226 149
---------------------------------------------
Subtotal Stabilized Mezzanine Loans 2,014 (137) 1,877 239
---------------------------------------------
Properties in Lease-Up
----------------------
The Hollows (K)(N)
Greenville, NC 25% (H) 8,915 1,549 (150) 1,399 191
Elmhurst Village (J)(N)
Oveido, FL 25% (H) 21,677(L) 2,874 (419) 2,455 319
The Reserve at Autumn Creek (J)(N)
Friendswood, TX 25% (H) 16,023(L) 1,987 (60) 1,927 192
---------------------------------------------
Subtotal Properties in Lease-Up 6,410 (629) 5,781 702
---------------------------------------------
Properties in Construction
--------------------------
Club at Brazos (I)(N)(K)
Rosenberg, TX 25% (H) 13,436 1,962 (77) 1,885 198
Northbrooke (J)(N)
Harris County, TX 50% (H) 10,475(L) 1,500 (136) 1,364 134
Del Mar Villas
Dallas, TX N/A (H) 5,554 765 -- 765 8
Mountain Valley
Dallas, TX N/A (H) 5,242 776 -- 776 6
---------------------------------------------
Subtotal Properties in Construction 5,003 (213) 4,790 346
---------------------------------------------
Subtotal Mezzanine Loans 13,427 (979) 12,448 1,287
---------------------------------------------
Total Mortgage Loans $ 23,377 $(993) $ 22,384 $ 2,050
=============================================
8
(A) Loans are subject to mandatory prepayment at the option of the Company ten
years after construction completion, with one year's notice. Loans with a
call date of "TBD" are still under construction.
(B) 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 and participation in sale or refinancing proceeds and certain
provisions that cap the Company's total yield, including additional
interest and participations, over the term of the loan.
(C) No principal amounts of mortgage loans are subject to delinquent interest
as of December 31, 2002.
(D) Carrying amounts of the loans are net of unamortized origination costs and
fees and loan discounts.
(E) Interest and principal payments on this first mortgage loan are insured by
the U.S. Department of Housing and Urban Development.
(F) Requires monthly payments of principal and interest based on a 40-year
amortization period. Loan is subject to five-year lockout against
prepayments, as well as a prepayment penalty structure during the second
five-year term of the loan.
(G) 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
36 months after construction completion by an entity related to the general
partner of the entity that owns the underlying property.
(H) Interest only payments are due monthly, with loan balance due at maturity.
(I) The funding of this mezzanine loan is based on property level operational
achievements.
(J) The Company has an interest in the first lien
position relating to this mezzanine loan.
(K) The Company does not have an interest in the first lien position relating
to this mezzanine loan.
(L) The first mortgage loans related to those properties were converted from
participations in FHA loans to ownership of the GNMA certificates and are
held by the Company.
(M) This first mortgage loan is pledged to secure the Company's obligation
under a first loss protection agreement with Fannie Mae - see Note 14 in
the accompanying consolidated financial statements.
(N) Lifetime interest cap represents the maximum annual return, including
interest, fees and participations, that can be earned by the Company over
the life of the mezzanine loan, computed as a percentage of the balance of
the first mortgage loan plus the mezzanine loan.
(O) Interest cap on these loans is the maximum rate permitted by law.
(P) The Stony Brook II first mortgage loan and mezzanine loan were repaid in
January 2003 - See Note 14 in the accompanying consolidated financial
statements.
9
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 National 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.
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.
The Company owns 800,000 preferred equity units of ARCap, with a face amount of
$25 per unit, representing a 7.27% ownership and voting interest. The preferred
equity units are convertible, at the Company's option, into ARCap common units.
If converted into common units, the conversion price is equivalent to $25 per
unit, subject to certain adjustments. Also, if not already converted, for a
period of sixty days following the fifth anniversary of the first closing date,
which will be August 4, 2005, the preferred equity units are convertible, at the
Company's option, into a three-year note bearing interest at 12% that would be
junior to all of ARCap's then existing indebtedness. The preferred equity units
are also redeemable, at the option of ARCap, up until the fifth anniversary of
the first closing date.
Through the Company's convertible preferred membership interests in ARCap, 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, 2002,
ARCap had $823 million in assets, including investments in $799 million of CMBS.
Multi-family 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
----------------------------------------
The Company entered into a loan program with Fannie Mae, which agreed to fully
fund the origination of $250 million of Delegated Underwriter and Servicer loans
for apartment properties that qualify for tax credits under the LIHTC program.
Under the loan program, the Company intended to originate and contract for
individual loans of up to $6 million each over a two-year period in conjunction
with American Property Financing, an unaffiliated third party, which would
underwrite and service the loans for Fannie Mae. The Company guarantees a first
loss position of up to $21.25 million, depending on the aggregate principal
amount of the loans the Company originates under this program and would receive
guaranty, loan origination and other fees. The Company also guarantees
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, 2002, the Company has
originated loans totaling approximately $3.3 million under the Fannie Mae
program and has made forward commitments for an additional approximate $4.0
million. The Company's maximum guaranty at December 31, 2002 was $7.3 million.
In order to conduct the program, the Company formed 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.
10
During August 2002, the Company purchased one first mortgage loan in the amount
of $342,000 due to a default on a construction loan that was 100% guaranteed by
the Company under the Fannie Mae program. The loan defaulted due to problems
relating to construction issues of Alexandrine Square, a 30-unit apartment
complex in Detroit, Michigan.
Subsequent to creating this program, the level of loan origination competition
has increased, reducing the program's projected financing value and
profitability. As a result, the Company decided in the first quarter of 2002 to
discontinue this program. The Company has reached an agreement in principle to
terminate this program and transfer its rights and obligations to a third party.
There can be no assurance, however, that this agreement will be consummated.
Accordingly, during the first quarter of 2002, the Company wrote off the balance
of unamortized deferred costs relating to this program. This write-off totaled
approximately $358,000 and is included in Fannie Mae loan program expenses in
the Consolidated Statement of Income.
The Fannie Mae loan program has not had, and its discontinuance is not
anticipated to have, a significant impact on the Company's financial condition
or results of operations.
The following table provides information relating to the loans originated and
forward commitments made on Fannie Mae's behalf.
(Dollars in thousands)
Loans Originated
----------------
Number of Loss
Apartment Sharing Fee
Property Location Units Loan Amount (annual rate)
---------------------- ---------------- --------- ----------- ------------
Valley View Cedar Rapids, IA 96 $2,187 0.36%
Maple Ridge Apartments Jackson, MI 69 1,137 0.52%
--------- -----------
Total 165 $3,324
--------- -----------
Forward Commitments
-------------------
Number of Loss
Apartment Sharing Fee
Property Location Units Loan Amount (annual rate)
----------------------- ---------------- --------- ----------- ------------
Cameron Creek Apartments Dade Country, FL 148 $3,000 0.35%
Desert View Apartments Coolidge, AZ 372 1,011 0.52%
--------- -----------
Total 520 $4,011
--------- -----------
Competition
-----------
The Company competes with various financial institutions in each of its lines of
business. The Company competes with banks and quasi-governmental agencies such
as Fannie Mae, Freddie Mac and HUD, as well as their designated mortgagees, for
multi-family loan product. 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'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.
11
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.
12
PART II
Item 5. Market for the Registrant's Common Equity and Related Shareholder
Matters.
As of March 20, 2003, there were 243 registered shareholders owning 6,363,630
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 common share prices for each quarterly period in the past two
fiscal years in which the Shares were traded is as follows:
2002 2002 2001 2001
Quarter Ended Low High Low High
------------- --------- --------- --------- ---------
March 31 $ 12.60 $ 14.70 $ 7.50 $ 11.25
June 30 $ 12.70 $ 14.09 $ 9.60 $ 12.00
September 30 $ 10.05 $ 13.60 $ 10.93 $ 15.50
December 31 $ 11.50 $ 14.09 $ 12.60 $ 14.80
The last reported sale price of Shares on the American Stock Exchange on March
20, 2003 was $15.62.
On February 25, 2002, the Company completed a public offering of 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,
were used to fund 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. Peter T. Allen and Arthur P. 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 (or in the initial year, as of December 31, 1999),
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 (i.e. 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 have been granted under this plan as of December 31, 2002.
Distribution Information
------------------------
Cash distributions per share for the years ended December 31, 2002 and 2001 are
as set forth in the following table:
(Dollars in thousands, except per share amounts)
Cash Distribution Total Amount
for Quarter Ended Date Paid Per Share Distributed
----------------- --------- --------- ------------
March 31, 2002 5/15/02 $ .3625 $ 2,308
June 30, 2002 8/14/02 .3750 2,386
September 30, 2002 11/14/02 .3750 2,386
December 31, 2002 2/14/03 .4000 2,545
--------- ---------
Total for 2002 $ 1.5125 $ 9,625
========= =========
March 31, 2001 5/15/01 $ .3625 $ 1,391
June 30, 2001 8/14/01 .3625 1,391
September 30, 2001 11/14/01 .3625 1,392
December 31, 2001 2/14/02 .3625 1,392
--------- ---------
Total for 2001 $ 1.4500 $ 5,566
========= =========
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
13
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.
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
to shareholders. The Company believes that it is in compliance with the
REIT-related provisions of the Code.
Of the total distributions of $9,624,992 and $5,566,015 for the years ended
December 31, 2002 and 2001, respectively, the year ended December 31, 2002 had
no return of capital and for 2001, $378,952 ($.10 per share or 6.81%)
represented a return of capital determined in accordance with generally accepted
accounting principles. As of December 31, 2002, 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 $14,462,307. 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.
(Dollars in thousands except per share amounts)
Year Ended December 31,
--------------------------------------------------------------
OPERATIONS 2002 2001 2000 1999 1998
---------- ---------- ---------- ---------- ---------- ----------
Total revenues $ 10,458 $ 5,698 $ 7,910 $ 5,507 $ 4,032
Total expenses 3,812 2,660 4,766 2,301 647
---------- ---------- ---------- ---------- ----------
Income before other gain 6,646 3,038 3,144 3,206 3,385
Total other gain
3,014 2,149 174 3,054 12
---------- ---------- ---------- ---------- ----------
Net income $ 9,660 $ 5,187 $ 3,318 $ 6,260 $ 3,397
========== ========== ========== ========== ==========
Net income per share (basic and diluted) $ 1.61 $ 1.35 $ .86 $ 1.63 $ .88
========== ========== ========== ========== ==========
Weighted average shares outstanding (basic
and diluted) 6,017,740 3,838,630 3,838,630 3,841,931 3,845,101
========== ========== ========== ========== ==========
December 31,
--------------------------------------------------------------
FINANCIAL POSITION 2002 2001 2000 1999 1998
------------------ ---------- ---------- ---------- ---------- ----------
Total assets $ 195,063 $ 101,982 $ 70,438 $ 115,565 $ 59,993
========== ========== ========== ========== ==========
Repurchase facility payable $ 87,880 $ 43,610 $ 12,656 $ 19,127 $ --
========== ========== ========== ========== ==========
Warehouse facility payable $ 8,788 -- -- -- --
========== ========== ========== ========== ==========
Total liabilities $ 100,725 $ 46,703 $ 15,362 $ 58,474 $ 1,788
========== ========== ========== ========== ==========
Total shareholders' equity $ 94,338 $ 55,279 $ 55,076 $ 57,091 $ 58,205
========== ========== ========== ========== ==========
DISTRIBUTIONS
-------------
Distributions to shareholders $ 9,625 $ 5,566 $ 5,566 $ 5,544 $ 5,567
========== ========== ========== ========== ==========
Distribution per share $ 1.513 $ 1.450 $ 1.450 $ 1.444 $ 1.450
========== ========== ========== ========== ==========
14
Item 7. Management's Discussion and Analysis of Financial Condition and Results
of Operations.
Results of Operations
---------------------
Comparison of Years Ended December 31, 2002 and 2001
Interest income from mortgage loans decreased approximately $723,000 for the
year ended December 31, 2002 as compared to 2001 due to the sale of the
Columbiana mortgage during 2001 offset by additional construction period
interest received from the Club at Brazos and Northbrooke. The decrease can also
be attributed to the conversion of the Hollows, Elmhurst Village and Autumn
Creek mortgages to GNMA certificates; the interest income on these assets was
included in interest income from mortgage loans prior to conversion and in
interest income from GNMA certificates after the conversion. Conversely,
interest income from GNMA certificates increased approximately $3.5 million for
the year ended December 31, 2002 as compared to 2001 primarily due to the
conversion of these three mortgage loans to GNMA certificates and the purchase
of an additional six GNMA certificates in 2002 offset by the loss of interest
income from the Hollows GNMA certificate which was sold in March of 2002. The
increase in interest income from GNMA certificates and the decrease in interest
income from mortgage loans were, in part, a result of the interest income earned
by these loans converted to GNMA certificates subsequent to the conversion. No
gains or losses resulted from the conversion.
Interest income from notes receivable increased approximately $1.8 million, for
the year ended December 31, 2002 as compared to 2001, primarily due to the
addition of nine notes receivable during 2001 and 2002 offset by the paydown of
the Sunset Bay note.
Other income increased approximately $212,000, for the year ended December 31,
2002 as compared to 2001, primarily due to the collection of loan extension fees
from Autumn Creek during 2002.
Interest expense decreased approximately $178,000, for the year ended December
31, 2002 as compared to 2001, primarily due to the net effect of lower interest
rates on repurchase facility borrowings and increased leverage.
General and administrative expenses increased approximately $45,000, for the
year ended December 31, 2002 as compared to 2001, primarily due to an increase
in the write-off of deferred loan origination costs associated with the pursuit
of investments that were not completed, higher accounting fees and legal
expenses offset by a decrease in unused Nomura Asset Capital Corporation fees
and amortization.
Fees to manager increased approximately $927,000, for the year ended December
31, 2002 as compared to 2001, due to an increase in the Company's assets and an
increase in the reimbursements of certain administrative and other costs
incurred by the Advisor on behalf of the Company. The Company also paid to the
Advisor an incentive management fee of approximately $235,000 for 2002; no such
fee was paid in 2001.
During the year ended December 31, 2002, the Company recognized approximately
$358,000 in Fannie Mae loan program expenses associated with the write-off of
the unamortized deferred costs related to this program, which is being
discontinued. The Company has not recognized significant fee income from this
program. Except for the write-off of the program costs, this program has not,
and its discontinuance is not anticipated to have a significant impact on the
Company's financial position or results of operation.
A gain on the sale or repayment of GNMAs and mortgage loans increased
approximately $865,000, for the year ended December 31, 2002 as compared to
2001, primarily due to the sale of the Hollows GNMA in March of 2002 versus the
loss on repayment of the Columbiana loans in 2001. Although the Company intends
to hold its GNMA certificates until maturity, it elected "available for sale"
designation under SFAS 115 to give it the flexibility to liquidate those asset
if business conditions require. The Company decided to sell the Hollows GNMA
when it received an unsolicited offer at an extremely favorable price.
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. The increase was
primarily a result of the interest income earned by these loans converted to
GNMA certificates subsequent to the conversion. No gain or loss resulted from
the conversion.
Interest income from CMBS-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.
15
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 repurchase
facility used to finance the CMBS-related investment 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 CMBS-related
investment and a decrease in the expense reimbursement charged by the Advisor.
Amortization increased approximately $28,000 due to acceleration of the
amortization of deferred costs relating to the Nomura Repurchase Facility, which
was not renewed.
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.
Acquisitions
------------
During the year ended December 31, 2002, the Company made the following
investments:
Mezzanine Loans
On March 28, 2002, the Company funded an initial advance of $1.5 million on a
total potential mezzanine loan of approximately $2.2 million secured by a
240-unit apartment complex project known as Northbrooke located in Houston,
Texas. The loan is subordinate to a first mortgage loan of approximately $6.1
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 11.50%.
