SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
-------------
FORM 8-K
CURRENT REPORT
PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
Date of Report (Date of earliest event reported): December 3, 2003
American Home Mortgage Investment Corp.
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(Exact Name of Registrant as Specified in Charter)
Maryland 001-31916 20-0103914
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(State or Other Jurisdiction (Commission (I.R.S. Employer
of Incorporation) File Number) Identification No.)
520 Broadhollow Road, Melville, New York 11747
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(Address of Principal Executive Offices) (Zip Code)
Registrant's telephone number, including area code: (516) 949-3900
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N/A
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(Former Name or Former Address, if Changed Since Last Report)
ITEM 2. ACQUISITION OR DISPOSITION OF ASSETS
On December 3, 2003, American Home Mortgage Holdings, Inc., a Delaware
corporation ("American Home") completed its internal reorganization and
subsequent acquisition of Apex Mortgage Capital, Inc., a Maryland corporation
("Apex"). The reorganization, which resulted in American Home Mortgage
Investment Corp. ("AHM Investment Corp."), a Maryland corporation, becoming the
new parent company of American Home, was consummated by merging American Home
with and into a subsidiary of AHM Investment Corp. The acquisition of Apex was
consummated by merging Apex with and into AHM Investment Corp. Pursuant to the
reorganization, each share of American Home common stock, par value $0.01 per
share, has been converted into one share of AHM Investment Corp. common stock,
par value $0.01 per share ("AHM Investment Corp. Common Stock"), and pursuant to
the merger with Apex, each share of Apex common stock, par value $0.01 per
share, has been converted into 0.25762 share of AHM Investment Corp. Common
Stock.
The issuance of AHM Investment Corp. Common Stock in the merger and the
reorganization was registered under the Securities Act of 1933, as amended,
pursuant to AHM Investment Corp.'s registration statement on Form S-4 (File No.
333-107545) (the "Registration Statement") filed with the Securities and
Exchange Commission and declared effective on October 24, 2003.
Attached hereto as Exhibit 99.1 is a copy of the joint press release of
American Home and Apex, dated December 3, 2003, reporting the completion of the
merger and reorganization.
ITEM 7. FINANCIAL STATEMENTS, PRO FORMA FINANCIAL INFORMATION AND EXHIBITS.
(a) Financial Statements of Businesses Acquired.
The following financial information is attached hereto as Exhibit 99.2.a
and is incorporated herein by reference:
Audited consolidated balance sheets of Apex as of December 31, 2002
and 2001; and
Audited consolidated statements of income, changes in stockholders'
equity and cash flows of Apex for the years ended December 31, 2002,
2001 and 2000.
The following financial information is attached hereto as Exhibit 99.2.b
and is incorporated herein by reference:
Unaudited condensed consolidated balance sheet of Apex as of September
30, 2003; and
Unaudited condensed statements of income, changes in stockholders'
equity and cash flows of Apex for the nine months ended September 30,
2003 and 2002.
(b) Pro Forma Financial Information.
The following pro forma financial information is attached hereto as
Exhibit 99.3 and is incorporated herein by reference:
Pro forma condensed balance sheet as of September 30, 2003; and
Pro forma condensed statements of income for the year ended December
31, 2002 and the nine-month period ended September 30, 2003.
2
(c) Exhibits.
2.1 Agreement and Plan of Merger, dated as of July 12, 2003, by and
among American Home, Apex and AHM Investment Corp. (formerly called
AHM New Holdco, Inc.) (incorporated by reference from Exhibit 2.1 of
Amendment No. 3 to AHM Investment Corp.'s Registration Statement on
Form S-4 filed on October 24, 2003 (File No. 333-107545)).
23.1 Consent of Deloitte & Touche LLP.
99.1 Joint press release of American Home and Apex, dated December 3,
2003.
99.2.a Audited consolidated balance sheets of Apex as of December 31, 2002
and 2001; and
Audited consolidated statements of income, changes in stockholders'
equity and cash flows of Apex for the years ended December 31, 2002,
2001 and 2000.
99.2.b Unaudited condensed consolidated balance sheet of Apex as of
September 30, 2003; and
Unaudited condensed statements of income, changes in stockholders'
equity and cash flows of Apex for the nine months ended September
30, 2003 and 2002.
99.3 Pro forma condensed balance sheet as of September 30, 2003; and
Pro forma condensed statements of income for the year ended December
31, 2002 and the nine-month period ended September 30, 2003.
3
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, as
amended, the registrant has duly caused this report to be signed on its behalf
by the authorized undersigned.
Date: December 16, 2003 AMERICAN HOME MORTGAGE
INVESTMENT CORP.
By: /s/ Michael Strauss
--------------------------------------
Name: Michael Strauss
Title: Chief Executive Officer
& President
4
EXHIBIT INDEX
-------------
2.1 Agreement and Plan of Merger, dated as of July 12, 2003, by and
among American Home, Apex and AHM Investment Corp. (formerly called
AHM New Holdco, Inc.) (incorporated by reference from Exhibit 2.1 of
Amendment No. 3 to AHM Investment Corp.'s Registration Statement on
Form S-4 filed on October 24, 2003 (File No. 333-107545)).
23.1 Consent of Deloitte & Touche LLP.
99.1 Joint press release of American Home and Apex, dated December 3,
2003.
99.2.a Audited consolidated balance sheets of Apex as of December 31, 2002
and 2001; and
Audited consolidated statements of income, changes in stockholders'
equity and cash flows of Apex for the years ended December 31, 2002,
2001 and 2000.
99.2.b Unaudited condensed consolidated balance sheet of Apex as of
September 30, 2003; and
Unaudited condensed statements of income, changes in stockholders'
equity and cash flows of Apex for the nine months ended September
30, 2003 and 2002.
99.3 Pro forma condensed balance sheet as of September 30, 2003; and
Pro forma condensed statements of income for the year ended December
31, 2002 and the nine-month period ended September 30, 2003.
EXHIBIT 23.1
INDEPENDENT AUDITORS' CONSENT
We consent to the incorporation by reference in this Form 8-K of American Home
Mortgage Investment Corp. of our report dated March 6, 2003, (March 13, 2003 as
to Note 13) (which report expresses an unqualified opinion and includes an
explanatory paragraph relating to a change in method of accounting for
derivative financial instruments to conform to Statement of Financial Accounting
Standards Number 133) appearing in the Annual Report on Form 10-K of Apex
Mortgage Capital, Inc. for the year ended December 31, 2002.
/s/ Deloitte & Touche LLP
Los Angeles, California
December 15, 2003
EXHIBIT 99.1
[AHMH Logo] [Apex Logo]
FOR IMMEDIATE RELEASE
---------------------
American Home Mortgage Completes Merger
With Apex Mortgage Capital
Exchange Ratio Fixed at 0.25762
American Home Reorganizes Into a Real Estate Investment Trust (REIT)
MELVILLE, N.Y., and LOS ANGELES, CA, Dec. 3 /PRNewswire-FirstCall/ -- American
Home Mortgage Holdings, Inc. (Nasdaq: AHMH - News), announced today it has
completed its merger with Apex Mortgage Capital, Inc. (Amex: AXM - News), a
financial company structured as a Real Estate Investment Trust (REIT).
Final Transaction Details
Under the terms of the agreement, American Home reorganized through a reverse
triangular merger that caused a newly formed REIT called American Home Mortgage
Investment Corp. to become American Home's parent.
Stockholders of American Home received one share in the new parent, American
Home Mortgage Investment Corp., for each of their American Home shares.
Stockholders of Apex received 0.25762 shares in the new parent for each of their
Apex shares.
The exchange ratio was calculated by applying a 7.5% premium to Apex's $5.239
adjusted book value per share as of December 2, and dividing by $21.86164. In
accordance with the merger agreement, the denominator in the exchange ratio
calculation was fixed at $21.86164 since the average of the volume weighted
average share prices of AHMH for the 10 trading days prior to the closing
exceeded $21.86164. The $5.239 adjusted book value was determined through an
independent broker valuation process conducted on December 2, and is also net of
transaction related expenses including a termination fee to TCW, the former
manager of Apex.
In commenting on the completion of the merger, Michael Strauss, Chairman and
Chief Executive of American Home stated, "We are very pleased to have completed
this merger with Apex and we are confident that this transaction will provide
long term benefits for all of our stakeholders. In 2004 we project that as a
result of our reorganization and purchase of Apex, our business segments of
mortgage holdings, mortgage origination and mortgage servicing will account for
43%, 45% and 12% of our total earnings, respectively."
As previously announced, as of December 4, 2003, American Home Mortgage
Investment Corp. will trade on the New York Stock Exchange under the symbol
"AHH."
Friedman, Billings, Ramsey & Co., Inc., acted as financial advisor, and
Cadwalader, Wickersham & Taft LLP served as the legal advisor to American Home.
UBS Securities LLC acted as financial advisor and O'Melveny & Myers LLP served
as the legal advisor to Apex.
ABOUT AMERICAN HOME MORTGAGE HOLDINGS, INC.
American Home Mortgage Holdings, Inc. is an originator and servicer of
residential mortgage loans. It operates 267 loan production offices located in
34 states, as well as MortgageSelect, an online mortgage lender, and a loan
servicing center. American Home shares were traded on NASDAQ under the symbol
"AHMH." For additional information, please visit American Home's Web site at
www.americanhm.com.
ABOUT APEX MORTGAGE CAPITAL, INC.
Apex Mortgage Capital, Inc. is a financial company structured as a real estate
investment trust. Apex primarily acquires United States agency securities, other
mortgage securities, mortgage loans, equity securities and other investments.
Apex was listed on the American Stock Exchange under the symbol "AXM."
Safe Harbor Statement under the Private Securities Litigation Reform Act of
1995: This news release contains statements about future events and
expectations, which are "forward-looking statements." Any statement in this
release that is not a statement of historical fact, including, but not limited
to earnings guidance and forecasts, projections of financial results, and
expected future financial position, dividends and dividend plans and business
strategy, is a forward-looking statement. Such forward-looking statements
involve known and unknown risks, uncertainties and other factors, which may
cause American Home Mortgage Investment Corp.'s actual results to be materially
different from any future results, performance or achievements expressed or
implied by such forward-looking statements. Specific factors that might cause
such a difference include, but are not limited to: the potential fluctuations in
American Home Mortgage Investment Corp.'s operating results; American Home
Mortgage Investment Corp.'s potential need for additional capital; the direction
of interest rates and their subsequent effect on American Home Mortgage
Investment Corp.'s business; federal and state regulation of mortgage banking;
and those risks and uncertainties discussed in filings made by American Home
Mortgage Investment Corp. with the Securities and Exchange Commission. Such
forward-looking statements are inherently uncertain, and stockholders must
recognize that actual results may differ from expectations. Neither American
Home Mortgage Investment Corp. assumes any responsibility to issue updates to
any forward-looking statements discussed in this press release.
AMERICAN HOME MORTGAGE CONTACT:
John D. Lovallo
Senior Vice President
Ogilvy Public Relations Worldwide
212-880-5216
john.lovallo@ogilvypr.com
EXHIBIT 99.2.a
INDEPENDENT AUDITORS' REPORT
To the Stockholders of
Apex Mortgage Capital, Inc.
We have audited the accompanying balance sheets of Apex Mortgage Capital, Inc.
(the "Company") as of December 31, 2002 and 2001 and the related statements of
operations, stockholders' equity, and cash flows for each of the three years in
the period ended December 31, 2002. These financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these financial statements based on our audits.
