UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
-------------------------------
FORM 10-Q
|X| QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 2002March 31, 2003
OR
|_| TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from ______________ to ______________
Commission File Number: 1-13991
MFA MORTGAGE INVESTMENTS, INC.
(Exact name of registrant as specified in its charter)
-------------------------------
Maryland 13-3974868
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
350 Park Avenue, 21st Floor, New York, New York 10022
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (212) 207-6400
-------------------------------
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 |_|
46,269,949Indicate by check mark whether the registrant is an accelerated filer (as
defined in Rule 12b-2 of the Securities Exchange Act of 1934). Yes |X| No |_|
46,354,605 shares of the registrant's Common Stock, $0.01 par value, were
outstanding as of October 28, 2002.April 21, 2003.
INDEX
Page
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PART I
Financial Information
Item 1. Financial Statements
Statements of Financial Condition as of September 30, 2002
(Unaudited) and December 31, 2001............................... 1
Statements of Operations (Unaudited) for the Three and Nine
Months Ended September 30, 2002 and September 30, 2001.......... 2
Statements of Changes in Stockholders' Equity (Unaudited)
for the Nine Months Ended September 30, 2002,................... 3
Statements of Cash Flows (Unaudited) for the Nine Months
Ended September 30, 2002 and September 30, 2001................. 4
Notes to the Financial Statements (Unaudited)................... 5
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations....................................... 19
Item 3. Quantitative and Qualitative Disclosures About Market Risk...... 24
Item 4. Controls and Procedures......................................... 26
PART II
Other Information
Item 1. Legal Proceedings............................................... 27
Item 2. Changes in Securities and Use of Proceeds....................... 27
Item 6. Exhibits and Reports on Form 8-K................................ 27
Signatures................................................................ 29
Certifications............................................................ 30
PART I
Financial Information
Page
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Item 1. Financial Statements
Consolidated Statements of Financial Condition as of March 31, 2003
(Unaudited) and December 31, 2002.............................................. 1
Consolidated Statements of Operations (Unaudited) for the Three Months
Ended March 31, 2003 and March 31, 2002........................................ 2
Consolidated Statements of Changes in Stockholders' Equity
for the Three Months Ended March 31, 2003 (Unaudited).......................... 3
Consolidated Statements of Cash Flows (Unaudited) for the Three Months
Ended March 31, 2003 and March 31, 2002........................................ 4
Consolidated Statements of Comprehensive Income for the Three Months
Ended March 31, 2003 and March 31, 2002........................................ 5
Notes to the Consolidated Financial Statements (Unaudited)..................... 6
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations.................................................................. 18
Item 3. Quantitative and Qualitative Disclosures About Market Risk..................... 22
Item 4. Controls and Procedures........................................................ 24
PART II
Other Information
Item 1. Legal Proceedings.............................................................. 25
Item 6. Exhibits and Reports on Form 8-K............................................... 25
SIGNATURES............................................................................... 27
CERTIFICATIONS........................................................................... 28
MFA MORTGAGE INVESTMENTS, INC.
CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION
September 30,March 31, December 31,
(In Thousands, Except Share and per Share Amounts) 2003 2002
2001
------------------------ ------------
(Unaudited)
Assets:
Mortgage backed securities ("MBS") (Note 4) $ 3,446,5343,535,722 $ 1,926,9003,485,319
Cash and cash equivalents 112,839 58,53334,931 64,087
Restricted cash -- 39,499
Corporate debt securities -- 9,774
Corporate equity securities -- 4,0882,300 39
Accrued interest and dividends receivable 19,813 12,340
Other investments 9,625 9,80019,749 19,472
Interest rate cap agreements 934 513(Note 5) 770 1,108
Equity interest in real estate investments (Note 6) 3,721 3,806
Real estate (Note 6) 21,825 21,986
Goodwill, net 7,189 7,189
Prepaid and other assets 1,985 2971,353 853
----------- -----------
$ 3,598,9193,627,560 $ 2,068,9333,603,859
=========== ===========
Liabilities:
Repurchase agreements (Note 7) $ 3,197,1353,211,577 $ 1,845,5983,185,910
Accrued interest payable 16,114 11,38713,535 14,299
Mortgages payable on real estate 16,295 16,337
Dividends payable 14,951 7,718
Accounts payable 839 60613,105 14,952
Accrued expenses and other liabilities 976 1,161
----------- -----------
3,229,039 1,865,309
----------- -----------$ 3,255,488 $ 3,232,659
=========== ===========
Commitments and contingencies (Note 10)8) -- --
Stockholders' Equity:
Common stock, $.01 par value; 375,000,000 shares authorized,
46,269,949authorized;
46,354,605 and 28,348,60146,270,855 issued and outstanding at
September 30, 2002March 31, 2003 and December 31, 2001,2002, respectively 462 283464 463
Additional paid-in capital 359,887 212,536359,767 359,359
Accumulated deficit (12,506) (13,704)(10,178) (12,417)
Accumulated other comprehensive income 22,037 4,509(Note 11) 22,019 23,795
----------- -----------
369,880 203,624372,072 371,200
----------- -----------
$ 3,598,9193,627,560 $ 2,068,9333,603,859
=========== ===========
The accompanying notes are an integral part of the financial statements.
1
MFA MORTGAGE INVESTMENTS, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
Three Months Ended
Nine Months Ended
September 30, September 30,March 31,
-------------------------
2003 2002 2001 2002 2001
-------- --------
-------- --------
(In Thousands, Except per Share Amounts) (Unaudited)
Interest and Dividend Income:
MBS income $ 36,67232,065 $ 15,937 $ 93,458 $ 32,11326,638
Corporate debt securities income 181 361 791 1,261-- 321
Dividend income -- 129 39 569
Interest income on temporary cash investments 178 261 706 598
-------- --------123 255
-------- --------
Total Interest and Dividend Income 37,031 16,688 94,994 34,541
-------- --------32,188 27,253
-------- --------
Interest Expense on Borrowed Funds 17,830 10,276 46,560 22,626
-------- --------Repurchase Agreements 14,967 13,483
-------- --------
Net Interest and Dividend Income 19,201 6,412 48,434 11,915
-------- --------17,221 13,770
-------- --------
Other Income (Loss):
Income and gains (losses) from other investments (52) 229 139 3,174equity interest in real estate (100) 59
Revenue from operations of real estate 427 --
Net gain (loss) on sale of investment securities (363) (124) (115) (375)-- 414
Other-than-temporary impairment on investment securities -- -- (3,474) --
-------- --------
-------- --------
Total Other Income (415) 105 (3,450) 2,799Income/(Loss) 327 (3,001)
-------- --------
Operating and Other Expense:
Compensation and benefits 951 819
Real estate operating expense 347 --
Mortgage interest on real estate 203 --
Other general and administrative 703 393
-------- --------
GeneralTotal Operating and Administrative Expenses 1,446 1,430 3,930 3,336
-------- --------Other Expense 2,204 1,212
-------- --------
Net Income $ 17,34015,344 $ 5,087 $ 41,054 $ 11,378
======== ========9,557
======== ========
Income perPer Share:
Net income per share - basic $ 0.37.33 $ 0.27 $ 1.03 $ 0.920.28
Weighted average shares outstanding - basic 46,257 19,035 39,801 12,33146,316 34,329
Net income per share - diluted .33 $ 0.37 $ 0.27 $ 1.03 $ 0.920.28
Weighted average shares outstanding - diluted 46,346 19,148 39,913 12,42546,378 34,453
The accompanying notes are an integral part of the financial statements.
2
MFA MORTGAGE INVESTMENTS, INC.
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
Nine Months Ended
September 30, 2002
------------------
(Unaudited)
(In Thousands, Except per Share Data)
Common Stock (Par Value $.01):
Balance at December 31, 2001 $ 283
Issuance of common stock, par value 179
---------
Balance at September 30, 2002 462
---------
Additional Paid-in Capital:
Balance at December 31, 2001 212,536
Issuance of common stock, net of offering expenses 146,789
Exercise of common stock options 438
Issuance of common stock to directors 60
Compensation expense for 1997 stock option plan 64
---------
Balance at September 30, 2002 359,887
---------
Accumulated Deficit:
Balance at December 31, 2001 (13,704)
Net income 41,054
Cash dividends declared (39,856)
---------
Balance at September 30, 2002 (12,506)
---------
Accumulated Other Comprehensive Income:
Balance at December 31, 2001 4,509
Unrealized gain on available-for-sale securities during period, net 19,978
Unrealized loss on interest rate cap agreements (2,450)
---------
Balance at September 30, 2002 22,037
---------
Total Stockholders' Equity $ 369,880Three Months Ended
March 31, 2003
------------------
(Unaudited)
(In Thousands, Except per Share Amounts)
Common Stock (Par Value $.01):
Balance at December 31, 2002 $ 463
Issuance of common stock for option exercises and
stock based compensation 1
---------
Balance at March 31, 2003 464
---------
Additional Paid-in Capital:
Balance at December 31, 2002 359,359
Exercise of common stock options 408
---------
Balance at March 31, 2003 359,767
---------
Accumulated Deficit:
Balance at December 31, 2002 (12,417)
Net income 15,344
Cash dividends declared ($.28 per share) (13,105)
---------
Balance at March 31, 2003 (10,178)
---------
Accumulated Other Comprehensive Income:
Balance at December 31, 2002 23,795
Unrealized loss on MBS during period, net (1,447)
Unrealized loss on interest rate cap agreements (329)
---------
Balance at March 31, 2003 22,019
---------
Total Stockholders' Equity $ 372,072
=========
The accompanying notes are an integral part of the financial statements.
3
MFA MORTGAGE INVESTMENTS, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
NineThree Months Ended
September 30, September 30,March 31,
(In Thousands) 2003 2002
2001
------------- ----------------------- -----------
(Unaudited)
Cash Flows From Operating Activities:
Net income $ 41,05415,344 $ 11,3789,557
Adjustments to reconcile net income to net cash
provided by operating activities:
Net (gain) loss on sale of investment securities/otherportfolio investments 115 (2,507)
Other-than-temporary-- (414)
Unrealized impairment recognized on corporate
investmentdebt securities -- 3,474
124Amortization of purchase premiums on investments 8,741 5,739
Amortization of premium on investments 18,833 2,353
Amortization of goodwillcost for interest rate cap agreements 9 -- 150
Increase in interest receivable (7,473) (5,187)
(Increase) decrease(277) (4,650)
Increase in prepaid and other assets and other (1,564) 206
Increase(430) (193)
Decrease in accounts payable 233 593
Increaseaccrued expenses and other liabilities (185) (2)
(Decrease) increase in accrued interest payable 4,727 4,299(764) 100
----------- -----------
Net cash provided by operating activities 59,399 11,40922,438 13,611
----------- -----------
Cash Flows From Investing Activities:
Principal payments on MBS 850,559 147,874421,481 280,518
Proceeds from sale of MBS 4,540 5,544
Proceeds from sale of corporate debt securities 5,664 2,516-- 4,600
Proceeds from sale of corporate equity securities 3,947 5,143-- 3,167
Loss from equity interests in real estate in excess of distributions 100 (44)
Principal amortization of mortgage principal (42) --
Depreciation and amortization on real estate 76 --
Purchases of MBS (2,372,925) (1,040,452)
Purchases of corporate equity securities -- (392)
Decrease (increase) in other investments, excluding reinvested real estate gains 175 (196)(482,072) (1,006,890)
----------- -----------
Net cash used inby investing activities (1,508,040) (879,963)(60,457) (718,649)
----------- -----------
Cash Flows From Financing Activities:
Decrease (increase)(Increase) decrease in restricted cash 39,499 (10,503)
Purchases(2,261) 679
Purchase of interest rate cap agreements (2,872) -- (1,486)
Net increase in repurchase agreement borrowings through repurchase agreements 1,351,537 832,35125,667 641,795
Net proceeds from common stock offering 146,968 67,088-- 58,213
Dividends paid (14,952) (7,718)
Proceeds from exercise of stock options 438409 --
Dividends paid (32,623) (6,343)
----------- -----------
Net cash provided by financing activities 1,502,947 882,5938,863 691,483
----------- -----------
Net decrease in unrestricted cash and cash equivalents 54,306 14,039(29,156) (13,555)
Cash and cash equivalents at beginning of period 64,087 58,533 8,400
----------- -----------
Cash and cash equivalents at end of period $ 112,83934,931 $ 22,43944,978
=========== ===========
Supplemental Disclosure of Cash Flow Information:
Cash paid during the period for interest $ 41,83315,721 $ 18,32713,382
=========== ===========
The accompanying notes are an integral part of the financial statements.
4
MFA MORTGAGE INVESTMENTS, INC.
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
Three Months Ended
March 31,
(In Thousands) 2003 2002
-------- --------
Net income $ 15,344 $ 9,557
Other Comprehensive Income:
Unrealized holding losses arising during the period, net (1,447) (6,729)
Unrealized holding (losses) gains on interest rate cap
agreements arising during the period, net (329) 200
-------- --------
Comprehensive Income $ 13,568 $ 3,028
======== ========
The accompanying notes are an integral part of the financial statements.
5
MFA MORTGAGE INVESTMENTS, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
1. Organization
MFA Mortgage Investments, Inc. (the "Company" or "MFA"), formerly known as
America First Mortgage Investments, Inc., was incorporated in
Maryland on July 24, 1997. The Company1997 and began operations on April 10, 1998.
On April 10, 1998, when it merged withthe Company and three partnerships (the "1998 Merger"),partnerships; America First
Participating/Preferred Equity Mortgage Fund Limited Partnership ("PrepPREP Fund
1"), America First PrepPREP Fund 2 Limited Partnership ("PrepPREP Fund 2"), and America
First PrepPREP Fund 2 Pension Series Limited Partnership ("Pension Fund"),
collectively referredconsummated a merger transaction whereby the pre-existing net assets and
operations of PREP Fund 1 and PREP Fund 2 and a majority interest in the Pension
Fund were contributed to as the "Prep Funds"Company in exchange for 9,035,084 shares of the
Company's common stock (the "1998 Merger"). The 1998 Merger was accounted for
using the purchase method of accounting in accordance with generally accepted
accounting principles. PREP Fund 1 was deemed to be the acquirer of PREP Fund 2
and Pension Fund under the purchase method. Accordingly, the 1998 Merger
resulted, for financial accounting purposes, in the effective purchase by PREP
Fund 1 of all the Beneficial Unit Certificates ("BUCs") of PREP Fund 2 and 99%
of the BUCs of Pension Fund. In December 1999, Pension Fund was liquidated and
dissolved and, as a result, the Company hasdirectly acquired 99% of the assets of
Pension Fund. The remaining assets, consisting solely of cash, were distributed
to the holders of Pension Fund BUCs who elected to be taxed as a real estate investment trust
("REIT")remain in place following the
1998 Merger. As the surviving entity for federal income tax purposes. Pursuantfinancial accounting purposes, the
assets and liabilities of PREP Fund 1 were recorded by the Company at their
historical cost and the assets and liabilities of PREP Fund 2 and Pension Fund
were adjusted to the current federal tax
regulations, onefair value. The excess of the requirementsfair value of maintaining its statusthe common stock
issued over the fair value of net assets acquired was recorded as a REIT is that
the Company must distribute at least 90% of its annual taxable net income to its
stockholders, subject to certain adjustments.goodwill.
From the time of its inception, through December 31, 2001, the Company was externally advisedmanaged by
America First Mortgage Advisory Corporation (the "Advisor"), pursuant to an
advisory agreement between the parties (the "Advisory
Agreement"). During the period the Company wasparties. As an externally managed itcompany, the Company had
no employees of its own and relied on the Advisor to conduct its business and
operations.
Pursuant to the consummation of the stockholder approved merger between the
Company and the Advisor (the "Advisor Merger"), the Company and the Advisor
merged effective 12:01 a.m. on January 1, 2002. As a result, of the Advisor Merger, the Company became
self-advised and commencing January 1, 2002 and thereafter has directly incurred the
cost of all overhead necessary to operate the Company.2002. For accounting purposes, the
Advisor Merger wasis not considered the acquisition of a "business" for purposes of
applying Accounting Principles Board ("APB") Opinion No. 16, "Business
Combinations" as superceded by FASFinancial Accounting Standards ("FAS") 141,
"Business Combinations" and, therefore, the market value of the common stock
issued, valued as of the consummation of the Advisor Merger, in excess of the
fair value of the net tangible assets acquired was charged to operating income
rather than capitalized as goodwill.