Bridge Loans
On January 28, 2002, the Company entered into a commitment to fund a maximum
bridge loan of up to $4.6 million, secured by a 528-unit apartment complex
located in Long Beach, California, known as Parwood. At December 31, 2002, the
Company has funded approximately $3 million. The Company received a 1% fee for
the bridge loan, which bears an interest rate of 11% and matures in January
2004.
On February 27, 2002, the Company fully funded a bridge loan of $3.5 million,
secured by a 276-unit apartment complex located in Houston, Texas, known as
Concord at Little York. The Company received a 1.25% fee for the bridge loan,
which bears an interest rate of 12% and matures in February 2004.
On May 8, 2002, the Company fully funded a bridge loan of $3.5 million, secured
by a 288-unit apartment complex located in Houston, Texas, known as Concord at
Gulfgate. The Company received a 2% fee for the bridge loan, which bears an
interest rate of 12% and matures in May 2004.
On October 31, 2002, the Company funded an acquisition bridge loan and mezzanine
loan totaling approximately $6.3 million for Del Mar Villas, a 260-unit
multi-family apartment complex located in Dallas, Texas. In connection with the
funding of the bridge loan, the Company borrowed approximately $4.6 million from
its warehouse facility with Fleet Bank. These loans, which mature April 2004,
bear an interest rate of LIBOR + 462.5 basis points. Payments on these loans are
interest only for the full 18-month term. The Company received a loan
origination fee of 1.5%.
On November 20, 2002, the Company funded an acquisition bridge loan and
mezzanine loan totaling approximately $6 million for Mountain Valley, a 312-unit
multi-family apartment complex located in Dallas, Texas. The Company will fund
an additional $1.1 million during the rehabilitation stage of this property. In
connection with the funding of the bridge loan, the Company has borrowed
approximately $4.2 million from its warehouse facility with Fleet Bank. These
loans, which mature November 2004, bear an interest rate of LIBOR + 475 basis
points. Payments on these loans are interest only for the full 24-month term.
The Company received a loan origination fee of 1% of the amount of these loans.
On November 25, 2002, the Company fully funded a predevelopment bridge loan of
approximately $1.4 million secured by an apartment complex development project
known as Reserve at Fox River Apartments. The Company received a 1% fee for the
bridge loan, which bears interest at a rate of 12% and matures in May 2003.
16
Liquidity and Capital Resources
-------------------------------
During the year ended December 31, 2002, cash and cash equivalents increased
approximately $9.4 million primarily due to proceeds from repurchase and
warehouse facilities payable, approximately $53.1 million, net proceeds from the
common share offering, approximately $31 million, and cash provided by operating
activities, approximately $8.3 million, offset by investments in GNMA
Certificates, approximately $55.6 million, funding of notes receivable,
approximately $22.3 million, and distributions to shareholders, approximately
$8.5 million.
The net unrealized gains on GNMA investments included in shareholders' equity
aggregated $8,702,929 at December 31, 2002 consisted of gross unrealized gains
and losses of $8,730,076 and $27,147 respectively. This represents an increase
of $8,142,542 from the unrealized gain of $560,387 at December 31, 2001.
The Company finances the acquisition of its assets primarily through borrowing
at short-term rates using demand repurchase agreements and the mortgage
warehouse line of credit (see below). 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. On
February 25, 2002, the Company completed a public offering of 2.5 million common
shares at a price of $13.50 per share. The net proceeds of approximately $31
million, net of underwriter's discount and expenses, were used to fund
investments. In October 2002, the Company filed a registration statement with
the Securities and Exchange Commission with respect to its common and preferred
shares. If market conditions warrant, the Company may seek to raise additional
funds for investment through further common and/or preferred offerings in the
future, although the timing and amount of such offerings cannot be determined at
this time.
Effective February 15, 2000, the Company entered into a repurchase facility with
Nomura Securities International Inc. 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, which are pledged as collateral for
the borrowings. Up until May 2002, interest on borrowings were at LIBOR plus
0.50%. Subsequent to May 2002, interest on borrowings decreased to LIBOR plus
0.05%. As of December 31, 2002 and 2001, the amount outstanding under this
facility was approximately $87.9 and $43.6 million, respectively, and interest
rates were 1.47% and 2.58%, respectively. All borrowings under this facility
typically have 30-day settlement terms. However, the Company has the option to
shorten or extend the length of the settlement terms at its discretion. The
Company has not experienced any problems when renewing its borrowing and
management believes it will be able to continue to renew its borrowings when
due. If the Company were unable to renew such borrowings with Nomura, it would
have to either find replacement financing or sell assets at prices which may be
below market value.
In October 2002, the Company entered into the Fleet Warehouse Facility with
Fleet National Bank ("Fleet") in the amount of $40 million. Advances under the
Fleet Warehouse Facility, up to 83% of the total loan package, will be used to
fund first mortgage loans, which the Company will make to its customers for the
acquisition/refinancing and minor renovation of existing, lender-approved
multi-family properties located in stable sub-markets. The Fleet Warehouse
Facility, which matures April 2006, bears an interest rate of LIBOR + 200 basis
points (3.46% and 3.42% for Del Mar Villas and Mountain Valley loans,
respectively, at December 31, 2002), payable monthly on advances. Principal is
due upon the earlier of refinance or sale of the underlying project or upon
maturity. The Company will pay a fee of 12.5 basis points, paid quarterly, on
any unused portion of the Fleet Warehouse Facility. As of December 31, 2002, the
Company had approximately $8.8 million in loans outstanding under this program.
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.
Critical Accounting Policies
----------------------------
In preparing the consolidated financial statements, management has made
estimates and assumptions that affect the reported amounts of assets and
liabilities at the date of the financial statements and the reported amounts of
revenues and expenses during the reporting periods. Actual results could differ
from those estimates. Set forth below is a summary of the accounting policies
that management believes are critical to the preparation of the consolidated
financial statements. The summary should be read in conjunction with the more
complete discussion of the Company's accounting policies included in Note 2 to
the consolidated financial statements in this annual report on Form 10-K.
The Company's portfolio of mortgage loans and notes is periodically evaluated
for possible impairment to establish appropriate loan loss reserves, if
necessary. The Company's Advisor has a credit review committee which meets each
month. This committee reviews the status of each of the Company's loans and
notes, and maintains a "watch list" of loans (including loans for which the
Company has issued guarantees) for which the underlying property may be
experiencing construction cost overruns, delays in construction completion,
occupancy shortfalls, lower than expected debt service coverage ratios, or other
matters which might cause the borrower to be unable to make the interest and
principal payments as scheduled in the loan agreement. If a loan is experiencing
difficulties, members of this credit committee work with the borrower to try to
resolve the issues, which could include extending the loan term, making
additional advances, or reducing required payments. If, in the judgment of
Company management, it is determined that is probable that the Company will not
receive all contractually required payments when they are due, the loan or note
would be deemed impaired, and a loan loss reserve established. As of December
31, 2002, all mortgage loans and notes are current and management has determined
that none of these assets are impaired and that no loan loss reserve is
necessary.
17
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. The
Company uses quoted market prices as its primary source of valuation
information.
During 2001, the Company converted three of its first mortgage loans into
investments in GNMA certificates. The conversion was made solely to improve the
leveragability of the debt instruments from 80% as an FHA mortgage to 95% as a
GNMA certificate, and to reduce the interest rate on the associated borrowings
from LIBOR + 125 bps to LIBOR + 5 bps. It is the Company's intention to hold its
GNMA certificates to maturity, but the Company elected the "available for sale"
designation under SFAS 115 to give it the flexibility to liquidate these assets
if business conditions require. The first mortgage loans remaining in the
portfolio will not be converted to GNMA certificates and, along with future
originations of first mortgage loans, are intended to be held to maturity.
The Company's mezzanine investments of approximately $12.4 million at December
31, 2002 bear interest at fixed rates, but also include provisions that allow
the Company to participate in a percentage of the underlying property's excess
cash flows from operations and excess proceeds from a sale or refinancing. At
the inception of each such investment, Company management must determine whether
such investment should be accounted for as a loan, joint venture or as real
estate, using the guidance contained in the Third Notice to Practitioners issued
by the AICPA. Although the accounting methodology does not affect the Company's
cash flows from these investments, this determination affects the balance sheet
classification of the investments as well as the classification, timing and
amounts of reported earnings.
Accounting for the investment as real estate is required if the Company expects
that the amount of profit, whether called interest or another name, such as an
equity kicker, that it expects to receive above a reasonable amount of interest
and fees, is over 50 percent of the property's total expected residual profit.
If a mezzanine investment were to be accounted for as an investment in real
estate, the Company's balance sheet would show the underlying property and its
related senior debt (if such debt were not also held by the Company), and the
income statement would include the property's rental revenues, operating
expenses and depreciation.
If the Company expects that it will receive less than 50 percent of the
property's residual profit, then loan or joint venture accounting is applied.
Loan accounting is appropriate if the borrower has a substantial equity
investment in the property, if the Company has recourse to substantial assets of
the borrower, if the property is generating sufficient cash flow to service
normal loan amortization, or if certain other conditions are met. Under loan
accounting, the Company recognizes interest income as earned and additional
interest from participations as received. Joint venture accounting would require
that the Company only record its share of the net income from the underlying
property.
Company management must exercise judgment in making the required accounting
determinations. For each mezzanine arrangement, the Company projects total cash
flows over the loan's term and the Company's share in those cash flows, and
considers the borrower's equity, 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.
Based on the Company's experience with similar arrangements, management has
taken the position that the likelihood that any of the commitments, with the
exception of a standby bridge loan commitment granted to fund the construction
of Clark's Crossing Apartments in the approximate amount of $1.7 million, will
be exercised is remote. Therefore, the fees received for a commitment to
originate a loan are recognized over the commitment period on a straight-line
basis in other income. If however, management believes that the likelihood that
the commitments will be exercised is possible or probable, the commitment fees
will be deferred and, if the commitment is exercised, recognized over the life
of the loan as an adjustment of yield, or, if the commitment expires
unexercised, recognized in other income upon expiration of the commitment.
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.
Commitments and Contingencies
-----------------------------
The Company entered into a loan program with Fannie Mae, which 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 loan program, the Company
intended to originate and contract for individual loans of up to $6 million each
over a two-year period in conjunction with American Property Financing, an
unaffiliated third party, which would underwrite and service the loans for
Fannie Mae. The Company guarantees a first loss position of up to $21.25
million, depending on the aggregate principal amount of the loans the Company
originates under this program and would receive guaranty, loan origination and
other fees. The Company also guarantees 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, 2002, the Company has originated loans totaling
approximately $3.3 million under the Fannie Mae program and has made forward
commitments for an additional approximate $4.0 million. The Company's maximum
guaranty at December 31, 2002 was $7.3 million.
During August 2002, the Company purchased one first mortgage loan in the amount
of $342,000 due to a default on a construction loan that was 100% guaranteed by
the Company under the Fannie Mae program. The loan defaulted due to problems
relating to construction issues of Alexandrine Square, a 30-unit apartment
complex in Detroit, Michigan.
18
Subsequent to creating this program, the level of loan origination competition
has increased, reducing the program's projected financing value and
profitability. As a result, the Company decided in the first quarter of 2002 to
discontinue this program. The Company has reached an agreement in principle to
terminate this program and transfer its rights and obligations to a third party.
There can be no assurance, however, that this agreement will be consummated.
Accordingly, during the first quarter of 2002, the Company wrote off the balance
of unamortized deferred costs relating to this program. This write-off totaled
approximately $358,000 and is included in Fannie Mae loan program expenses in
the Consolidated Statement of Income.
Except for the write-off of the program costs described above, the Fannie Mae
loan program has not had, and its discontinuance is not anticipated to have, a
significant impact on the Company's financial condition or results of
operations.
The following table provides information relating to the loans originated and
forward commitments made on Fannie Mae's behalf.
(Dollars in thousands)
Loans Originated
----------------
Number of Loss
Apartment Sharing Fee
Property Location Units Loan Amount (annual rate)
---------------------- ---------------- --------- ----------- -----------
Valley View Cedar Rapids, IA 96 $2,187 0.36%
Maple Ridge Apartments Jackson, MI 69 1,137 0.52%
--------- -----------
Total 165 $3,324
--------- -----------
Forward Commitments
-------------------
Number of Loss
Apartment Sharing Fee
Property Location Units Loan Amount (annual rate)
----------------------- ---------------- --------- ----------- -----------
Cameron Creek Apartments Dade Country, FL 148 $3,000 0.35%
Desert View Apartments Coolidge, AZ 372 1,011 0.52%
--------- -----------
Total 520 $4,011
--------- -----------
19
Standby and Forward Loan and GNMA Commitments
---------------------------------------------
During 2002, the Company issued the following standby and forward bridge and
permanent loan commitments for the purpose of constructing/rehabilitating
certain multi-family apartment complexes in various locations.
(Dollars in thousands)
Standby and
Forward Bridge Loan Commitments
-------------------------------
Maximum Amount of Commitments
------------------------------------------
Issue Date Project Location No. of Apt. Units Less than 1 Year 1-3 Years
------------------------------------------------------------------------------------------------------------------------------------
Jan-02 Parwood Long Beach, CA 528 $ -- $ 1,578(3)
Jan-02 Valley View/Summertree (7) Little Rock, AK 240 400(1)(4) --
May-02 McMullen Square San Antonio, TX 100 400(8)(4) --
Jul-02 Clark's Crossing Apartments Laredo, TX 160 -- 1,649(2)(5)
Nov-02 Mountain Valley Dallas, TX 312 -- 1,065(3)
--------------------------------------------------------------------
Total Standby Bridge Loan Commitments 1,340 $ 800 $ 4,292
====================================================================
Standby and Forward Permanent Loan
Commitments
----------------------------------
Maximum Amount of Commitments
------------------------------------------
Issue Date Project Location No. of Apt. Units Less than 1 Year 1-3 Years
------------------------------------------------------------------------------------------------------------------------------------
Mar-02 Sunset Gardens Eagle Pass, TX 60 $ 177(3) --
May-02 Highland Park Topeka, TX 200 4,250(1)(5)(6) --
--------------------------------------------------------------------
Total Standby and Forward Permanent Loan Commitments 260 $ 4,427 --
====================================================================
20
Forward GNMA Commitments
------------------------
Maximum Amount of Commitments
--------------------------------------------------------------------
Date Purchased Project Less than 1 Year 1-3 Years
--------------------------------------------- --------------------------------------------------------------------
Mar-02 Cantera Crossing $ 973 (3) $ --
Mar-02 Fillmore Park 235 (3) --
Mar-02 Casitas at Montecito 708 (3) --
May-02 Ellington Plaza 27,114 (3) --
N/A Northbrooke 3,415 (3) --
--------------------------------------------------------------------
Total Forward GNMA Commitments $32,445 --
--------------------------------------------------------------------
Total Standby and Forward Loan and GNMA Commitments $37,672 $ 4,292
====================================================================
(1) Funding not anticipated to occur.
(2) Initial funding in the amount of $550,000 has occurred during March 2003.
Remaining fundings are on an as needed basis.
(3) Funding has already begun. Amount represents remaining commitment to be
funded.
(4) The Company received a loan commitment fee of 2.50% for issuing the
commitment.
(5) The Company received a loan commitment fee of 2.00% for issuing the
commitment.
(6) The Company will receive a 1% loan origination fee if funding occurs.
(7) The first mortgage bond relating to these apartments is held by Charter
Municipal Mortgage Acceptance Company ("CharterMac"), a publicly traded
company which is managed by an affiliate of the Advisor.