We conducted our audits in accordance with auditing standards generally accepted
in the United States of America. Those standards require that we plan and
perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, such financial statements present fairly, in all material
respects, the financial position of Apex Mortgage Capital, Inc. as of December
31, 2002 and 2001 and the results of its operations and its cash flows for each
of the three years in the period ended December 31, 2002, in conformity with
accounting principles generally accepted in the United States of America.
As discussed in Note 2 to the financial statements, effective January 1, 2001,
the Company changed its method of accounting for derivative financial
instruments.
/s/ Deloitte & Touche LLP
Los Angeles, California
March 6, 2003 (March 13, 2003 as to Note 13)
Apex Mortgage Capital, Inc.
Balance Sheets
<TABLE>
<CAPTION>
December 31, December 31,
2002 2001
---------------- ----------------
<S> <C> <C>
Assets
Cash and cash equivalents $ 1,456,000 $ 4,330,000
Fixed income trading securities, at fair value 606,014,000 437,954,000
Fixed income securities available-for-sale, at fair value 1,818,893,000 1,067,575,000
Equity securities available-for-sale, at fair value 4,168,000 6,028,000
Interest rate swaps, at fair value -- 4,620,000
Accrued interest receivable 12,012,000 8,580,000
Principal payments receivable 248,000 485,000
Receivable for unsettled securities -- 5,520,000
Other assets 2,587,000 333,000
---------------- ----------------
$ 2,445,378,000 $ 1,535,425,000
================ ================
Liabilities and Stockholders' Equity
Liabilities
Reverse repurchase agreements $ 2,112,444,000 $ 1,376,850,000
Accrued interest payable 2,444,000 975,000
Dividend payable 13,509,000 12,596,000
Forward contracts, at fair value -- 3,275,000
Interest rate swaps, at fair value 120,098,000 --
Accrued expenses and other liabilities 2,224,000 11,699,000
---------------- ----------------
2,250,719,000 1,405,395,000
---------------- ----------------
Commitments and contingencies (Note 10)
Stockholders' Equity
Preferred stock, par value $0.01 per share; 50,000,000 shares
authorized; no shares outstanding -- --
Common stock, par value $0.01 per share; 100,000,000 shares
authorized; 29,857,000 and 15,555,500 shares outstanding as of
December 31, 2002 and 2001, respectively 299,000 155,000
Additional paid-in-capital 331,499,000 175,802,000
Accumulated other comprehensive loss (95,880,000) (7,837,000)
Accumulated deficit (41,259,000) (38,090,000)
---------------- ----------------
194,659,000 130,030,000
---------------- ----------------
$ 2,445,378,000 $ 1,535,425,000
================ ================
</TABLE>
See accompanying notes to financial statements
Apex Mortgage Capital, Inc.
Statements of Operations
<TABLE>
<CAPTION>
Year Ended December 31,
--------------------------------------------
2002 2001 2000
--------------- ------------- --------------
<S> <C> <C> <C>
Interest Income:
Fixed income securities $ 163,448,000 $ 48,779,000 $ 42,618,000
Cash and cash equivalents 97,000 112,000 216,000
--------------- ------------- --------------
163,545,000 48,891,000 42,834,000
Interest Expense 89,251,000 23,723,000 33,779,000
--------------- ------------- --------------
Net Interest Income 74,294,000 25,168,000 9,055,000
Dividend Income 442,000 815,000 1,139,000
--------------- ------------- --------------
Net Interest and Dividend Income 74,736,000 25,983,000 10,194,000
--------------- ------------- --------------
General and Administrative Expenses:
Management fee 1,912,000 471,000 512,000
Incentive fee 2,000,000 634,000 --
Insurance 357,000 333,000 272,000
Professional fees 204,000 132,000 382,000
Directors' fees 57,000 65,000 76,000
Non-employee stock options 96,000 4,000 95,000
Other 884,000 184,000 397,000
--------------- ------------- --------------
5,510,000 1,823,000 1,734,000
--------------- ------------- --------------
Net Interest and Dividend Income After General and
Administrative Expenses 69,226,000 24,160,000 8,460,000
--------------- ------------- --------------
Net Loss from Investment and Derivative Activities (16,388,000) (5,015,000) (36,703,000)
Reclassification of Previously Unrealized Gains -- 1,742,000 --
--------------- ------------- --------------
Net Income (Loss) Before Cumulative Effect of Change in
Accounting Principle 52,838,000 20,887,000 (28,243,000)
Cumulative Effect of Change in Accounting Principle -- (2,173,000) --
--------------- ------------- --------------
Net Income (Loss) $ 52,838,000 $ 18,714,000 $ (28,243,000)
=============== ============= ==============
Net Income (Loss) Per Share Before Cumulative Effect of
Change in Accounting Principle:
Basic $ 2.02 $ 2.89 $ (4.91)
=============== ============= ==============
Diluted $ 2.01 $ 2.85 $ (4.91)
=============== ============= ==============
Effect of Accounting Change Per Share:
Basic $ -- $ (0.30) $ --
=============== ============= ==============
Diluted $ -- $ (0.30) $ --
=============== ============= ==============
Net Income (Loss) Per Share:
Basic $ 2.02 $ 2.59 $ (4.91)
=============== ============= ==============
Diluted $ 2.01 $ 2.55 $ (4.91)
=============== ============= ==============
Weighted Average Number of Shares Outstanding:
Basic 26,206,000 7,235,000 5,753,000
=============== ============= ==============
Diluted 26,300,000 7,325,000 5,753,000
=============== ============= ==============
Dividends Declared Per Share: $ 1.95 $ 1.95 $ 1.51
=============== ============= ==============
</TABLE>
See accompanying notes to financial statements
Apex Mortgage Capital, Inc.
Statements of Stockholders Equity
<TABLE>
<CAPTION>
Accumulated
Common Stock Additional Other
----------------------------- Paid-in Comprehensive
Shares Amount Capital Income (Loss)
--------------- ------------- ---------------- ---------------------
<S> <C> <C> <C> <C>
Balance, January 1, 2000 5,753,000 $ 58,000 $ 82,705,000 $ (26,513,000)
Amortization of non-employees stock options -- -- 95,000 --
Net loss -- -- -- --
Other comprehensive income (loss):
Net change in unrealized gain on
available-for-sale securities -- -- -- 32,860,000
Net change in unrealized and deferred
losses on forward contracts -- -- -- (7,426,000)
Comprehensive loss
Dividends declared -- -- -- --
--------------- ------------- ---------------- ---------------------
Balance, December 31, 2000 5,753,000 58,000 82,800,000 (1,079,000)
Issuance of common stock 9,802,500 97,000 92,998,000 --
Amortization of non-employees stock options -- -- 4,000 --
Net income -- -- -- --
Other comprehensive income (loss):
Net change in unrealized loss on
available-for-sale securities -- -- -- (23,793,000)
Net change in unrealized and deferred
losses on forward contracts -- -- -- 12,236,000
Net change in unrealized gain on
terminated interest rate swaps -- -- -- 179,000
Net change in unrealized gain on
interest rate swaps classified as
cash flow hedges -- -- -- 4,620,000
Comprehensive income
Dividends declared -- -- -- --
--------------- ------------- ---------------- ---------------------
Balance, December 31, 2001 15,555,500 155,000 175,802,000 (7,837,000)
Issuance of common stock 14,301,500 144,000 155,601,000 --
Amortization of non-employees stock options -- -- 96,000 --
Net income -- -- -- --
Other comprehensive income (loss):
Net change in unrealized gain on
available-for-sale securities -- -- -- 47,034,000
Net change in deferred loss on
terminated interest rate swaps -- -- -- (10,359,000)
Net change in unrealized loss on
interest rate swaps classified as
cash flow hedges -- -- -- (124,718,000)
Comprehensive loss
Dividends declared -- -- -- --
--------------- ------------- ---------------- ---------------------
Balance, December 31, 2002 29,857,000 $ 299,000 $ 331,499,000 $ (95,880,000)
=============== ============= ================ =====================
<CAPTION>
Total
Accumulated Stockholders' Comprehensive
Deficit Equity Income / (Loss)
----------------- -------------------- -----------------------
<S> <C> <C> <C>
Balance, January 1, 2000 (209,000) $ 56,041,000
Amortization of non-employees stock options -- 95,000
Net loss (28,243,000) (28,243,000) $ (28,243,000)
Other comprehensive income (loss):
Net change in unrealized gain on
available-for-sale securities -- 32,860,000 32,860,000
Net change in unrealized and deferred
losses on forward contracts -- (7,426,000) (7,426,000)
-----------------------
Comprehensive loss $ (2,809,000)
=======================
Dividends declared (8,944,000) (8,944,000)
----------------- --------------------
Balance, December 31, 2000 (37,396,000) 44,383,000
Issuance of common stock -- 93,095,000
Amortization of non-employees stock options -- 4,000
Net income 18,714,000 18,714,000 $ 18,714,000
Other comprehensive income (loss):
Net change in unrealized loss on
available-for-sale securities -- (23,793,000) (23,793,000)
Net change in unrealized and deferred
losses on forward contracts -- 12,236,000 12,236,000
Net change in unrealized gain on
terminated interest rate swaps -- 179,000 179,000
Net change in unrealized gain on
interest rate swaps classified as
cash flow hedges -- 4,620,000 4,620,000
-----------------------
Comprehensive income $ 11,956,000
=======================
Dividends declared (19,408,000) (19,408,000)
------------------ --------------------
Balance, December 31, 2001 (38,090,000) 130,030,000
Issuance of common stock -- 155,745,000
Amortization of non-employees stock options -- 96,000
Net income 52,838,000 52,838,000 $ 52,838,000
Other comprehensive income (loss):
Net change in unrealized gain on
available-for-sale securities -- 47,034,000 47,034,000
Net change in deferred loss on
terminated interest rate swaps -- (10,359,000) (10,359,000)
Net change in unrealized loss on
interest rate swaps classified as
cash flow hedges -- (124,718,000) (124,718,000)
-----------------------
Comprehensive loss $ (35,205,000)
=======================
Dividends declared (56,007,000) (56,007,000)
------------------ --------------------
Balance, December 31, 2002 $ (41,259,000) $ 194,659,000
================== ====================
</TABLE>
See accompanying notes to financial statements.
Apex Mortgage Capital, Inc.