An expense of
$12,539,000 was incurred in connection with the Advisor Merger, of which
$11,266,000 represented the market value of the 1,287,501 common shares the
Company issued in the transaction. (See Note 3.)
EffectiveOn August 13, 2002, the Company changed its name to MFA Mortgage
Investments, Inc. from America First
Mortgage Investments, Inc. in order to more
clearly reflect its independent status and identity as a self-advised REIT.MFA Mortgage Investments, Inc.
2. Summary of Significant Accounting Policies
(a) Basis of Presentation
The accompanying interim unaudited financial statements have been prepared
according to the rules and regulations of the Securities and Exchange
Commission
("SEC").Commission. Certain information and footnote disclosures normally included in
financial statements prepared in accordance with generally accepted accounting
principles ("GAAP") have been condensed or omitted according to such rules and
regulations, although management believes that the disclosures are adequate to
make the information presented not misleading. The financial statements should
be read in conjunction with the financial statements and notes thereto included
in the Company's Annual Report on Form 10-K for the year ended December 31,
2001.2002. In the opinion of management, all normal and recurring adjustments
necessary to present fairly the financial position at September 30, 2002March 31, 2003 and results
of operations for all periods presented have been made. The results of
operations for the three-month and nine-month periodsthree month period ended September 30, 2002
areMarch 31, 2003 should not necessarilybe
construed as indicative of the results to be expected for the full year.
As more fully discussed in Note 7, the Company has investments in
corporations and real estate limited partnerships, as a limited partner, which
are accounted for under the equity method. Through September 30, 2002, the
Company did not legally control any of the properties.
The financial statements are prepared on the accrual basis of accounting
in accordance with GAAP.generally accepted accounting principles. The preparation of
financial statements in conformity with GAAPgenerally accepted accounting principles
requires management to make estimates and assumptions that affect the reported
amounts of assets and liabilities and disclosure of contingent assets and
liabilities at the date of the financial statements and the reported
6
MFA MORTGAGE INVESTMENTS, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
amounts of revenues and expenses during the reporting period. Actual results
could differ from those estimates.
5
MFA MORTGAGE INVESTMENTS, INC.
NOTES TO THE FINANCIAL STATEMENTS
(UNAUDITED)
(b) Credit Risk and Declines in Market Value
The Company limits its exposure to credit losses on its investment
portfolio by requiring that at least 50% of its investment portfolio consist of
MBS that are guaranteed as to principal and interest by an agency of the U.S.
Government, such as Ginnie Mae, Fannie Mae and Freddie Mac ("Agency MBS") or
rated in one of the two highest rating categories by at least one nationally
recognized rating agency. The remainder of the Company's assets may be
investments in: (i) multi-family apartment properties; (ii) limited
partnerships, REITs or preferred stock of real estate related corporations or
(iii) other fixed-income instruments, such as corporate debt securities, that
provide increased call protection relative to the Company's MBS portfolio.
Corporate debt that is rated below investment-grade will be limited to less than
5% of the Company's total assets. Agency and AAA rated MBS, substantially all of
which were adjustable rate MBS ("ARM-MBS"), comprised approximately 96% and 93%
of the Company's total assets at September 30, 2002 and December 31, 2001,
respectively. The Company did not have an allowance for credit losses at
September 30, 2002 or December 31, 2001.
A decline in the market value of any of the Company's investment
securities that is considered by management to be other-than-temporary would
result in the Company reducing the cost basis of the specific security through a
corresponding charge against earnings. Losses related to other-than-temporary
declines in market value are determined based on management's review and
interpretations of various factors. Management considers various criteria in
assessing whether and to what extent an other-than-temporary impairment exists,
including the expected cash flows, credit quality of the underlying mortgages,
debtor, or investee entity, as applicable. Credit protection available to the
related mortgage pool for MBS and various other market information available,
including analysts assessments, public statements and filings made by the
debtor, counterparty or other relevant party issuing or otherwise securing the
particular security may also be considered. Because management's assessments are
based on factual as well as subjective information available at the time of
assessment, the determination as to whether an other-than-temporary decline
exists and, if so, the amount considered impaired is also subjective and,
therefore, constitutes a material estimate, that is susceptible to a significant
change. (See Note 5.)
(c) MBS, Corporate Debt Securities and Corporate Equity Securities
Statement of Financial Accounting Standards ("FAS")FAS No. 115, "Accounting for Certain Investments in Debt and
Equity Securities" ("SFAS 115"), requires that investments in securities be designated as
either "held-to-maturity,""held-to-maturity", "available-for-sale" or "trading" at the time of
acquisition. Securities that are designated as held-to-maturity are carried at
their amortized cost. Securities designated as available-for-sale are carried at
fair value with unrealized gains and losses excluded from earnings and reported
in other comprehensive income.
Although the Company generally intends to hold most of its MBS until
maturity, it may, from time to time, sell any of its MBS as part of the overall
management of its business. The available-for-sale designation provides the
flexibility to sell its MBS in order to act on potential future market
opportunities, changes in economic conditions and to facilitateensure future liquidity.
As of September 30, 2002, all of the Company's investments in MBS
were classified as available-for-sale. The Company had no investments in
corporate equity or debt securities as of September 30, 2002.
If management were to decide to sell any security, whether
held-for-investment or held for sale, unrealized losses at the time that the
decision to sell is made would be charged against earnings in that period, if
any. However, any gains would be deferred until realized.
Other-than-temporary losses on investment securities, whether designated
as available-for-sale or held-to-maturity, as measured by the amount of decline
in fair value attributable to factors that are considered to be
other-than-temporary, are charged against income resulting in an adjustment of
the cost basis of such securities.(See Note 2e.)
Gains or losses on the sale of investment securities are based on the
specific identification method.
The Company's adjustable rate assets are comprised primarily of ARM-MBS, which include
"hybrid-MBS",adjustable
rate MBS ("ARM-MBS") issued throughor guaranteed as to principal or interest by Ginnie
Mae, Fannie Mae or Freddie Mac. TheIncluded in these ARM-MBS are hybrid MBS in which the Company investsthat
have a fixed interest rate for an initial period, which generally does not extend beyond 36 months, and thereafter
typicallythree years for
those purchased by the Company, then convert into a one-yearto an adjustable interest rate for thetheir
remaining term to maturity.
Interest income is accrued based on the outstanding principal balance of
the investment securities and their contractual terms. Premiums and discounts
associated with the purchase of the investment securities are amortized into
interest income over the lives of the securities using the effective yield
method, adjusted for actual prepayment activity.
6
MFA MORTGAGE INVESTMENTS, INC.
NOTES TO THE FINANCIAL STATEMENTS
(UNAUDITED)
(d)During 2002, the Company liquidated its remaining portfolio of corporate
debt and equity securities. The corporate debt securities were comprised of
non-investment grade, high yield bonds. The Company had taken an impairment
charge of $3,474,000 on certain of its corporate debt securities during the
first quarter of 2002. The Company had no investments in corporate debt
securities at March 31, 2003 or December 31, 2002. (See Note 3d.)
(c) Cash and Cash Equivalents
Cash and cash equivalents include cash on hand and highly liquid
investments with original maturities of three months or less. The carrying
amount of cash equivalents approximates their fair value.
(e)(d) Restricted Cash
The Company's restrictedRestricted cash represents cashamounts held on deposit with certain counterparties (i.e., lenders) to satisfy margin calls onlending institutions
with which the Company has repurchase agreements. Such amounts may be used to
make principal and interest payments on the related repurchase agreements.
(e) Credit Risk
The margin calls result from the decline in the valueCompany limits its exposure to credit losses on its investment
portfolio by requiring that at least 50% of its investment portfolio consist of
MBS that are issued or guaranteed as to principal or interest by an agency or
federally chartered corporation of the MBS securing
repurchase agreements, generally due to principal reductions onU.S. Government, such as Ginnie Mae,
Fannie Mae and Freddie Mac ("Agency MBS"). The remainder of the MBS
reflecting scheduled amortization and prepayments. At the time a repurchase
agreement rolls (i.e., matures or reprices), the Company will apply the
restricted cash against the repurchase agreement, thereby reducing the
borrowing.
(f) Other Investments
OtherCompany's assets
may be investments include indirectin: (i) multi-family apartment properties; (ii) investments
in six multi-family rental
properties. The investments are indirectly held through either investments in
(i) non-votinglimited partnerships, real estate investment trusts or a preferred stock of corporationsa
real estate related corporation or (iii) other fixed-income instruments. As of
March 31, 2003, 94.3% of the Company's assets consisted of Agency MBS, 3.2% were
MBS rated "AAA" and 1.0% were of cash and cash equivalents; combined these
assets comprised 98.5% of the Company's total assets.
Other-than-temporary losses on investment securities, whether designated
as available-for-sale or held-to-maturity, as measured by the amount of decline
in fair value attributable to factors that are considered to be
other-than-temporary, are charged against income resulting in an adjustment of
the cost basis of such securities. The following are among, but not all, the
factors considered in determining whether and to what extent an
other-than-temporary impairment exists: (i) the expected cash flow from the
investments; (ii) limited partnership
interests. Otherwhether there has been an other-than-temporary deterioration
of the credit quality of the underlying mortgages, debtor, or the company in
which equity interests are held; (iii) the credit protection available to the
related mortgage pool for MBS; (iv) any other market information available,
including analysts assessments and statements, public statements and filings
made by
7
MFA MORTGAGE INVESTMENTS, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
the debtor, counterparty or other relevant party issuing or otherwise securing
the particular security; (v) management's internal analysis of the security
considering all known relevant information at the time of assessment; and (vi)
the magnitude and duration of historical decline in market prices. Because
management's assessments are based on factual information as well as subjective
information available at the time of assessment, the determination as to whether
an other-than-temporary decline exists and, if so, the amount considered
impaired is also subjective and, therefore, constitutes material estimates, that
are susceptible to a significant change. (See Note 4.)
(f) Equity Interests in Real Estate
Equity interest in real estate consists of certain non-consolidated
investments which are accounted for under the equity method, werewhich are comprised of
investments in limited partnerships owning real estate. The Company acquired
these investments as part of the 1998 Merger. Certain of the properties
underlying the equity interests in the limited partnerships that the Company
received in the 1998 Merger were subsequently exchanged for other properties
through non-taxable exchanges, known for tax purposes as a "Section 1031
exchange."exchange".
Certain of the investments have a zero net carrying value and in some
cases are generating
operating losses after depreciation. .On these investments, earnings are recorded
only to the extent distributions are received. Such investments have not been
reduced below zero through recognition of allocated investment losses since the
Company has no legal obligation to provide additional cash support to the
underlying property entities,partnerships as it is not the general partner, nor has it
indicated any commitment to provide this support. Earnings from such properties are recorded only to the
extent that operating distributions are received. EachAs of the properties in
whichMarch 31, 2003, the
Company has indirect interests is mortgaged, withhad investments in four such limited partnerships, which had mortgage
loans secured by the underlying investment properties serving as collateral. Theproperties; however, the Company has
no liability for the mortgage loans, since (1) the Company's investment is as a
limited partner or a member of a limited liability company and (2) the mortgages have non-recourse provisions, such that
they are secured only to the extent of the collateral which is comprised of the
mortgaged property.
(g) Derivative Financial Instruments - Interest Rate Cap Agreements
The Company utilizes interest rate cap agreementsReal Estate
Real estate is comprised of two multi-family real estate properties owned
by the Company's wholly-owned subsidiary Retirement Centers Corporation ("Cap Agreements"RCC"),
which are derivative instruments, for the purpose of managing interest rate
risk. The Company has not entered, nor does it anticipate entering, into
derivative transactions for speculative or trading purposes.
In accordance with FAS No. 133, "Accounting for Derivative Instruments and
Hedging Activities" a derivative which is designated as a hedge is recognized as
an asset/liability and measured at fair value. To qualify for hedge accounting,
at the inception of a Cap Agreement,.
On October 1, 2002, the Company must anticipate thatpurchased 100% of the hedge
will be highly effective in limitingvoting common stock of
RCC. (See Note 3c.) Prior to the Company's cost beyondOctober 1, 2002 purchase of RCC's
voting common stock, the Cap Agreement
threshold onCompany held only the preferred stock of RCC and
accounted for its matching (on an aggregate basis) anticipated repurchase
agreements duringinvestment in RCC under the active periodequity method of accounting.
Subsequent to October 1, 2002, RCC became a wholly-owned subsidiary of the
Cap Agreement. As longCompany and, as the hedge
remains effective, changes in fair value are included in the accumulated other
comprehensive income component of stockholders' equity. Upon the Cap Agreement
active period commencing, the premium paid to enter into the Cap Agreement is
amortized and reflected in interest expense. The periodic amortization of the
premium expense is based on an estimated allocation of the premium, determined
at inception of the hedge,such, was consolidated on a fair valueprospective basis. Payments receivedRCC is
consolidated with its subsidiaries, which hold properties known as "The
Greenhouse" and "Lealand Place". The Greenhouse is a 127-unit muti-family
apartment building located in Omaha, Nebraska; Lealand Place is a 192-unit
garden-style apartment complex located in Lawrenceville, Georgia.
The properties, capital improvements and other assets held in connection
with the Cap Agreement will be reported as a reduction to interest
expense,properties are carried at cost, net of premium amortization. If it is determined that a Cap Agreement
isaccumulated depreciation and
amortization, not effective,to exceed fair value. Depreciation and amortization are
computed using the premium would be reduced and a corresponding charge made
to interest expense forstraight line method over the ineffective portionuseful life of the Cap Agreement. The
maximum cost related
asset. Maintenance, repairs and minor improvements are charged to each ofexpense in the
Company's Cap Agreements is limited to the
original purchase price (i.e., the premium) of each such instrument. In order to
limit credit risk associated with purchased Cap Agreements, the Company only
enters into Cap Agreements with financially sound institutions, whose parent or
holding company's long-term debt is rated "A" or better by at least one
nationally recognized rating agency.
In order to continue to qualify for,period incurred, while capital improvements are capitalized and to apply, hedge accounting, the
Cap Agreements are monitored on a quarterly basis to determine whether they
continue to be effective or, if prior to the strike date, whether the Cap
Agreement is expected to be effective. If during the term of the Cap Agreement
the Company determines that a Cap Agreement is not effective or that a Cap
Agreement is not expected to be effective, the ineffective portion of the Cap
Agreement will no longer qualify for hedge accounting and, accordingly,
subsequent changes in its fair value will be reflected in earnings. (See Note
8.)
7
MFA MORTGAGE INVESTMENTS, INC.
NOTES TO THE FINANCIAL STATEMENTS
(UNAUDITED)depreciated over
their useful life.
(h) Repurchase Agreements
The Company finances the acquisition of its MBS at short-term borrowing
rates through the use of repurchase agreements. Under a repurchase agreement,agreements, the
Company sells securities to a lender and agrees to repurchase those securities
in the future for a price that is higher than the original sales price. The
difference between the sale price the Company receives and the repurchase price
the Company pays represents interest paid to the lender. Although structured as
a sale and repurchase obligation, a repurchase agreement operates as a financing
under which the Company effectively pledges its securities as collateral to
secure thea loan which is equal in value to a specified percentage of the market
value of the pledged collateral. The Company retains beneficial ownership of the
pledged collateral, including the right to distributions. At the maturity of a
repurchase agreement, the Company is required to repay the loan and concurrently
receives back its pledged collateral from the lender or, upon mutual consent
with the lender, the Company may renew such agreement at the then prevailing
financing rate. The repurchase agreements may require that the Company to pledge
additional assets to the lender in the event the market value of the existing
pledged collateral declines, which is often the case as the principal balance of
collateral (i.e., MBS) and corresponding market value decrease through scheduled
amortization and prepayments.declines. Through September 30, 2002,March 31, 2003, the Company did not have
any margin calls on its repurchase agreements that it was not able to satisfy
with either cash or additional pledged securities.collateral.
8
MFA MORTGAGE INVESTMENTS, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
The Company enters intoCompany's repurchase agreements that generally rangehave typically ranged from one month
to 18 months in duration.months; however, future repurchase agreements may have longer maturities.