(8) Expired in February 2003.
21
Construction Loan Guarantees
----------------------------
During 2002, the Company has guaranteed the following loans in relation to the
construction of affordable multi-family apartment complexes in various
locations. The construction loan guarantees will provide credit support for the
following projects after construction completion, up until the date in which
permanent financing takes place.
During October 2002, the Company entered into an agreement with Wachovia Bank,
National Association ("Wachovia") to provide stabilization guarantees for new
construction of multi-family properties under the LIHTC program. Wachovia
already provides construction and stabilization guarantees to Fannie Mae, for
loans Wachovia originates under the Fannie Mae LIHTC forward commitment loan
program, but only for loans within regions of the country Wachovia has
designated to be within its territory. For loans outside Wachovia's territory,
the Company has agreed to issue a stabilization guarantee, for the benefit of
Wachovia. The Company is guarantying that properties which have completed
construction will stabilize and the associated construction loans will convert
to permanent Fannie Mae loans. The Company receives origination and guarantee
fees from the developers for providing the guarantees. If the properties do not
stabilize with enough Net Operating Income for Fannie Mae to fully fund their
commitment, AMAC may be required to purchase the construction loan from Wachovia
or to fund the difference between the construction loan amount and the reduced
Fannie Mae Permanent Loan Amount.
(Dollars in thousands)
Maximum Amount of
Guarantee
Loan Administra- Construction
Less than 1 tion Fee(1) Guarantee
Date Closed Project Location No. of Units Year 1-3 Years (annual percentage) Fee (2)
------------------------------------------------------------------------------------------------------------------------------------
Jul-02 Clark's Crossing Laredo, TX 160 $ 4,790 $ -- 0.500% 0.625%
Sept-02 Creekside Apts. Colorado Springs, CO 144 7,500 -- 0.375% --
Oct-02 Village at Meadowbend Temple, TX 138 -- 3,675 0.500% 0.750%
Nov-02 Mapleview Apartments (3) Saginaw, MI 104 -- 3,240 0.625% 0.247%
--------------------------------------------------------------------
546 $ 12,290 $ 6,915
====================================================================
(1) Loan Administration Fee is paid on a monthly basis during the guarantee
period.
(2) Construction Guarantee Fee is an up-front fee - paid at closing and
amortized over the guarantee period.
(3) Guarantee was made under Wachovia Bank, National Association Guarantee
Agreement.
For each of these guarantees, and for the guarantees issued under the FNMA
program discussed in the first paragraph of Note 13 in the accompanying
consolidated financial statements, the Company monitors the status of the
underlying properties and evaluates its exposure under the guarantees. To date,
the Company has concluded that no accrual for probable losses is required under
SFAS 5.
22
Distributions
-------------
Of the total distributions of $9,624,992 and $5,561,015 for the years ended
December 31, 2002 and 2001, respectively, the year ended December 31, 2002 had
no return of capital and for 2001, $378,952 ($.10 per share or 6.81%)
represented a return of capital determined in accordance with generally accepted
accounting principles. As of December 31, 2002, 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 $14,462,307. 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 ("FASB") 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 consolidated financial statements.
In June 2001, the FASB issued SFAS No. 143, "Accounting for Asset Retirement
Obligations". SFAS No. 143 requires the fair value of a liability or an asset
retirement obligation to be recorded in the period in which it is incurred. SFAS
No. 143 is not effective until January 1, 2003. Management does not anticipate
that the implementation of this statement will have a material impact on the
Company's consolidated financial statements.
In August 2001, the FASB issued Statement No. 144, "Accounting for the
Impairment or Disposal of Long Lived Assets". 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 implemented SFAS No. 144 on January 1,
2002. Implementation of SFAS No. 144 did not have a material impact on the
Company's consolidated financial statements.
In April 2002, the FASB issued Statement No. 145 "Rescission of FASB Statements
No. 4, 44 and 64, Amendment of FASB Statement No. 13 and Technical Corrections".
SFAS No. 145 among other things, rescinds SFAS No. 4, "Reporting Gains and
Losses from Extinguishment of Debt", and accordingly, the reporting of gains and
losses from the early extinguishments of debt as extraordinary items will only
be required if they meet the specific criteria for extraordinary items included
in Accounting Principles Board Opinion No. 30, "Reporting the Results of
Operations". The rescission of SFAS No. 4 is effective January 1, 2003.
Management does not anticipate that the implementation of this statement will
have a material impact on the Company's consolidated financial statements.
In July 2002, the FASB issued Statement No. 146, "Accounting for Costs
Associated with Exit or Disposal Activities". SFAS No. 146 replaces current
accounting literature and requires the recognition of costs associated with exit
or disposal activities when they are incurred rather than at the date of a
commitment to an exit or disposal plan. SFAS No. 146 is not effective until
January 1, 2003. Management does not anticipate that the implementation of this
statement will have a material effect on the Company's consolidated financial
statements.
In November 2002, the FASB issued Interpretation No. 45, Guarantors' Accounting
and Disclosure Requirements for Guarantees, Including Indirect Guarantees of
Indebtedness of Others. The Interpretation elaborates on the disclosures to be
made by a guarantor in its financial statements about its obligations under
certain guarantees that it has issued. It also clarifies that a guarantor is
required to recognize, at the inception of a guarantee, a liability for the fair
value of the obligation undertaken in issuing the guarantee. This Interpretation
does not prescribe a specific approach for subsequently measuring the
guarantor's recognized liability over the term of the related guarantee. The
disclosure provisions of this interpretation are included in Note 13. The
initial recognition and initial measurement provisions of this Interpretation
are applicable on a prospective basis to guarantees issued or modified after
December 31, 2002. The Company currently receives a fee, in advance, for acting
as guarantor of certain construction loans. This fee is deferred and amortized
over the guarantee period. The Company believes that the fee received
approximates the fair value of the obligation undertaken in issuing the
guarantee; therefore, the Company's current accounting for these guarantees will
not be affected by this Interpretation. The Company has ceased making new
guarantees under its Fannie Mae DUS program and is in the process of
transferring its rights and obligations under this program to a third party;
therefore, this Interpretation will not have an impact on the accounting for
these guarantees.
In January 2003, the FASB issued Interpretation No. 46, Consolidation of
Variable Interest Entities. This Interpretation clarifies the application of
existing accounting pronouncements to certain entities in which equity investors
do not have the characteristics of a controlling financial interest or do not
have sufficient equity at risk for the entity to finance its activities without
additional subordinated financial support from other parties. The provisions of
the Interpretation will be immediately effective for all variable interests in
variable interest entities created after January 31, 2003, and the Company will
need to apply its provisions to any existing variable interest in variable
interest entities by no later than July 1, 2003. The Company is in the process
of evaluating all of its mezzanine loans, which may be deemed variable interests
in variable interest entities under the provision of FIN 46. The real estate
entities whose ownership interests collateralize these loans have assets
totaling approximately $110,000,000 at December 31, 2002. The Company's maximum
exposure to loss represents its recorded investment in these loans, totaling
23
$12,448,000 at December 31, 2002. The Company believes that some, and possibly
all, of these investments may not ultimately fall under the provisions of FIN 46
and, accordingly, continue to be accounted for as loans and not consolidated as
investments in real estate. The Company cannot make any definitive conclusion
until it completes its evaluation.
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 7 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 are exposed is interest rate
risk, which is 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 risk
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, 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 and warehouse agreements bear interest at rates that fluctuate with
LIBOR. Based on the approximate $96.7 million of borrowings outstanding under
these facilities at December 31, 2002, a 1% change in LIBOR would impact the
Company's annual net income and cash flows by approximately $967,000. Increases
in these rates will 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
Multi-family 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
24
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 $20.2 million 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.
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.
25
Item 8. Financial Statements and Supplementary Data.
Page
(a) 1. Financial Statements ---------
--------------------
Independent Auditors' Report 27
Consolidated Balance Sheets as of
December 31, 2002 and 2001 28
Consolidated Statements of Income
for the years ended December 31,
2002, 2001 and 2000 29
Consolidated Statements of Changes
in Shareholders' Equity for the
years ended December 31, 2002, 2001
and 2000 30
Consolidated Statements of Cash
Flows for the years ended December
31, 2002, 2001 and 2000 31
Notes to Consolidated Financial Statements 33
(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.
26
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,
2002 and 2001, 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, 2002. 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, 2002 and 2001, and the results of
their operations and their cash flows for each of the three years in the period
ended December 31, 2002, in conformity with accounting principles generally
accepted in the United States of America.
/s/ DELOITTE & TOUCHE LLP
New York, New York
March 21, 2003
27
AMERICAN MORTGAGE ACCEPTANCE COMPANY AND
SUBSIDIARIES CONSOLIDATED BALANCE SHEETS
(Dollars in thousands)
ASSETS
December 31,
--------------------
2002 2001
--------------------
Investments in mortgage loans, net $ 22,384 $ 17,799
Investments in GNMA certificates-available for sale 114,034 50,060
Investment in ARCap 20,240 20,246
Cash and cash equivalents 10,404 1,018
Notes receivable, net 25,997 11,373
Accrued interest receivable 1,170 570
Other assets 834 916
-------- -------
Total assets $195,063 $101,982
======== ========
LIABILITIES AND SHAREHOLDERS' EQUITY
Liabilities:
Repurchase facilities payable $ 87,880 $ 43,610
Warehouse facility payable 8,788 --
Accounts payable and accrued expenses 822 1,370
Due to Advisor and affiliates 690 331
Distributions payable 2,545 1,392
-------- --------
Total liabilities 100,725 46,703
-------- --------
Commitments and contingencies
Shareholders' equity:
Shares of beneficial interest; $.10 par value; 25,000,000
shares authorized; 6,738,826 issued and 6,363,630
outstanding and 4,213,826 issued and 3,838,630
outstanding in 2002 and 2001, respectively 674 421
Treasury shares of beneficial interest;
375,196 shares (38) (38)
Additional paid-in capital 99,470 68,841
Distributions in excess of net income (14,471) (14,505)
Accumulated other comprehensive income 8,703 560
-------- --------
Total shareholders' equity 94,338 55,279
-------- --------
Total liabilities and shareholders' equity $195,063 $101,982
======== ========
See accompanying notes to consolidated financial statements.
28
AMERICAN MORTGAGE ACCEPTANCE COMPANY AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
(Dollars in thousands except per share amounts)
Years Ended December 31,
-----------------------------------
2002 2001 2000
-----------------------------------
Revenues:
Interest income:
Mortgage loans $ 2,050 $ 2,773 $ 1,565
GNMA certificates 5,769 2,294 473
Commercial mortgage-backed
security-related investment -- -- 3,190
Notes receivable 2,270 451 529
Temporary investments 50 73 2,084
Other income 319 107 69
----------- --------- ---------
Total revenues 10,458 5,698 7,910
----------- --------- ---------
Expenses:
Interest 1,228 1,406 3,372
General and administrative 706 661 633
Fees to Advisor 1,520 593 761
FNMA loan program 358 -- --
----------- --------- ---------
Total expenses 3,812 2,660 4,766
----------- --------- ---------
Other gain (loss):
Equity in earnings of ARCap 2,400 2,400 401
Net loss on commercial
mortgage-backed security-
related investment and
government security sold short -- -- (299)
Net gain (loss) on sale or repayment of
mortgage loans and GNMA
certificates 614 (251) 72
----------- --------- ---------
Total other gain 3,014 2,149 174
----------- --------- ---------
Net income $ 9,660 $ 5,187 $ 3,318
=========== ========= =========
Net income per share
(basic and diluted) $ 1.61 $ 1.35 $ .86
=========== ========= =========
Weighted average
shares outstanding
(basic and diluted) 6,017,740 3,838,630 3,838,630
=========== ========= =========
See accompanying notes to consolidated financial statements.
29
AMERICAN MORTGAGE ACCEPTANCE COMPANY AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS'EQUITY
FOR THE YEARS ENDED DECEMBER 31, 2002, 2001 AND 2000
(Dollars in thousands)
Accum-
Treasury Shares of lated Other
Shares of Beneficial Beneficial Additional Distributions Comprehen- Comprehen-
Interest Interest Paid-in in Excess sive sive
Shares Amount Shares Amount Capital of Net Income Income Income Total
---------- --------- -------- ------- ---------- -------------- ---------- ---------- --------
Balance at January 2000 4,213,826 $ 421 (375,196) $ (38) $ 68,841 $ (11,878) $ (255) $ 57,091
Comprehensive income:
Net income 3,318 $ 3,318 3,318
Other comprehensive income:
Net unrealized holding gain
arising during the period 291
Less: reclassification adjustment
for gains included in net income (58)
----------
Other comprehensive income 233 233 233
----------
Comprehensive income $ 3,551
==========
Distributions (5,566) (5,566)
------------------------------------------------------------------- --------------------
Balance at December 31, 2000 4,213,826 421 (375,196) (38) 68,841 (14,126) (22) 55,076
Comprehensive income:
Net income 5,187 $ 5,187 5,187
Other comprehensive income:
Net unrealized holding gain arising
during the period 582 582 582
---------
Comprehensive income $ 5,769
=========
Distributions (5,566) (5,566)
-------------------------------------------------------------------- --------------------
Balance at December 31, 2001 4,213,826 421 (375,196) (38) 68,841 $ (14,505) 560 55,279
Comprehensive income:
Net income 9,660 $ 9,660 9,660
Other comprehensive income:
Unrealized holding gain arising
during the period
Less:reclassification adjustment 8,757
for gain included in net income (614)
---------
Total other comprehensive gain 8,143 8,143 8,143
---------
Comprehensive income $ 17,803
=========
Issuance of common shares 2,525,000 253 30,629 30,882
Distributions
(9,626) (9,626)
---------------------------------------------------------------- --------------------
Balance at December 31, 2002 6,738,826 $ 674 $(375,196) $ (38) $ 99,470 $ (14,471) $ 8,703 $ 94,338
================================================================ ========== =========
See accompanying notes to consolidated financial statements.