Statements of Cash Flows
<TABLE>
<CAPTION>
Year Ended December 31,
--------------------------------------------------
2002 2001 2000
---------------- ---------------- ----------------
<S> <C> <C> <C>
Operating Activities:
Net income (Loss) $ 52,838,000 $ 18,714,000 $ (28,243,000)
Adjustments to reconcile net income to net cash
provided by operating activities:
Net amortization 6,687,000 (4,189,000) (2,559,000)
Net loss on investment and derivative activities 16,388,000 5,015,000 36,703,000
Cumulative effect of change in accounting
principle -- 2,173,000 --
Reclassification of previously unrealized gains -- (1,742,000) --
Trading activities (1,313,445,000) 135,650,000 --
Change in assets and liabilities:
Accrued interest receivable (3,432,000) (4,846,000) 2,520,000
Other assets (2,254,000) 379,000 104,000
Accrued interest payable 1,469,000 406,000 (3,091,000)
Accrued expenses and other liabilities (9,475,000) 10,876,000 163,000
---------------- ---------------- ----------------
Net cash (used in) provided by operating (1,251,224,000) 162,436,000 5,597,000
activities ---------------- ---------------- ----------------
Investing Activities:
Purchase of fixed income securities
available-for-sale (1,503,945,000) (1,081,801,000) (133,930,000)
Proceeds from sales of fixed income securities
available-for-sale 1,570,699,000 -- 193,953,000
Proceeds from maturities of fixed income
securities available-for-sale 5,000,000 -- --
Proceeds from sales of equity securities 1,937,000 7,578,000 6,481,000
Principal payments on fixed income securities
available-for-sale 338,414,000 350,000 73,893,000
Net payments on closed forward contracts -- -- (17,192,000)
Proceeds from terminated interest rate swaps -- -- 5,554,000
---------------- ---------------- ----------------
Net cash provided by (used in) investing 412,105,000 (1,073,873,000) 128,759,000
activities ---------------- ---------------- ----------------
Financing Activities:
Net change in reverse repurchase agreements 735,594,000 831,416,000 (127,226,000)
Dividend distributions (55,094,000) (8,884,000) (9,595,000)
Issuance of common stock 155,745,000 93,095,000 --
---------------- ---------------- ----------------
Net cash provided by (used in) financing 836,245,000 915,627,000 (136,821,000)
activities ---------------- ---------------- ----------------
Net (Decrease) Increase in Cash and Cash Equivalents (2,874,000) 4,190,000 (2,465,000)
Cash and Cash Equivalents at Beginning of Year 4,330,000 140,000 2,605,000
---------------- ---------------- ----------------
Cash and Cash Equivalents at End of Year $ 1,456,000 $ 4,330,000 $ 140,000
================ ================ ================
Supplemental Disclosure of Cash Flow Information:
Cash paid for interest $ 86,863,000 $ 24,339,000 $ 39,711,000
Noncash Investing and Financing Activities:
Change in accumulated other comprehensive loss (88,043,000) (6,758,000) 25,434,000
Change in receivable for unsettled securities (5,520,000) 5,520,000 --
Change in payable for unsettled securities -- (14,514,000) 14,514,000
Change in dividends declared, not yet paid 913,000 10,523,000 2,073,000
</TABLE>
See accompanying notes to financial statements.
Apex Mortgage Capital, Inc.
Notes to Financial Statements
Note 1 - The Company
Apex Mortgage Capital, Inc. (the "Company") was incorporated in
Maryland on September 15, 1997. The Company commenced its operations
of acquiring and managing a portfolio of mortgage related assets on
December 9, 1997, upon receipt of the net proceeds from the initial
public offering of the Company's Common Stock. The Company uses its
equity capital and borrowed funds to seek to generate income based
on the difference between the yield on its investments and the cost
of its borrowings. The Company is structured for tax purposes as a
real estate investment trust ("REIT") under the Internal Revenue
Code of 1986, as amended (the "Code").
The Company has entered into a Management Agreement (the "Management
Agreement"), as amended, with TCW Investment Management Company (the
"Manager"), a wholly owned subsidiary of The TCW Group, Inc.,
pursuant to which the Manager manages the Company's day-to-day
operations, subject to the direction and oversight of the Company's
Board of Directors.
Note 2 - Summary of Significant Accounting Policies and Certain Risks
Cash and Cash Equivalents
Cash and cash equivalents include cash and highly liquid investments
with original maturities of three months or less. The carrying
amount of cash equivalents approximates their fair value.
Investment Securities
Fixed income securities consist primarily of residential mortgage
securities and other fixed income securities. Equity securities
consist primarily of equity securities issued by other real estate
investment trusts. All fixed income and equity securities are
initially recorded at cost on the date they are purchased. A
majority of the Company's securities are expected to qualify as real
estate assets under the REIT Provisions of the Code.
Securities are classified as either trading or available-for-sale.
Securities that management actively considers for near-term
disposition because of earnings volatility associated with the
interest rate risk hedging strategies used in connection with those
securities or for other reasons are classified as trading
securities. Other securities are classified as available-for-sale.
Trading securities are reported at fair value, and changes in fair
value are reported in net gain (loss) from investment and derivative
activities in the statements of operations. Available-for-sale
securities are reported at fair value, with unrealized gains and
losses excluded from earnings and reported in accumulated other
comprehensive loss. Realized gains and losses on sales of both
trading and available-for-sale securities are determined on an
average cost basis and included in net gain (loss) from investment
and derivative activities.
When the fair value of an available-for-sale security is less than
amortized cost, management considers whether there is an
other-than-temporary impairment in the value of the security (e.g.,
whether the security will be sold prior to the recovery of fair
value). If, in management's judgment, an other-than-temporary
impairment exists, the cost basis of the security is written down to
the then-current fair value, and the unrealized loss is transferred
from accumulated other comprehensive income as an immediate
reduction of current earnings (i.e., as if the loss had been
realized in the period of impairment).
Interest Income and Dividend Recognition
Interest income on the Company's mortgage securities and other fixed
income securities is accrued based on the actual coupon rate and the
outstanding principal amount. Premiums and discounts are amortized
or accreted into interest income over the lives of the securities
using the effective yield method adjusted for the effects of
estimated prepayments. In the event that the cost basis of a
security has been reduced below par because of an
other-than-temporary impairment in value, the difference is treated
like a discount in determining the appropriate amount of accretion
to recognize as interest income between the date when the cost is
adjusted and when the security is ultimately sold. Also, dividends
on equity securities are recognized as income on their declaration
dates.
Derivatives and Hedging Transactions
The Company may enter into interest rate swaps and other financial
instruments in order to mitigate the impact of rising interest rates
on the cost of its short-term borrowings and market value of its
portfolio securities. The Company may also enter into forward
contracts to sell U.S. Treasury securities and other financial
instruments in order to mitigate the negative impact of rising
interest rates on the fair value of its fixed income securities.
Such financial instruments are generally referred to as
"derivatives."
The Company adopted SFAS No. 133, Accounting for Derivative
Instruments and Hedging Activities, as amended, on January 1, 2001.
Under SFAS No. 133, all derivatives are recorded at fair value and
presented as either assets or liabilities on the Company's balance
sheets. If the Company were to change current or anticipated
borrowings so that they were no longer appropriately matched to the
swap agreements, the agreements might no longer qualify for hedge
accounting treatment. In that case, changes in their fair values
would affect net income.
Prior to adopting SFAS No. 133, the Company accounted for changes in
fair values of the forward contracts through adjustments to
accumulated other comprehensive income. Following adoption of SFAS
No. 133, the Company recognizes changes in fair values of forward
contracts as a component of net gain (loss) on investment and
derivative activities in the statements of operations.
At December 31, 2002 and 2001, the Company's outstanding interest
rate swaps qualify as cash flow hedges and are deemed to be fully
effective as hedges under SFAS No. 133. Changes in fair values of
such swaps are not reflected in current earnings, but are reflected
in other comprehensive income. Currently, fair value of the interest
rate swaps is determined by the average of values obtained from two
market analytics systems, The Yield Book and Bloomberg.
During 2001, the adoption of SFAS No. 133 and the related amendments
resulted in a transition adjustment that reclassified $2,173,000 of
net losses on unrealized and deferred gains and losses on investment
securities and forward contracts from accumulated other
comprehensive income to earnings. The Company also reclassified
deferred gains totaling $2,546,000 on terminated interest rate swaps
previously designated as hedges of short-term borrowings from other
liabilities to accumulated other comprehensive income. Deferred
gains on terminated swaps are amortized into earnings over their
original lives as adjustments to interest expense.
In conjunction with adopting SFAS No. 133, the Company reclassified
$594,469,000 of its mortgage securities from the available-for-sale
category to the trading category on January 1, 2001 for investments
accounted for under SFAS No. 115. This change resulted in the
reclassification of $1,742,000 of net unrealized gains from
accumulated other comprehensive income to earnings, in addition to
net unrealized gains included in the SFAS No. 133 transition
adjustment discussed above.
Notes 5 and 11 contain additional information about the Company's
derivative and hedging activities, including additional details
about changes to accumulated other comprehensive income relating to
the accounting changes summarized above.
Stock-based Compensation
The Company grants stock options to its Directors and to certain
directors, officers and employees of the Manager, as discussed in
Note 6. Options granted to Directors of the Company are accounted
for using the intrinsic-value method, and generally no compensation
expense is recognized in the statements of operations for such
options. Options granted to persons other than Directors (i.e., to
non-employees) are accounted for using the fair value method; such
stock options are measured at their fair value when they are granted
and are recognized as general and administrative expense during the
periods when the options are vested and the related services are
performed.
The following table presents the pro forma effects on net income
(loss) and net income (loss) per share if compensation costs related
to the director stock options were measured using the fair value
method as prescribed under SFAS No. 123, Accounting for Stock-based
Compensation:
<TABLE>
<CAPTION>
Year Ended December 31,
-------------------------------------------------
2002 2001 2000
---------------- ---------------- ---------------
<S> <C> <C> <C>
Reported net income (loss) $ 52,838,000 $ 18,714,000 $ (28,243,000)
Deduct: Total stock-based employee compensation
expense determined under fair value based method
for all awards, net of related tax effects (2,000) (5,000) (166,000)
---------------- ---------------- ---------------
Pro forma net income (loss) $ 52,836,000 $ 18,709,000 $ (28,409,000)
================ ================ ===============
Earnings per share:
Basic - as reported $ 2.02 $ 2.59 $ (4.91)
================ ================ ===============
Basic - pro forma $ 2.02 $ 2.59 $ (4.94)
================ ================ ===============
Diluted - as reported $ 2.01 $ 2.55 $ (4.91)
================ ================ ===============
Diluted - pro forma $ 2.01 $ 2.55 $ (4.94)
================ ================ ===============
</TABLE>
Federal and State Income Taxes
The Company has elected to be taxed as a REIT and generally is not
subject to federal and state taxes on its income to the extent it
distributes annually 90% of its pre-distribution taxable income to
stockholders and meets certain other asset, income and stock
ownership tests. Therefore, no provision for income taxes has been
included in the financial statements. Also, since the Company holds
only mortgage-related assets and not actual real property in its
portfolio, 100% of the Company's distributions are ordinary taxable
income to stockholders of the Company.
Net Income Per Share
Basic net income per share is calculated on the basis of the
weighted average number of common shares outstanding during each
period. Diluted net income per share includes the additional
dilutive effect of outstanding stock options as calculated using the
treasury stock method. The weighted average number of shares used to
calculate net income per diluted share includes the effect of the
assumed exercise of outstanding stock options that have exercise
prices less than the average market price of the stock.
Interest Rate Risk
The principal risk affecting the Company's net income, including
operating earnings distributable as dividends to the Company's
stockholders under the REIT provisions of the Code, is interest rate
risk. The Company's assets are principally fixed-rate mortgage
securities with weighted average maturities of several years or more
(approximately 2.7 years as of December 31, 2002). Such assets are
funded primarily with short-term reverse repurchase agreements
subject to repricing as they mature. As noted above, the Company may
engage in, and has engaged in, various hedging strategies to
mitigate the effects of changes in interest rates. The Company's net
income, distributable operating earnings, and net book value are
highly dependent on its ability to manage interest rate risk, and on
the availability of reverse repurchase agreements or similar forms
of financing in the future.
Credit Risk
The Company has limited its exposure to credit losses on its
portfolio of fixed income securities by purchasing securities that
are either rated "AAA" by at least one nationally recognized rating
agency or are issued by the Federal Home Loan Mortgage Corporation
("FHLMC"), Fannie Mae (formerly known as the Federal National
Mortgage Corporation) or the Government National Mortgage
Association ("GNMA"). The payment of principal and interest on the
FHLMC, Fannie Mae and GNMA securities are guaranteed by those
respective agencies. In addition, the Company has the ability to
purchase up to 10% of its portfolio in below-investment-grade
securities, although it holds no such securities as of December 31,
2002.