Should a lenderthe counterparty to repurchase agreements decide not to renew a
particularthe
agreement at maturity, the Company must either refinance elsewhere or be in a
position to satisfy the obligation. If, during the term of a repurchase
agreement, a lender should file for bankruptcy, the Company might experience
difficulty recovering its pledged assets and couldmay have an unsecured claim against
the lender's assets. To reduce its exposure,this risk, the Company enters into repurchase
agreements only with financially sound institutions whose holding or parent
company's long-term debt rating is "A" or better as determined by at
least onetwo of the
nationally recognized rating agencies,Rating Agencies, where applicable. The Company will not enter into repurchase
agreements with a lender without the specific approval of the Company's Board of
Directors, if the minimum criterion is not met. In the event an existing lender
is downgraded below "A,""A", the Company is required to obtainwill seek board approval from the Company's board of directors before
renewing or entering
into additional repurchase agreements with that lender. The Company generally
aims to diversify its exposure by entering into repurchase agreements with at
least four separate lenders with a maximum loan from any lender of no more than
three times the Company's stockholders' equity. As of September 30, 2002,March 31, 2003, the
Company had repurchase agreements with 12 separate lenders with a maximum loan amount of $581.2 million and a maximum net
exposure (the difference between the amount loaned to the Company and the fair
value of the security pledged by the Company as collateral) to a single lender
of approximately $38.5$51.2 million. (See Note 9.7.)
(i) Stock Based Compensation
The Company's policy is to apply the intrinsic method of Accounting
Principles Bulletin No. 25 ("APB 25") for options issued to its direct employees
and independent directors. Under the intrinsic method, no compensation expense
is recorded when options are issued with an exercise price equal to the market
price of the underlying security. The Company has not granted stock options
since 1998.
(j) Federal Income Taxes
The Company has elected to be taxed as a REIT under the provisions of the
Internal Revenue Code of 1986, as amended (the "Code"), and the corresponding
provisions of state law. The Company expects to operate in a manner that will
enable it to continue to be taxed as a REIT. As such, no provision for current
or deferred income taxes has been made in the accompanying financial statements.
As of September 30, 2002, the Company had an aggregate of $6.5 million of
long-term capital losses for tax purposes, which can only be used to offset
long-term capital gains.
8
MFA MORTGAGE INVESTMENTS, INC.
NOTES TO THE FINANCIAL STATEMENTS
(UNAUDITED)
(k) Earnings per Common Share ("EPS")
Basic EPS is computed by dividing net income by the weighted average
number of shares of common stock outstanding during the period. Diluted EPS is
computed by dividing net income by the weighted-average common shares and common
equivalent shares outstanding during the period. For the diluted EPS
calculation, the weighted average common shares and common equivalent shares
outstanding areinclude the average number of shares of common stock outstanding
adjusted for the dilutive effect of unexercised stock options using the treasury
stock method. Under the treasury stock method, common equivalent shares which include the common stock options issued to employees
and directors, are
calculated assuming that all dilutive common stock options
(i.e., options on which the exercise price is below the market price of the
Company's common stock during the period)equivalents are exercised and
the proceeds are used to buy back shares of the Company's outstanding common
stock at the average market price during the reported period. No common share
equivalents are included in the computation of diluted earnings per share for any period in
which their inclusion would be antidilutive. In addition, no common share
equivalents are included in the computation of any diluted per share amount for
a period in which a net operating loss is reported. (See Note 12.10.)
(l) Other(j) Comprehensive Income
Statement of FAS No. 130, "Reporting Comprehensive Income" requires the
Company to display and report comprehensive income, which includes all changes
in Stockholders' Equity with the exception of additional investments by or
dividends to stockholders. Comprehensive income for the Company includes net
income and the change in net unrealized holding gains (losses) on investments
and certain derivative instruments. (See Note 13.11.)
(m) Adoption(k) Federal Income Taxes
The Company has elected to be taxed as a real estate investment trust
("REIT") under the provisions of New Accounting Standards
In Julythe Internal Revenue Code of 1986, as amended
(the "Code"), and the corresponding provisions of state law. The Company expects
to operate in a manner that will enable it to continue to be taxed as a REIT. As
such, no provision for current or deferred income taxes has been made in the
accompanying consolidated financial statements.
(l) Derivative Financial Instruments - Interest Rate Cap Agreements
On January 1, 2001, the FASB issuedCompany adopted FAS No. 141, "Business Combinations"133, "Accounting for
Derivative Instruments and Hedging Activities," ("FAS 141"133") andas amended by FAS
No. 142, "Goodwill138, "Accounting for Certain Derivative Instruments and Other Intangible Assets"Certain Hedging
Activities" ("FAS 142"138") which
provide guidance on how entities are to account for business combinations and
for the goodwill and other intangible assets that arise from those combinations
or are acquired otherwise. Pursuant to FAS 142 goodwill is no longer amortized,
but instead is tested for impairment at least annually. As of the date of
adoption,. Since the Company had unamortized goodwill inno derivative instruments nor any
embedded derivatives that required bifurcation and separate accounting; there
was no cumulative effect of an accounting change upon the amount of $7,189,000. The
Company's adoption of FAS 142 on January 1, 2002 did not have133,
as amended.
In accordance with FAS 133, a material effect
onderivative which is designated as a hedge is
recognized as an asset/liability and measured at fair value. In order for the
Company's financial statements.interest rate cap agreements ("Cap Agreement/s" or "Cap/s") to qualify
for hedge accounting, upon entering into the Cap Agreement, the Company must
anticipate that the hedge will be highly effective in limiting the Company's
cost beyond the Cap threshold on its matching (on an aggregate basis)
anticipated repurchase agreements during the active period of the Cap. As long
as the hedge remains effective, changes in fair value are included in the
accumulated other comprehensive income portion of stockholders' equity. Upon the
Cap Agreement active period commencing, the premium paid to enter into the Cap
Agreement is amortized and reflected in interest expense. The Company recognized goodwillperiodic
amortization of $50,000 and $150,000the premium expense is based on an estimated allocation of the
premium, determined at inception of the hedge, for the three month and nine-month periods
ended September 30, 2001, respectively.
In October 2001, the FASB issued FAS No. 144, "Accounting for the
Impairment or Disposal of Long-Lived Assets" ("FAS 144"). FAS 144 provides new
guidance on the recognition of impairment losses on long-lived assets to be held
and used or to be disposed of and also broadens the definition of what
constitutes a discontinued operation and how the results of a discontinued
operation are to be measured and presented. The Company's adoption of FAS 144 on
January 1, 2002 did not have any impact on the Company's financial statements.
On April 30, 2002, the FASB issued FASB Statement No. 145 ("FAS 145"),
"Rescission of FASB Statements No. 4, 44, and 64, Amendment of FASB Statement
No. 13, and Technical Corrections." FAS 145 rescinds both FASB Statement No. 4
("FAS 4"), "Reporting Gains and Losses from Extinguishment of Debt," and the
amendment to FAS 4, FASB Statement No. 64 ("FAS 64"), "Extinguishments of Debt
Made to Satisfy Sinking-Fund Requirements." Through this rescission, FAS 145
eliminates the requirement (in both FAS 4 and FAS 64) that gains and losses from
the extinguishment of debt be aggregated and, if material, classified as an
extraordinary item, net of the related income tax effect. However, an entity is
not prohibited from classifying such gains and losses as extraordinary items, so
long as they meet the criteria in paragraph 20 of Accounting Principles Board
Opinion No. 30, "Reporting the Results of Operations Reporting the Effects of
Disposal of a Segment of a Business, and Extraordinary, Unusual and Infrequently
Occurring Events and Transactions." While early adoption of FAS 145 is
encouraged, certain provisions of FAS 145 are effective for fiscal periods
beginning after May 15, 2002, while other provisions of FAS 145 are effective
for transactions occurring after May 15, 2002. The Company's early adoption of
FAS 145 in its entirety did not have a material impact on the Company's
financial statements.
(n) New Accounting Pronouncements
In June 2002, the FASB issued FASB Statement No. 146 ("FAS 146"),
"Accounting for Costs Associated with Exit or Disposal Activities." FAS 146
specifies, among other things, that a liability for a cost associated with an
exit or disposal activity is incurred when the definition of a liability in
Concepts Statement 6 is met. The provisions of FAS 146 are effective for exit or
disposal activities that are initialed after December 31, 2002, with early
application encouraged. The Company's adoption of FAS 146 on January 1, 2003 is
not expected to have a material impact on the Company's financial condition or
results of operations.monthly components
9
MFA MORTGAGE INVESTMENTS, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
In October 2002,on a fair value basis. Payments received in connection with the FASB issued Financial Accounting Standard No. 147,
"AcquisitionsCap Agreement
will be reported a reduction to interest expense, net of Certain Financial Institutions" ("FAS 147") which clarifies the accounting treatment for acquisitions of financial institutions. In addition,
this Statement amends FASB Statement No. 144, "Accountingamortization
recognized for the Impairment or
Disposalpremium. If it is determined that a Cap Agreement is not
effective, the premium would be reduced and a corresponding charge made to
interest expense, for the ineffective portion of Long-Lived Assets,"the Cap Agreement. The maximum
cost related to include in its scope long-term
customer-relationship intangible assetsthe Company's Caps is limited to the original purchase price of
the derivative. In order to limit credit risk associated with purchased Caps,
the Company only purchases caps from financial institutions suchrated "A" or better
by one of the Rating Agencies. Income generated by purchased caps, if any, would
be presented as depositor-an off-set to interest expense on the hedged liabilities.
In order to continue to qualify for and borrower-relationship intangible assets and credit cardholder
intangible assets. FAS 147to apply hedge accounting, Caps
are monitored on a quarterly basis to determine whether they continue to be
effective or, if prior to the commencement of the active period, whether the Cap
expects to continue to be effective. If during the term of the Cap agreement the
Company determines that a Cap is not effective on October 1, 2002. The Company's
adoption of FAS 147or that a Cap is not expected to
be effective, the ineffective portion of the Cap will no longer qualify for
hedge accounting and, accordingly subsequent changes in its fair value will be
reflected in earnings.
The Company has Caps, which are derivative instruments, as defined by FAS
133 and FAS 138. At March 31, 2003, the Company had 11 Cap Agreements, with an
aggregate notional amount of $310.0 million. The Company utilizes Caps for the
purpose of managing interest rate risk and does not anticipate entering into
derivative transactions for speculative or trading purposes. There were
unrealized losses of $3.3 million on the Company's Caps. (See Note 5.)
(m) Adoption of New Accounting Standards
On January 1, 2003, the Company adopted Financial Accounting Standards No.
148, "Accounting for Stock-Based Compensation - Transition and Disclosure" ("FAS
148"). FAS 148, amends FAS No. 123, "Accounting for Stock-Based Compensation,"
("FAS 123") by providing alternative methods of transition for a voluntary
change to the fair value based method of accounting for stock-based employee
compensation. In addition, FAS 148 amends the disclosure requirements of
Statement 123 to require prominent disclosures in both annual and interim
financial statements about the method of accounting for stock-based employee
compensation and the effect of the method used on reported results. The Company
will record option expense for options granted subsequent to January 1, 2003, in
accordance with FAS 123, as amended by FAS 148. The adoption of FAS 148 did not
have a significant impact on the Company; however, the future effect of FAS 148
will be based on, among other things, the underlying terms of future grants of
stock based on compensation.
(n) New Accounting Pronouncements
In January 2003, the FASB issued Interpretation No. 46 "Consolidation of
Variable Interest Entities" ("FIN 46"), which requires consolidation by the
primary beneficiary of all variable interest entities. FIN 46 is effective
immediately for investments in all variable interest entities acquired after
February 1, 2003 and for previously held investments beginning with the first
interim period beginning after June 15, 2003. It is anticipated that this will
apply to certain of the Company's equity investments in real estate in which it
has a majority interest as a limited partner but has not historically
consolidated because it does not have effective control under the terms of the
respective partnership agreements (see Note 6). Accordingly, the Company will
consolidate such investments as required by FIN 46 effective for its third
quarter of calendar 2003. It is not anticipated that the application of FIN 46
will have a material impact on the Company's financial statements.
(o) Reclassifications
Certain prior period amounts have been reclassified to conform to the
current period presentation.
3. Advisor MergerMerger/Related Parties and Other Related Party TransactionsParties
(a) Advisor Fees and Advisor Merger
From the time of the 1998 Merger through December 31, 2001, the Advisor
managed the operations and investments of the Company and performed
administrative services for the Company. Prior to the Advisor Merger, the
Advisor was owned directly and indirectly by certain of the Company's directors
and executive officers (see discussion below). For the services and functions
provided to the Company, the Advisor received a formula based monthly management
fee in an
amount equal to 1.10% per annum of the first $300 million of stockholders'
equity of the Company, plus 0.80% per annum of the portion of stockholders'
equity of the Company above $300 million. The Company also paid the Advisor an incentive fee for each calendar quarter equal to 20% of the dollar
amount by which the annualized return on equity for such quarter exceeded the
amount necessary to provide an annualized return on equity equal to the Ten-Year
U.S. Treasury rate plus 1%.
For the three and nine months ended September 30, 2001,
the Company paid the Advisor a base management fee of $395,000 and $875,000,
respectively, and incentive fees of $743,000 and $1,753,000, respectively.
Included in the $1,753,000 fee for the nine months ended September 30, 2001 was
$511,000 attributable to a $2.6 million gain on the sale of a property that
closed during the first quarter of 2001.10
MFA MORTGAGE INVESTMENTS, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
The Company entered into an Agreement and Plan of Merger, dated September
24, 2001 (the "Advisor Merger Agreement"), with the Advisor, America First
Companies L.L.C. ("AFC") and the stockholders of the Advisor. In December 2001,
the Company's stockholders approved the terms of the Advisor Merger Agreement,
which provided for the Merger of the Advisor into the Company on January 1,
2002. The Company issued 1,287,501 shares of its common stock to the
stockholders of the Advisor as merger consideration. As a result, the Company
became self advised commencingself-advised on January 1, 2002 and has since directly incurred
the cost of all overhead necessary for its operation and administration. The
market value of the common stock issued in the Advisor Merger, valued as of the
consummation of the Advisor Merger in excess of the fair value of the net
tangible assets acquired, was charged to operating income of the Company for the
year ended December 31, 2001.2002.
Certain of the Company's directors and executive officers who were
involved in discussions and negotiations relating to the Advisor Merger had, and
continue to have, interests that are affected by the Advisor Merger. At the time
of the Advisor Merger, AFC owned 80% of the outstanding capital stock of the
Advisor. At that time, Michael Yanney, who retired from the Board during the
first quarter of 2003, was the Chairman of the Company's Board of Directors, and
George H. Krauss, one of the Company's directors, beneficially owned
approximately 57% and 17%, respectively, of AFC. In addition, Stewart Zimmerman,
the Company's President and Chief Executive Officer, and William S. Gorin, the
Company's Executive Vice President, Chief Financial Officer and Treasurer,
collectively owned approximately 3% of AFC. At the time of the Advisor Merger,
Messrs. Zimmerman, Gorin and Ronald A. Freydberg, the Company's Executive Vice
President and Secretary, also owned, in the aggregate, the remaining 20% of the
Advisor. Accordingly, the Advisor Merger resulted in these individuals
receiving, in the aggregate, beneficial ownership of an additional 1,287,501
shares of the Company's common stock valued at approximately $11.3 million at
the time of the Advisor Merger.
Because the Advisor Merger was between affiliated parties and may not be
considered to have been negotiated in a completely arm's-length manner, the
Company's Board of Directors established a special committee of the Board, which
consisted of three of the Company's independent directors who had no personal
interest in the Advisor Merger, to direct the negotiations relating to the
Advisor Merger on the Company's behalf and to consider and make recommendations
to the Board relating to the Advisor Merger.
10
MFA MORTGAGE INVESTMENTS, INC.
NOTES TO THE FINANCIAL STATEMENTS
(UNAUDITED)
(b) Property ManagerManagement
America First Properties Management Company L.L.C. (the "Property
Manager"), which is a wholly owned subsidiary of AFC, provides property management
services for certain of the multi-family properties in which the Company has an
interest. The Property Manager receives a management fee equal to a stated
percentage of the gross revenues generated by the Company's properties under
management, ranging from 3.5% to 4% of gross revenues, which are considered in
line with market terms for such services. The Property Manager was paid fees
of
approximately $103,000totaling $98,000 and $316,000$109,000 for the quarterquarters ended March 31, 2003 and year to date period
ended September 30, 2002, respectively, and $108,000 and $327,000 for the
quarter and year to date period ended September 30, 2001,
respectively for managing the properties in which the Company has interests.