30
AMERICAN MORTGAGE ACCEPTANCE COMPANY AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Dollars in thousands)
Years Ended December 31,
---------------------------------
2002 2001 2000
---------------------------------
Cash flows from operating activities:
Net income $ 9,660 $ 5,187 $ 3,318
Adjustments to reconcile net income to net
cash provided by operating activities:
Net loss on commercial mortgage-backed
security-related investment and government
security sold short -- -- 299
Net loss (gain) on repayment of GNMA
certificates and mortgage loans (614) 251 (72)
FNMA loan program 358 -- --
Equity in earnings of ARCap (2,400) (2,400) (401)
Equity in income of unconsolidated
subsidiary -- -- (9)
Amortization - deferred financing costs 6 113 92
Amortization (income) expense-loan premium
and origination costs and fees (89) 79 163
Accretion of GNMA discount (premium) 23 (22) (22)
Accretion of discount on commercial
mortgage-backed security-related
investment -- -- (653)
Government security sold short -- -- 33,541
Purchase of government securities sold
short -- -- (72,329)
Changes in operating assets and liabilities:
Investment in commercial mortgage-
backed security-related investment -- -- 36,764
Deposit with broker as collateral for
security sold short -- -- 37,733
Accrued interest receivable (599) 111 499
Other assets 385 (410) (355)
Due to Advisor and affiliates 359 (638) 575
Accounts payable and
accrued expenses (586) 1,069 240
Accrued interest payable 39 (6) (380)
---------- --------- --------
Net cash provided by operating activities 6,542 3,334 39,003
---------- --------- --------
Cash flows from investing activities:
Increase in investment in mortgage loans (4,542) (24,661) (21,487)
Proceeds from repayments of mortgage loans -- 9,245 9,995
Periodic principal payments of mortgage loans 46 85 62
Funding of notes receivable (22,307) (9,959) (7,414)
Repayment of notes receivable 7,683 -- 6,000
Investment in ARCap preferred stock -- -- (20,000)
Distribution from ARCap 2,406 2,196 --
Principal repayments of GNMA certificates 526 346 3,927
Investment in GNMA certificates (55,768) (6,506) --
Costs relating to repayment of mortgage loans -- (39) (59)
---------- --------- --------
Net cash used in investing activities (71,956) (29,293) (28,976)
---------- --------- --------
(continued)
31
AMERICAN MORTGAGE ACCEPTANCE COMPANY AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Dollars in thousands)
(continued)
Years Ended December 31,
---------------------------------
2002 2001 2000
---------------------------------
Cash flows from financing activities:
Proceeds from repurchase facilities payable 100,750 62,030 13,699
Proceeds from warehouse facility payable 8,788 -- --
Repayments of repurchase facilities payable (56,480) (31,076) (20,170)
Increase in deferred loan costs (669) (43) (160)
Distributions paid to shareholders (8,471) (5,566) (5,566)
Issuance of common shares 30,882 -- --
---------- --------- --------
Net cash provided by (used in)
financing activities 74,800 25,345 (12,197)
---------- --------- --------
Net increase (decrease) in cash and cash
equivalents 9,386 (614) (2,170)
Cash and cash equivalents at the beginning
of the year 1,018 1,632 3,802
---------- --------- --------
Cash and cash equivalents at the end of
the year $ 10,404 $ 1,018 $ 1,632
========== ========= ========
Supplemental information:
Interest paid $ 1,163 $ 1,412 $ 3,752
========== ========= ========
Conversion of mortgage loans to GNMA
Certificates
Increases in GNMA certificates $ 37,444
Decrease in mortgage loans (37,444)
---------
$ 0
---------
See accompanying notes to consolidated financial statements.
32
AMERICAN MORTGAGE ACCEPTANCE COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1 - General
American Mortgage Acceptance Company (the "Company") was formed on June 11, 1991
as a Massachusetts business trust. The Company elected to be treated as a real
estate investment trust ("REIT") under the Internal Revenue Code of 1986, as
amended (the "Code").
Effective April 26, 1999, upon authorization by the Company's 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".
The Company's business plan focuses on originating and acquiring government
insured and uninsured mortgages secured by multi-family 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-multi-family mortgages, issues
guarantees of construction and permanent financing, and makes standby and
forward loan commitments.
The Company is governed by a board of trustees comprised of three independent
trustees and two trustees who are affiliated with Related Capital Company
("Related"). The Company has engaged Related AMI Associates, Inc. (the
"Advisor"), an affiliate of Related, to manage its day-to-day affairs. The
Advisor has sub-contracted 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.
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 three
wholly-owned subsidiaries which it controls: AMAC Repo Seller, AMAC/FM
Corporation ("AMAC/FM") and AMAC Credit Facility, LLC. All intercompany accounts
and transactions have been eliminated in consolidation. Unless otherwise
indicated, the "Company" as hereinafter used, refers to American Mortgage
Acceptance Company and its subsidiaries.
b) Investments in Mortgage Loans and Notes Receivable
Mortgage loans and notes receivable are intended to be held to maturity and,
accordingly, are carried at cost, net of unamortized loan origination costs and
fees.
The Company's mezzanine investments bear interest at fixed rates, but also
include provisions that allow the Company to participate in a percentage of the
underlying property's excess cash flows from operations and excess proceeds from
a sale or refinancing. At the inception of each such investment, Company
management must determine whether such investment should be accounted for as a
loan, joint venture or as real estate, using the guidance contained in the Third
Notice to Practitioners issued by the AICPA. Although the accounting methodology
does not affect the Company's cash flows from these investments, this
determination affects the balance sheet classification of the investments as
well as the classification, timing and amounts of reported earnings.
Accounting for the investment as real estate is required if the Company expects
that the amount of profit, whether called interest or another name, such as an
equity kicker, that it expects to receive above a reasonable amount of interest
and fees, is over 50 percent of the property's total expected residual profit.
If a mezzanine investment were to be accounted for as an investment in real
estate, the Company's balance sheet would show the underlying property and its
related senior debt (if such debt was not also held by the Company), and the
income statement would include the property's rental revenues, operating
expenses and depreciation.
If the Company expects that it will receive less than 50 percent of the
property's residual profit, then loan or joint venture accounting is applied.
Loan accounting is appropriate if the borrower has a substantial equity
investment in the property, if the Company has recourse to substantial assets of
the borrower, if the property is generating sufficient cash flow to service
normal loan amortization, or if certain other conditions are met. Under loan
accounting, the Company recognizes interest income as earned and additional
interest from participations as received. Joint venture accounting would require
that the Company only record its share of the net income from the underlying
property.
33
AMERICAN MORTGAGE ACCEPTANCE COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Company management must exercise judgment in making the required accounting
determinations. For each mezzanine arrangement, the Company projects total cash
flows over the loan's term and the Company's share in those cash flows, and
considers the borrower's equity, 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.
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. The Company's portfolio of mortgage loans and notes is
periodically evaluated for possible impairment to establish appropriate loan
loss reserves, if necessary. If, in the judgment of Company management, it is
determined that is probable that the Company will not receive all contractually
required payments when they are due, the loan or note would be deemed impaired,
and a loan loss reserve established.
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. The Company uses quoted
market prices as its primary source of valuation information or, if quoted
market prices are not available, uses values provided by third party pricing
services. 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. Realized gains and losses on
securities are included in earnings and are recorded on the trade date and
calculated as the difference between the amount of cash received and the
amortized cost of the specific GNMA certificate, including unamortized discounts
or premiums.
During 2001, the Company converted three of its FHA-guaranteed first mortgage
loans into investments in GNMA certificates. Each loan's amortized cost became
the cost basis of the applicable GNMA certificate, which also approximated the
market value of the GNMA certificate at the conversion date. No gain or loss was
recognized upon conversion. The three FHA-guaranteed first mortgage loans and
the related GNMA certificates are serviced by third-party servicers. The
conversion was made to improve the leveragability of the debt instruments and to
reduce the interest rate on the associated borrowings. It is the Company's
intention to hold its GNMA certificates to maturity, but elected the "available
for sale" designation under SFAS 115 to give it the flexibility to liquidate
these assets if business conditions require. The first mortgage loans remaining
in the portfolio will not be converted to GNMA certificates and, along with
future originations, are intended to be held to maturity.
d) Investment in ARCap
The Company's preferred equity investment in ARCap Investors, LLC ("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, net of 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) Revenue Recognition
The Company derives its revenues from a variety of investments and guarantees,
summarized as follows:
o Interest Income from Mortgage Loans and Notes Receivable - Interest on
mortgage loans and notes receivable is recognized on the accrual basis
as it becomes due. Deferred loan origination costs and fees are
amortized over the life of the applicable loan as an adjustment to
interest income, using the interest method. Interest which was accrued
is reversed out of income if deemed to be uncollectible. Certain
mortgage loans (mezzanine investments) contain provisions that allow
the Company to participate in a percentage of the underlying
34
AMERICAN MORTGAGE ACCEPTANCE COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
property's excess cash flows from operations and excess proceeds from
a sale or refinancing. This income is recognized when received.
o Interest Income on GNMA Certificates - Interest on GNMA certificates
is recognized on the accrual basis as it becomes due. Interest income
also includes the amortization or accretion of premiums and discounts
recognized at the purchase date, using the effective yield method.
o Interest Income on Temporary Investments - Interest income from
temporary investments, such as cash in banks and short-term
instruments, is recognized on the accrual basis as it becomes due.
o Equity in Earnings of ARCap - The Company's equity in the earnings of
ARCap Investors, LLC ("ARCap") is accrued at the Company's preferred
dividend rate of 12%, unless ARCap does not have earnings and cash
flows adequate to meet this dividend requirement.
o Standby Loan Commitment Fees - The Company receives fees for issuing
standby loan commitments. If the Company does not expect to fund the
commitment, the commitment fee is recognized ratably over the
commitment period. If it is determined that it is possible or probable
that a commitment will be exercised, such fees are deferred and, if
the commitment is exercised, amortized over the life of the loan as an
adjustment to interest income or, if the commitment expires
unexercised, recognized as income upon expiration of the commitment.
o Construction Guarantee and Loan Administration Fees - The Company
receives fees from borrowers for guaranteeing construction loans made
by third-party lenders. The Company guarantees the loan during the
period between construction completion and funding of the permanent
loan. These fees are received in advance and are deferred and
amortized into other income over the guarantee period. The Company
also receives loan administration fees on these guaranteed loans, on a
monthly basis during the guarantee period. These fees are recognized
in other income as they become due.
o Loss Sharing/Guarantee Fees - The Company receives loss
sharing/guarantee fees related to the FNMA DUS program. These fees are
received monthly and recognized in other income as they become due.
h) Repurchase Facilities Payable
The Company finances its investments in GNMA certificates under a repurchase
facility with an investment bank. Under such facility, the GNMA certificates are
sold to the investment bank under an agreement requiring the Company to
repurchase such certificates for a fixed price on a fixed date, generally 30
days from sale date. These transactions are accounted for as collateralized
borrowings. Accordingly, the GNMA certificates remain on the Company's
consolidated balance sheet, with the proceeds from the sales included on the
consolidated balance sheet as "Repurchase Facilities Payable". The difference
between the sales proceeds and the fixed repurchase price is recorded as
interest expense ratably over the period between the sale and repurchase.
i) 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, 2002 and 2001. 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.
j) 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 2002, the Company declared distributions of $1.51 per share. For federal
income tax purposes, the Company's distribution totaled $1.47, of which $1.42
and $.05 were reported as ordinary income and capital gain, respectively, to
shareholders for 2002.
k) 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
35
AMERICAN MORTGAGE ACCEPTANCE COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
comprehensive income in shareholders' equity and current period unrealized gains
and losses are included as a component of comprehensive income.
l) 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's chief operating decision
maker, its president and chief executive officer makes asset allocation
decisions between various real estate lending activities as opportunities are
brought to the Company through its relationship with the Advisor. Each potential
investment is evaluated for its potential return on investment and risks. 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.
m) 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 consolidated
financial statements.
In June 2001, the Financial Accounting Standards Board ("FASB") 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 consolidated financial statements.
In June 2001, the FASB issued SFAS No. 143, "Accounting for Asset Retirement
Obligations". SFAS No. 143 requires the fair value of a liability or an asset
retirement obligation to be recorded in the period in which it is incurred. SFAS
No. 143 is not effective until January 1, 2003. Management does not anticipate
that the implementation of this statement will have a material impact on the
Company's consolidated financial statements.
In August 2001, the FASB issued Statement No. 144, "Accounting for the
Impairment or Disposal of Long Lived Assets". 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 implemented SFAS No. 144 on January 1,
2002. Implementation of SFAS No. 144 did not have a material impact on the
Company's consolidated financial statements.
In April 2002, the FASB issued Statement No. 145 "Rescission of FASB Statements
No. 4, 44 and 64, Amendment of FASB Statement No. 13 and Technical Corrections".
SFAS No. 145 among other things, rescinds SFAS No. 4, "Reporting Gains and
Losses from Extinguishment of Debt", and accordingly, the reporting of gains and
losses from the early extinguishments of debt as extraordinary items will only
be required if they meet the specific criteria for extraordinary items included
in Accounting Principles Board Opinion No. 30, "Reporting the Results of
Operations". The rescission of SFAS No. 4 is effective January 1, 2003.
Management does not anticipate that the implementation of this statement will
have a material impact on the Company's consolidated financial statements.
In July 2002, the FASB issued Statement No. 146, "Accounting for Costs
Associated with Exit or Disposal Activities". SFAS No. 146 replaces current
accounting literature and requires the recognition of costs associated with exit
or disposal activities when they are incurred rather than at the date of a
commitment to an exit or disposal plan. SFAS No. 146 is not effective until
January 1, 2003. Management does not anticipate that the implementation of this
statement will have a material effect on the Company's consolidated financial
statements.
In November 2002, the FASB issued Interpretation No. 45, Guarantors' Accounting
and Disclosure Requirements for Guarantees, Including Indirect Guarantees of
Indebtedness of Others. The Interpretation elaborates on the disclosures to be
made by a guarantor in its financial statements about its obligations under
certain guarantees that it has issued. It also clarifies that a guarantor is
required to recognize, at the inception of a guarantee, a liability for the fair
value of the obligation undertaken in issuing the guarantee. This Interpretation
does not prescribe a specific approach for subsequently measuring the
guarantor's recognized liability over the term of the related guarantee. The
disclosure provisions of this Interpretation are included in Note 13. The
initial recognition and initial measurement provisions of this Interpretation
are applicable on a prospective basis to guarantees issued or modified after
December 31, 2002. The Company currently receives a fee, in advance, for acting
as a guarantor of certain construction loans. This fee is deferred and amortized
over the guarantee period. The Company believes that the fee received
approximates the fair value of the obligation undertaken in issuing the
guarantee; therefore, the Company's current accounting for these guarantees will
not be affected by this Interpretation. The Company has ceased making new
guarantees under its Fannie Mae DUS program (see Note 12) and is in the process
of transferring its rights and obligations under this program to a third party;
therefore, this Interpretation will not have an impact on the accounting for
these guarantees.
36
AMERICAN MORTGAGE ACCEPTANCE COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
In January 2003, the FASB issued Interpretation No. 46, Consolidation of
Variable Interest Entities. This Interpretation clarifies the application of
existing accounting pronouncements to certain entities in which equity investors
do not have the characteristics of a controlling financial interest or do not
have sufficient equity at risk for the entity to finance its activities without
additional subordinated financial support from other parties. The provisions of
the Interpretation will be immediately effective for all variable interests in
variable interest entities created after January 31, 2003, and the Company will
need to apply its provisions to any existing variable interest in variable
interest entities by no later than July 1, 2003. The Company is in the process
of evaluating all of its mezzanine loans, which may be deemed variable interests
in variable interest entities under the provision of FIN 46. The real estate
entities whose ownership interests collateralize these loans have assets
totaling approximately $110,000,000 at December 31, 2002. The Company's maximum
exposure to loss represents its recorded investment in these loans, totaling
$12,448,000 at December 31, 2002. The Company believes that some, and possibly
all, of these investments may not ultimately fall under the provisions of FIN 46
and, accordingly, continue to be accounted for as loans and not consolidated as
investments in real estate. The Company cannot make any definitive conclusion
until it completes its evaluation.
n) Reclassifications
Certain amounts in the 2001 and 2000 financial statements have been reclassified
to conform to the 2002 presentation.