The Company is also exposed to credit risk with respect to amounts
due from counterparties to derivative financial instruments. The
Company has limited its exposure to credit losses on derivatives by
entering into agreements only with nationally recognized,
highly-rated counterparties.
Use of Estimates
The preparation of financial statements in conformity with
accounting principles generally accepted in the United States of
America requires management to make estimates and assumptions that
affect the reported amounts of assets and liabilities at the date of
the financial statements and the reported amounts of revenues and
expenses during the reporting period. Actual results could differ
from those estimates. Estimates most significant to the Company's
financial statements are related to the fair values of certain
investment securities. The majority of the Company's fixed income
securities are priced by management based on information obtained
from national pricing services, market-makers in the securities,
management's knowledge about the markets for the securities, and
other factors deemed by management to be significant.
Recently Issued Accounting Standards
During the year ended December 31, 2002, the Company has not adopted
any new accounting standards that would have a material effect on
the Company's results of operations, financial position and cash
flows. Recently issued accounting standards required to be adopted
by the Company in 2003 and future years are either not applicable to
the Company or are not expected to have a material effect on the
Company's results of operations, financial position or cash flows,
based on the current and anticipated nature of the Company's
operations.
The Financial Accounting Standards Board (FASB) issued
Interpretation (FIN) No. 45, Guarantors Accounting and Disclosure
Requirements for Guarantees, Including Indirect Guarantees and
Indebtedness of Other, an interpretation of SFAS Nos. 5, 57 and 107,
and rescission of FIN No. 34, Disclosure of Indirect Guarantees of
Indebtedness of Others, in November 2002. FIN No. 45 elaborates on
the disclosures to be made by the guarantor in its interim and
annual financial statements about its obligations under certain
guarantees that it has issued. It also requires that a guarantor
recognize, at the inception of a guarantee, a liability for the fair
value of the obligation undertaken in issuing the guarantee. The
initial recognition and measurement provisions of the interpretation
are applicable on a prospective basis to guarantees issued or
modified after December 31, 2002, while the provision of the
disclosure requirements are effective for financials statements of
interim or annual periods ending after December 15, 2002. The
Company believes the adoption of such interpretation will not have a
material impact on its results of operations, financials position or
cash flows.
Statement of Financial Accounting Standards ("SFAS") No. 148,
Accounting for Stock-based Compensation - Transition and Disclosure,
an amendment of FASB Statement No. 123, amends SFAS No. 123 to
provide alternative methods of transition for a voluntary change to
the fair value based method of accounting for stock-based employee
compensation. It also amends the disclosure provisions of SFAS No.
123 to require prominent disclosure in both annual and interim
financials statements about the method of accounting for stock-based
employee compensation and the effect of the method used on reported
results. The provisions of SFAS No. 148 are effective for annual
financials statements for fiscal years ending after December 15,
2002, and for financials reports containing condensed financials
statements for interim periods beginning after December 15, 2002.
The Company has not determined whether it will adopt the fair value
based method of accounting for stock-based employee compensation.
Note 3 - Fixed Income and Equity Securities
At December 31, 2002, fixed income and equity securities consisted
of the following:
<TABLE>
<CAPTION>
Fixed Fixed
Income Income Equity
Trading Securities Securities
(in thousands) Securities Available-For-Sale Available-For-Sale
---------------------------------- ---------------- ------------------ ------------------
<S> <C> <C> <C>
Principal Amount $ 585,817 $ 1,765,448
Unamortized Premium (Discount) 12,838 20,371
---------------- ---------------- ------------------
Adjusted Cost 598,655 1,785,819 $ 2,844
Gross Unrealized Gains 7,359 33,225 1,324
Gross Unrealized Losses -- (151) --
---------------- ---------------- ------------------
Fair Value $ 606,014 $ 1,818,893 $ 4,168
================ ================ ==================
</TABLE>
At December 31, 2001, fixed income and equity securities consisted
of the following:
<TABLE>
<CAPTION>
Fixed Fixed
Income Income Equity
Trading Securities Securities
(in thousands) Securities Available-For-Sale Available-For-Sale
---------------------------------- ---------------- ------------------ ------------------
<S> <C> <C> <C>
Principal Amount $ 432,630 $ 1,071,009
Unamortized Premium (Discount) (9,266) 11,044
---------------- ---------------- ------------------
Adjusted Cost 423,364 1,082,053 $ 4,187
Gross Unrealized Gains 14,725 180 1,841
Gross Unrealized Losses (135) (14,658) --
---------------- ---------------- ------------------
Fair Value $ 437,954 $ 1,067,575 $ 6,028
================ ================ ==================
</TABLE>
The contractual final maturity of the mortgage loans supporting
fixed income mortgage securities is generally between 15 and 30
years at origination. Because of prepayments on the underlying
mortgage loans, the actual weighted average maturity is expected to
be substantially less.
Fixed-rate mortgage securities composed over 99% and 98% of the
Company's portfolio of fixed income securities at December 31, 2002
and 2001, respectively. The expected average remaining maturity of
the Company's other fixed income securities as of December 31, 2002
and 2001 was less than one year.
Adjustable-rate mortgage securities comprised approximately 0.4% and
1.1% of the Company's portfolio of fixed income securities at
December 31, 2002 and 2001, respectively. A portion of the
adjustable-rate mortgage securities in the Company's portfolio are
backed by loans subject to periodic and lifetime caps that limit the
amount the securities' effective interest rates can change during
any given period and over the lives of the assets. Both at December
31, 2002 and 2001, the portion of adjustable-rate mortgage
securities subject to periodic and lifetime caps had an average
periodic cap equal to 2.0% and an average lifetime cap equal to
11.3%.
During 2002, the Company reported a net loss on investment and
derivative activities of $16,388,000 in the statement of operations.
This loss consisted of a net loss of $55,517,000 on closed forward
contracts, a gain of $28,156,000 on the sale of $1,456,542,000 of
fixed income trading securities, a gain of $16,929,000 on the sale
of $1,565,180,000 of fixed income available-for-sale securities, a
gain of $593,000 on the sale of $1,937,000 equity securities
available-for-sale, a loss of $2,593,000 on terminated swaps, and an
unrealized loss of $3,956,000 on fixed income trading securities.
During 2001, the Company reported a net loss on investment and
derivative activities of $5,015,000 in the statement of operations.
This loss consisted of a net loss of $19,007,000 on closed forward
contracts, a gain of $7,676,000 on the sale of $379,198,000 of fixed
income trading securities, a gain of $3,076,000 on the sale of
$7,578,000 of equity securities available-for-sale, and an
unrealized gain of $3,240,000 on fixed income trading securities.
There were no sales of available-for-sale fixed income securities
during 2001.
During 2000, the Company realized $741,000 and $6,536,000 in gross
gains and losses, respectively, on the sale of $97,440,000 and
$96,513,000 of fixed income securities available-for-sale,
respectively. During 2000, the Company realized $348,000 and
$221,000 in gross gains and losses, respectively, on the sale of
$3,419,000 and $3,062,000 of equity securities, respectively, which
were classified as available-for-sale. During 2000, the Company
realized a gain of $172,000 from the sale of interest rate caps.
During 2000, the Company recorded an impairment adjustment of
$18,284,000 on its fixed-rate mortgage securities, which was
included in net loss on investment and derivative activities in the
statement of operations. The impairment adjustment represents an
other-than-temporary decline in the fair value, as of September 30,
2000, of investments held that the Company no longer intended to
hold. A substantial portion of these investments were sold in the
fourth quarter of 2000 and during 2001 and 2002.
Net deferred losses and unrealized losses of $7,345,000 and
$1,079,000, respectively, on forward contracts were reclassified
from other comprehensive income into net loss on investment and
derivative activities in the statement of operations during 2000 as
part of the impairment charge recorded on the underlying assets
being hedged.
The Company also recorded impairment adjustments of $3,368,000 and
$958,000 on its Dynex Capital Inc. preferred stock and common stock
holdings, respectively, which were included in net loss on
investment and derivative activity in the statement of operations.
Note 4 - Reverse Repurchase Agreements
The Company has entered into reverse repurchase agreements to
finance certain of its investments. These agreements are secured by
a portion of the Company's investments and bear interest rates that
have historically moved in close relationship to LIBOR. Reverse
repurchase agreements are accounted for as short-term borrowings and
recorded as a liability on the balance sheet.
At December 31, 2002, the Company had outstanding $2,112,444,000 of
reverse repurchase agreements with a weighted average current
borrowing rate of 1.40% and a weighted average maturity of 1.0
month. The reverse repurchase agreements were collateralized by
securities with an estimated fair value of $2,199,852,000.
At December 31, 2001, the Company had outstanding $1,376,850,000 of
reverse repurchase agreements with a weighted average current
borrowing rate of 1.89% and a weighted average maturity of 1.0
month. The reverse repurchase agreements were collateralized by
securities with an estimated fair value of $1,440,014,000.
For the year ended December 31, 2002, the average reverse repurchase
agreement balance was $2,549,641,000 with a weighted average
interest cost of 3.5% inclusive of the effect of interest rate
swaps. The maximum reverse repurchase agreement balance outstanding
during 2002 was $3,704,177,000.
For the year ended December 31, 2001, the average reverse repurchase
agreement balance was $635,954,000 with a weighted average interest
cost of 3.9% inclusive of the effect of interest rate swaps. The
maximum reverse repurchase agreement balance outstanding during the
year ended December 31, 2001 was $1,376,850,000.
For the year ended December 31, 2000, the average reverse repurchase
agreement balance was $576,190,000 with a weighted average interest
cost of 6.33%. The maximum reverse repurchase agreement balance
outstanding during the year ended December 31, 2000 was
$672,660,000.
Note 5 - Derivative Financial Instruments and Hedging Activities
The Company has entered into interest rate swap agreements as
summarized below. Under these agreements, the Company receives a
floating rate and pays a fixed rate. The swaps qualify as cash flow
hedges for accounting purposes, and effectively fix the interest
rate paid on $1,678,500,000, as of December 31, 2002, of current and
anticipated future borrowings under reverse repurchase agreements.
The Company estimates that approximately $39,600,000 of unrealized
and deferred realized losses on interest rate swaps currently
included in accumulated other comprehensive loss will be
reclassified into interest expense within the next twelve months as
net settlements occur. As of December 31, 2002, the maximum length
of time over which the Company is hedging its exposure to the
variability in future cash flows for current and anticipated future
transactions is approximately 9.5 years.
Interest Rate Swaps at December 31, 2002:
(Dollars in thousands)
<TABLE>
<CAPTION>
Current Average Floating Par Weighted Unrealized
Notional Amount Fixed Rate Rate Average Maturity Losses
------------------ ----------------- -------------- --------------------- -------------
<S> <C> <C> <C> <C>
$ 1,678,500 4.643% 1Month LIBOR 4.4 years $ 120,098
</TABLE>
Interest Rate Swaps at December 31, 2001:
(Dollars in thousands)
<TABLE>
<CAPTION>
Current Average Floating Par Weighted Unrealized
Notional Amount Fixed Rate Rate Average Maturity Losses
------------------ ----------------- -------------- --------------------- -------------
<S> <C> <C> <C> <C>
$ 850,000 4.239% 1Month LIBOR 6.6 years $ 4,620
</TABLE>
During the fourth quarter of 2002, the Company terminated a portion
of the outstanding interest rate swap agreements with a combined
notional amount of $544,500,000, which resulted in a deferred loss
of approximately $13,872,000 with an average term of 1.3 years and
an average rate of 3.57%. As a result of declining reverse
repurchase agreements, the Company accelerated the deferred loss
recognition and reclassified $2,593,000 from accumulated other
comprehensive income (loss) into earnings. The loss reclassification
was included in net loss from investment and derivative activities
for the year ended December 31, 2002. The acceleration of the
deferred loss recognition depends on the balance of reverse
repurchase agreements maintained by the Company. If the general
level of reverse repurchase agreements decline further, the Company
may be required to accelerate the deferred loss recognition in the
future. The remaining deferred loss is being amortized as an
adjustment to interest expense over the remaining lives of the
original swap agreements.