(c) Investments in Corporate Debt Securities
As of September 30, 2002, the Company had no investments in corporate debt
securities, as all such securities remaining were sold during the quarter ended
September 30, 2002. The Company had previously held corporate debt securities of
RCN Corporation ("RCN"), which were purchased between February 1999 and August
2000, and Level 3 Corporation ("Level 3"), which were purchased between August
1998 and August 2000. Mr. Yanney, the Chairman of the Company's Board of
Directors, is a board member for both RCN and Level 3. One of the Company's
Directors, W. David Scott, is the son of the individual who is the Chairman of
both Level 3 and RCN. During the quarter ended September 30, 2002, the Company
realized an aggregate net loss on the sale of the RCN and Level 3 securities of
$363,000, comprised of gross gains of $928,000 on the sale of Level 3 securities
and gross losses of $1,291,000 million on the sale of RCN securities. The
Company had recognized an other-than-temporary impairment charge of $2,453,000
against the RCN securities in the fourth quarter of 2001 and $3,474,000 against
the Level 3 securities during the first quarter of 2002. (See Note 5.)
(d) Investment in Retirement Centers Corporation
SinceFrom 1998 thorough September 30, 2002, the Company has held all of the
non-voting preferred stock, representing 95% of the ownership and economic
interest, in Retirement Centers
Corporation ("RCC"),RCC, an entity formed following the 1998 Merger, which indirectly
holds two rental income properties. (See Note 7.) Through September 30, 2002, Mr. Gorin, the
Company's Executive Vice President, Chief Financial Officer and Treasurer, held
all of the voting common stock of RCC, representing 5% of the ownership and
economic interest in RCC.
Mr. Gorin also serves as a
director of RCC.
On October 1, 2002, the Company entered into an agreement with Mr. Gorin
to purchasepurchased 100% of the voting common stock
held by Mr. Gorin, representing a 5% economic interest and 100% controlling
interest in RCC, for $260,000. The purchase price was based on the estimated
value of the underlying properties, as determined by independent appraisers, net
of the related mortgage indebtedness. As a result of the purchase of common
shares, RCC become a wholly-owned subsidiary of the Company. (See Note 6.)
(d) Investments in Certain Corporate Debt Securities
Prior to the Company now holds allliquidating its corporate debt securities portfolio
during 2002, the Company held the corporate debt securities of RCN Corporation
("RCN"), which were purchased between February 1999 and August 2000 and Level 3
Corporation ("Level 3"), which were purchased between August 1998 and August
2000. At December 31, 2001, the Company's investment in (i) the RCN debt
securities had a carrying value of $2,147,000 and (ii) the Level 3 debt
securities had a carrying value of $6,553,000 and an estimated fair value of
$3,360,000. Mr. Yanney, who retired as Chairman and as a member of the outstanding securitiesCompany's
Board of RCC.Directors on March 6, 2003, was on the board of directors of both RCN
and Level 3 at the time the Company purchased and sold these securities.
11
MFA MORTGAGE INVESTMENTS, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
One of the Company's Directors, W. David Scott, is the son of the Chairman of
both Level 3 and RCN.
4. Mortgage Backed Securities
As of September 30, 2002March 31, 2003 and December 31, 2001,2002, all of the Company's MBS were
classified as available-for-sale and, as such, were carried at their estimated
fair value. The following table presents the carrying value of the Company's MBS
as of September 30, 2002March 31, 2003 and December 31, 2001.
September 30,2002.
March 31, December 31,
2003 2002
2001
----------------------- ------------
(In Thousands)
Fannie Mae Certificates $2,017,178 $1,228,095$1,844,866 $1,901,621
Ginnie Mae Certificates 6,032 12,2664,646 5,577
Freddie Mac Certificates 1,210,670 472,908
Commercial/multi-family 11,631 11,4861,571,263 1,450,675
Non-agency AAA 201,023 202,145114,947 127,446
---------- ----------
$3,446,534 $1,926,900$3,535,722 $3,485,319
========== ==========
At September 30, 2002March 31, 2003 and December 31, 2001,2002, the Company's portfolio of MBS
consisted of pools of adjustable rate MBSARM-MBS with carrying values of approximately $3,439,727,000$3.53
billion and $1,915,380,000,$3.47 billion respectively, and fixed rate MBS with carrying values
of approximately $6,807,000$6.7 million and $11,520,000,$6.8 million respectively.
11
MFA MORTGAGE INVESTMENTS, INC.
NOTES TO THE FINANCIAL STATEMENTS
(UNAUDITED)Agency MBS: Although not rated, Agency MBS carry an implied "AAA" rating.
Agency MBS are issued or guaranteed as to principal or interest by a government
agency or federally chartered corporation, such as Fannie Mae, MBS: Fannie Mae MBS are certificates issued by Fannie Mae that
are backed by pools of single-family and multi-family mortgage loans. Fannie Mae
guarantees to the registered holders of its certificates that it will distribute
amounts representing principal and interest on the mortgage loans in the pool
underlying its certificates, and the full payment amount of any such mortgage
loan foreclosed or otherwise finally liquidated, whether or not the principal
amount is actually received. The obligations of Fannie Mae under its guarantees
are solely those of Fannie Mae and are not backed by the full faith and credit
of the U.S. Government. If Fannie Mae were unable to satisfy its obligations,
distributions to holders of its certificates would consist solely of payments
and other recoveries on the underlying mortgage loans and, accordingly, monthly
distributions to holders of its certificates would be affected by delinquent
payments and defaults on these mortgage loans.
Ginnie Mae MBS: Ginnie Mae MBS are certificates issued by a wholly owned
instrumentality of the U.S. Government within the Department of Housing and
Urban Development that are backed mostly by pools of single-family mortgage
loans. Ginnie Mae is authorized by the National Housing Act of 1934 to guarantee
the timely payment of principal and interest on its certificates which represent
an interest in a pool of mortgages insured by the Federal Housing Administration
or
partially guaranteed by the Department of Veterans Affairs and other loans
eligible for inclusion in mortgage pools underlying its certificates. The
National Housing Act of 1934 provides that the full faith and credit of the U.S.
Government is pledged to the payment of all amounts that may be required to be
paid under any guarantee by Ginnie Mae.
Freddie Mac MBS: Freddie Mac MBS are certificates issued by Freddie Mac
that are backed by pools of mortgage loans. Freddie Mac guarantees to the
holders of its certificates the timely payment of interest and the ultimate
payment of all principal on each holder's pro rata share of the unpaid balance
of the underlying mortgage loans, but does not guarantee the timely payment of
scheduled principal of the underlying mortgage loans. The obligations of Freddie
Mac under its guarantees are solely those of Freddie Mac and are not backed by
the full faith and credit of the U.S. Government. If Freddie Mac were unable to
satisfy its obligations, distributions to holders of its certificates would
consist solely of payments and other recoveries on the underlying mortgage loans
and, accordingly, monthly distributions to holders of its certificates would be
affected by delinquent payments and defaults on these mortgage loans.
Commercial/multi-family MBS: The Company's investments in
commercial/multi-family MBS are comprised of privately issued certificates that
are backed by pools of single-family and multi-family mortgage loans. These
securities are not guaranteed by the U.S. Government or any of its agencies. As
of September 30, 2002 and December 31, 2001, all the Company's investments in
commercial/multi-family MBS were rated "AAA" by at least one nationally
recognized rating agency.Mac.
Non-Agency "AAA"MBS:: Non-Agency "AAA" MBS are privately issued certificates
that are backed by pools of single-family and multi-family mortgage loans.
Non-Agency "AAA" MBS are rated as such by at least one nationally
recognized rating agency.of the Rating Agencies. "AAA" is
the highest rating given by bond rating agencies and indicates the relative
security of the investment. These securities are not guaranteed by the U.S.
Government or any of its agencies.
The following table presents the amortized cost, gross unrealized gains,
gross unrealized losses and fair value of MBS as of September 30, 2002March 31, 2003 and December
31, 2001:
September 30,2002:
March 31, December 31,
2003 2002
2001
------------------------ ------------
(In Thousands)
Current face cost $ 3,349,7633,431,541 $ 1,885,8693,382,275
Premium 73,056 37,54478,898 76,333
Discount (540) (79)(2) (20)
Gross unrealized gains 25,574 8,33925,974 27,154
Gross unrealized losses (1,319) (4,773)(689) (423)
----------- -----------
FairCarrying value/fair value $ 3,446,5343,535,722 $ 1,926,9003,485,319
=========== ===========
5. Corporate Debt SecuritiesInterest Rate Cap Agreements
As of September 30, 2002,March 31, 2003, the Company had no remaining investments in
corporate debt securities. The corporate debt securities previously held by the
Company were comprised11 interest rate Caps with an
aggregate notional amount of "non-investment grade," "high yield securities."
Corporate debt securities, which are not guaranteed by the U.S Government or any
of its agencies, are subject$310.0 million purchased to substantially greater credit risk than is the
Company's core investment portfolio, which is comprised primarily of Agency MBS.
As such, in addition to the market value impact related to changeshedge against increases
in interest rates corporate debt securities are also affected by, amongon $310.0 million of its anticipated future 30-day term
repurchase agreements. The Caps had an amortized cost of $4,036,000 and a fair
value of $770,000 at March 31, 2003, resulting in an unrealized loss of
$3,266,000, which is included as a component of accumulated other things,
changescomprehensive
income. If the 30-day London Interbank Offered Rate ("LIBOR") were to increase
above the rate specified in the financial conditionCap Agreement during the effective term of the
debtor, general market and economic
conditions.Cap, the Company would receive monthly payments from its counterparty.
12
MFA MORTGAGE INVESTMENTS, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
During the quarter ended September 30, 2002, the Company sold all of its
remaining investments in corporate debt securities, realizing an aggregate net
loss of $363,000, comprised of gross gains of $928,000 and gross losses of
$1,291,000. The Company had previously recognized impairment charges on its
investments in corporate debt securities equal to: (i) $3,474,000 on its Level 3
securities during the first quarter of 2002 and (ii) $2,453,000 on its RCN
securities during the fourth quarter of 2001. During the second quarter of 2002,
the Company had designated all of its investments in corporate debt securities
as available-for-sale, due to changes in the risk profile of the issuer.
The following table presents the amortized cost, gross unrealized gains,
gross unrealized losses and estimated fair value of the Company's corporate debt
securities by investment strategy classification as of December 31, 2001.
December 31,
2001
------------
(In Thousands)
Held-to-maturity securities:
Amortized cost/carrying value $ 7,627
Gross unrealized gains --
Gross unrealized losses (3,439)
-------
Estimated fair value $ 4,188
=======
Available-for-sale securities:
Amortized cost, as adjusted $ 2,147
Gross unrealized gains --
Gross unrealized losses --
-------
Estimated fair value/carrying value $ 2,147
=======
Corporate Debt Securities -carrying value:
Held-to-maturity securities $ 7,627
Available-for-sale securities 2,147
-------
$ 9,774
=======
6. Corporate Equity Securities
The following table presents the cost, gross unrealized gains, gross
unrealized losses and fair value of the Company's corporate equity securities as
of December 31, 2001. The Company had no investments in corporate equity
securities as of September 30, 2002.
December 31,
2001
------------
(In Thousands)
Cost $3,378
Gross unrealized gains 710
Gross unrealized losses --
------
Carrying value/Estimated fair value $4,088
======
The Company sold all of its investments in corporate equity securities
during the first six months of 2002, realizing net gains of $569,000.
13
MFA MORTGAGE INVESTMENTS, INC.
NOTES TO THE FINANCIAL STATEMENTS
(UNAUDITED)
7. Other Investments
Other investments consisted of the following as of September 30, 2002 and
December 31, 2001:
September 30, December 31,
2002 2001
------------- ------------
(In Thousands)
Investment in and advances to RCC $5,328 $5,572
Investments in and advances to real estate limited
partnerships and qualified REIT subsidiary 4,297 4,228
------ ------
$9,625 $9,800
====== ======
As of September 30, 2002 and December 31, 2001, the Company had net
indirect investments of $9,625,000 in six multi-family rental properties. These
investments were held primarily through limited partnership interests and
preferred stock holdings in various entities. As of September 30, 2002, an
aggregate of approximately $47.9 million of non-recourse mortgage loans were
secured by the underlying investment properties. (See below and Note 3(d).)
Income from the Company's other investments was as followscounterparties for the three
and nine-month periods ended September 30, 2002 and 2001:
Three Months Ended Nine Months Ended
September 30, September 30,
------------------ -----------------
2002 2001 2002 2001
------ ------ ------ ------
(In Thousands)
Gains on sale of underlying properties $ -- $ -- $ -- $2,757
Equity earnings (loss), net (52) 229 139 417
------ ------ ------ ------
$ (52) $ 229 $ 139 $3,174
====== ====== ====== ======
Retirement Center Corporation
Through September 30, 2002, the Company owned 100% of the non-voting
preferred stock in RCC, which represented a 95% economic interest. The Company
accounted for its investment in RCC using the equity method. On October 1, 2002,
the Company entered into an agreement to purchase 100% of the voting common
stock in RCC, representing the remaining 5% economic interest. (See Note 3(d)).
As of September 30, 2002, RCC had (i) an indirect controlling interest in
a 128-unit apartment property located in Omaha, Nebraska, known as the
"Greenhouse," which was acquired on January 12, 2000 and (ii) an indirect 88.3%
interest in a 192-unit apartment property located in Lawrenceville, Georgia,
which was acquired on January 18, 2001. The Company also indirectly holds the
remaining 11.7% undivided interest in the Lawrenceville, Georgia property. In
December 2000, the Company loaned Greenhouse Holding LLC (which holds the
Greenhouse property), $437,000 to fund building renovations. This non-amortizing
loan, which was originally scheduled to mature on July 31, 2002, was extended
until December 31, 2002. This is included in the above table in the Company's
investment in and advances to RCC.
As of December 31, 2000, RCC owned a limited partnership interest in a
real estate limited partnership, which operated an assisted living center
located in Salt Lake City, Utah. On January 2, 2001, the limited partnership,
which owned the assisted living center, was liquidated with RCC receiving an
undivided interest in the net assets of such partnership. RCC then sold its
undivided interest in the net assets of this assisted living center. Such sale
contributed approximately $2,063,000 ($2,574,000 less a related incentive fee of
approximately $511,000 reflected in other general and administrative expense) to
the Company's net income for the nine months ended September 30, 2001. The
proceeds of such sale were utilized by RCC to acquire its indirect interest in
the 192-unit apartment property in Lawrenceville, Georgia on January 18, 2001 as
discussed above.
On October 1, 2002, the Company entered into a purchase and sale agreement
with Mr. Gorin to purchase 100% of the RCC common stock, representing a 5%
economic and 100% controlling interest in RCC, held by Mr. Gorin for $260,000,
The purchase price was based on the estimated value of the underlying properties
indirectly held by RCC, as determined by independent appraisers, net of the
related mortgage indebtedness. As a result of this transaction, the Company now
holds all of the outstanding securities of RCC.
14
MFA MORTGAGE INVESTMENTS, INC.
NOTES TO THE FINANCIAL STATEMENTS
(UNAUDITED)
Real Estate Limited Partnerships and Qualified REIT Subsidiary
Other investments include investments in and advances made to certain real
estate limited partnerships, some of which were acquired as part of the 1998
Merger, and a Qualified REIT Subsidiary ("QRS"). Certain of the underlying
properties have been exchanged for other properties through a non-taxable
exchange, known for tax purposes as a "Section 1031 exchange." Through September
30, 2002, the investments in or advances made to the limited partnerships and
the QRS were accounted for under the equity method of accounting. Certain of the
investments have a zero carrying value and, as such, earnings are recorded only
to the extent distributions are received. Such investments have not been reduced
below zero through recognition of allocated investment losses since the Company
has no legal obligation to provide additional cash support to the underlying
property partnerships as it is not the general partner, nor has it indicated any
commitment to provide this support.
8. Interest Rate Cap Agreements The Company only enters into Cap Agreements with financially soundare financial
institutions whose holding or parent company's long-term debt rating is "A" or
better, as determined by at least one nationally recognized rating agency,two of the Rating Agencies, where applicable. In the
unlikely event of a default by the counterparty, the Company would not receive
payments provided for under the terms of the Cap Agreement and could incur a
loss for the initial cost of entering into the Cap Agreement.