37
AMERICAN MORTGAGE ACCEPTANCE COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Investments in Mortgage Loans
-----------------------------
Information relating to the Company's investments in mortgage loans as of
December 31, 2002 is as follows:
(Dollars in thousands)
Final Share of
Maturity Lifetime Excess Operating
Property Description Date Call Date (A) Interest Rate (b) Interest Cap Cash Flows
First Mortgage Loans:
Stony Brook II(E)(M)(P)
East Haven, CT 125 Units 6/37 12/06 7.625% N/A N/A
Sunset Gardens
Eagle Pass, TX 60 Units 9/03 N/A 11.50% N/A N/A
Northbrooke
Harris County, TX 240 Units 8/43 N/A 7.45% N/A N/A
Alexandrine
Detroit, MI 30 Units 12/03 N/A 11.00% N/A N/A
Subtotal First Mortgage
Loans
Mezzanine Loans(G):
Stabilized Properties
---------------------
Stony Brook II (J)(N)(P)
East Haven, CT 125 Units 6/37 12/06 15.33% 16% 40%
Plaza at San Jacinto (K)(N)
Houston, TX 132 Units 1/43 6/11 11.40% 16% 50%
Subtotal Stabilized Mezzanine Loans
Properties in Lease-Up
----------------------
The Hollows (K)(N)
Greenville, NC 184 Units 1/42 1/12 10.00% 16% 50%
Elmhurst Village (J)(N)
Oveido, FL 313 Units 1/42 3/19 10.00% 16% 50%
The Reserve at Autumn Creek (J)(N)
Friendswood, TX 212 Units 1/42 9/14 10.00% 16% 50%
Subtotal Properties in Lease-Up
Properties in Construction
--------------------------
Club at Brazos (I)(N)(K)
Rosenberg, TX 200 Units 5/43 TBD 10.00% 14% 50%
Northbrooke (J)(N)
Harris County, TX 200 Units 8/43 TBD 11.50% 14% 50%
Del Mar Villas
Dallas, TX 260 Units 4/04 N/A LIBOR+4.625% (O) N/A
Mountain Valley
Dallas, TX 312 Units 11/04 N/A LIBOR+4.750% (O) N/A
Subtotal Properties in Construction
Subtotal Mezzanine Loans
Total Mortgage Loans
Interest
Earned
Applicable
Share of to the
Excess Sale or Periodic Outstanding Unamortized Carrying Year Ended
Refinancing Payment Face Amount of Costs and Amount of December
Property Proceeds Terms Prior Liens Mortgages (C) Fees Mortgages (D) 31,2002
First Mortgage Loans:
Stony Brook II(E)(M)(P)
East Haven, CT N/A (F) -- $ 8,285 $ -- $ 8,285 $ 633
Sunset Gardens
Eagle Pass, TX N/A (H) -- 1,323 (14) 1,309 99
Northbrooke
Harris County, TX N/A (L) -- -- -- -- 16
Alexandrine
Detroit, MI N/A (H) -- 342 -- 342 15
--------------------------------------------------
Subtotal First Mortgage Loans 9,950 (14) 9,936 763
--------------------------------------------------
Mezzanine Loans(G):
Stabilized Properties
---------------------
Stony Brook II (J)(N)(P)
East Haven, CT 35% (H) $8,285 764 (113) 651 90
Plaza at San Jacinto (K)(N)
Houston, TX 50% (H) 6,522 1,250 (24) 1,226, 149
--------------------------------------------------
Subtotal Stabilized Mezzanine Loans 2,014 (137) 1,877 239
--------------------------------------------------
Properties in Lease-Up
----------------------
The Hollows (K)(N)
Greenville, NC 25% (H) 8,915 1,549 (150) 1,399 191
Elmhurst Village (J)(N)
Oveido, FL 25% (H) 21,677(L) 2,874 (419) 2,455 319
The Reserve at Autumn Creek (J)(N)
Friendswood, TX 25% (H) 16,023(L) 1,987 (60) 1,927 192
--------------------------------------------------
Subtotal Properties in Lease-Up 6,410 (629) 5,781 702
--------------------------------------------------
Properties in Construction
--------------------------
Club at Brazos (I)(N)(K)
Rosenberg, TX 25% (H) 13,436 1,962 (77) 1,885 198
Northbrooke (J)(N)
Harris County, TX 50% (H) 10,475(L) 1,500 (136) 1,364 134
Del Mar Villas
Dallas, TX N/A (H) 5,554 765 -- 765 8
Mountain Valley
Dallas, TX N/A (H) 5,242 776 -- 776 6
--------------------------------------------------
Subtotal Properties in Construction 5,003 (213) 4,790 346
--------------------------------------------------
Subtotal Mezzanine Loans 13,427 (979) 12,448 1,287
--------------------------------------------------
Total Mortgage Loans $23,377 $ (993) $ 22,384 $ 2,050
==================================================
38
AMERICAN MORTGAGE ACCEPTANCE COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(A) Loans are subject to mandatory prepayment at the option of the Company ten
years after construction completion, with one year's notice. Loans with a
call date of "TBD" are still under construction.
(B) 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 and participation in sale or refinancing proceeds and certain
provisions that cap the Company's total yield, including additional
interest and participations, over the term of the loan.
(C) No principal amounts of mortgage loans are subject to delinquent interest
as of December 31, 2002.
(D) Carrying amounts of the loans are net of unamortized origination costs and
fees and loan discounts.
(E) Interest and principal payments on this first mortgage loan are insured by
the U.S. Department of Housing and Urban Development.
(F) Requires monthly payments of principal and interest based on a 40-year
amortization period. Loan is subject to five-year lockout against
prepayments, as well as a prepayment penalty structure during the second
five-year term of the loan.
(G) 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
36 months after construction completion by an entity related to the general
partner of the entity that owns the underlying property.
(H) Interest only payments are due monthly, with loan balance due at maturity.
(I) The funding of this mezzanine loan is based on property level operational
achievements.
(J) The Company has an interest in the first lien position relating to this
mezzanine loan.
(K) The Company does not have an interest in the first lien position relating
to this mezzanine loan.
(L) The first mortgage loans related to those properties were converted from
participations in FHA loans to ownership of the GNMA certificates and are
held by the Company.
(M) This first mortgage loan is pledged to secure the Company's obligation
under a first loss protection agreement with Fannie Mae - see Note 14 in
the accompanying consolidated financial statements.
(N) Lifetime interest cap represents the maximum annual return, including
interest, fees and participations, that can be earned by the Company over
the life of the mezzanine loan, computed as a percentage of the balance of
the first mortgage loan plus the mezzanine loan.
(O) Interest cap on these loans is the maximum rate permitted by law.
(P) The Stony Brook II first mortgage loan and mezzanine loan were repaid in
January 2003 - See Note 14 in the accompanying consolidated financial
statements.
39
AMERICAN MORTGAGE ACCEPTANCE COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Further information relating to investments in mortgage loans for the years
ended December 31, 2002, 2001 and 2000 is as follows:
(Dollars in thousands)
2002 2001 2000
-------- -------- --------
Reconciliation of mortgage loans:
Balance at beginning of period $ 17,799 $ 31,829 $ 28,893
Advances made during the period 4,711 24,813 22,253
Conversion of mortgage loans to GNMA certificates -- (37,444) --
Loan origination fees (net of acquisition
expenses) (169) (152) (766)
Proceeds from repayment of mortgage loans -- (9,245) (9,995)
Periodic principal payments of mortgage loans (46) (85) (62)
Loan contributed to unconsolidated subsidiary -- -- (8,404)
Consolidation of previously unconsolidated subsidiary -- 8,374 --
Excess(deficiency) of proceeds over carrying value of
mortgage loans -- (251) 14
Amortization and accretion -- net 89 (40) (104)
-------- -------- --------
Investments in mortgage loans - December 31, $ 22,384 $ 17,799 $ 31,829
======== ======== ========
40
AMERICAN MORTGAGE ACCEPTANCE COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 4 - Investments in GNMA Certificates - Available for Sale
Information relating to GNMA certificates owned by the Company as of December
31, 2002, is as follows:
(Dollars in thousands)
Interest
Income
Earned
Applicable
Date Principal Amortized Unrealized to the Year
Purchased/ Stated at Cost at Gain (Loss) at Fair Value at Ended
Certificate Final Interest December December December December December
Name Number Payment Date Rate 31, 2002 31, 2002 31, 2002 31,2002 31 ,2002
---- ----------- ------------ -------- --------- --------- -------------- ------------- -----------
Western Manor (1) 0355540 7/27/94 7.125% $ 2,460 $ 2,470 $ 39 $ 2,509 $ 196
3/15/29
Copper Commons (1) 0382486 7/28/94 8.500% 2,088 2,158 (28) 2,130 179
8/15/29
SunCoast Capital Group, G002412 6/23/97 7.000% 546 547 32 579 50
Ltd. (1) 4/20/27
Hollows Apts.(2) 511909 5/29/01 -- -- -- -- -- 197
Elmhurst Village(1) 549391 6/28/01 7.745% 21,677 21,677 922 22,599 1,659
1/1/42
Reserve at Autumn Creek(1) 448748 6/28/01 7.745% 16,023 16,023 2,574 18,597 1,200
1/1/42
Casitas at Montecito(1)(3) 519289 3/11/02 7.300% 5,787 6,178 458 6,636 321
10/15/42
Village at Marshfield(1) 519281 3/11/02 7.475% 19,869 21,493 1,331 22,824 1,140
1/15/42
Cantera Crossing(1) 532662 3/28/02 6.500% 5,555 5,489 592 6,081 210
6/1/29
Fillmore Park(1) 536739 3/28/02 6.700% 1,189 1,203 116 1,319 48
10/15/42
Northbrooke(1) 548972 5/24/02 7.080% 10,475 10,625 1,231 11,856 244
8/1/43
Ellington Plaza(1) 585494 7/26/02 6.835% 10,501 10,559 1,159 11,718 258
6/1/44
Burlington(1) 595515 11/1/02 5.900% 6,824 6,909 277 7,186 67
4/15/31
------------------------------------------------------------------
Total $102,994 $105,331 $ 8,703 $114,034 $5,769
==================================================================
(1) These GNMA certificates are partially or wholly pledged as collateral
for borrowings under the repurchase facility - See Note 7.
(2) This GNMA certificate was sold March 25, 2002, resulting in a gain of
approximately $614,000.
(3) This GNMA certificate was repaid in March 2003.
41
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, 2002 and 2001 were as follows:
(Dollars in thousands)
December 31,
---------------------------
2002 2001
---------------------------
Amortized cost $105,331 $ 49,499
Net unrealized gain 8,703 561
-------- --------
Fair value $114,034 $ 50,060
======== ========
For the year ended December 31, 2002, there were gross unrealized gains and
losses of $8,730,076 and $27,147 respectively, on GNMA certificates. For the
year ended December 31, 2001, there were gross unrealized gains and losses of
$579,252 and $18,865, respectively, on GNMA certificates.
Due to the complexity of the GNMA structure and the uncertainty of future
economic events 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 - CMBS-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 a Bear
Stearns Repurchase Facility. 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 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 due to market-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, 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.
The Company owns 800,000 preferred equity units of ARCap, with a face amount of
$25 per unit, representing a 7.27% ownership and voting interest. The preferred
equity units are convertible, at the Company's option, into ARCap common units.
If converted into common units, the conversion price is equivalent to $25 per
unit, subject to certain adjustments. Also, if not already converted, for a
period of sixty days following the fifth anniversary of the first closing date,
which will be August 4, 2005, the preferred equity units are convertible, at the
Company's option, into a three-year note bearing interest at 12% that would be
junior to all of ARCap's then existing indebtedness. The preferred equity units
are also redeemable, at the option of ARCap, up until the fifth anniversary of
the first closing date.
42
AMERICAN MORTGAGE ACCEPTANCE COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Summarized information for ARCap as of December 31, 2002 and 2001, and the years
then ended is as follows:
2002 2001
--------------- ---------------
($'s in millions) ($'s in millions)
Investment securities - trading $ 799 $ 565
Other assets 24 31
--------------- ---------------
Total assets $ 823 $ 596
=============== ===============
Repurchase agreements and long-term debt $ 392 $ 322
Other liabilities 206 50
Members' equity 225 224
--------------- ---------------
Total liabilities and equity $ 823 $ 596
=============== ===============
Total revenues $ 96 $ 63
Total expenses 65 50
--------------- ---------------
Net income $ 31 $ 13
=============== ===============
43
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 consist of the following as of December 31,
2002:
(Dollars in thousands)
Remaining
Number of Outstanding Unamortized Committed
Apartment Principal Costs and Carrying Balance to Interest
Property Location Units Balance Fees Amount Fund Rate Maturity
------------------------------------------------------------------------------------------------------------------------------------
Alexandrine(3) Detroit, MI 30 $ 214 $ -- $ 214 $ -- 12.50% November 2002(5)
Concord at
Palm(3)(6) Houston, TX 360 3,850 18 3,832 -- 12.00% December 2003
Parwood(3) Long Beach, CA 528 3,022(1) 25 2,997 1,578 11.00% January 2004
Concord at
Little York Houston, TX 276 3,500 25 3,475 -- 12.00% February 2004
Concord at
Gulfgate Houston, TX 288 3,500 47 3,453 -- 12.00% May 2004
Reserve at
Fox River Yorkville, IL 132 1,350 11 1,339 -- 12.00% May 2003
Del Mar LIBOR +
Villas(4) Dallas, TX 260 5,554 42 5,512 -- 4.625% April 2004
Mountain LIBOR +
Valley(4) Dallas, TX 312 5,242 67 5,175 1,065(2) 4.750% November 2004
-----------------------------------------------------------
Total 2,186 $26,232 $ 235 $25,997 $2,643
===========================================================
(1) Funded on an as needed basis.
(2) To be funded for rehabilitation.
(3) These loans are to limited partnerships whose general partners are
affiliates of the Advisor (see Note 9).
(4) Pledged as collateral in connection with warehouse facility with Fleet
National Bank (see Note 8).
(5) Consists of two notes that mature in November 2002. One note, in the
approximate amount of $207,000, was repaid January 2003. The remaining
note, in the amount of $6,800, remains unpaid.
(6) The Concord at Palm bridge loan was repaid in full in March 2003.
44
AMERICAN MORTGAGE ACCEPTANCE COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 7- Repurchase Facilities
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 enabled 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%. At December 31, 2001, there was no outstanding balance. Deferred costs
relating to the Nomura Repurchase Facility have been fully amortized. This
Repurchase Facility was not renewed in 2002.
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. Up until May 2002, borrowings would bear interest at LIBOR plus
0.50%. Subsequent to May 2002, interest on borrowings decreased to LIBOR plus
0.05%. As of December 31, 2002 and 2001, the amount outstanding under this
facility was $87.9 million and $43.6 million, respectively, and interest rates
were 1.47% and 2.58%, respectively. Deferred costs relating to the Nomura
Securities Repurchase Facility have been fully amortized. All amounts
outstanding at December 31, 2002 had 30 day settlement terms. As of December 31,
2002 and 2001, all GNMA certificates owned by the Company were wholly or
partially pledged as collateral.
NOTE 8- Warehouse Facilities
In October 2002, the Company entered into a mortgage warehouse line of credit
(the "Fleet Warehouse") with Fleet National Bank ("Fleet") in the amount of $40
million. Advances under the Fleet Warehouse Facility, up to 83% of the total
loan package, will be used to fund first mortgage loans, which the Company will
make to its customers for the acquisition/refinancing and minor renovation of
existing, lender-approved multi-family properties located in stable sub-markets.
The Facility, which matures April 2006, bears an interest rate of LIBOR + 200
basis points (3.46% and 3.42% for Del Mar Villas and Mountain Valley loans,
respectively, at December 31, 2002), payable monthly on advances. Principal is
due upon the earlier of refinance or sale of the underlying project or upon
maturity. The Company will pay a fee of 12.5 basis points, paid quarterly, on
any unused portion of the Facility. As of December 31, 2002, the Company had
approximately $8.8 million in loans outstanding under this program.
NOTE 9- Related Party Transactions
Pursuant to the amended Advisory Agreement between the Company and the Advisor,
the Advisor receives certain fees, in addition to reimbursements of certain
administrative and other costs incurred by the Advisor on behalf of the Company,
for its ongoing management and operations of the Company:
Fees/Compensation Annual Amount
----------------- -------------
I. Asset .355% for investments in mortgage loans
management fees .355% for certain investment grade investments
.750% for certain non-investment grade investments
1.000% for unrated investments
.625% for investments held prior to the adoption
of the amended Advisory Agreement between the
Company and the Advisor dated April 6, 1999.