During 2000, the Company terminated outstanding interest rate swap
agreements with a combined notional amount of $386,213,000, which
resulted in a deferred gain of $5,554,000. The deferred gain was
being amortized as an adjustment to interest expense over the
remaining lives of the original swap agreements, and the remaining
unamortized amount was 1included in accumulated other comprehensive
income (loss) as of December 31, 2001. The deferred gain was fully
amortized in 2002.
During 2002, interest expense was increased by $43,231,000 paid to
swap counterparties and $920,000 from amortization of net deferred
losses on terminated swap contracts. During 2001, interest expense
was increased by $1,663,000 paid to swap counterparties and
decreased by $2,367,000 from amortization of deferred gains on
terminated swap contracts. During 2000, interest expense was
decreased by $334,000 received from swap counterparties and
$3,808,000 from amortization of deferred gains on terminated swap
contracts.
At December 31, 2002, there was no cash collateral held from a swap
counterparty. At December 31, 2001, the Company held $2,500,000 in
cash as collateral from a swap counterparty.
At December 31, 2002, the Company had no open forward contracts to
sell U.S. Treasury notes.
At December 31, 2001, the Company had open forward contracts to sell
U.S. Treasury notes with terms stated below:
(Dollars in thousands)
<TABLE>
<CAPTION>
Average Average Maturity of
Current Termination Net Unrealized Underlying
Notional Amount Date Losses Securities
-------------------- -------------------- --------------------- ---------------------
<S> <C> <C> <C>
$ 359,000 1/14/2002 $ 3,275 5.57 Years
</TABLE>
Note 6 - Stock Option Plan
The Company has adopted a stock option plan (the "Amended and
Restated 1997 Stock Option Plan") that provides for the grant of
both qualified incentive stock options that meet the requirements of
Section 422 of the Code, and non-qualified stock options, stock
appreciation rights and dividend equivalent rights. Stock options
may be granted to directors of the Company ("employees"), and to the
directors, officers and key employees of the Manager
("non-employees"). The Manager is not eligible to be a recipient of
stock options.
The exercise price for any stock option granted under the Amended
and Restated 1997 Stock Option Plan may not be less than 100% of the
fair market value of the shares of Common Stock at the time the
option is granted. Each option must terminate no more than ten years
from the date it is granted. Subject to anti-dilution provisions for
stock splits, stock dividends and similar events, the Amended and
Restated 1997 Stock Option Plan authorizes the grant of options to
purchase an aggregate of 1,000,000 shares of Common Stock.
Stock option activity during 2002, 2001, and 2000 was as follows:
Weighted
Average
Exercise
Options Price
---------- ---------
Options Outstanding at January 1, 2000 570,000 $ 13.62
Granted During 2000 305,000 6.98
----------
Options Outstanding at December 31, 2000 875,000 11.29
Granted During 2001 56,000 11.18
Exercised During 2001 (27,500) 6.98
----------
Options Outstanding at December 31, 2001 903,500 11.43
Exercised During 2002 (41,500) 9.11
Forfeited During 2002 (71,000) 11.16
----------
Options Outstanding at December 31, 2002 791,000 $ 11.58
----------
Stock options outstanding at December 31, 2002 are as follows:
<TABLE>
<CAPTION>
Options Outstanding Options Exercisable
------------------------------------------ ----------------------------
Weighted- Weighted- Weighted-
Exercise average average average
Price Number of Contractual Exercise Number of Exercise
Range Options Life Price Options Price
------------- ------------- ------------- -------------- ------------- --------------
<S> <C> <C> <C> <C> <C>
$6.98 228,000 8 years $ 6.98 228,000 $ 6.98
$10.38 144,000 6 years $ 10.38 144,000 $ 10.38
$11.18 56,000 9 years $ 11.18 28,000 $ 11.18
$15.00 363,000 5 years $ 15.00 363,000 $ 15.00
------------- -------------
$6.98-$15.00 791,000 6.3 years $ 11.58 763,000 $ 11.59
------------- -------------
</TABLE>
Of the stock options outstanding summarized in the tables above,
489,000 are held by Directors of the Company and the remainder are
held by non-employees. The Company recognized expense (included in
other general and administrative expense) relating to options
granted to non-employees of $96,000, $4,000, and $95,000 during
2002, 2001, and 2000, respectively.
164,000 of the stock options summarized above have dividend
equivalent rights that entitle each option holder to receive a cash
payment equal to the dividends declared on the Company's Common
Stock multiplied by the number of stock options held until the stock
options are exercised or expire. Under the terms of the Company's
outstanding dividend equivalent rights, dividends are payable on the
dividend equivalent rights prior to the vesting of the related stock
options. Dividends paid on stock options with dividend equivalent
rights are charged to accumulated deficit in the balance sheet. As
of December 31, 2002, there were 10,000 outstanding dividend
equivalent rights related to unvested stock options.
The fair value of the stock options granted was estimated using the
Black-Scholes option-pricing model with the following assumptions
(where dividend yield is shown as zero in the table, the stock
options have dividend equivalent rights as discussed above, and the
assumption of no dividends adjusts for that factor and increases the
estimated fair value):
Year Ended December 31,
--------------------------------
2001 2000
--------------- ---------------
Estimated fair value $0.14 and $5.95 $ 0.04
Dividend yield 18% and 0% 20%
Volatility 30% 30%
Risk-free interest rate 5.27% 5.22%
Expected life 10 10
No stock options were granted during 2002.
Note 7 - Shareholders' Rights Plan
On June 30, 1999, the Board of Directors of the Company declared a
dividend distribution of one Right for each outstanding share of the
Company's Common Stock to stockholders of record at the close of
business on July 30, 1999 (the "Record Date"). Each Right entitles
the registered holder to purchase from the Company one one-hundredth
of a share of Series A Junior Participating Preferred Stock, par
value $0.01 per share (the "Preferred Stock"), at a Purchase Price
of $50, subject to adjustment. The description and terms of the
Rights are set forth in a Shareholder Rights Agreement (the "Rights
Agreement") between the Company and The Bank of New York, as Rights
Agent.
Initially, the Rights will be attached to all common stock
certificates representing shares then outstanding, and no separate
Rights Certificates will be distributed. Subject to certain
exceptions specified in the Rights Agreement, the Rights will
separate from the common stock and a Distribution Date will occur
upon the earlier of (i) 10 business days following a public
announcement that a person or group of affiliated or associated
persons (an "Acquiring Person") has acquired, or obtained the right
to acquire, beneficial ownership of 15% or more of the outstanding
shares of common stock (the "Stock Acquisition Date"), other than as
a result of repurchases of stock by the Company or certain
inadvertent actions by institutional or certain other stockholders
or (ii) 10 business days (or such later date as the Board shall
determine) following the commencement of a tender offer or exchange
offer that would result in a person or group becoming an Acquiring
Person. Until the Distribution Date, (i) the Rights will be
evidenced by the common stock certificates and will be transferred
with and only with such common stock certificates, (ii) new common
stock certificates issued after the Record Date will contain a
notation incorporating the Rights Agreement by reference and (iii)
the surrender for transfer of any certificates for common stock
outstanding will also constitute the transfer of the Rights
associated with the common stock represented by such certificate.
Pursuant to the Rights Agreement, the Company reserves the right to
require that, prior to the occurrence of a triggering event, upon
any exercise of Rights, a number of Rights be exercised so that only
whole shares of Preferred Stock will be issued.
The Rights are not exercisable until the Distribution Date and will
expire on July 30, 2009, unless earlier redeemed or exchanged by the
Company.
Note 8 - Fair Value of Financial Instruments
The following table presents the carrying values and estimated fair
values of the Company's financial instruments. SFAS No. 107,
Disclosures About Fair Value of Financial Instruments, defines the
fair value of a financial instrument as the amount at which the
instrument could be exchanged in a current transaction between
willing parties, other than in a forced or liquidation sale:
(Dollars in thousands)
<TABLE>
<CAPTION>
December 31,
----------------------------------------------------
2002 2001
----------------------------------------------------
Carrying Fair Carrying Fair
Value Value Value Value
------------ ------------- ------------ ------------
<S> <C> <C> <C> <C>
Mortgage-related securities $ 2,424,657 $ 2,424,657 $ 1,500,077 $ 1,500,077
Equity securities 4,168 4,168 6,028 6,028
Other fixed income securities 250 250 5,452 5,452
Cash and cash equivalents 1,456 1,456 4,330 4,330
Receivable for unsettled securities -- -- 5,520 5,520
Accrued interest receivable 12,012 12,012 8,580 8,580
Accrued interest payable 2,444 2,444 975 975
Reverse repurchase agreements 2,112,444 2,112,444 1,376,850 1,376,850
Interest rate swaps (120,098) (120,098) 4,620 4,620
Forward contracts -- -- (3,275) (3,275)
</TABLE>
Substantially all the Company's assets are carried at their fair
values on the balance sheets. The Company bases its fair value
estimates for mortgage related securities, equity securities, other
fixed income securities, interest rate swaps, and forward contracts
primarily on third party price indications provided by dealers who
make markets in these financial instruments when such indications
are available. However, the fair value reported reflects estimates
and may not necessarily be indicative of the amounts the Company
could realize in a current market exchange. Because the price
estimates may vary to some degree between sources, management must
make certain judgments and assumptions about the appropriate price
to use to calculate the fair value of investments for financial
reporting purposes. Different judgments and assumptions could result
in different presentations of value. Cash and cash equivalents,
interest receivable and payable, and reverse repurchase agreements
are reflected in the financial statements at their costs, which
approximates their fair value because of the short-term nature of
those instruments.
Note 9 - Related Party Transactions
The Company pays the Manager annual base management compensation,
payable monthly in arrears, equal to 3/4 of 1% of the Average Net
Invested Capital as defined in the Management Agreement. The Company
recorded expense of $1,912,000, $471,000, and $512,000 in base
management compensation to the Manager during 2002, 2001, and 2000,
respectively. The accrued liability for base management
compensation, included in accrued expenses and other liabilities in
the balance sheets, was $1,593,000 and $144,000 at December 31, 2002
and 2001, respectively.
The Company also pays the Manager, as incentive compensation, an
amount equal to 30% of the Net Income of the Company, as defined in
the Management Agreement, before incentive compensation, in excess
of the amount that would produce an annualized Return on Equity, as
defined in the Management Agreement, equal to the ten-year U.S.
Treasury rate plus 1%. The Company recorded expense of $2,000,000
and $634,000 for incentive compensation to the Manager for the years
ended December 31, 2002 and 2001, respectively. No incentive
compensation was incurred for the year ended December 31, 2000.
During 2002, the incentive fee calculated using the formula
summarized above was $10,982,000. However, the Manager waived all
but $2,000,000 of the incentive fee. Because the Company had
previously paid the Manager incentive fees exceeding that amount
during 2002, the excess of $650,000 is receivable from the Manager
and is included in Other Assets in the accompanying balance sheets
as of December 31, 2002.