As of September 30, 2002, the Company had nine Cap Agreements with an
aggregate notional amount of $250 million which were purchased to hedge against
increases in interest rates on its anticipated future 30-day term repurchase
agreements. The following table presents information about the Company's Cap
Agreements as of September 30, 2002:
Weighted
Average Weighted Estimated
Average AverageEstimated Fair Gross
Active Libor StrikeLIBOR Notional Unamortized Value/Carrying Unrealized
Period Rate (1)Strike Rate(1) Amount Premium Value Loss
(Dollars in Thousands) -------- ---------------------------- -------- ----------- -------------- ----------
(Dollars in Thousands)
Months until active:
Currently active 19 Months 5.75% $ 50,000 $ 339 $ 8 $ (331)
Within six months 2418 Months 5.750%4.75 $ 50,000 $ 350 $ 60 $ (290)100,000 1,486 102 (1,384)
Six to nine months 18 Months 4.50 100,000 1,386 193 (1,193)
Nine to 12 months -- -- -- -- --
--
Nine to 12 months 18 Months 4.750 100,000 1,486 324 (1,162)
12 to 24 months 18 Months 4.500 100,000 1,386 550 (835)
-------- ------ ----- -------3.25 60,000 825 467 (358)
--------- --------- --------- ---------
Weighted Average/Total 1918 Months 4.850% $250,000 $3,2224.54% $ 934 $(2,287)
======== ====== ===== =======310,000 $ 4,036 $ 770 $ (3,266)
========= ========= ========= =========
(1) The rate at which payments would become due to the Company under the terms
of the Cap Agreement.
9.cap agreement.
6. Equity Interests in Real Estate Investments and Real Estate
Equity interests in real estate investments and real estate consisted of
the following as of March 31, 2003 and December 31, 2002:
March 31, December 31,
2003 2002
--------- ------------
(In Thousands)
Real estate $21,825 $21,986
Investments in and advances to real estate limited
partnerships 3,721 3,806
------- -------
$25,546 $25,972
======= =======
On October 1, 2002, the Company purchased the voting common stock of RCC.
Prior to this purchase, the Company held the non-voting preferred stock and
accounted for its investment in RCC under the equity method. Upon acquiring the
controlling interest in RCC, the Company changed from the equity method of
accounting for this investment to consolidating RCC, reflecting the assets and
liabilities and results of operations of RCC on a prospective basis.
(a) Real Estate /Retirement Center Corporation
RCC was formed as a separate taxable corporation to hold certain
properties acquired in the 1998 Merger, primarily retirement/assisted living
properties, the operations of which, if held directly would be incompatible with
the Company's maintaining compliance with the REIT provisions of the Code. Such
assets have since been sold and the proceeds reinvested in the properties
currently held by RCC. As noted above, on October 1, 2002, the Company acquired
100% of the voting common stock of RCC, resulting in a change in the accounting
for RCC from that of an equity interest to a wholly-owned consolidated
subsidiary.
As of March 31, 2003 and December 31, 2002, RCC owned (i) The Greenhouse,
which was acquired on January 12, 2000, and (ii) an 88.3% undivided interest in
a 192-unit apartment property located in Lawrenceville, Georgia, which was
acquired on January 18, 2001. The Company also owned the remaining 11.7%
undivided interest in the Georgia property, which was purchased on January 18,
2001. In December 2000, the Company loaned Greenhouse Holding LLC (which holds
The Greenhouse) $437,000 to fund building renovations.
13
MFA MORTGAGE INVESTMENTS, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
The summary results of real estate, reflects the operations of RCC as
consolidated with its two apartment properties for the quarter ended March 31,
2003, were as follows:
(In Thousands)
Revenue from operations of real estate $ 427
Interest expense for mortgages on real estate (203)
Other real estate operations expense (347)
-----
$(123)
=====
(b) Equity Interests in Real Estate
As of March 31, 2003, the Company had investments in four limited
partnerships, which had an aggregate of $31.3 million of non-recourse mortgage
loans secured by the underlying investment properties. These mortgages have
non-recourse provisions, such that they are generally secured to the extent of
the collateral, which is comprised of the mortgaged property. Prior to October
1, 2002, the Company held 100% of the non-voting preferred stock of RCC which
represented a 95% economic interest, as such the net assets of RCC were included
in equity interests in real estate and income recognized under the equity
method. On October 1, 2002, the Company acquired 100% of RCC's voting common
stock, thereby gaining full ownership of RCC. Therefore, the Company changed its
accounting for RCC from that of an equity investment to a consolidated
subsidiary effective October 1, 2002.
7. Repurchase Agreements
As of September 30, 2002,March 31, 2003, the Company had outstanding balances of approximately $3.20$3.2 billion
under 178195 repurchase agreements with a weighted average borrowing rate of 2.16%1.75%
and a weighted average remaining maturity of approximately six6.4 months. As of September 30, 2002,March 31, 2003,
the repurchase agreements had the following remaining maturities:
March 31,
2003
----------
(In Thousands)
Within 30 days $ 156,858151,510
31 to 60 days 345,813300,060
61 to 90 days 97,100560,460
3 to 6 months 1,134,692888,311
6 to 9 months 939,934535,250
9 to 12 months 393,546
12 to 18 months 522,738382,440
----------
$3,197,135$3,211,577
==========
15
MFA MORTGAGE INVESTMENTS, INC.
NOTES TO THE FINANCIAL STATEMENTS
(UNAUDITED)
The repurchase agreements are collateralized by the Company's MBS which
had a carrying value of approximately $3.45 billion as of September 30, 2002.$3.5 billion. The Company's repurchase
agreements generally bear interest at rates that are priced off of LIBOR.
10.LIBOR-based.
8. Commitments and Contingencies
(a) Securities Purchase Commitments
At September 30, 2002,March 31, 2003, there were no commitments to purchase any investment
securities or enter into any security transactions.
(b) Lease Commitment
During the second quarter of 2002, the Company entered into a
noncancellable lease through 2012 for its corporate headquarters, which it moved
into during the third quarter of 2002. Additional office space was necessary to
house the Company's operations, which prior to the Advisor Merger were partially
housed in Omaha, Nebraska. The lease provides for, among other things, annual
rent of $338,000 though 2005, $348,000 from 2006 through 2008 and $357,000 from
2009 through 2012.
11.repurchase agreements.
14
MFA MORTGAGE INVESTMENTS, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
9. Stockholders' Equity
(a) Dividends/Distributions
The following presents dividends declared by the Company from January 1,
20012002 through March 31, 2003:
Dividend
Declaration Date Record Date Payment Date per Share
- ------------------ ------------------ --------------- ----------
2003
March 13, 2003 March 28, 2003 April 30, 2003 $ 0.280
2002
December 19, 2002 December 30, 2002 January 24, 2003 0.320 (2)
September 12, 2002 September 30, 2002:
Dividend per
Declaration Date Record Date Payment Date Share
- ------------------------------ --------------------- ------------------ ------------
2002
September 12, 2002 September 30, 2002 October 30, 2002 $ 0.280
September 12, 2002 September 30, 2002 October 30, 2002 0.040*
June 12, 2002 June 28, 2002 July 30, 2002 0.280
June 12, 2002 June 28, 2002 July 30, 2002 0.020*
March 12, 2002 March 28, 2002 April 30, 2002 0.280
March 12, 2002 March 28, 2002 April 30, 2002 0.020*
2001
February 12, 2001 April 16, 2001 April 30, 2001 $ 0.165
April 9, 2001 June 30, 2001 July 16, 2001 0.175
September 19, 2001 October 2, 2001 October 18, 2001 0.225
December 12, 2001 December 28, 2001 January 30, 2002 0.280
* Represents2002 October 30, 2002 0.320 (2)
June 12, 2002 June 28, 2002 July 30, 2002 0.300 (1)
March 12, 2002 March 28, 2002 April 30, 2002 0.300 (1)
(1) Includes a special dividend declared, in addition to the
applicable quarterly dividend.of $0.02 per share.
(2) Includes a special dividend of $0.04 per share.
(b) Common Stock Offerings
On June 5, 2002, the Company issued 10,350,000 shares of its common stock,
$0.01 par value (the "Common Stock"), at $9.10 per share, raising net proceeds
of approximately $88.8 million, and on January 18, 2002, the Company issued
7,475,000 shares of its Common Stock at $8.25 per share, raising net proceeds of
approximately $58.2 million.
(c) Shelf Registration
On September 25, 2001, the Company filed a registration statement on Form
S-3 with the SECSecurities and Exchange Commission under the Securities Act of
1933, as amended, (the "Act"), with respect to an aggregate of $300,000,000 of
Common Stockcommon stock and/or preferred stock that may be sold by the Company from time to
time pursuant to Rule 415 under the Act. On October 5, 2001, the Commission
declared the registration statement effective. As of September 30, 2002,March 31, 2003, the Company
had approximately $80.1 million remaining under this shelf registration statement.
(d)(c) Stock Repurchase Plan
The Company did not repurchase any of its Common Stock during the nine
monthsquarter
ended September 30, 2002.March 31, 2003. Since implementing the stock repurchase program during the
fourth quarter of 1999, through September 30, 2002,March 31, 2003, the Company had repurchased and
retired 378,221 shares at an aggregate cost of $1,924,000.
16
MFA MORTGAGE INVESTMENTS, INC.
NOTES TO THE FINANCIAL STATEMENTS
(UNAUDITED)
12.10. EPS Calculation
The following table presents the reconciliation between basic and diluted
shares outstanding used in calculating basic and diluted EPS for the three
and
nine months ended September 30,March 31, 2003 and 2002:
Three Months Ended
March 31,
2003 2002
and 2001:
Three Months Ended Nine Months Ended
September 30, September 30,
------------------ -----------------
2002 2001 2002 2001
------ ------ ------ ------
(In Thousands)
Weighted average shares outstanding - basic 46,257 19,035 39,801 12,331
Add effect of assumed shares issued under
treasury stock method for stock options 89 113 112 94
------ ------ ------ ------
Weighted average shares outstanding - diluted 46,346 19,148 39,913 12,425
====== ======------ ------
(In Thousands)
Weighted average shares outstanding - basic 46,316 34,329
Add effect of assumed shares issued under
treasury stock method for stock options 62 124
------ ------
Weighted average shares outstanding - diluted 46,378 34,453
====== ======
13. Other Comprehensive Income/15
MFA MORTGAGE INVESTMENTS, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
11. Accumulated Other Comprehensive Income
Comprehensive income for the three and nine months ended September 30,
2002 and 2001 was as follows:
Three Months Ended Nine Months Ended
September 30, September 30,
--------------------- ---------------------
2002 2001 2002 2001
-------- -------- -------- --------
(In Thousands)
Net income $ 17,340 $ 5,087 $ 41,054 $ 11,378
Other comprehensive income:
Net unrealized holding gains(losses) on available-for-sale
investment securities arising during the period 17,535 5,043 19,978 8,365
Unrealized losses on Cap Agreements (1,548) -- (2,450) --
-------- -------- -------- --------
Comprehensive income $ 33,327 $ 10,130 $ 58,582 $ 19,743
======== ======== ======== ========
Accumulated other comprehensive income at September 30, 2002March 31, 2003 and December 31,
20012002 was as follows:
September 30, December 31,
2002 2001
------------- ------------
(In Thousands)
Unrealized gains on securities available-for-sale:
MBS $ 25,643 $ 8,409
Corporate equity securities -- 710
Unrealized losses on securities available-for-sale:
MBS (1,319) (4,773)
-------- --------
24,324 4,346
Unrealized appreciation (depreciation) on Cap Agreements (2,287) 163
-------- --------
Accumulated other comprehensive income $ 22,037 $ 4,509March 31, December 31,
2003 2002
--------- ------------
(In Thousands)
Unrealized gains on available-for-sale:
MBS $ 25,974 $ 27,155
Unrealized losses on available for sale:
MBS (689) (423)
-------- --------
25,285 26,732
-------- --------
Hedging Instruments:
Unrealized depreciation on interest
rate cap agreements (3,266) (2,937)
-------- --------
Accumulated other comprehensive income $ 22,019 $ 23,795
======== ========
14.12. 1997 Stock Option Plan and Employment Agreements
(a) 1997 Stock Option Plan
The Company's Second Amended and Restated 1997 Stock Option Plan as amended (the
"1997 Plan"), authorizes the granting of options to purchase an aggregate of up
to 1,400,000 shares of the Company's Common Stock,common stock, but not more than 10% of the
total outstanding shares of the Company's Common Stock.common stock. The Plan authorizes the
Board of Directors, or a committee of the Board of Directors, to grant Incentive
Stock Options ("ISOs"), as defined under section 422 of the Code, non-qualified
stock options ("NQSOs") and dividend equivalent rights ("DERs") to eligible
persons. The exercise price for any options granted to eligible persons under
the 1997 Plan shall not be less than the fair market value of the Common Stockcommon stock
on the day of the grant. The options expire if not exercised ten years from the
date of grant or upon certain other conditions.
17
MFA MORTGAGE INVESTMENTS, INC.
NOTES TO THE FINANCIAL STATEMENTS
(UNAUDITED)
DERs on the ISOs vest on the same basis as the options and DERs on NQSOs
become fully vested one year following the date of grant. Dividends are paid on
vested DERs only to the extent of ordinary income. DERs are not entitled to
distributions representing a return of capital. Dividends paid on DERs attached
to ISOs are
charged to stockholders' equity when declared and dividends paid on DERs attached to NQSOs are
charged to earnings when declared. For the ninethree months ended September 30,March 31, 2003 and
2002, and 2001, the Company recorded charges of $429,000$126,000 and $283,000,$150,000, respectively, to
stockholders' equity (included in dividends paid or accrued) associated with the
DERs on ISOs and charges of $2,700$700 and $2,500,$1,125, respectively, to earnings
associated with DERs on NQSOs. As
of September 30, 2002,At March 31, 2003, the Company had 452,500 DERs, were outstanding,
all of which were fully vested.
The ISOs granted to the executive officers of the Company, who were also
employees of the Advisor, were accounted for under the fair value method
established under FAS 123, "Accounting for Stock Based Compensation" ("FAS 123") resulting in option related expenses recognized over
the vesting period. Management used the Black-Scholes valuation model to
determine the option expense. Since the Company commenced operations in 1998,
management used assumptions consistent with activity of a comparable peer group
of companies including an estimated option life, a volatility rate, a risk free
rate and a current dividend yield for the 1998 and 1999 grants (or a dividend yield of 0% if the
related DERs wereare issued).
Effective January 1, 2002, the status of the employees of the Advisor
changed such that they became employees of the Company.Company, resulting in a change in
status of these individuals. Accordingly, the unvested options outstanding as of
January 1, 2002 were treated as newly granted options to employees and accounted
for under the APB 25, with the difference between the fair market value of the
Company's Common Stockcompany's common stock and option price expensed over the remaining vesting
period of approximately seven months. ForThe Company did not incur any expense for
stock options during the nine monthsquarter ended September 30,March 31, 2003; for the quarter ended
March 31, 2002, the Company recognized $48,000$24,000 of employee related compensation
expense for stock options and recognized $138,000
of stock option related expense for options granted to non-employees for the
nine months ended September 30, 2001.options.
16
MFA MORTGAGE INVESTMENTS, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
NQSOs were granted to the Company's directors as consideration for the
performance of their duties as directors. The Company treated the directors as
employees for purposes of applying FAS 123 and, in accordance with its policy,
accounted for the NQSOs under APB 25, as described earlier, with no expense
recognized for the NQSOs, as the exercise price at the time of grant was equal
to the market value of the Company's Common Stock at the time of grant.stock.
(b) Employment Agreements
On March 12, 2002, the Board of Directors adopted anew compensation planplans
for Messrs. Zimmerman, Gorin and Freydberg that took effect on August 1, 2002.
Under the newtheir employment agreements, salaries to be paid to Messrs. Zimmerman,
Gorin, and Freydberg will be equal to 0.25%, 0.20% and 0.20%, respectively, of
the Company's tangible net worth, which will be calculated on a semi-annual
basis on each SeptemberJune 30 and December 31. In the event that the Company's
annualized return on equity for any given six-month period were to fall below
10%, the salaries to be paid to Messrs. Zimmerman, Gorin and Freydberg with
respect to the following six-month period would be adjusted downward to equal
(i) 0.2375%, 0.19% and 0.19%, respectively, of the Company's tangible net worth
if its annualized return on equity was between 10% and 5% and (ii) 0.225%, 0.18%
and 0.18%, respectively, of the Company's tangible net worth if its annualized
return on equity was less than 5%. Notwithstanding the foregoing, the annual
base salaries payable to Messrs. Zimmerman, Gorin and Freydberg pursuant to the
new compensation plan will in no event exceed $1,000,000, $750,000 and $750,000,
respectively. TheOn October 1, 2002, the Company also expects to enterentered into an employment
agreement with Ms. Teresa Covello, the Company's Senior Vice
President/Controller.