II. Annual A) 25% of the dollar amount by which
incentive fees
(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.
45
AMERICAN MORTGAGE ACCEPTANCE COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
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, with respect to 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%.
During 2002, the Company made an agreement with the Advisor, whereby the Advisor
waived approximately $71,000 in net fees and expense reimbursements, in light of
higher than usual expenses related to the origination of investments that were
never completed.
The costs incurred to related parties for the years ended December 31, 2002,
2001 and 2000 were as follows:
(Dollars in thousands)
Years Ended December 31,
------------------------------------
2002 2001 2000
------ ------ ------
Expense reimbursement $ 447 $ 345 $ 375
Asset management fees 838 248 386
Incentive fee 235 -- --
------ ------ ------
$1,520 $ 593 $ 761
====== ====== ======
Asset management fees, the incentive management fee and expense reimbursements
owed to the Advisor and its affiliates amounting to approximately $553,000 and
$318,000 were accrued and unpaid at December 31, 2002 and 2001, respectively.
Some of the Company's notes receivable (see Note 6), the guarantee on Creekside
Apartments and standby bridge loan commitments described in Note 12 are to
limited partnerships where the general partner is an affiliate of the Advisor.
In December 2002, Charter Municipal Mortgage Company announced a proposed
acquisition of Related Capital Company, an affiliate of the Advisor. This
acquisition will not affect The Company or its day-to-day operations.
NOTE 10 - Earnings Per Share
Basic net income per share in the amount of $1.61, $1.35 and $.86 for the years
ended December 31, 2002, 2001 and 2000, respectively, equals net income for the
periods ($9,659,362, $5,187,064 and $3,317,757, respectively), divided by the
weighted average number of shares outstanding for the periods (6,017,740,
3,838,630 and 3,838,630, respectively).
Because the Company had no dilutive securities outstanding during 2002, 2001 and
2000, diluted net income per share is the same as basic net income per share for
all periods presented.
NOTE 11 - Capital Shares
On February 25, 2002, the Company completed a public offering of 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,
were used to fund investments.
The Company has an incentive share option plan, under which the Compensation
Committee of the board of trustees has the authority to issue options to the
Company's trustees and employees of the Advisor 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 383,363 shares. No options have been granted under this plan as of December
31, 2002.
46
AMERICAN MORTGAGE ACCEPTANCE COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 12 - Selected Quarterly Financial Data
2002 Quarter Ended
-------------------------------------------------
(Dollars in thousands except per share amounts)
(Unaudited)
March 31 June 30 September 30 December 31
---------- ---------- ------------ -----------
Revenues:
Interest income:
Mortgage loans $ 401 $ 609 $ 536 $ 504
GNMA certificates 1,084 1,370 1,548 1,767
Notes receivable 487 627 548 608
Temporary investments 11 13 16 10
Other income 60 76 67 116
---------- ---------- ------------ -----------
Total revenues 2,043 2,695 2,715 3,005
---------- ---------- ------------ -----------
Expenses:
Interest 272 307 290 359
General and administrative 126 164 119 297
Fees to Advisor 357 371 318 474
FNMA loan program 355 3 -- --
---------- ---------- ------------ -----------
Total expenses 1,110 845 727 1,130
---------- ---------- ------------ -----------
Other gain:
Equity in earnings of ARCap 592 608 600 600
Net gain on repayment of mortgage loans
and GNMA certificates 614 -- -- --
---------- ---------- ------------ -----------
Total other gain 1,206 608 600 600
---------- ---------- ------------ -----------
Net income $ 2,139 $ 2,458 $ 2,588 $ 2,475
========== ========== ============ ===========
Net income per weighted average share
(basic and diluted) $ 0.43 $ 0.39 $ 0.41 $ 0.39
========== ========== ============ ===========
Weighted average shares outstanding
(basic and diluted) 4,960,852 6,363,630 6,363,630 6,363,630
========== ========== ============ ===========
47
AMERICAN MORTGAGE ACCEPTANCE COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
2001 Quarter Ended
----------------------------------------------------
March 31 June 30 September 30 December 31
---------- ---------- ------------ -----------
Revenues:
Interest income:
Mortgage loans $ 888 $ 1,018 $ 350(1) $ 517(1)
GNMA certificates 116 379 860 939
Notes receivable 45 61 127 218
Temporary investments 17 10 20 26
Other income 6 25 39 37
---------- ---------- ---------- ---------
Total revenues 1,072 1,493 1,396 1,737
---------- ---------- ---------- ---------
Expenses:
Interest 275 361 463 307
General and administrative 140 122 115 284
Fees to Advisor 118 178 121 176
---------- ---------- ---------- ---------
Total expenses 533 661 699 767
---------- ---------- ---------- ---------
Other gain (loss):
Equity in earnings of ARCap 592 592 604 612
Net loss on repayment of mortgage loans
and GNMA certificates -- -- (212) (39)
---------- ---------- ---------- ---------
Total other gain (loss) 592 592 392 573
---------- ---------- ---------- ---------
Net income $ 1,131 $ 1,424 $ 1,089 $ 1,543
========== ========== ========== =========
Net income per weighted average share
(basic and diluted) $ 0.29 $ 0.37 $ 0.28 $ 0.40
========== ========== ========== =========
Weighted average shares outstanding
(basic and diluted) 3,838,630 3,838,630 3,838,630 3,838,630
========== ========== ========== =========
(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. The increase
or decrease in interest income was primarily a result of the interest
income earned by these loans converted to GNMA certificates subsequent to
the conversion. No gains or losses resulted from the conversion.
NOTE 13 - Commitments and Contingencies
The Company completed a loan program with Fannie Mae, which 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 loan program, the Company
intended to originate and contract for individual loans of up to $6 million each
over a two-year period in conjunction with American Property Financing, an
unaffiliated third party, which would underwrite and service the loans for
Fannie Mae. The Company guarantees a first loss position of up to $21.25
million, depending on the aggregate principal amount of the loans the Company
originates under this program and would receive guaranty, loan origination and
other fees. The Company also guarantees 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, 2002, the Company has originated loans totaling
approximately $3.3 million under the Fannie Mae program and has made forward
commitments for an additional approximate $4.0 million. The Company's maximum
guaranty at December 31, 2002 was approximately $7.3 million.
During August 2002, the Company purchased one construction loan in the amount of
$342,000 due to a default on a construction loan that was 100% guaranteed by the
Company under the Fannie Mae program. The loan defaulted due to problems
relating to construction issues of Alexandrine Square, a 30-unit apartment
complex in Detroit, Michigan. The construction loan is classified as a first
mortgage loan on the balance sheet at December 31, 2002.
Subsequent to creating this program, the level of loan origination competition
has increased, reducing the program's projected financing value and
profitability. As a result, the Company decided in the first quarter of 2002 to
discontinue this program. The Company has reached an agreement in principle to
terminate this program and transfer its rights and obligations to a third party.
There can be no assurance, however, that this agreement will be consummated.
48
AMERICAN MORTGAGE ACCEPTANCE COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Accordingly, during the first quarter of 2002, the Company wrote off the balance
of unamortized deferred costs relating to this program. This write-off totaled
approximately $358,000 and is included in Fannie Mae loan program expenses in
the Consolidated Statement of Income.
Except for the write-off of the program costs described above, the Fannie Mae
loan program has not had, and its discontinuance is not anticipated to have, a
significant impact on the Company's financial condition or results of
operations.
The following table provides information relating to the loans originated and
forward commitments made on Fannie Mae's behalf.
(Dollars in thousands)
Loans Originated
----------------
Number of Loss
Apartment Sharing Fee
Property Location Units Loan Amount (annual rate)
---------------------- ---------------- --------- ----------- ------------
Valley View Cedar Rapids, IA 96 $2,187 0.36%
Maple Ridge Apartments Jackson, MI 69 1,137 0.52%
--------- -----------
Total 165 $3,324
--------- -----------
Forward Commitments
-------------------
Number of Loss
Apartment Sharing Fee
Property Location Units Loan Amount (annual rate)
----------------------- ---------------- --------- ----------- ------------
Cameron Creek Apartments Dade Country, FL 148 $3,000 0.35%
Desert View Apartments Coolidge, AZ 372 1,011 0.52%
--------- -----------
Total 520 $4,011
--------- -----------
49
AMERICAN MORTGAGE ACCEPTANCE COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Standby and Forward Loan and GNMA Commitments
---------------------------------------------
During 2002, the Company issued the following standby and forward bridge and
permanent loan commitments for the purpose of constructing/rehabilitating
certain multi-family apartment complexes in various locations.
(Dollars in thousands)
Standby and
Forward Bridge Loan Commitments
-------------------------------
Maximum Amount of Commitments
------------------------------------------
Issue Date Project Location No. of Apt. Units Less than 1 Year 1-3 Years
------------------------------------------------------------------------------------------------------------------------------------
Jan-02 Parwood Long Beach, CA 528 $ -- $ 1,578(3)
Jan-02 Valley View/Summertree (7) Little Rock, AK 240 400(1)(4) --
May-02 McMullen Square San Antonio, TX 100 400(8)(4) --
Jul-02 Clark's Crossing Apartments Laredo, TX 160 -- 1,649(2)(5)
Nov-02 Mountain Valley Dallas, TX 312 -- 1,065(3)
--------------------------------------------------------------------
Total Standby Bridge Loan Commitments 1,340 $ 800 $ 4,292
====================================================================
Standby and Forward Permanent Loan
Commitments
----------------------------------
Maximum Amount of Commitments
------------------------------------------
Issue Date Project Location No. of Apt. Units Less than 1 Year 1-3 Years
------------------------------------------------------------------------------------------------------------------------------------
Mar-02 Sunset Gardens Eagle Pass, TX 60 $ 177(3) --
May-02 Highland Park Topeka, TX 200 4,250(1)(5)(6) --
--------------------------------------------------------------------
Total Standby and Forward Permanent Loan Commitments 260 $ 4,427 --
====================================================================
50
AMERICAN MORTGAGE ACCEPTANCE COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Forward GNMA Commitments
------------------------
Maximum Amount of Commitments
--------------------------------------------------------------------
Date Purchased Project Less than 1 Year 1-3 Years
--------------------------------------------- --------------------------------------------------------------------
Mar-02 Cantera Crossing $ 973 (3) $ --
Mar-02 Fillmore Park 235 (3) --
Mar-02 Casitas at Montecito 708 (3) --
May-02 Ellington Plaza 27,114 (3) --
N/A Northbrooke 3,415 (3) --
--------------------------------------------------------------------
Total Forward GNMA Commitments $32,445 --
--------------------------------------------------------------------
Total Standby and Forward Loan and GNMA Commitments $37,672 $ 4,292
====================================================================
(1) Funding not anticipated to occur.
(2) Initial funding in the amount of $550,000 has occurred during March 2003.
Remaining fundings are on an as needed basis.
(3) Funding has already begun. Amount represents remaining commitment to be
funded.
(4) The Company received a loan commitment fee of 2.50% for issuing the
commitment.
(5) The Company received a loan commitment fee of 2.00% for issuing the
commitment.
(6) The Company will receive a 1% loan origination fee if funding occurs.
(7) The first mortgage bond relating to these apartments is held by Charter
Municipal Mortgage Acceptance Company ("CharterMac"), a publicly traded
company which is managed by an affiliate of the Advisor.
(8) Expired in February 2003.
51
AMERICAN MORTGAGE ACCEPTANCE COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Construction Loan Guarantees
----------------------------
During 2002, the Company has guaranteed the following loans in relation to the
construction of affordable multi-family apartment complexes in various
locations. The construction loan guarantees will provide credit support for the
following projects after construction completion, up until the date in which
permanent financing takes place.
During October 2002, the Company entered into an agreement with Wachovia Bank,
National Association ("Wachovia") to provide stabilization guarantees for new
construction of multi-family properties under the LIHTC program. Wachovia
already provides construction and stabilization guarantees to Fannie Mae, for
loans Wachovia originates under the Fannie Mae LIHTC forward commitment loan
program, but only for loans within regions of the country Wachovia has
designated to be within its territory. For loans outside Wachovia's territory,
the Company has agreed to issue a stabilization guarantee, for the benefit of
Wachovia. The Company is guarantying that properties which have completed
construction will stabilize and the associated construction loans will convert
to permanent Fannie Mae loans. The Company receives origination and guarantee
fees from the developers for providing the guarantees. If the properties do not
stabilize with enough Net Operating Income for Fannie Mae to fully fund their
commitment, AMAC may be required to purchase the construction loan from Wachovia
or to fund the difference between the construction loan amount and the reduced
Fannie Mae Permanent Loan Amount.
(Dollars in thousands)
Maximum Amount of
Guarantee
Loan Administra- Construction
Less than 1 tion Fee(1) Guarantee
Date Closed Project Location No. of Units Year 1-3 Years (annual percentage) Fee (2)
------------------------------------------------------------------------------------------------------------------------------------
Jul-02 Clark's Crossing Laredo, TX 160 $ 4,790 $ -- 0.500% 0.625%
Sept-02 Creekside Apts. Colorado Springs, CO 144 7,500 -- 0.375% --
Oct-02 Village at Meadowbend Temple, TX 138 -- 3,675 0.500% 0.750%
Nov-02 Mapleview Apartments (3) Saginaw, MI 104 -- 3,240 0.625% 0.247%
--------------------------------------------------------------------
546 $ 12,290 $ 6,915
====================================================================
(1) Loan Administration Fee is paid on a monthly basis during the guarantee
period.
(2) Construction Guarantee Fee is an up-front fee - paid at closing and
amortized over the guarantee period.
(3) Guarantee was made under Wachovia Bank, National Association Guarantee
Agreement.
For each of these guarantees, and for the guarantees issued under the FNMA
program discussed in the first paragraph of Note 13 in the accompanying
consolidated financial statements, the Company monitors the status of the
underlying properties and evaluates its exposure under the guarantees. To date,
the Company has concluded that no accrual for probable losses is required under
SFAS 5.
52
AMERICAN MORTGAGE ACCEPTANCE COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 14 - Subsequent Events
In February 2003, a distribution of $2,545,452 ($.40 per share), which was
declared in December 2002, was paid to shareholders for the quarter ended
December 31, 2002.
In February 2003, the Company received approximately $10 million in proceeds
relating to the repayment of the Stony Brook II first mortgage and mezzanine
loans. At December 31, 2002, the carrying value of the Stony Brook II first
mortgage and mezzanine loans were approximately $8.3 million and approximately
$651,000, respectively. The cash proceeds from the principal repayment of the
first mortgage loan are being held as collateral for the Company's contingent
liabilities under guarantees issued in the Fannie Mae DUS program (see Note 13).
During March 2003, AMAC exercised its rights under the subordinated promissory
note and other documents to take possession of the real estate collateral of
Plaza at San Jacinto. The Company has paid approximately $6.7 million and now
owns the first mortgage. As such, AMAC is now "mortgagee in possession". This is
a preliminary step toward foreclosure which is expected to take place in the
near future and allow the Company to secure and protect the real estate and cash
collateral, securing both the senior and subordinate mortgages. The Company
believes that the value of the collateral exceeds the amounts of the first
mortgage loan (approximately $6.5 million) and the mezzanine loan (approximately
$1.3 million).
In February 2003, the Company funded a predevelopment bridge loan of
approximately $6.9 million and agreed to fund a $7.3 million rehabilitation loan
secured by Noble Tower Apartments, a 195-unit apartment complex located in
Oakland, CA. The Company has received a 1% fee for the bridge loan, which bears
interest at 12% and matures in July 2005. The Company will receive an additional
1% fee for the rehabilitation loan, which will bear interest at a rate of 9.75%
and is expected to have a term of fifteen months.