The Company's other fixed income investments include securities that
are issued by special purpose entities that invest primarily in
mortgage related assets. The Manager serves as the investment
manager to these companies and is paid fees in connection with such
services. The Company does not anticipate paying any management fees
directly to the Manager in connection with these investments.
Note 10 - Commitments and Contingencies
The Company's Board of Directors has authorized a program to
repurchase shares of the Company's Common Stock. As of December 31,
2002, the Company was authorized to repurchase an additional 552,900
shares of the Company's Common Stock pursuant to this program.
Shares repurchased are retired immediately. No shares were
repurchased during 2002, 2001 or 2000.
The Management Agreement between the Company and the Manager may be
renewed each year at the discretion of the Company's Board of
Directors, unless previously terminated by the Company or the
Manager upon written notice. Except in the case of a termination or
non-renewal by the Company for cause, upon termination or
non-renewal of the Management Agreement by the Company, the Company
is obligated to pay the Manager a termination or non-renewal fee,
which may be significant. The termination or non-renewal fee shall
be equal to the fair market value of the Management Agreement
without regard to the Company's termination right, as determined by
an independent appraisal. Neither the fair market value of the
Management Agreement nor the various factors that an appraiser may
find relevant in its determination of the fair market value can be
determined at this time. The fair market value of the Management
Agreement will be affected by significant variables, including (i)
the historical management fees paid to the Manager, (ii) any
projections of future management fees to be paid to the Manager
determined by the independent appraiser, (iii) the relative
valuations of agreements similar to the Management Agreement and
(iv) other factors, all of which may be unrelated to the performance
of the Manager. Any termination or non-renewal fee paid may be
materially greater than eight times historical fees and the Company
can provide no assurance at this time as to the amount of any such
fee.
Note 11 - Accumulated Other Comprehensive Income (Loss)
The following is a presentation of the changes in accumulated other
comprehensive income (loss) for the years ended December 31, 2002,
2001, and 2000, including the cumulative effects of the change in
accounting principle relating to the adoption of SFAS No. 133 on
January 1, 2001 (see Note 2), and other adjustments to reclassify
amounts from accumulated other comprehensive income (loss) into the
statements of operations during each year:
<TABLE>
<CAPTION>
Year Ended December 31,
-----------------------------------------------
2002 2001 2000
--------------- --------------- ---------------
<S> <C> <C> <C>
Unrealized Gains (Losses) on
Available-for-Sale Securities:
Unrealized gains (losses) arising during the
year $ 64,556,000 $ (8,912,000) $ 1,315,000
Reclassification of impairment losses to net
loss on investment and derivative
activities -- -- 22,610,000
Reclassification of net (gains) losses
resulting from securities sales to net
gain (loss) on investment and derivative
activities (17,522,000) (3,076,000) 8,935,000
Cumulative effect of change in accounting
principle - SFAS No. 133 transition
adjustment -- (10,063,000) --
Reclassification of net gains relating to
reclassification of securities to trading -- (1,742,000) --
--------------- --------------- ---------------
Net change in unrealized gains (losses) on
available-for-sale securities $ 47,034,000 $ (23,793,000) $ 32,860,000
=============== =============== ===============
Unrealized and Deferred Gains (Losses) on
Forward Contracts:
Net deferred gain (loss) from forward
contracts closed during the year $ -- $ -- $ (16,860,000)
Reclassification of impairment losses to net
loss on investment and derivative
activities -- -- 8,424,000
Reclassification of deferred losses included
in interest income -- -- 346,000
Reclassification of net losses resulting from
sales to net gain (loss) on investment and
derivative activities -- -- 664,000
Cumulative effect of change in accounting
principle - SFAS No. 133 transition
adjustment -- 12,236,000 --
--------------- --------------- ---------------
Net change in unrealized and deferred gains
(losses) on forward contracts $ -- $ 12,236,000 $ (7,426,000)
=============== =============== ===============
Deferred Gain (Loss) on Terminated Interest
Rate Swaps:
Cumulative effect of change in accounting
principle - SFAS No. 133 transition
adjustment $ -- $ 2,546,000 $ --
Deferred loss from terminated interest rate
swaps (13,872,000) -- --
Reclassification of deferred loss to net gain
(loss) from investment and derivative
activities 2,593,000 -- --
Reclassification for amortization into
interest expense 920,000 (2,367,000) --
--------------- --------------- ---------------
Net change in deferred gain (loss) on
terminated interest rate swaps $ (10,359,000) $ 179,000 $ --
=============== =============== ===============
Unrealized Gain (Loss) on Interest Rate Swaps
Classified as Cash Flow Hedges:
Net unrealized gain (loss) on interest rate
swaps classified as cash flow hedges $ (167,949,000) $ 2,957,000 $ --
Reclassification for adjustments to interest
expense 43,231,000 1,663,000 --
--------------- --------------- ---------------
Net change in unrealized gain (loss) on
interest rate swaps classified as cash
flow hedges $ (124,718,000) $ 4,620,000 $ --
=============== =============== ===============
</TABLE>
The following is a summary of the amounts included in accumulated other
comprehensive income (loss) as of December 31, 2002 and 2001:
<TABLE>
<CAPTION>
December 31,
----------------------------
2002 2001
------------- --------------
<S> <C> <C>
Net unrealized gains (losses) on available-for-sale securities $ 34,398,000 $ (12,636,000)
Net deferred gains (losses) on terminated interest rate swaps (10,180,000) 179,000
Net unrealized gains (losses) on interest rate swaps classified
as cash flow hedges (120,098,000) 4,620,000
----------------------------
Accumulated Other Comprehensive Loss $ (95,880,000)$ (7,837,000)
============================
</TABLE>
Note 12 - Summarized Quarterly Results (Unaudited)
The following is a presentation of the quarterly results of
operations (amounts are in thousands except per share amounts):
<TABLE>
<CAPTION>
Year Ended December 31, 2002,
----------------------------------------------------
Fourth Third Second First
Quarter Quarter Quarter Quarter
----------- ------------ ------------ ------------
<S> <C> <C> <C> <C>
Interest Income $ 37,252 $ 53,715 $ 45,270 $ 27,308
Interest Expense 25,920 29,237 21,390 12,704
----------- ------------ ------------ ------------
Net Interest Income 11,332 24,478 23,880 14,604
----------- ------------ ------------ ------------
Net Gain (Loss) on Investment and
Derivative Activities 9,709 (15,645) (8,748) (1,704)
Dividend Income 101 106 109 126
General and Administrative Expenses 3,050 (557) (280) 3,297
----------- ------------ ------------ ------------
Net Income $ 18,092 $ 9,496 $ 15,521 $ 9,729
=========== ============ ============ ============
Basic Net Income per Share $ 0.61 $ 0.32 $ 0.58 $ 0.53
=========== ============ ============ ============
Diluted Net Income per Share $ 0.61 $ 0.32 $ 0.58 $ 0.53
=========== ============ ============ ============
Average Number of Shares Outstanding:
Basic 29,857 29,857 26,628 18,316
=========== ============ ============ ============
Diluted 29,865 29,992 26,796 18,428
=========== ============ ============ ============
Dividends Declared Per Share $ 0.45 $ 0.50 $ 0.50 $ 0.50
=========== ============ ============ ============
</TABLE>
<TABLE>
<CAPTION>
Year Ended December 31, 2001,
----------------------------------------------------
Fourth Third Second First
Quarter Quarter Quarter Quarter
----------- ------------ ------------ ------------
<S> <C> <C> <C> <C>
Interest Income $ 18,274 $ 9,833 $ 9,764 $ 11,020
Interest Expense 7,458 4,201 4,988 7,076
----------- ------------ ------------ ------------
Net Interest Income 10,816 5,632 4,776 3,944
----------- ------------ ------------ ------------
Net Gain (Loss) on Investment and
Derivative Activities (584) 2,409 (4,382) (2,458)
Dividend Income 159 162 306 188
General and Administrative Expenses 887 367 300 269
Reclassification of Previously
Unrealized Gains -- -- -- 1,742
Cumulative Effect of Change in
Accounting Principle -- -- -- (2,173)
----------- ------------ ------------ ------------
Net Income $ 9,504 $ 7,836 $ 400 $ 974
=========== ============ ============ ============
Basic Net Income per Share $ 0.82 $ 1.36 $ 0.07 $ 0.17
=========== ============ ============ ============
Diluted Net Income per Share $ 0.81 $ 1.34 $ 0.07 $ 0.17
=========== ============ ============ ============
Average Number of Shares Outstanding:
Basic 11,631 5,753 5,753 5,753
=========== ============ ============ ============
Diluted 11,739 5,846 5,819 5,783
=========== ============ ============ ============
Dividends Declared Per Share $ 0.80 $ 0.40 $ 0.40 $ 0.35
=========== ============ ============ ============
</TABLE>
13. Subsequent Events
On March 13, 2003, the Board of Directors of the Company declared a
dividend of $0.25 per common share for the first quarter of 2003,
payable on April 30, 2003 to stockholders of record on March 28,
2003. The Company's policy is to accrue cash dividend payments once
declared by the Board of Directors and, as such, the dividend
declared on March 13, 2003 is not reflected in the accompanying
financial statements.
On March 13, 2003, the Board of Directors authorized management to
consider a full range of strategic alternatives for the Company in
order to maximize shareholder value, including the potential sale of
the Company. In this context, the Board of Directors has appointed a
special committee consisting of the independent directors. In the
event of a sale of the Company, the Manager is entitled to receive a
termination fee under the terms of the Management Agreement. In the
event of a termination, the Manager and the Board of Directors have
agreed to limit the termination fee to an amount less than the fair
market value contemplated to be paid under the Management Agreement.
In the event of a sale of the Company, the termination fee will be
an amount up to fifty percent of the premium over book value, not to
exceed $10 million.
EXHIBIT 99.2.b
Apex Mortgage Capital, Inc.
Balance Sheets
(Unaudited)
<TABLE>
<CAPTION>
September 30, December 31,
2003 2002
----------------- -----------------
<S> <C> <C>
Assets
Cash and cash equivalents $ 8,708,000 $ 1,456,000
Fixed income trading securities, at fair value 22,083,000 606,014,000
Fixed income securities available-for-sale, at fair value 1,343,636,000 1,818,893,000
Equity securities available-for-sale, at fair value -- 4,168,000
Accrued interest receivable 5,444,000 12,012,000
Principal payments receivable 5,335,000 248,000
Other assets 5,080,000 2,587,000
----------------- -----------------
$ 1,390,286,000 $ 2,445,378,000
================= =================
Liabilities and Stockholders' Equity
Liabilities
Reverse repurchase agreements $ 927,079,000 $ 2,112,444,000
Payable for unsettled securities 237,750,000 --
Accrued interest payable 1,744,000 2,444,000
Dividend payable -- 13,509,000
Interest rate swaps, at fair value 58,105,000 120,098,000
Accrued expenses and other liabilities 1,512,000 2,224,000
----------------- -----------------
1,226,190,000 2,250,719,000
----------------- -----------------
Commitments and contingencies (Note 6)
Stockholders' Equity
Preferred stock, par value $0.01 per share; 50,000,000
shares authorized; no shares outstanding -- --
Common stock, par value $0.01 per share; 100,000,000 shares
authorized; 29,857,000 shares outstanding as of
September 30, 2003 and December 31, 2002 299,000 299,000
Additional paid-in-capital 331,521,000 331,499,000
Accumulated other comprehensive loss (55,414,000) (95,880,000)
Accumulated deficit (112,310,000) (41,259,000)
----------------- -----------------
164,096,000 194,659,000
----------------- -----------------
$ 1,390,286,000 $ 2,445,378,000
================= =================
</TABLE>
See accompanying notes to financial statements
Apex Mortgage Capital, Inc.