18Controller, and effective March 13, 2003 was named the Company's Chief
Accounting Officer, that provides for, among other things, a base salary of
$140,000.
(c) Deferred Compensation Plans
On December 19, 2002, the Company's Board of Directors adopted the MFA
Mortgage Investments, Inc. 2003 Nonemployee Directors' Deferred Compensation
Plan and the MFA Mortgage Investments, Inc. Senior Officers Deferred Bonus Plan
(collectively, the "Deferred Plans"). Directors and senior officers of the
Company may elect to defer a percentage of their compensation under the Deferred
Plans for compensation earned subsequent to December 31, 2002. The Deferred
Plans are intended to provide non-employee Directors and Senior Officers of the
Company with an opportunity to defer up to 100% of certain compensation, as
defined in the Deferred Plans, while at the same time aligning their interests
with the interests of the stockholders. Amounts deferred are considered to be
converted into "stock units" of the Company, which do not represent stock of the
Company, but rather the right to receive a cash payment equal to the fair market
value of an equivalent number of shares of the Common Stock. Deferred accounts
increase or decrease in value as would equivalent shares of the Common Stock and
are settled in cash at the termination of the deferral period, based on the
value of the stock units at that time. The Deferred Plans are non-qualified
plans under the Employee Retirement Income Security Act ("ERISA") and are not
funded. Prior to the time that the deferred accounts are settled, participants
are unsecured creditors of the Company.
The Deferred Plans are intended to be non-qualified deferred compensation
plans under the provisions of the Code. At the time a participant's deferral of
compensation is made, it is intended that such participant will not recognize
income for federal income tax purposes, nor will the Company receive a deduction
until such time that the compensation is actually distributed to the
participant.
17
Item 2.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
The following discussion should be read in conjunction with the financial
statements and notes thereto included in Item 1 of this Quarterly Report on Form
10-Q as well as in the Company's Annual Report on Form 10-K for the year ended
December 31, 2001.2002.
GENERAL
MFA Mortgage Investments, Inc. is a self-advised mortgage REIT, which is
primarily engaged in the business of investing in adjustable rate MBS. The
Company's investment portfolio consists primarily of MBS issued or guaranteed as
to principal andor interest by ana U.S. Government agency of the U.S. Government,or federally chartered
corporation, such as Ginnie Mae, Fannie Mae or Freddie Mac (collectively
referred to as "Agency Securities"), and, to a lesser extent, high quality MBS,
rated in one of the two highest rating categories by at least one nationally
recognized rating agency. The Company's investment strategy also provides for
the acquisition of multi-family housing properties, investments in REIT
securities and other securities. The Company's principal business objective is
to generate net income for distribution to its stockholders, resulting from the
spread between the interest and other income it earns on its investments and the
cost of financing such investments.
On August 13, 2002, the Company changed its name from America First
Mortgage Investments, Inc. to MFA Mortgage Investments, Inc. The name change was
made in order to more clearly reflect MFA's independent status and identity as a
self-advised mortgage REIT.
The Company has elected to be taxed as a REIT for federal income tax
purposes. Pursuant to the current federal tax regulations, one of the
requirements of maintaining its status as a REIT is that the Company must
distribute at least 90% of its annual taxable net income to its stockholders,
subject to certain adjustments.
The Company was incorporated in Maryland on July 24, 1997 and began
operations on April 10, 1998 when it merged with the Prep Funds. As a result of
the 1998 Merger, Prep Fund 1 and Prep Fund 2 were merged directly into the
Company and Pension Fund became a partnership subsidiary of the Company. In
December 1999, Pension Fund was liquidated and dissolved and, as a result, the
Company acquired approximately 99% of the assets of Pension Fund. The remaining
assets, consisting solely of cash, were distributed to the holders of Pension
Fund securities who elected to remain in place following the 1998 Merger. As a
result of the 1998 Merger, the Company issued a total of 9,035,084 shares of its
Common Stock to the former partners of the Prep Funds.
Following the completion of the 1998 Merger through December 31, 2001, the
Company was externally advised and managed by the Advisor.REIT. As such, the Company had no
employees and relied entirely on the Advisor to perform all of the duties that
are generally performed by internal management, as well as perform all back
office operations.management. Pursuant the Advisory Agreement,an agreement with
the Advisor, the Advisor provided the day-to-day management and administrative
functions for the CompanyCompany's operations for a fee, which was calculated on a
quarterly basis. The Advisor was a subsidiary of AFC.
On December 12, 2001, the Company's stockholders approved the terms of the
Advisor Merger Agreement, dated September 24, 2001, among the Company, the
Advisor, AFC and the stockholders of the Advisor which provided for the Advisor
Merger. The Advisor Merger became effective on January 1, 2002. As a result of
the Advisor Merger, the Company became a self-advised REIT and, as such, is no
longer be required to pay a fee to the Advisor under the Advisory Agreement, but
rather directly incurs all of the costs of operating the Company.REIT. In connection with
the Advisor Merger, the employees of the Advisor became employees of the Company
and the Company assumed the employment contracts of these individuals. The
Company also acquired all of the tangible and intangible business assets of the
Advisor.
The Company's core business strategy is to invest on a leveraged basis in
a portfolio of high-grade ARM-MBS,adjustable rate MBS, which primarily consist of Agency
MBS. Beginning in SeptemberJune 2001, the Company began to significantly increase its
asset base by leveraging equity raised through additional public offerings of the Company's
Common Stock.common stock. As a result, the Company has experienced significant growth in
assetsinterest income, interest expense and earnings.net interest income. The Company's total
assets grew to approximately
$3.60were $3.6 billion at September 30, 2002 from $2.07 billion atMarch 31, 2003 and December 31, 2001 and
$1.44 billion as of September 30, 2001.2002. As of September 30, 2002, approximately
99%March
31, 2003, 98.5% of the Company's assets consisted of Agency MBS, AAA rated MBS
and cash. The Company also has indirect interests in sixfour apartment properties
containingand a controlling indirect interest in two apartment properties, these six
properties contain a total of 1,473 rental units. Four of these apartment
properties are located in Georgia, one is located in North Carolina and one is
located in Nebraska.
19
The results of the Company's operations are affected by various factors,
many of which are beyond the control of the Company. The results of the
Company's operations primarily depend on, among other things, the level of its
net interest income, the market value of its assets and the supply of and demand
for such assets. The Company's net interest income, which reflects the
amortization of purchase premiums, varies primarily as a result of changes in
short-term interest rates, borrowing costs and prepayment rates, the behavior of
which involves various risks and
18
uncertainties. Prepayment rates, as reflected by the constant prepayment rate
("CPR"), and interest rates vary according to the type of investment, conditions
in financial markets, competition and other factors, none of which can be
predicted with any certainty. The CPR on the Company's MBS portfolio averaged
29% and 28%33% for the three and nine monthsquarter ended September 30, 2002, respectively.March 31, 2003. In addition to these factors,
borrowing costs are further affected by the credit worthinesscreditworthiness of the borrower.
Since changes in interest rates may significantly affect the Company's
activities, the operating results of the Company depend, in large part, upon the
ability of the Company to effectively manage its interest rate and prepayment
risks while maintaining its status as a REIT. During the quarter ended September 30, 2002, the Company had
sold all of its remaining investments in corporate debt securities, realizing an
aggregate net loss of $363,000. The Company also has risks
inherent in its other investments, comprised of interests in multi-family real
estate properties and hedging instruments. Because these investments represented
less than 0.3%1.0% of the Company's total assets at September 30, 2002,March 31, 2003, the risk related
to these assets is limited; nonetheless, these investments have the potential of
causing a material impact on the Company's operating performance in future
periods.
RESULTS OF OPERATIONS
It should be noted that due to the significant growth in the Company's
assets as well as the completion of the Advisor Merger on January 1, 2002, the
amount and components of the Company's income and expenses for the quarter and
year to date periods ended September 30, 2002 differ significantly from the same
periods in 2001.
Three Month Period Ended September 30, 2002March 31, 2003 Compared to the Three Month Period Ended
September 30, 2001March 31, 2002
Net income increased to $17.3$15.3 million for the three months ended September
30, 2002,March 31,
2003, reflecting basic and diluted earnings per share of $.37,$0.33, from $5.1$9.6
million, or basic and diluted earnings per share of $0.27,$0.28, for the three months
ended September 30, 2001.March 31, 2002. Comparing the thirdfirst quarter of 20022003 to the thirdfirst quarter
of 2001,2002, the Company's core net revenue, comprised of net interest income,
increased by $12.8$3.5 million, or 199%25%, to $19.2$17.2 million for the 2003 period from
$13.8 million for the 2002 period from $6.4period. During the quarter ended March 31, 2002, the
Company had a non-recurring $3.5 million charge for the 2001 period. This increasean other-than-temporary
impairment against an investment in net interest
income reflects the significant growth in the Company's interest earning assets
and interest bearing liabilities.corporate debt securities.
During the three months ended September 30,
2002,March 31, 2003, total interest and dividend
income net of amortization of premium and
accretion of discounts, increased by $20.3$4.9 million, or 122%18.1%, to $37.0$32.2 million from $16.7$27.3 million for
the three months ended September 30, 2001. This increase
reflects the significant growth in the Company's interest earning assets, which
were primarily funded through the leveraging of new equity capital raised
through public sales of the Company's Common Stock.March 31, 2002. The Company's average interest-earning
assets for the three months ended September 30, 2002March 31, 2003 were $3.45$3.52 billion, compared to
$1.14$2.38 billion for the thirdfirst quarter of 2001.2002. The increase in interest income
generated by the growth in interest earninginterest-earning assets, which growth was facilitated
by leveraging equity raised through public offerings of the Company's common
stock, was partially offset by a decrease in the yield on interest earninginterest-earning
assets to 4.30%3.66% from 5.87%4.65% for the comparable period in 2001 reflecting the declining interest
rate environment.first quarter of 2002.
The Company's interest expense on borrowed funds (i.e.,its repurchase agreements)agreements increased by
$7.6$1.5 million, or 74%11.0%, to $17.8$15.0 million, for the three months ended September 30, 2002,March 31,
2003, compared to $10.3$13.5 million for the third quarter
of 2001, reflecting the significant increase in borrowings. The increase in
interest expense related to the increase in the balance of repurchase agreements
was partially offset by a reduction in the average cost of funds, which
decreased to 2.27% for the current quarter compared to 3.87% for the third
quarter of 2001. The increase in borrowings was facilitated by the Company's
increase in equity raised in capital market transactions. Between June 27, 2001
and June 5, 2002, the Company issued approximately 36.2 million shares of its
Common Stock through four public offerings, which generated aggregate net
proceeds of approximately $273.6 million of additional equity capital that was
invested on a levered basis. (See "Liquidity and Capital Resources" below.)
20
Because the Company's interest bearing liabilities (i.e., repurchase
agreements) reprice faster than its interest earning assets (primarily, hybrid
MBS), the declining interest rate environment that began during 2001 has
benefited the Company. The Company's interest rate margin (i.e., annualized net
interest and dividend income divided by average interest earning assets) was
2.25% for the current quarter compared to 2.29% for the third quarter of 2001.
The net interest rate spread increased slightly to 2.03% for the current quarter
from 2.00% for the third quarter of 2001. The prepayment rate on the Company's
MBS portfolio averaged 29% CPR during the third quarter of 2002. Given the
positive slope of the yield curve, the Company expects adjustable-rate mortgage
rates to remain below fixed mortgage rates. As of September 30, 2002, the
Company's MBS portfolio had a weighted average coupon rate of 5.40% and an
average purchase premium of 2.20%. The Company expects that prepayment speeds on
the MBS portfolio may increase in the fourth quarter of 2002. However,
management believes that the potential impact on earnings of increased
prepayments may be partially offset by declining borrowing costs.
Other investments generated a loss of $52,000 during the three months
ended September 30, 2002, compared to income of $229,000 during the third
quarter of 2001. The Company's investment in multi-family apartment properties
was intended to compliment the performance of its MBS portfolio, offering a
degree of asset diversification. Given the significant growth of the Company's
MBS portfolio during 2001 and 2002, these investments and their returns have
become a relatively insignificant component of the Company's income, as the net
investments in real estate represented approximately 0.3% of total assets as of
September 30, 2002. However, gains and/or losses on the sale of any of these
investments, if any, could significantly impact the results of operations for
future periods. The Company is actively marketing its interests in certain of
these properties for sale, as its focus is on managing the core asset portfolio
of ARM-MBS. While management believes that in the present real estate market a
sale of any one of the properties would result in a gain to the Company, no
assurance can be given as to when or whether such sales will take place or
whether they will ultimately result in a gain.
During the quarter ended September 30, 2002, the Company realized gains of
$928,000 and losses of approximately $1.3 million on the sale of debt
securities. During the third quarter of 2001, the Company realized gains of
$208,000 and losses of $332,000 on the sale of securities.
Prior to the January 1, 2002 Advisor Merger, the most significant
component of the Company's general and administrative expenses were formula
driven advisory fees. General and administrative expenses for the third quarter
of 2002 reflect the Company's direct operating expenses following the Advisor
Merger. Therefore, the expenses incurred during the third quarter of 2001,
during which time the Company was externally managed, are not readily comparable
with those of the current period.
For the three months ended September 30, 2002, general and administrative
expenses (on an annualized basis) were 0.16% of average assets, compared to
0.49% of average assets for the three months ended September 30, 2001, when the
Company was externally managed. Although general and administrative expenses
remained at approximately $1.4 million for the third quarter of 2002 and 2001,
as a percentage of assets general and administrative expenses have been
substantially reduced as a result of the Company becoming self managed through
the Advisor Merger.
During the quarter ended September 30, 2001, the Company paid the Advisor
total fees of $1.1 million. (See Note 3(a) to the Financial Statements.) For the
third quarter of 2002, employee compensation and benefits accounted for
approximately $759,000, or 52%, of general and administrative expenses. Fees for
professional services, such as legal and accounting, office rent, corporate
insurance and director compensation are the other major costs incurred in
operating the Company.
Nine Month Period Ended September 30, 2002 Compared to the Nine Month Period
Ended September 30, 2001
Significant non-recurring items are reflected in both the 2002 and 2001
periods. During the first quarter of 2002, the Company recognized a charge of
$3.5 million against its debt securities portfolio due to an
other-than-temporary decline in the market value of a corporate debt security.
In addition, during the first nine months of 2001, the Company realized a gain
of $2.6 million on the sale of an assisted living center. For tax purposes, the
Company sets its dividend rates based on the Company's taxable income.2002. The capital loss realized on the sale of the Company's investments in corporate debt
securities during the third quarter of 2002 represents a capital loss and, as
such cannot be used to offset operating income. The tax loss will be carried
forward and used to offset future long-term capital gains, if any. The gain
realized on the sale of the assisted living center during the first nine months
of 2001 was not realized for tax purposes and therefore did not impact the
Company's taxable income.
21
Net income increased to $41.1 million for the nine months ended September
30, 2002, reflecting basic and diluted earnings per share of $1.03, compared to
net income of $11.4 million, or $.92 per basic and diluted share, for the nine
months ended September 30, 2001. Comparing the first nine months of 2002 to the
first nine months of 2001, the Company's core net revenue, comprised of net
interest income, increased by $36.5 million, or 306%, to $48.4 million for the
2002 period from $11.9 million for the 2001 period. Thisoverall
increase in net
interest income reflects the significant growth in the Company's interest
earning assets and the related liabilities funding such assets.
Interest and dividend income for the current nine-month period increased
by $60.5 million, or 175%, from $34.5 million for the first nine months of 2001.
Interest expense increased by $23.9 million, or 106%, to $46.6 million for the
current nine-month period, compared with $22.6 million for the first nine months
of 2001. This increase reflects the significant increase in borrowings,
that wasreflecting the leveraging of proceeds received from the Company's common stock
offerings, partially offset by a reduction64 basis point (i.e., one basis point equals
1/100 of 1%) decrease in the cost of fundsborrowings, which decreased to 2.40%1.91% for
the nine
months 2002quarter ended March 31, 2003 from 4.56%2.55% for the nine months of 2001. The aggregate decrease of
$1.0 million inquarter ended March 31,
2002. (See Liquidity and Capital Resources.)