In March 2003, the Company partially funded an acquisition bridge loan totaling
approximately $11 million for Baywoods Apartment, a 128-unit multi-family
apartment complex located in Antioch, CA. The Company's initial funding was
approximately $10.5 million with future fundings totaling approximately
$500,000. In connection with the funding of this bridge loan, the Company has
borrowed $8 million from its warehouse facility with Fleet Bank. This loan,
which matures March 2005, bears an interest rate of LIBOR + 400 basis points.
Payments on this loan are interest only for the full 24 month term. The Company
received a loan origination fee of .625%.
In March 2003, the Company partially funded a bridge loan of $1.7 million,
secured by a 288-unit apartment complex located in Houston, TX, known as The
Concord at Gessner. The Company's initial funding was approximately $1.5 million
with future fundings totaling approximately $200,000. The Company has received a
2.0% fee for the bridge loan, which bears interest at a rate of 12.0% and
matures in March 2005.
In March 2003, the Concord at Palm bridge loan was repaid. The Company has
received proceeds in the amount of approximately $39 million, which approximates
the carrying amount of the bridge loan at December 31, 2002.
In March 2003, the Casitas at Montecito GNMA certificate was repaid. The Company
has received proceeds in the approximate amount of $5.8 million. The carrying
amount of the certificate at December 31, 2002 was approximately $6.2 million.
53
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.
Item 14. Controls and Procedures
(a) Evaluation of Disclosure Controls and Procedures. The Company's Chief
Executive Officer and Chief Financial Officer have evaluated the
effectiveness of the Company's disclosure controls and procedures (as such
term is defined in Rules 13a-14(c) and 15d-14(c) under the Securities
Exchange Act of 1934, as amended (the "Exchange Act")) as of a date within
90 days prior to the filing date of this quarterly report (the "Evaluation
Date"). Based on such evaluation, such officers have concluded that, as of
the Evaluation Date, the Company's disclosure controls and procedures are
effective in alerting them on a timely basis to material information
relating to the Company (including its consolidated subsidiaries) required
to be included in the Company's reports filed or submitted under the
Exchange Act.
(b) Changes in Internal Controls. Since the Evaluation Date, there have not
been any significant changes in the Company's internal controls or in other
factors that could significantly affect such controls.
Item 15. Exhibits, Financial Statement Schedules, and Reports on Form 8-K
Sequential
(a) 1. Financial Statements Page
-------------------- ----------
American Mortgage Acceptance Company
Independent Auditors' Report 27
Consolidated Balance Sheets as of
December 31, 2002 and 2001 28
Consolidated Statements of Income
for the years ended December 31,
2002, 2001 and 2000 29
Consolidated Statements of Changes
in Shareholders' Equity for the years
ended December 31, 2002, 2001 and 2000 30
Consolidated Statements of Cash Flows
for the years ended December 31,
2002, 2001 and 2000 31
Notes to Consolidated Financial Statements 33
ARCap Investors, LLC
--------------------
Consolidated 2002 financial statements for ARCap
Investors, LLC (see Exhibit 99) 99(a)
Consolidated 2001 financial statements for ARCap
Investors, LLC (see Exhibit 99) 99(b)
54
Item 15. Exhibits, Financial Statement Schedules, and Reports on Form 8-K
(continued)
Sequential
Page
----------
(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.
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).
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).
55
Item 15. Exhibits, Financial Statement Schedules, and Reports on Form 8-K
(continued)
Sequential
Page
----------
23(a) 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). 63
23(b) Consent of Deloitte & Touche LLP with respect to
incorporation by reference of its report relating to the
financial statements of ARCap Investors, LLC in the
Company's Registration Statement on Form S-3
(filed herewith). 64
23(c) Consent of Ernst & Young LLP with respect to
incorporation by reference of its report relating to the
financial statements of ARCap Investors, LLC in the
Company's Registration Statement on form S-3
(filed herewith). 65
24.1 Power of Attorney (Included on signature page hereto)
99. Additional Exhibits
-------------------
99(a) The 2002 Financial Statements of ARCap Investors, LLC
which invests primarily in subordinated commercial
mortgage-backed securities, as required by Regulation S-X,
Rule 3-09 (filed herewith). 66
99(b) The 2001 Financial Statements of ARCap Investors, LLC
which invests primarily in subordinated commercial
mortgage-backed securities, as required by Regulation S-X,
Rule 3-09 (filed herewith). 78
(b) Reports on Form 8-K
-------------------
Current report on Form 8-K relating to press release
issued regarding proposed acquisition by Charter
Municipal Mortgage Acceptance Company of Related Capital
Company, dated and filed December 18, 2002.
56
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 21, 2003 By: /s/ Stuart J. Boesky
---------------------
Stuart J. Boesky
Trustee, Chairman of the Board,
President and Chief Executive Officer
Date: March 21, 2003 By: /s/ Stuart A. Rothstein
-----------------------
Stuart A. Rothstein
Chief Financial Officer
57
POWER OF ATTORNEY
Each person whose signature appears below hereby constitutes and appoints Stuart
J. Boesky, Alan P. Hirmes and Stuart A. Rothstein, and each or either of them,
his true and lawful attorney-in-fact with full power of substitution and
resubstitution, for him and in his name, place and stead, in any and all
capacities, to sign any and all amendments to this Annual Report, and to cause
the same to be filed, with all exhibits thereto and other documents in
connection therewith, with the Securities Exchange Commission, hereby granting
to said attorneys-in-fact and agents, and each of them, full power and authority
to do and perform each and every act and thing whatsoever requisite or desirable
to be done in and about the premises, as fully to all intents and purposes as
the undersigned might or could do in person, hereby ratifying and confirming all
acts and things that said attorneys-in-fact and agents, or either of them, or
their substitutes or substitute, may lawfully do or cause to be done by virtue
hereof.
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
--------------------
Stuart J. Boesky Trustee, Chairman of the Board, March 21, 2003
President and Chief Executive Officer
/s/ Peter T. Allen
------------------
Peter T. Allen Trustee March 21, 2003
/s/ Arthur P. Fisch
-------------------
Arthur P. Fisch Trustee March 21, 2003
/s/ Alan P. Hirmes
------------------
Alan P. Hirmes Trustee March 21, 2003
/s/ Scott M. Mannes
-------------------
Scott M. Mannes Trustee March 21, 2003
/s/ Stuart A. Rothstein
-----------------------
Stuart A. Rothstein Chief Financial Officer March 21, 2003
58
CERTIFICATION
I, Stuart J. Boesky, hereby certify that:
1. I have reviewed this annual report on Form 10-K of American Mortgage
Acceptance Company;
2. Based on my knowledge, this annual report does not contain any untrue
statement of a material fact or omit to state a material fact
necessary in order to make the statements made, in light of the
circumstances under which such statements were made, not misleading
with respect to the period covered by this annual report;
3. Based on my knowledge, the financial statements, and other financial
information included in this annual report, fairly present in all
material respects the financial condition, results of operations and
cash flows of the registrant as of, and for, the periods presented in
this annual report;
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as
defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant
and we have:
a) designed such disclosure controls and procedures to ensure the
material information relating to the registrant, including its
consolidated subsidiaries, is made known to us by others within those
entities, particularly during the period in which this annual report
is being prepared;
b) evaluated the effectiveness of the registrant's disclosure controls
and procedures as of a date within 90 days prior to the filing date of
this annual report (the "Evaluation Date"); and
c) presented in this annual report our conclusions about the
effectiveness of the disclosure controls and procedures based on our
evaluation as of the Evaluation Date;
5. The registrant's other certifying officers and I have disclosed, based
on our most recent evaluation, to the registrant's auditors and the
audit committee of registrant's board of directors or persons
performing the equivalent functions:
a) all significant deficiencies in the design or operation of internal
controls which could adversely affect the registrant's ability to
record, process, summarize and report financial data and have
identified for the registrant's auditors any material weaknesses in
internal controls; and
b) any fraud, whether or not material, that involves management or
other employees who have a significant role in the registrant's
internal controls; and
6. The registrant's other certifying officers and I have indicated in
this annual report whether or not there were significant changes in
internal controls or in other factors that could significantly affect
internal controls subsequent to the date of our most recent
evaluation, including any corrective actions with regard to
significant deficiencies and material weaknesses.
Date: March 21, 2003 By: /s/ Stuart J. Boesky
-------------- --------------------
Stuart J. Boesky
Chief Executive Officer
59
CERTIFICATION
I, Stuart A. Rothstein, hereby certify that:
1. I have reviewed this annual report on Form 10-K of American Mortgage
Acceptance Company;
2. Based on my knowledge, this annual report does not contain any untrue
statement of a material fact or omit to state a material fact
necessary in order to make the statements made, in light of the
circumstances under which such statements were made, not misleading
with respect to the period covered by this annual report;
3. Based on my knowledge, the financial statements, and other financial
information included in this annual report, fairly present in all
material respects the financial condition, results of operations and
cash flows of the registrant as of, and for, the periods presented in
this annual report;
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as
defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant
and we have:
a) designed such disclosure controls and procedures to ensure the
material information relating to the registrant, including its
consolidated subsidiaries, is made known to us by others within those
entities, particularly during the period in which this annual report
is being prepared;
b) evaluated the effectiveness of the registrant's disclosure controls
and procedures as of a date within 90 days prior to the filing date of
this annual report (the "Evaluation Date"); and
c) presented in this annual report our conclusions about the
effectiveness of the disclosure controls and procedures based on our
evaluation as of the Evaluation Date;
5. The registrant's other certifying officers and I have disclosed, based
on our most recent evaluation, to the registrant's auditors and the
audit committee of registrant's board of directors or persons
performing the equivalent functions:
a) all significant deficiencies in the design or operation of internal
controls which could adversely affect the registrant's ability to
record, process, summarize and report financial data and have
identified for the registrant's auditors any material weaknesses in
internal controls; and
b) any fraud, whether or not material, that involves management or
other employees who have a significant role in the registrant's
internal controls; and
6. The registrant's other certifying officers and I have indicated in
this annual report whether or not there were significant changes in
internal controls or in other factors that could significantly affect
internal controls subsequent to the date of our most recent
evaluation, including any corrective actions with regard to
significant deficiencies and material weaknesses.
Date: March 21, 2003 By: /s/ Stuart A. Rothstein
-------------- -----------------------
Stuart A. Rothstein
Chief Financial Officer
60
Exhibit 99.1
CERTIFICATION PURSUANT TO
18.U.S.C. SECTION 1350,
AS ADOPTED PURSUANT TO
SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002
In connection with the Annual Report of American Mortgage Acceptance Company
(the "Company") on Form 10-K for the year ending December 31, 2002, as filed
with the Securities and Exchange Commission on the date hereof (the "Report"),
I, Stuart J. Boesky, Chief Executive Officer of the Company, certify, pursuant
to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002, that:
(1) The Report fully complies with the requirements of Section 13(a) or
15(d) of the Securities Exchange Act of 1934; and
(2) The information contained in the Report fairly presents, in all
material respects, the financial condition and results of operations of the
Company.
By: /s/ Stuart J. Boesky
--------------------
Stuart J. Boesky
Chief Executive Officer
March 21, 2003
61
Exhibit 99.2
CERTIFICATION PURSUANT TO
18.U.S.C. SECTION 1350,
AS ADOPTED PURSUANT TO
SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002
In connection with the Annual Report of American Mortgage Acceptance Company
(the "Company") on Form 10-K for the year ending December 31, 2002, as filed
with the Securities and Exchange Commission on the date hereof (the "Report"),
I, Stuart J. Boesky, Chief Executive Officer of the Company, certify, pursuant
to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002, that:
(1) The Report fully complies with the requirements of Section 13(a) or
15(d) of the Securities Exchange Act of 1934; and
(2) The information contained in the Report fairly presents, in all
material respects, the financial condition and results of operations of the
Company.
By: /s/ Stuart A. Rothstein
-----------------------
Stuart A. Rothstein
Chief Financial Officer
March 21, 2003
62
EXHIBIT 23(a)
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, 2002 and 2001, and for each of the three years in the period
ended December 31, 2002, dated March 21, 2003, appearing in this Annual Report
on Form 10-K of American Mortgage Acceptance Company for the year ended December
31, 2002.
/s/ DELOITTE & TOUCHE LLP
New York, New York
March 21, 2003
63
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 consolidated financial statements of ARCap Investors, L.L.C. as
of December 31, 2002 and for each of the two years in the period ended December
31, 2001, dated January 31, 2002, appearing in this Annual Report on Form 10-K
of American Mortgage Acceptance Company for the year ended December 31, 2002.
/s/ DELOITTE & TOUCHE LLP
Dallas, Texas
March 21, 2003
64
EXHIBIT 23(c)
INDEPENDENT AUDITORS' CONSENT
We consent to the incorporation by reference in Registration Statement (Form S-3
No. 33-42481) of American Mortgage Acceptance Company and in the related
Prospectus of our report dated February 4, 2003 on the consolidated financial
statements of ARCap Investors, L.L.C. included in this Annual Report (Form 10-K)
for the year ended December 31, 2002.
/s/ Ernst & Young LLP
Dallas, Texas
March 21, 2003
65
EXHIBIT 99 (a)
INDEPENDENT AUDITORS' REPORT
The Board of Managers
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, 2002, and the related
consolidated statements of operations, 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. 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, the financial statements referred to above present fairly, in
all material respects, the consolidated financial position of ARCap Investors,
L.L.C. and subsidiaries at December 31, 2002, and the consolidated results of
their operations and their cash flows for the year then ended in conformity with
accounting principles generally accepted in the United States.