Statements of Operations
(Unaudited)
<TABLE>
<CAPTION>
Three Months Three Months Nine Months Nine Months
Ended Ended Ended Ended
September 30, September 30, September 30, September 30,
2003 2002 2003 2002
----------------- ----------------- ----------------- -----------------
<S> <C> <C> <C> <C>
Interest Income:
Fixed income securities $ 14,923,000 $ 53,701,000 $ 72,520,000 $ 126,206,000
Cash and cash equivalents 45,000 14,000 92,000 87,000
----------------- ----------------- ----------------- -----------------
14,968,000 53,715,000 72,612,000 126,293,000
Interest Expense 14,927,000 29,237,000 60,629,000 63,331,000
----------------- ----------------- ----------------- -----------------
Net Interest Income 41,000 24,478,000 11,983,000 62,962,000
Dividend Income 34,000 106,000 236,000 341,000
----------------- ----------------- ----------------- -----------------
Net Interest and Dividend Income 75,000 24,584,000 12,219,000 63,303,000
----------------- ----------------- ----------------- -----------------
General and Administrative
Expenses:
Management fee 466,000 539,000 1,570,000 1,360,000
Incentive fee (1,287,000) (1,437,000) -- --
Insurance 164,000 83,000 491,000 250,000
Professional fees 1,025,000 62,000 1,277,000 161,000
Directors' fees 30,000 22,000 74,000 66,000
Non-employee stock
options 7,000 23,000 22,000 73,000
Other 202,000 151,000 635,000 550,000
----------------- ----------------- ----------------- -----------------
607,000 (557,000) 4,069,000 2,460,000
----------------- ----------------- ----------------- -----------------
Net Interest and Dividend
Income (Loss) After General
and Administrative Expenses (532,000) 25,141,000 8,150,000 60,843,000
----------------- ----------------- ----------------- -----------------
Net Loss from Investment and
Derivative Activities (80,670,000) (15,645,000) (66,592,000) (26,097,000)
----------------- ----------------- ----------------- -----------------
Net Income (Loss) $ (81,202,000) $ 9,496,000 $ (58,442,000) $ 34,746,000
================= ================= ================= =================
Net Income Per Share:
Basic $ (2.72) $ 0.32 $ (1.96) $ 1.39
================= ================= ================= =================
Diluted $ (2.72) $ 0.32 $ (1.96) $ 1.38
================= ================= ================= =================
Weighted Average Number of
Shares Outstanding:
Basic 29,857,000 29,857,000 29,857,000 24,976,000
================= ================= ================= =================
Diluted 29,857,000 29,992,000 29,857,000 25,105,000
================= ================= ================= =================
Dividends Declared Per Share: $ -- $ 0.50 $ 0.42 $ 1.50
================= ================= ================= =================
</TABLE>
See accompanying notes to financial statements
Apex Mortgage Capital, Inc.
Statement of Stockholders' Equity
(Unaudited)
<TABLE>
<CAPTION>
Accumulated
Common Stock Additional Other Total
----------------------- Paid-in Comprehensive Accumulated Stockholders' Comprehensive
Shares Amount Capital Income (Loss) Deficit Equity Income / (Loss)
---------- ----------- ----------- --------------- ------------ -------------- ----------------
<S> <C> <C> <C> <C> <C> <C>
Balance, January 1, 2003 29,857,00 $299,000 331,499,000 $ (95,880,00) $(41,259,0) $ 194,659, 000
Amortization of
non-employees stock
options -- -- 22,000 -- -- 22,000
Net loss -- -- -- -- (58,442,00) (58,442,00) $(58,442,00)
Other comprehensive
income (loss):
Net change in
unrealized gain
(loss) on
available-for-sale
securities -- -- -- (26,130,000) -- (26,130,000) (26,130,000)
Net change in deferred
gain (loss) on
terminated interest
rate swaps -- -- -- 4,603,000 -- 4,603,000 4,603,000
Net change in
unrealized gain
(loss) on interest
rate swaps
classified as cash
flow hedges -- -- -- 61,993,000 -- 61,993,000 61,993,000
------------
Comprehensive income
(loss) $(17,976,00)
============
Dividends declared -- -- -- -- (12,609,000) (12,609,000)
---------- --------- ----------- ------------- ------------- ------------
Balance, September 30,
2003 29,857,00 $299,000 331,521,000 $ (55,414,00) $(112,310,000) $ 164,096,000
========== ========= ============ ============= ============= ============
</TABLE>
The following is a presentation of the changes in accumulated other
comprehensive income (loss) for the nine months ended September 30, 2003.
<TABLE>
<CAPTION>
Nine Months
Ended
September 30,
2003
------------------
<S> <C>
Unrealized Gains (Losses) on Available-for-Sale Securities:
Change in unrealized gains (losses) during the period $ (48,828,000)
Realized (gains) losses on sale of securities during the period 22,698,000
------------------
Net change in unrealized gains (losses) on available-for-sale
securities $ (26,130,000)
==================
Deferred Gain (Loss) on Terminated Interest Rate Swaps:
Deferred gain (loss) on interest rate swaps terminated during
the period $ (42,435,000)
Accelerated loss recognition during the period 42,479,000
Reclassification for amortization into interest expense 4,559,000
------------------
Net change in deferred gain (loss) on terminated interest rate
swaps $ 4,603,000
==================
Unrealized Gain (Loss) on Interest Rate Swaps Classified as Cash
Flow Hedges:
Change in unrealized gain (loss) during the period $ (18,457,000)
Deferred loss on interest rate swaps terminated during the period 42,435,000
Reclassification for adjustments to interest expense 38,015,000
------------------
Net change in unrealized gain (loss) on interest rate swaps
classified as cash flow hedges $ 61,993,000
==================
See accompanying notes to financial statements
</TABLE>
Apex Mortgage Capital, Inc.
Statements of Cash Flows
(Unaudited)
<TABLE>
<CAPTION>
Nine Months Nine Months
Ended Ended
September 30, September 30,
2003 2002
----------------- -----------------
<S> <C> <C>
Operating Activities:
Net (loss) income $ (58,442,000) $ 34,746,000
Adjustments to reconcile net (loss) income to net cash provided
by (used in) operating activities:
Net amortization 19,822,000 669,000
Net loss from investment and derivative activities 66,592,000 26,097,000
Trading activities 532,696,000 (594,929,000)
Change in assets and liabilities:
Accrued interest receivable 6,568,000 (10,867,000)
Other assets (2,493,000) 238,000
Accrued interest payable (700,000) 2,953,000
Accrued expenses and other liabilities (712,000) (9,542,000)
----------------- -----------------
Net cash provided by (used in) operating activities 563,331,000 (550,635,000)
----------------- -----------------
Investing Activities:
Purchase of fixed income securities available-for-sale (2,303,271,000) (1,503,945,000)
Proceeds from sales of fixed income securities available-for-sale 2,257,126,000 109,153,000
Proceeds from sales of equity securities 4,299,000 1,937,000
Principal payments on fixed income securities available-for-sale 697,250,000 138,330,000
----------------- -----------------
Net cash provided by (used in) investing activities 655,404,000 (1,254,525,000)
----------------- -----------------
Financing Activities:
Net change in reverse repurchase agreements (1,185,365,000) 1,689,237,000
Dividend distributions (26,118,000) (40,025,000)
Issuance of common stock -- 155,819,000
----------------- -----------------
Net cash (used in) provided by financing activities (1,211,483,000) 1,805,031,000
----------------- -----------------
Net Increase (Decrease) in Cash and Cash Equivalents 7,252,000 (129,000)
Cash and Cash Equivalents at Beginning of Period 1,456,000 4,330,000
----------------- -----------------
Cash and Cash Equivalents at End of Period $ 8,708,000 $ 4,201,000
================= =================
Supplemental Disclosure of Cash Flow Information:
Cash paid for interest $ 57,273,000 $ 61,406,000
Noncash Investing and Financing Activities:
Change in accumulated other comprehensive loss (40,466,000) (71,874,000)
Change in receivable for unsettled securities -- 330,567,000
Change in payable for unsettled securities 237,750,000 (384,730,000)
Change in dividends declared, not yet paid (13,509,000) 2,473,000
See accompanying notes to financial statements
</TABLE>
Apex Mortgage Capital, Inc.
Notes to Financial Statements
(Unaudited)
Note 1 - The Company
Apex Mortgage Capital, Inc., or the "Company," was incorporated in
Maryland on September 15, 1997. The Company commenced its operations of
acquiring and managing a portfolio of mortgage related assets on
December 9, 1997, upon receipt of the net proceeds from the initial
public offering of the Company's common stock. The Company uses its
equity capital and borrowed funds to seek to generate income based on
the difference between the yield on its investments and the cost of its
borrowings. The Company is structured for tax purposes as a real estate
investment trust, or REIT, under the Internal Revenue Code of 1986, as
amended, or the "Code."
The Company entered into a management agreement, or the "Management
Agreement," as amended, with TCW Investment Management Company, or the
"Manager," a wholly owned subsidiary of The TCW Group, Inc., pursuant
to which the Manager manages the Company's day-to-day operations,
subject to the direction and oversight of the Company's Board of
Directors. The Management Agreement was initially executed on December
9, 1997.
Note 2 - Summary of Significant Accounting Policies and Certain Risks
Overview
Certain information and note disclosures normally included in annual
financial statements prepared in accordance with accounting principles
generally accepted in the United States of America, or "GAAP," have
been condensed or omitted pursuant to the rules and regulations of the
Securities and Exchange Commission, or the "SEC," for interim financial
statements. The unaudited financial statements should be read in
conjunction with the audited financial statements and notes thereto
included in the Company's Annual Report on Form 10-K for the year ended
December 31, 2002. The accounting policies used in the preparation of
these interim financial statements were consistent with those used in
the preparation of the financial statements for the year ended December
31, 2002, unless otherwise noted.
Derivatives and Hedging Transactions
The Company may enter into interest rate swaps and other financial
instruments in order to mitigate the impact of rising interest rates on
the cost of its short-term borrowings and market value of its portfolio
securities. The Company may also enter into forward contracts to sell
U.S. Treasury securities and other financial instruments in order to
mitigate the negative impact of rising interest rates on the fair value
of its fixed income securities. Such financial instruments are
generally referred to as "derivatives."
The Company adopted SFAS No. 133, Accounting for Derivative Instruments
and Hedging Activities, as amended, on January 1, 2001. Under SFAS No.
133, all derivatives are recorded at fair value and presented as either
assets or liabilities on the Company's balance sheets.
Prior to adopting SFAS No. 133, the Company accounted for changes in
fair values of the forward contracts through adjustments to accumulated
other comprehensive income (loss). Following adoption of SFAS No. 133,
the Company recognizes changes in fair values of forward contracts as a
component of net gain (loss) on investment and derivative activities in
the statements of operations.
At September 30, 2003 and December 31, 2002, the Company's outstanding
interest rate swaps qualify as cash flow hedges and are deemed to be
fully effective as hedges under SFAS No. 133. Changes in fair values of
such swaps are not reflected in current earnings, but are reflected in
other comprehensive income. Currently, fair value of the interest rate
swaps is determined by the average of values obtained from two market
analytics systems, i.e., The Yield Book and Bloomberg. If the Company
were to change current or anticipated borrowings so that they were no
longer appropriately matched to the swap agreements, the agreements
might no longer qualify for hedge accounting treatment. In that case,
changes in their fair values would affect net income.