Total other income from corporate debt and equity securities reflects the
declining investment in these instruments, as management has continuedincreased to emphasize investing in MBS. As of September 30, 2002, the Company had no
remaining investments in corporate debt or equity securities.
The Company realized a net other loss of $3.5 million$327,000 for the nine months
ended September 30, 2002, compared to income of $2.8 million for the comparative
2001 period. During the current nine month period, a $3.5 million
other-than-temporary impairment charge was recognized on corporate debt
securities and an additional net loss of $363,000 was recognized upon the sale
of these securities during the third quarter of 2002, as reflected in the net
loss on the sale of investments of $115,000. During the nine months ended
September 30, 2001, the Company realized a $2.6 million non-recurring gain on
the sale of an assisted living center.
The $3.5 million impairment charge (which was recognized during the first quarter of 2002) represents2003,
from a loss of $.087 per share$3.0 million for the nine months ended
September 30,first quarter of 2002. This $3.3 million
increase primarily reflects the impact of a non-recurring $3.5 million charge
taken in the first quarter of 2002 for an other-than-temporary impairment on
investment corporate debt securities. This loss was entirely attributable to an
investment in the corporate debt securities of Level 3. During3 Corporation. The Company
liquidated all of its corporate debt and equity portfolios during 2002, and
currently has no plans to resume investing in such instruments.
Prior to October 1, 2002, the Company accounted for its non-controlling
interest in the preferred stock of RCC under the equity method, whereby RCC's
results of operations were reported net, relative the Company's equity interest.
On October 1, 2002, the Company acquired 100% of the voting common stock in RCC,
and commenced accounting for such subsidiary on a consolidated basis,
prospectively. (See Notes 3c and 6 to the accompanying consolidated financial
statements.) This change in ownership and resulting change in accounting for RCC
caused certain line items of the Company's statement of operations for the
quarter ended September 30,March 31, 2003 to be non-comparable to the results of operations
for the quarter ended March 31, 2002 presentation. As of March 31, 2003, the
Company had indirect interests in six multi-family properties consisting of a
total of 1,473 rental units, through investments in four limited partnerships
and one corporation as a common stockholder. In the aggregate, real estate
equity interests and real estate, which is owned through a consolidated
subsidiary, comprised less than 1.0% of the Company's total assets at March 31,
2003.
19
The Company did not sell any of its investments during the quarter ended
March 31, 2003; during the quarter ended March 31, 2002, the Company sold allrealized
gains of its remaining corporate debt securities, including$595,000 and losses of $181,000 on the Level 3 securities, allsale of equity and MBS.
During the first quarter of 2003, the Company had operating and other
expenses of $2.2 million, compared to $1.2 million for the first quarter of
2002. This $1.0 million increase reflects $550,000 of mortgage interest and
other expenses related to the real estate properties held by RCC, which were designated as available-for-sale.
Priorprior to
JanuaryOctober 1, 2002 were accounted for under the Company'sequity method and reported as a net
component of income from equity interests in real estate. Compensation and
benefits increased by $132,000 from $819,000 to $951,000, primarily reflecting
the additional staff hired to operate as an internally managed Company.
Other general and administrative expenses wereexpense increased by $310,000 to $703,000
for the quarter ended March 31, 2003, compared to $393,000 for the quarter ended
March 31, 2002, primarily formula driven fees payable toreflecting the Advisor. Forcost of the nine
months ended September 30, 2001,new headquarters that the
Company paid the Advisor total fees of $2.6
million. (See Note 3(a) to the Financial Statements.) During the nine months
ended September 30, 2002, the Company incurred $3.9 million of operating
expenses, or 0.18% of average assets on an annualized basis, Employee
compensation and benefits accounted for $2.1 million of general and
administrative expenses with the remainder expended primarily for professional
services, including legal and accounting, corporate insurance, office rent on
the Company's corporate headquarters. Duringbegan occupying during the third quarter of 2002,2002. In addition, market
based increases for the Company moved into itscost of corporate insurance have been experienced by the
Company. Management expects other operating expenses to increase over the
remainder of 2003, as costs will be incurred to comply with new headquarters, asrules
promulgated by the Company required additional
space to accommodate its post Advisor Merger operations. (See Note 10(b) toSecurities and Exchange Commission and New York Stock
Exchange in connection with the Financial Statements.)
LIQUIDITY AND CAPITAL RESOURCESSarbanes-Oxley Act.
Liquidity and Capital Resources
The Company's principal sources of liquidity consist of borrowings under
repurchase agreements, principal payments received on its portfolio of MBS, cash
flows generated by operations and proceeds from capital market transactions. The
Company primarilyCompany's principal uses its funds to purchase MBS. In addition,of cash include purchases of MBS and, to a lesser
extent, the Company may invest ininclude purchases of hedge instruments, such as the interest rate
Cap Agreements. The Company also requires cash to payinstruments; payments for operating
expenses and dividends on itsthe Company's Common StockStock; and to fund its operating expenses. Although the Company may also investinvestments in multi-family properties and other assets consistent with its operating
policy, it currently has no plans to do so.real
estate assets.
Borrowings under repurchase agreements totaled $3.20 billionwere $3.2 billon as of September 30, 2002, compared to $1.85 billion atMarch 31,
2003, and December 31, 2001. This
increase in leverage was facilitated by the increase in the Company's capital as
a result of the public stock offerings completed in January and June of 2002. The proceeds from the sale of the Company's Common Stock along with the
incremental borrowings under repurchase agreements were used to purchase Agency
and AAA rated ARM-MBS. At September 30, 2002,March 31, 2003, the Company's repurchase
agreements had a weighted average borrowing rate of 2.16%1.75%, on loan balances of
between $560,000$350,000 and $96.6$77.0 million. Since the first quarter of 2002, the Company
has entered into repurchase agreements with terms to maturity of up to 18
months; prior to that time, the maximum term to maturity was 12 months at
inception of the loan. These agreements generally have original
terms to maturity ranging from one month to 18 months and interest rates that
are typically based off of LIBOR. However, management has recently noted the
increased availability of repurchase agreements extending as long as 36 months,
and expects to extend a portion of the maturing agreements into such longer term
agreements. In addition, management may also purchase hybrid MBS that have a
fixed rate for up to five years (i.e., 5/1 MBS) and adjust annually thereafter,
compared to the present three year fixed term limit. To date, the Company has
not had any margin calls on its repurchase agreements that it was unable to
satisfy with either cash or additional pledged collateral.
22
On January 18, 2002, the Company issued 7,475,000 shares of its Common
Stock, generating net proceeds of approximately $58.2 million in a public
offering. In addition, on June 4, 2002, the Company issued 10,350,000 shares of
its Common Stock generating net proceeds of approximately $88.8 million. As of
September 30, 2002, the net proceeds of the January and June equity offerings
were fully invested. At September 30, 2002, the Company had an assets-to-equity
ratio of 9.7x. Over time, the Company expects to maintain this ratio within a
range of 9x to 11x. Following the completion of the June 2002 equity offering,
the Company had approximately $80.1 million remaining on its effective shelf
registration statement, which was filed with the SEC on September 25, 2001 for
the purpose of registering and offering, from time to time, shares of the
Company's common and preferred stock.
To the extent the Company raises additional equity capital from future
sales of common and/or preferred stock pursuant to its shelf registration
statement,capital market transactions, the Company anticipates using the net proceeds
primarily to acquire additional Agency and/or AAA rated ARM-MBS.ARM-MBS on a leveraged basis. Management may
also consider additional interests in multi-family apartment properties and
other investments consistent with its operating policies. There can be no
assurance, however, that the Company will be able to raise additional equity
capital at any particular time or on any particular terms.
During the nine monthsquarter ended September 30, 2002,March 31, 2003, principal payments on MBS
generated cash of approximately $850.6$421.5 million and operations provided a net of
$59.4$22.4 million in cash.
In addition, during the first nine months of 2002, the
Company received proceeds of $9.6 million from the sale of corporate debt and
equity securities and $4.5 million from the sale of MBS.
During the first nine months of 2002, asAs part of its core investing activities, during the first quarter of 2003, the
Company acquired $2.4 billion$482.1 million of MBS, all of which were either Agency or AAA
rated adjustable rate or hybrid MBS. Other uses of funds during the nine-month periodquarter
included payments of $32.6$14.9 million for dividends on the Company's Common Stock.
In order to reduce interest rate risk exposure on a portion of the
Company's LIBOR-based repurchase agreements, the Company enters into Cap
Agreements. As of September 30, 2002, the Company had nine Cap Agreements with a
total notional amount of $250.0 million, of which eight had been entered into
during the nine-month period ended September 30, 2002 with aggregate premium
cost of $2.9 million. A Cap Agreement will generate cash payments if the market
interest rate specified in the Cap Agreement (i.e., LIBOR) increases beyond the
strike rate specified in the Cap Agreement. The timingoutstanding
common stock and amount of such cash
flows on the Company's Cap Agreements, if any, cannot be predicted.DERs.
The Company's restricted cash balance represents cash held on deposit with
certain counterparties (i.e., lenders) to satisfy margin calls on repurchase
agreements. MarginThe margin calls onresult from the Company's repurchase agreement collateral are
generally expected, asdecline in the value of the MBS
securing repurchase agreements, decline as thegenerally due to principal value ofreduction in the MBS
is reduced throughfrom scheduled amortization and prepayments. At the time a repurchase agreement
rolls (i.e., matures or reprices)matures), the Company will apply the restricted cash against the
repurchase agreement, thereby reducing the borrowing.
The Company believes it has adequate financial resources to meet its
obligations as they come due and to fund committed dividends as well as to
actively pursue its investment policies. However, should market interest rates
20
suddenly spike, margin calls due to a decline in the market value of the MBS
collateralizing the Company's repurchase agreements could result, causing an
adverse change in the Company's liquidity position.
OTHER MATTERS
The Company at all times intends to conduct its business so as to not
become regulated as an investment company under the Investment Company Act of
1940, as amended (the "Investment Company Act"). If the Company were to become
regulated as an investment company, then, among other things, the Company's
ability to use leverage would be substantially reduced. The Investment Company
Act exempts entities that are "primarily engaged in the business of purchasing
or otherwise acquiring mortgages and other liens on and interestsinterest in real estate"
(i.e., "Qualifying Interests"Interest"). Under the current interpretation of the staff of
the SEC,Securities and Exchange Commission, in order to qualify for this exemption,
the Company must maintain at least 55% of its assets directly in Qualifying
Interests. In addition, unless certain mortgage securities represent an
undivided interest in the entire pool backing such mortgage securities (i.e.,
"whole pool" mortgage securities)securities"), such mortgage securities may be treated as
securities separate from the underlying mortgage loan and, thus, may not be
considered Qualifying Interests for purposes of the 55% exemption requirement.
Accordingly, the Company monitors its compliance with this requirement in order
to maintain its exempt status. As of September 30, 2002,March 31, 2003, the Company determined that
it wasis in and has maintained compliance with this requirement.
23
INFLATION
Virtually all of the Company's assets and liabilities are financial in
nature. As a result, changes in interest rates and other factors drive the Company'simpact our
performance far more than does inflation. Changes in interest rates do not
necessarily correlate with inflation rates and changes in inflation rates. The
Company'sOur
financial statements are prepared in accordance with GAAPGenerally Accepted
Accounting Principles and our dividends are based upon our net income as calculated
for tax purposes; in each case, our activities and statements of financial condition (i.e., balance sheets)sheet are measured
with reference to historical cost or fair market value without considering
inflation.
FORWARD LOOKING STATEMENTS
When used in this Quarterly Report on Form 10-Q, in future SEC filings with
the Securities and Exchange Commission, or in press releases or other written or
oral communications, the words or phrases "will likely result," "are expected
to," "will continue," "is anticipated," "estimate," "project" or similar
expressions are intended to identify forward-looking statements"forward-looking statements" for purposes
of Section 27A if the Securities Act of the Act1933, as amended, and Section 21E of the
Securities Exchange Act of 1934, as amended, and as such may involve knownknow and
unknown risks, uncertainties and assumptions.
These forward-looking statements are subject to various risks and
uncertainties, including, but not limited to, those relating to: increases in
the prepayment rates on the mortgage loans securing the Company's MBS; changes
in short-term and
long-term interest rates and the market value of the Company's MBS and other
investments;rates; the Company's ability to use borrowings to finance
its assets; risks associated with investing in real estate, including changes in
business conditions and the general economy; changes in government regulations
affecting the Company's business; and the Company's ability to maintain its
qualification as a REIT for federal income tax purposes. These risks,
uncertainties and factors could cause the Company's actual results to differ
materially from those projected in any forward-looking statements it makes.
All forward-looking statements speak only as the date they are made and
the Company does not undertake, and specifically disclaims, any obligation to
update any forward-looking statement to reflect events or circumstances after
the date of such statements. Readers are cautioned that the Company's actual
results could differ materially from those set forth in such forward-looking
statements.
21
Item 3. Quantitative and Qualitative Disclosures About Market Risk.
The Company seeks to manage the interest rate, market value, liquidity,
prepayment and credit risks inherent in all financial institutions in a prudent
manner designed to insure the longevity of the Company while, at the same time,
seeking to provide an opportunity to stockholders to realize attractive total
rates of return through stock ownership of the Company. While the Company does
not seek to avoid risk, it does seek, to the best of its ability, to assume risk
that can be quantified from historical experience, to actively manage such risk,
to earn sufficient compensation to justify the taking of such risks and to
maintain capital levels consistent with the risks it does undertake.
INTEREST RATE RISK
The Company primarily invests in adjustable rate and hybrid MBS. The
hybrid-MBS represent fixed rate coupons for a specified period, generally three
years, and thereafter converts to a variable rate coupon. The Company's debt
obligations are generally repurchase agreements of limited duration, which are
periodically refinanced at new market rates. The Company expects to extend the
terms on its hybrid-MBS to include 5/1 ARM-MBS, which will have a fixed rate for
five years and adjust annually thereafter. In addition, the Company would also
expect to extend the terms on its repurchase agreements to include three year
fixed rate obligations.
The interest rates for most of the Company's adjustable rate assets are
dependent on the one-year CMTconstant maturity treasury ("CMT") rate, while debt
obligations, in the form of repurchase agreements, are generally dependent on
LIBOR. These indexes generally move in parallel, but there can be no assurance
that this will continue to occur.
The Company's adjustable rate investment assets and debt obligations reset
on various dates that differ for the specific asset or obligation. In general,
the repricing of the Company's debt obligations occurs more quickly than the
repricing of assets. Therefore, on average, the Company's cost of funds may rise
or fall more quickly than does its earnings rate on the assets. Further, the
Company's net income may vary somewhat as the yield curve between one-month
interest rates and six-and 12-month interest rate varies.
24
The following table presents the Company's interest rate risk using the
static gap methodology. The table presents the difference between the carrying
value of the Company's interest rate sensitive assets and liabilities at September 30, 2002,March
31, 2003, based on the earlier of term to repricing or the term to repayment of
the asset or liability, scheduled principal amortization is not reflected in the
table. Further, MBS can be prepaid before contractual amortization and/or
maturity, which is also not reflected in the table. The table does not include
assets and liabilities that are not interest rate sensitive.
As of September 30, 2002,March 31, 2003, the Company's investment assets and debt obligations
will prospectively reprice based on the following time frames:
As of September 30, 2002March 31, 2003
-----------------------------------------------------------------------------------------
(In Thousands)One Year Two Years Beyond
Less than Six Months One Year to Two to Year Three
(In Thousands) Six Months to One Year Two Years Three Years Total
----------- ----------- ----------- ----------- ----------- -----------
Interest Earning Assets:
Adjustable Rate - MBS $ 964,650708,764 $ 394,557441,337 $ 611,867662,201 $ 1,468,6531,716,727 $ -- $ 3,439,7273,529,029
Fixed-Rate - MBS -- -- -- -- 6,807 6,807
Cash 112,839 -- -- -- -- 112,8396,693 6,693
----------- ----------- ----------- ----------- ----------- -----------
Total interest-earning assets 1,077,489 394,557 611,867 1,468,653 6,807 3,559,373708,764 441,337 662,201 1,716,727 6,693 3,535,722
Interest Bearing Liabilities:
Repurchase agreements 1,709,540 1,487,5951,900,341 928,796 382,440 -- -- -- 3,197,1353,211,577
----------- ----------- ----------- ----------- ----------- -----------
Total interest-bearing
liabilities 1,709,540 1,487,5951,900,341 928,796 382,440 -- -- -- 3,197,1353,211,577
Interest sensitivity gap $(1,191,577) $ (632,051) $(1,093,038)(487,459) $ 611,867279,761 $ 1,468,6531,716,727 $ 6,8076,693 $ 362,238324,145
Cumulative interest
sensitivity gap $(1,191,577) $(1,679,036) $(1,399,275) $ (632,051) $(1,725,089) $(1,113,222)317,452 $ 355,431 $ 362,238324,145
The difference between assets and liabilities repricing or maturing in a
given period is one approximate measure of interest rate sensitivity. When more
assets than liabilities reprice during a period, the gap is considered positive
and it is anticipated that earnings will increase as interest rates rise and
earnings will decrease as interest rates
22
decline. When more liabilities reprice than assets during a given period,
as is the case with respect to the Company for periods less than one year, the
gap is considered negative. With a negative gap it is anticipated that income
will decline as interest rates increase and income will increase as interest
rates decline. The static gap analysis does not reflect the constraints on the
repricing of adjustable rate MBS in a given period resulting from periodic and
life time cap features on these securities, nor the behavior of various indexes
applicable to the Company's assets and liabilities.