/s/ Ernst & Young LLP
Dallas, Texas
February 4, 2003
66
ARCap INVESTORS, L.L.C. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEET
ASSETS
December 31, 2002
-----------------
Investment securities - trading,
net (Note 3) $798,856,791
Accrued interest receivable 9,243,042
Cash and cash equivalents 4,953,388
Deferred borrowing costs, net (Note 5) 4,453,750
Restricted cash - CBO swap (Note 5) 4,325,848
Other assets 722,261
------------
Total assets $822,555,080
============
LIABILITIES AND MEMBERS' EQUITY
Liabilities:
Long-term debt (Note 5) $236,000,000
Repurchase agreements (Note 6) 155,423,000
Accrued interest payable 4,853,757
Borrowed investment securities and
interest rate swap, net (Note 4) 4,487,562
CBO swap liability (Note 5) 4,125,000
Accrued expenses 208,455
------------
Total liabilities 405,097,774
------------
Commitments and contingencies
Minority interest in consolidated entities 192,337,631
Members' equity:
Series A preferred members 147,340,254
Common members 77,779,421
Total members' equity 225,119,675
------------
Total liabilities and members' equity $822,555,080
============
See notes to consolidated financial statements
67
ARCap INVESTORS, L.L.C. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF OPERATIONS
December 31, 2002
-----------------
Revenues:
Interest income - CMBS $ 76,306,706
Other investment income 2,175,975
------------
Total revenues 78,482,681
------------
Expenses:
Interest - long-term debt and repurchase agreements 20,527,438
Interest - borrowed investment securities and
interest rate swap, net 7,287,485
Financing fee 1,180,000
Salaries and employee benefits 5,508,718
General and administrative 4,442,601
------------
Total expenses 38,946,242
------------
Net margin on CMBS and other investments 39,536,439
Other revenue (expense):
Accretion of purchase discount 17,137,362
Loss on trading securities, net (Note 7) (11,068,375)
------------
6,068,987
Income before minority interest 45,605,426
Minority interest (14,456,330)
------------
Net income $ 31,149,096
============
See notes to consolidated financial statements
68
ARCap INVESTORS, L.L.C. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF MEMBERS' EQUITY
YEAR EMDED DECEMBER 31, 2002
Series A
Common Preferred
Members Members Total
------------------------------------------------
Balance at January 1, 2002 $ 78,156,400 $145,827,125 $223,983,525
Costs to raise capital of
consolidated subsidiaries (386,470) (863,826) (1,250,296)
Distributions (10,890,994) (17,871,656) (28,762,650)
Net income 10,900,485 20,248,611 31,149,096
------------ ------------ ------------
Balance at December 31, 2002 $ 77,779,421 $147,340,254 $225,119,675
============ ============ ============
See notes to consolidated financial statements
69
ARCap INVESTORS, L.L.C. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF CASH FLOWS
December 31, 2002
-----------------
OPERATING ACTIVITIES
Net income $ 31,149,096
Adjustments to reconcile net income to net cash
used in operating activities:
Loss on trading securities, net 11,068,375
Accretion of purchase discount (17,137,362)
Amortization of deferred borrowing costs 680,930
Minority interest 14,456,330
Changes in operating assets and liabilities:
Investment securities - trading, net (205,485,635)
Accrued interest receivable (3,410,351)
Restricted cash - CBO swap (73,117)
Other assets (93,381)
Accrued interest payable 1,616,725
Borrowed investment securities and
interest rate swap, net (14,765,069)
Accrued expenses (190,995)
-------------
Net cash used in operating activities (182,184,454)
-------------
FINANCING ACTIVITIES
Distributions to members (28,762,650)
Contributions from minority interest members 148,576,742
Distributions to minority interest members (14,093,989)
Costs to raise capital (1,350,296)
Proceeds from repurchase agreements 69,321,000
--------------
Net cash provided by financing activities 173,690,807
--------------
NET CHANGE IN CASH AND CASH EQUIVALENTS (8,493,647)
CASH AND CASH EQUIVALENTS, BEGINNING OF YEAR 13,447,035
--------------
CASH AND CASH EQUIVALENTS, END OF YEAR $ 4,953,388
==============
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION
Cash payments for interest on repurchase agreements
and long-term debt $ 20,489,835
==============
See notes to consolidated financial statements
70
ARCap INVESTORS, L.L.C. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEAR ENDED DECEMBER 31, 2002
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. (ARCap REIT), a majority-owned subsidiary of the
Company.
- ARCAP Resecuritization Corporation (ARCap Resecuritization), a wholly
owned subsidiary of ARCap REIT. ARCap Resecuritization owns all the
residual interest in Commercial Resecuritization Trust 2001 ABC-2 (the
Trust).
- ARCap High Yield CMBS Fund, L.L.C. (the High Yield Fund), of which
ARCap REIT owned an approximate 23% controlling interest as of
December 31, 2002. The High Yield Fund owns approximately 60% of ARCap
CMBS Fund REIT, Inc. (the Fund REIT).
- ARCap Diversified Risk CMBS Fund, L.L.C. (the Diversified Risk Fund),
of which ARCap REIT owned an approximate 1% controlling interest as of
December 31, 2002. The Diversified Risk Fund owns approximately 40% of
the Fund REIT.
- ARCap Special Servicing, Inc. (Special Servicing), a taxable REIT
subsidiary wholly owned by ARCap REIT.
Minority interests primarily represent outside members' approximate 77%
ownership in the High Yield Fund and outside members' approximate 99% ownership
in the Diversified Risk Fund. The Company has consolidated the High Yield Fund
and Diversified Risk Fund as it exercises control (through ARCap REIT, which
acts as the Managing Member of both Funds in accordance with the terms of the
respective LLC agreements) over the operations of these Funds. The Company
records minority interest expense (income) that reflects the portion of the
earnings (losses) of the operations which is applicable to the minority interest
members.
Separate books of accounts are maintained for ARCap REIT, ARCap
Resecuritization, the Trust, the High Yield Fund, the Fund REIT, the Diversified
Risk Fund, and Special Servicing 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 for existing securities and the settlement date for
to-be-issued securities. 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.
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 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.
D) Revenue Recognition - Interest income and special servicing fees are
recognized as earned. Accretion of discounts is computed using the
effective-yield method over the life of the underlying assets.
E) Derivative Financial Instruments - Derivative financial instruments are
utilized by the Company to reduce interest rate risk. The Company utilizes
interest rate swaps and 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
71
ARCap INVESTORS, L.L.C. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEAR ENDED DECEMBER 31, 2002
value with any unrealized gain or loss included in earnings, in accordance with
the provisions of SFAS No. 133, Accounting for Derivative Instruments and
Hedging Activities.
F) Resale and Repurchase 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.
G) Cash and Cash Equivalents - Cash and cash equivalents include all highly
liquid investments with original maturities when purchased of three months or
less.
H) Restricted Cash - Restricted cash represents amounts required to be pledged
under interest rate cap and floor agreements (see Note 5).
I) 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).
J) 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.
K) Income Taxes - The Company has elected to be taxed as a partnership, whereby
all income is taxed at the member level, with the exception of Special Servicing
which is taxed at the entity level. ARCap REIT has elected to be taxed as a real
estate investment trust for federal income tax purposes.
No provision for income taxes has been made for Special Servicing for the period
April 1, 2002 (inception of Special Servicing) through December 31, 2002 as
Special Servicing did not generate any taxable income.
L) Use of Estimates - The preparation of consolidated financial statements in
conformity with accounting principles generally accepted in the United States
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.
M) 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 is 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.
NOTE 2. MEMBERS' EQUITY
The Limited Liability Company Agreement (LLC Agreement) establishes two classes
of membership: Series A Preferred members and Common members.
Cash Flows are distributed in the following order of priority:
- 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 ended 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 on an established value of $21.74 per
unit, 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.
72
ARCap INVESTORS, L.L.C. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEAR ENDED DECEMBER 31, 2002
- 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.
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 the effective date of the First Amendment to
the LLC Agreement (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.
At December 31, 2002, there were a total of 6,000,000 Series A Preferred Units
and 4,999,382 Common Units issued and outstanding.
The LLC Agreement contains certain restrictive covenants regarding the amount of
variable rate debt, total debt, and certain financial ratios. Failure to meet
the covenants in successive quarters can result in the Chief Executive Officer
and Chief Operating Officer being removed from the Board of Managers until such
time as the covenants are cured for successive quarters. Management believes
that the Company has not violated the covenants in successive quarters.
73
ARCap INVESTORS, L.L.C. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEAR ENDED DECEMBER 31, 2002
NOTE 3. INVESTMENT SECURITIES
The Company's trading securities are carried at estimated fair value and are
comprised of the following at December 31, 2002:
Face Cost Fair Value ercentage
----------------------------------------------------------
Subordinated CMBS:
Security rating:
BB+ $ 115,923,711 $ 91,176,800 $103,776,027 12.99%
BB 170,077,178 127,903,052 141,264,695 17.68%
BB- 134,295,076 90,149,121 99,793,698 12.49%
B+ 215,067,722 127,005,619 137,774,880 17.25%
B 264,721,814 151,661,428 144,486,471 18.09%
B- 161,254,347 79,612,839 70,601,239 8.84%
NR 420,501,779 110,757,808 101,159,781 12.66%
--------------- ------------- ------------ -------
$ 1,481,841,627 $ 778,266,667 $798,856,791 100.00%
=============== ============= ============ =======
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, 2002, was approximately $30,627,000.
The gross cumulative unrealized gains and losses on the Company's trading
investment securities at December 31, 2002, were approximately $41,709,000 and
($51,746,000), respectively.
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, 2002:
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) $( 13,072,362) $ (2,097,634)
U.S. Treasury (02-15-11) 5.000% (17,818,000) (17,523,195) (19,591,448) (2,068,253)
U.S. Treasury (08-15-11) 5.000% (136,603,000) (138,334,790) (149,900,450) (11,565,660)
U.S. Treasury (02-15-12) 4.875% (85,300,000) (91,513,064) (92,697,111) (1,184,047)
U.S. Treasury (11-15-12) 4.000% (20,468,000) (20,336,877) (20,775,020) (438,143)
-------------- -------------- -------------- ------------
$(271,428,000) $( 278,682,654) (296,036,391) $(17,353,737)
============== =============== =============
Reverse repurchase agreements 295,618,149
-------------
Borrowed investment securities, net (418,242)
Interest rate swap (4,069,320)
-------------
Borrowed investment securities and
interest rate swap, net $ (4,487,562)
==============
The borrowed 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.
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.
At December 31, 2002, the Company pledged CMBS valued at approximately
$10,363,000 as additional collateral against the borrowed investment securities
outstanding as of December 31, 2002.
74
ARCap INVESTORS, L.L.C. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEAR ENDED DECEMBER 31, 2002
The Company entered into an interest rate swap agreement with Bear Stearns
Capital Markets (Bear Stearns) with a notional amount at December 31, 2002, of
$27,000,000, 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. 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, 2002, the Company pledged CMBS
valued at approximately $14,611,000 as additional collateral against the
interest rate swap outstanding as of December 31, 2002.
NOTE 5. LONG-TERM DEBT
During fiscal year 2001, the Company entered into an agreement to sell its
interests in 50 CMBS pass-through 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 $345,512,000 at December 31, 2002. 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 method, over the life of the debt, which is seven years
(through February 22, 2008). The Company amortized $680,930 of deferred costs
for the year ended December 31, 2002. Total accumulated amortization of deferred
borrowing costs at December 31, 2002, was $1,213,830.
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 rate on its variable
rate debt at 7.435%. The notional amount for the CBO Swap is $137,500,000. 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 originally 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 paid monthly. Interest expense on the Notes was
approximately $17,238,000 for the year ended December 31, 2002, and the related
accrued interest payable at December 31, 2002, was approximately $480,000.
NOTE 6. REPURCHASE AGREEMENTS
The Company entered into repurchase agreements to finance a portion of its CMBS
purchases. The weighted-average interest rate as of December 31, 2002, was
2.73%, and the average maturity of the agreements was 30 days. The repurchase
agreements are collateralized by a portion of the Company's portfolio of CMBS
investments with a fair value of approximately $284,943,000 at December 31,
2002. Accrued interest payable at December 31, 2002, was approximately $209,000.
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, 2002, is as follows:
Unrealized loss - borrowed investment securities $(17,594,455)
Unrealized loss - interest rate swap (3,395,007)
Unrealized loss - CBO Swap (1,408,400)
Unrealized gain - CMBS 12,443,165
Realized loss - CMBS (1,086,698)
Realized loss - borrowed investment securities (26,980)
-------------
Loss on trading securities, net $(11,068,375)
=============
75
ARCap INVESTORS, L.L.C. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEAR ENDED DECEMBER 31, 2002
NOTE 8. OPERATING LEASES
The Company leases its office space and certain equipment under operating leases
that expire between April 2004 and January 2007. The office lease, as amended,
provides for an annual basic rental of $206,244 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:
2003 $313,851
2004 243,455
2005 207,384
2006 206,244
2007 17,187
--------
Total $988,121
========
Lease expense for the year ended December 31, 2002 was approximately $316,000.
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 represent transactions that are in
the normal course of business of the Company and the members. During the year
ended December 31, 2002, the Company purchased from such members CMBS with an
approximate face of $387,327,000 at an approximate purchase price of
$210,382,000.
The Company has loaned approximately $231,000 to key executives for funding of
tax liabilities associated with units granted under an incentive compensation
arrangement. As of December 31, 2002, there is approximately $190,000
outstanding.
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.
Under a fee arrangement, ARCap REIT paid C.P. Eaton & Associates, Inc. a monthly
retainer fee and an incentive fee to assist ARCap REIT in raising capital for
fund operations with respect to which ARCap REIT acts as the Managing Member.
The total costs incurred under this fee arrangement are allocated
proportionately (based on total dollars raised) to all funds for which capital
dollars are raised.
NOTE 10. EMPLOYEE BENEFITS
The Company holds a contributory defined contribution 401(k) plan that covers
substantially all full-time employees. The Company matches participant
contributions up to 3% of each participant's total compensation. Matching
contributions totaled approximately $75,000 for the year ended December 31,
2002.
The Company has 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, 2002, the Company has granted
approximately 551,000 and 193,000 appreciation units and grant units,
respectively. The Board of Managers approved the Compensation Committee's
recommendations to grant additional appreciation units and grant units of
approximately 138,000 and 95,000, respectively, effective January 1, 2003.
Grant units granted each have a vesting period, which generally is ratable over
a period of three years. Once vested, employees are entitled to receive a bonus
in an amount equal to the per Unit amount distributed on account of the Common
Units times the number of grant units vested in the employee. The employee is
entitled to this compensation regardless of whether the distribution to the
holders of Common Units is an ordinary distribution or an extraordinary
distribution. Thus, if the Company is sold or liquidated, the employee would be
entitled to share in the proceeds of the sale or liquidation on the same basis
as the holders of Common Units with respect to vested grant units.
Appreciation units granted also have a vesting period which is generally spread
ratably over a three year period. Once vested, employees begin to "earn" the
right to receive compensation on account of each vested appreciation unit by
being credited with an amount equal to the per Unit distributions made to
holders of Common Units until the amount credited equals the Initial Value (i.e.
the price at which a vested employee could obtain the appreciation unit)
established by the Compensation Committee. Vested employees are entitled to
compensation on account of each vested appreciation unit in an amount equal to
the per Unit distributions made to holders of Common Units only after they have
"earned" credits equal to the Initial Value. In the event of a liquidation or
76
ARCap INVESTORS, L.L.C. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEAR ENDED DECEMBER 31, 2002
sale, employees with vested appreciation units are entitled to compensation in
an amount equal to the per Unit proceeds in excess of the Initial Value plus the
credits which have been earned.
The amount actually received by employees on account of the vested grant and
appreciation units is compensation. For the year ended December 31, 2002, the
Company expensed approximately $157,000 relating to compensation paid on account
of vested grant units.
77
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 subsidiaries (the "Company") as of December 31, 2001, and the related
consolidated statements of income, members' equity and cash flows for each of
the two 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 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 each of the two years ended December 31, 2001 in conformity
with accounting principles generally accepted in the United States of America.
/s/ DELOITTE & TOUCHE LLP
Dallas, Texas
January 31, 2002
78
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.
79
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.
80
ARCap INVESTORS, L.L.C. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF INCOME AND COMPREHENSIVE INCOME
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
=============
See notes to consolidated financial statements.
81
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.
82
ARCap INVESTORS, L.L.C. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF MEMBERS' EQUITY
YEAR ENDED DECEMBER 31, 2000
-----------------------------------------------------------------------------------
Accumulated
Series A Other
Common Preferred Preferred Comprehensive
Members Members Members Income Total
-----------------------------------------------------------------------------------
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
============= ============= =============== ============= =============
See notes to consolidated financial statements.
83
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 rom 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.
84
ARCap INVESTORS, L.L.C. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF CASH FLOWS
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
=============
See notes to consolidated financial statements.
85
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.
86
ARCap INVESTORS, L.L.C. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEAR ENDED DECEMBER 31, 2001
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.
87
ARCap INVESTORS, L.L.C. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEAR ENDED DECEMBER 31, 2001
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.
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.
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%
============== ============== ============== ==========
88
ARCap INVESTORS, L.L.C. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEAR ENDED DECEMBER 31, 2001
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.
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.
89
ARCap INVESTORS, L.L.C. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEAR ENDED DECEMBER 31, 2001
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 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.
90
ARCap INVESTORS, L.L.C. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEAR ENDED DECEMBER 31, 2001
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 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
91
ARCap INVESTORS, L.L.C. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEAR ENDED DECEMBER 31, 2001
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.
92