To a limited extent, the Company uses Cap Agreements as part of its
interest rate risk management. The notional amounts of these instruments are not
reflected in the Company's balance sheet. The Cap Agreements that hedge against
increases in interest rates on the Company's LIBOR-based repurchase agreements
are not considered in the static gap analysis, as they do not effect the timing
of the repricing of the instruments they hedge, but rather to the extent of the
notional amount, cap the limit on the amount of interest rate change that can
occur relative to the applicable of the hedged liability. The Company entered
into Cap Agreements with an aggregate notional amount of $200 million during the
nine months ended September 30, 2002. These agreementsCompany's Caps are
intended to serve as a hedge against future interest rate increases on the
Company's repurchase agreements, which are typically priced off of LIBOR. TheAs of
March 31, 2003, the Company had total Cap
Agreements$310.0 million of $250.0 million,notional amount of Caps, with
a weighted average strike rate for the one-month LIBOR of 4.85%4.54%. (See Note 85 to
the accompanying Consolidated Financial Statements.)
MARKET VALUE RISK
Substantially all of the Company's investments are designated as
"available-for-sale" assets. As such, they are reflected at their estimated fair
value, with the difference between amortized cost and fair value reflected in
accumulated other comprehensive income, a component of stockholders' equity.
(See the Consolidated Statements of Comprehensive Income and Note 1311 to the
accompanying financial statements included in Item 1.Consolidated Financial Statements.) The market value of the
Company's MBS assets fluctuate primarily due to changes in interest rates and
other factors; however, given that these securities are issued or guaranteed as
to principal or interest by an agency or federally chartered corporation of the
U.S. Government or "AAA" rated, such fluctuations are generally not based on the
underlying credit worthiness.
25
LIQUIDITY RISK
The primary liquidity risk of the Company arises from financing
long-maturity assets with short-term debt in the form of repurchase agreements.
The Company had no long-term debt at September 30, 2002.March 31, 2003. Although the interest rate
adjustments of these assets and liabilities are matched within the Company's
operating policies, maturities are not required to be nor are they matched.
The Company's assets which are pledged to secure short-term borrowings are
high-quality, liquid assets. As a result, the Company has not had difficulty
rolling over (i.e., renewing) its short-term debt as it matures. However, the
Company cannot give assurances that it will always be able to roll over its
short-term debt. At September 30, 2002,March 31, 2003, the Company had cash and cash equivalents of
$112.8$34.9 million available to meet margin calls on repurchase agreements and for
other corporate purposes.
PREPAYMENT AND REINVESTMENT RISK
As the Company receives repayments of principal on its MBS, premiums on
the corresponding securities are amortized and amortization is netted against interest income, discounts on
MBS are accreted to income and increase interest income reported. Premiums arise
when the Company acquires a MBS at a price in excess of the principal value of
the mortgages or par value if purchased at the original issue. Conversely,
discounts arise when the Company acquires a MBS at a price below the principal
value of the mortgages, or par, if purchased at original issue. For financial
accounting purposes, the premium is amortized using the effective yield method,
which reflects the effect of prepayments on amortization of premium and
accretion of discounts. In general, an increase in the prepayment rate will
accelerate the amortization of premiums, thereby reducing interest income.
For tax accounting purposes, the premium is amortized based on the asset
yield at the purchase date. Therefore, on a tax basis, amortization of premiums
will differ from those reported for financial purposes. At September 30, 2002,March 31, 2003, the
gross unamortized premium for adjustable rate MBS for financial accounting
purposes was $73.1$78.9 million (2.1%(2.2% of the carrying value of MBS) compared with
$72.7 millionwhile the amount
for federal tax purposes.purposes was estimated at $72.1 million.
In general, the Company believes it will be able to reinvest proceeds from
scheduled principal payments and
23
prepayments at acceptable yields; however, no assurances can be given that,
should significant prepayments occur, market conditions would be such that
acceptable investments could be identified and the proceeds reinvested.
Item 4. Controls and Procedures
A review and evaluation was performed by the Company's management,
including the Company's Chief Executive Officer (the "CEO") and Chief Financial
Officer (the "CFO"), of the effectiveness of the design and operation of the
Company's disclosure controls and procedures as of a date within 90 days prior
to the filing of this quarterly report. Based on that review and evaluation, the
CEO and CFO have concluded that the Company's current disclosure controls and
procedures, as designed and implemented, were effective. There have been no
significant changes in the Company's internal controls or in other factors that
could significantly affect the Company's internal controls subsequent to the
date of their evaluation. There were no significant material weaknesses
identified in the course of such review and evaluation and, therefore, no
corrective measures were taken by the Company.
2624
PART II. OTHER INFORMATION
Item 1. Legal Proceedings
There are no material pending legal proceedings to which the Company is a
party or any of its assets are subject.
Item 2. Changes in Securities and Use of Proceeds.
On July 17, 2002, the Company issued an aggregate of 1,016 restricted
shares of Common Stock to Messrs. Yanney and Krauss, two of the Company's
directors, reflecting 50% of the annual director's fee that is to be paid in
Common Stock. The stock issued represented 50% of the prorated annual board fee
which is payable to non-employee directors in Common Stock of the Company. The
distribution was equal to the number of restricted shares of Common Stock
determined by dividing $5,000 by the closing sale price of the Common Stock on
the New York Stock Exchange on July 1, 2002, which was $9.85. These restricted
shares of Common Stock were issued in a private transaction exempt from the
registration requirements of the Act, by virtue of Section 4(2) and the rules
promulgated thereunder.
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
2.1 Agreement and Plan of Merger by and among the Registrant, America
First Participating/Preferred Equity Mortgage Fund Limited Partnership,
America First Prep Fund 2 Limited Partnership, America First Prep Fund 2
Pension Series Limited Partnership and certain other parties, dated as of
July 29, 1997 (incorporated herein by reference to Exhibit 2.1 of the
Registration Statement on Form S-4 dated February 12, 1998, filed by the
Registrant pursuant to the Securities Act of 1933 (Commission File No.
333-46179)).
2.2 Agreement and Plan of Merger by and among the Registrant, America
First Mortgage Advisory Corporation ("AFMAC") and the shareholders of
AFMAC, dated September 24, 2001 (incorporated herein by reference to
Exhibit A of the Preliminary Proxy Statement dated October 9, 2001, filed
by the Registrant pursuant to the Securities Exchange Act of 1934
(Commission File No. 1-13991)).
3.1 Amended and Restated Articles of Incorporation of the Registrant
(incorporated herein by reference to Form 8-K dated April 10, 1998, filed
by the Registrant pursuant to the Securities Exchange Act of 1934
(Commission File No. 1-13991)).
3.2 Articles of Amendment to the Amended and Restated Articles of
Incorporation of the Registrant dated August 6, 2002
(incorporated herein by reference to Form 8-K dated August 13,
2002, filed by the Registrant pursuant to the Securities
Exchange Act of 1934 (Commission File No. 1-13991)).
3.3 Articles of Amendment to the Amended and Restated Articles of
Incorporation of the Registrant dated August 16, 2002.
3.4 Amended and Restated Bylaws of the Registrant (incorporated herein by
reference to the Form 8-K dated August 13, 2002, filed by the Registrant
pursuant to the Securities Exchange Act of 1934 (Commission File No.
1-13991)).
4.1 Specimen of Common Stock Certificate of the Company (incorporated
herein by reference to Exhibit 4.1 of the Registration Statement on Form
S-4, dated February 12, 1998, filed by the Registrant pursuant to the
Securities Act of 1933 (Commission File No. 333-46179)).
10.1 Employment Agreement of Stewart Zimmerman, dated August 1, 2002.2002
(incorporated herein by reference to Exhibit 10.1 of the Form 10-Q, dated
September 30, 2002, filed by the Registrant pursuant to the 1934 Act
(Commission File No. 1-13991)).
10.2 Employment Agreement of William S. Gorin, dated August 1, 2002.2002
(incorporated herein by reference to Exhibit 10.2 of the Form 10-Q, dated
September 30, 2002, filed by the Registrant pursuant to the 1934 Act
(Commission File No. 1-13991)).
10.3 Employment Agreement of Ronald A. Freydberg, dated August 1, 2002.2002
(incorporated herein by reference to Exhibit 10.3 of the Form 10-Q dated
September 30, 2002, filed by the Registrant pursuant to the 1934 Act
(Commission File No. 1-13991)).
10.4 Employment Agreement of Teresa D. Covello, dated October 1, 2002
(incorporated herein by reference to Exhibit 10.4 of the Form 10-K, dated
December 31, 2002, filed by the Registrant pursuant to the 1934 Act
(Commission File No. 1-13991)).
10.5 Amended and Restated 1997 Stock Option Plan of the Company
(incorporated herein by reference to the Form 10-K, dated December 31,
1999, filed with the Securities and Exchange Commission pursuant to the
Securities Exchange Act of 1934 (Commission File No. 1-13991)).
10.6 Second Amended and Restated 1997 Stock Option Plan of the Company
(incorporated herein by reference to the Form 10-Q, dated August 10, 2001,
filed with the Securities and Exchange Commission pursuant to the
Securities Exchange Act of 1934 (Commission File No. 1-13991)).
2710.7 MFA Mortgage Investments, Inc. Senior Officers Deferred Compensation
Plan, adopted December 19, 2002 (incorporated herein by reference to
Exhibit 10.7 of the Form 10-K, dated December 31, 2002, filed by the
Registrant pursuant to the 1934 Act (Commission File No. 1-13991)).
25
10.8 MFA Mortgage Investments, Inc. 2003 Non-Employee Directors Deferred
Compensation Plan, adopted December 19, 2002 (incorporated herein by
reference to Exhibit 10.8 of the Form 10-K, dated December 31, 2002, filed
by the Registrant pursuant to the 1934 Act (Commission File No. 1-13991)).
99.1 Certification of the Chief Executive Officer pursuant to Section 906
of the Sarbanes-Oxley Act of 2002.
99.2 Certification of the Chief Financial Officer pursuant to Section 906
of the Sarbanes-Oxley Act of 2002.
Reports on Form 8-K
The RegistrantCompany filed a Current Report on Form 8-K on August 12, 2002March 11, 2003,
reporting under Item 75 "Other Events" relating to a press release dated August 12, 2002.the retirement of Michael B. Yanney
and the appointment of Stewart Zimmerman as the Company's new Chairman of
the Board effective as of March 6, 2003.
The RegistrantCompany filed a Current Report on Form 8-K on August 13, 2002March 19, 2003
reporting under Item 5 "Other Events" announcing4, "Changes in Registrant's Certifying Accountant"
the changeCompany's dismissal of PricewaterhouseCoopers LLP as its name from America First
Mortgage Investments, Inc.independent
public accountants on March 13, 2003; and the Company's engagement of
Ernst & Young LLP, as its independent auditors, to MFA Mortgage Investments, Inc., effective August
13, 2002.
28replace
PricewaterhouseCoopers LLP.
26
SignaturesSIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
Dated: October 28, 2002Date: April 21, 2003 MFA MORTGAGE INVESTMENTS, INC.
ByBy: /s/ Stewart Zimmerman
-----------------------------------------------------------------------------
Stewart Zimmerman
President and Chief Executive Officer
ByBy: /s/ William S. Gorin
-----------------------------------------------------------------------------
William S. Gorin
Executive Vice President Chief Financial
Officer/Treasurer
(Principal Accounting Officer)
2927
CERTIFICATIONS
I, Stewart Zimmerman, certify that:
1. I have reviewed this quarterly report on Form 10-Q of MFA Mortgage
Investments, Inc. (the "registrant");
2. Based on my knowledge, this quarterly report does not contain any untrue
statement of a material fact or omit to state a material fact necessary in
order to make the statements made, in light of the circumstances under
which such statements were made, not misleading with respect to the period
covered by this quarterly report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all
material respects the financial condition, results of operations and cash
flows of the registrant as of, and for, the periods presented in this
quarterly report;
4. The registrant's other certifying officer and I are responsible for
establishing and maintaining disclosure controls and procedures (as
defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and we
have:
a) designed such disclosure controls and procedures to ensure that
material information relating to the registrant, including its
consolidated subsidiaries, is made known to us by others within
those entities, particularly during the period in which this
quarterly report is being prepared;
b) evaluated the effectiveness of the registrant's disclosure controls
and procedures as of a date within 90 days prior to the filing date
of this quarterly report (the "Evaluation Date"); and
c) presented in this quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures based on our
evaluation as of the Evaluation Date;
5. The registrant's other certifying officer and I have disclosed, based on
our most recent evaluation, to the registrant's auditors and the audit
committee of the registrant's board of directors (or persons performing
the equivalent function):
a) all significant deficiencies in the design or operation of internal
controls which could adversely affect the registrant's ability to
record, process, summarize and report financial data and have
identified for the registrant's auditors any material weaknesses in
internal controls; and
b) any fraud, whether or not material, that involves management or
other employees who have a significant role in the registrant's
internal controls; and
6. The registrant's other certifying officer and I have indicated in this
quarterly report whether or not there were significant changes in internal
controls or in other factors that could significantly affect internal
controls subsequent to the date of our most recent evaluation, including
any corrective actions with regard to significant deficiencies and
material weaknesses.
Date: October 28, 2002April 21, 2003
/s/ Stewart Zimmerman
----------------------------------------------------------
Name: Stewart Zimmerman
Title: President and Chief Executive Officer
3028
I, William S. Gorin, certify that:
1. I have reviewed this quarterly report on Form 10-Q of MFA Mortgage
Investments, Inc. (the "registrant");
2. Based on my knowledge, this quarterly report does not contain any untrue
statement of a material fact or omit to state a material fact necessary in
order to make the statements made, in light of the circumstances under
which such statements were made, not misleading with respect to the period
covered by this quarterly report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all
material respects the financial condition, results of operations and cash
flows of the registrant as of, and for, the periods presented in this
quarterly report;
4. The registrant's other certifying officer and I are responsible for
establishing and maintaining disclosure controls and procedures (as
defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and we
have:
a) designed such disclosure controls and procedures to ensure that
material information relating to the registrant, including its
consolidated subsidiaries, is made known to us by others within
those entities, particularly during the period in which this
quarterly report is being prepared;
b) evaluated the effectiveness of the registrant's disclosure controls
and procedures as of a date within 90 days prior to the filing date
of this quarterly report (the "Evaluation Date"); and
c) presented in this quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures based on our
evaluation as of the Evaluation Date;
5. The registrant's other certifying officer and I have disclosed, based on
our most recent evaluation, to the registrant's auditors and the audit
committee of the registrant's board of directors (or persons performing
the equivalent function):
a) all significant deficiencies in the design or operation of internal
controls which could adversely affect the registrant's ability to
record, process, summarize and report financial data and have
identified for the registrant's auditors any material weaknesses in
internal controls; and
b) any fraud, whether or not material, that involves management or
other employees who have a significant role in the registrant's
internal controls; and
6. The registrant's other certifying officer and I have indicated in this
quarterly report whether or not there were significant changes in internal
controls or in other factors that could significantly affect internal
controls subsequent to the date of our most recent evaluation, including
any corrective actions with regard to significant deficiencies and
material weaknesses.
Date: October 28, 2002April 21, 2003
/s/ William S. Gorin
-------------------------------------------------
Name: William S. Gorin
Title: Executive Vice President and Chief Financial Officer
3129