Stock-based Compensation
The Company grants stock options to directors and to certain directors,
officers and employees of the Manager. Options granted to directors of
the Company are accounted for using the intrinsic-value method, and
generally no compensation expense is recognized in the statements of
operations for such options. Options granted to persons other than
directors (i.e., to non-employees) are accounted for using the fair
value method; such stock options are measured at their fair value when
they are granted and are recognized as general and administrative
expense during the periods when the options are vested and the related
services are performed. During the nine months ended September 30, 2003
and September 30, 2002, the Company did not issue any stock options.
The effects of previously issued and unvested stock options to the
Company's directors did not have an impact for either of the periods
presented below.
The following table represents the pro forma effects on net income
(loss) and net income (loss) per share if compensation costs related to
the director stock options were measured using the fair value method as
prescribed under SFAS No. 123, Accounting for Stock-based Compensation:
<TABLE>
<CAPTION>
Three Months Three Months Three Months Three Months
Ended Ended Ended Ended
September 30, September 30, September 30, September 30,
2003 2002 2003 2002
-------------- ------------ -------------- -------------
<S> <C> <C> <C> <C>
Reported net income (loss) $ (81,202,000) $ 9,496,000 $ (58,442,000) $ 34,746,000
Deduct: Total stock-based employee
compensation expense determined
under fair value based method for
all awards, net of related tax
effects -- -- -- 1,000
-------------- --------------------------- -------------
Pro forma net income (loss) $ (81,202,000) $ 9,496,000 $ (58,442,000) $ 34,745,000
============== ============ ============== =============
Earnings (losses) per share:
Basic - as reported $ (2.72) $ 0.32 $ (1.96) $ 1.39
============== ============ ============== =============
Basic - pro forma $ (2.72) $ 0.32 $ (1.96) $ 1.39
============== ============ ============== =============
Diluted - as reported $ (2.72) $ 0.32 $ (1.96) $ 1.38
============== ============ ============== =============
Diluted - pro forma $ (2.72) $ 0.32 $ (1.96) $ 1.38
============== ============ ============== =============
</TABLE>
Recent Accounting Developments
In April 2003, the Financial Accounting Standards Board issued
Statement of Financial Accounting Standards No. 149, Amendment of
Statement 133 on Derivative Instruments and Hedging Activities ("SFAS
149"), which clarifies and amends financial accounting and reporting
for derivative instruments, including certain derivative instruments
embedded in other contracts and for hedging activities under Statement
of Financial Accounting Standards No. 133, Accounting for Derivative
Instruments and Hedging Activities ("SFAS 133"). In general, SFAS 149
is effective for contracts entered into or modified after June 30, 2003
and for hedging relationships designated after June 30, 2003.
Implementation of this standard is not expected to have a material
effect on the earnings, cash flows or financial position of the
Company.
Note 3 - Fixed Income and Equity Securities
At September 30, 2003, fixed income securities consisted of the
following:
<TABLE>
<CAPTION>
Fixed Income Equity
Fixed Income Securities Securities
Trading Available-For- Available-For-
(in thousands) Securities Sale Sale
----------------------------------------- ---------------- ---------------- --------------
<S> <C> <C> <C>
Principal Amount $ 21,710 $ 1,319,450
Unamortized (Discount) Premium (147) 15,918
---------------- ---------------- --------------
Adjusted Cost 21,563 1,335,368 $ --
Gross Unrealized Gains 520 14,079 --
Gross Unrealized Losses -- (5,811) --
---------------- --------------- --------------
Fair Value $ 22,083 $ 1,343,636 $ --
================ ================ ==============
<CAPTION>
At December 31, 2002, fixed income and equity securities consisted of
the following:
Fixed Income Equity
Fixed Income Securities Securities
Trading Available-For- Available-For-
(in thousands) Securities Sale Sale
----------------------------------------- ---------------- ---------------- --------------
<S> <C> <C> <C>
Principal Amount $ 585,817 $ 1,765,448
Unamortized Premium 12,838 20,371
---------------- ---------------- --------------
Adjusted Cost 598,655 1,785,819 $ 2,844
Gross Unrealized Gains 7,359 33,225 1,324
Gross Unrealized Losses -- (151) --
---------------- --------------- --------------
Fair Value $ 606,014 $ 1,818,893 $ 4,168
================ =============== ===============
</TABLE>
The contractual final maturity of the mortgage loans supporting fixed
income mortgage securities is generally between 15 and 30 years at
origination. Because of prepayments on the underlying mortgage loans,
the actual weighted average maturity is expected to be substantially
less.
Fixed-rate mortgage securities comprised approximately 48.4% and 99.0%
of the Company's portfolio of fixed income securities at September 30,
2003 and December 31, 2002, respectively. The shift from fixed-rate
mortgage securities to adjustable-rate mortgage securities was made by
the Manager to seek to reduce exposure to price volatility and to seek
to increase exposure to securities that have more favorable prepayment
characteristics. The decrease in fixed income trading securities from
December 31, 2002 to September 30, 2003 was primarily due to the sale
of $432,761,000 of fixed income trading securities and $147,456,000 of
principal prepayments on fixed income trading securities. The expected
average remaining maturity of the Company's other fixed income
securities as of September 30, 2003 and December 31, 2002 was
approximately 27 years and less than one year, respectively.
Adjustable-rate mortgage securities comprised approximately 49.1% and
0.4% of the Company's portfolio of fixed income securities at September
30, 2003 and December 31, 2002, respectively. A portion of the
adjustable-rate mortgage securities in the Company's portfolio are
backed by loans subject to periodic and lifetime caps that limit the
amount the securities' effective interest rates can change during any
given period and over the lives of the assets. Both at September 30,
2003 and December 31, 2002, the portion of adjustable-rate mortgage
securities subject to periodic caps had an average periodic cap equal
to 2.0%. At September 30, 2003 and December 31, 2002, the portion of
adjustable-rate mortgage securities subject to lifetime caps had an
average lifetime cap equal to 9.5% and 11.3%, respectively.
During the nine months ended September 30, 2003, the Company reported a
net loss on investment and derivative activities of $66,592,000 in the
statement of operations. The loss consisted of a loss of $42,479,000 on
terminated swaps, a net loss of $24,153,000 on the sale of
$2,257,126,000 of fixed income securities available-for-sale, a gain of
$5,424,000 on the sale of $432,761,000 of fixed income trading
securities, a gain of $1,455,000 on the sale of $4,299,000 of equity
securities available-for-sale, and an unrealized loss of $6,839,000 on
fixed income trading securities.
During the nine months ended September 30, 2002, the Company reported a
net loss on investment and derivative activities of $26,097,000 in the
statement of operations. This loss consisted of a net loss of
$55,800,000 on closed forward contracts, a loss of $229,000 on the sale
of $98,634,000 of fixed income securities available-for-sale, a gain of
$29,907,000 on the sale of $894,372,000 of fixed income trading
securities, a gain of $594,000 on the sale of $1,937,000 of equity
securities available-for-sale, and an unrealized loss of $569,000 on
fixed income trading securities.
Note 4 - Reverse Repurchase Agreements
The Company has entered into reverse repurchase agreements to finance
certain of its investments. These agreements are secured by a portion
of the Company's investments and bear interest rates that have
historically moved in close relationship to LIBOR. Reverse repurchase
agreements are accounted for as short-term borrowings and recorded as a
liability on the balance sheet.
At September 30, 2003, the Company had outstanding $927,079,000 of
reverse repurchase agreements with a weighted average current borrowing
rate of 1.11% per annum and a weighted average maturity of one month.
The reverse repurchase agreements were collateralized by the Company's
securities with an estimated fair value of $952,656,000.
At December 31, 2002, the Company had outstanding $2,112,444,000 of
reverse repurchase agreements with a weighted average current borrowing
rate of 1.40% per annum and a weighted average maturity of one month.
The reverse repurchase agreements were collateralized by the Company's
securities with an estimated fair value of $2,199,852,000.
Note 5 - Derivative Financial Instruments and Hedging Activities
The Company has entered into interest rate swap agreements as
summarized below. Under these agreements, the Company receives a
floating rate and pays a fixed rate. The swaps qualify as cash flow
hedges for accounting purposes, and effectively fix the interest rate
paid on $771,500,000, as of September 30, 2003, of current and
anticipated future borrowings under reverse repurchase agreements. The
Company estimates that approximately $19,325,000 of unrealized and
deferred realized losses on interest rate swaps currently included in
accumulated other comprehensive loss will be reclassified into interest
expense within the next twelve months as net settlements occur. As of
September 30, 2003, the maximum length of time over which the Company
is hedging its exposure to the variability in future cash flows for
current and anticipated future transactions is approximately 8.7 years.
Interest Rate Swaps at September 30, 2003:
(Dollars in thousands)
<TABLE>
<CAPTION>
Par Weighted
Current Average Average Unrealized
Notional Amount Fixed Rate Floating Rate Maturity Losses
-------------------- ---------------- ----------------- ---------------- -----------------
<S> <C> <C> <C> <C>
$ 771,500 4.884% 1Month LIBOR 4.7 years $ 58,105
Interest Rate Swaps at December 31, 2002:
<CAPTION>
(Dollars in thousands)
Par Weighted
Current Average Average Unrealized
Notional Amount Fixed Rate Floating Rate Maturity Losses
-------------------- ---------------- ----------------- ---------------- -----------------
<S> <C> <C> <C> <C>
$ 1,678,500 4.643% 1Month LIBOR 4.4 years $ 120,098
</TABLE>
During the fourth quarter of 2002, the Company terminated a portion of
the outstanding interest rate swap agreements with a combined notional
amount of $544,500,000, which resulted in a deferred loss of
approximately $13,872,000 with an average term of 1.3 years and an
average rate of 3.57% per annum. Also, during the third quarter of
2003, the Company terminated another portion of the outstanding
interest rate swap agreements with a combined notional amount of
$907,000,000 which resulted in a deferred loss of approximately
$42,435,000 with an average term of 5.1 years and an average rate of
4.44% per annum.
As a result of declining reverse repurchase agreement balances as of
September 30, 2003, the Company accelerated the deferred loss
recognition and reclassified $42,479,000 from accumulated other
comprehensive income (loss) to net loss from investment and derivative
activities for the nine months ended September 30, 2003. The
acceleration of the deferred loss recognition depends on the balance of
reverse repurchase agreements maintained by the Company. If the general
level of reverse repurchase agreements were to decline further, the
Company may be required to accelerate the deferred loss recognition in
the future. The remaining deferred loss of $5,575,000 is being
amortized as an adjustment to interest expense over the remaining lives
of the original swap agreements.
During the nine months ended September 30, 2003, interest expense was
increased by $38,015,000 paid to swap counterparties and $4,559,000
from amortization of deferred losses on terminated swap contracts.
During the nine months ended September 30, 2002, interest expense was
increased by $29,342,000 paid to swap counterparties and decreased by
$180,000 from amortization of deferred gains on terminated swap
contracts.
Note 6 - Commitments and Contingencies
There have been no material changes to the matters disclosed in "Note
10 - Commitments and Contingencies" on the Company's Annual Report on
Form 10-K for the year ended December 31, 2002.
Note 7 - Risks and Uncertainties
The Company's future results of operations and overall book value
involve a number of risks and uncertainties that affect volatility of
earnings and book value. Factors that could affect the Company's future
operating results and/or book value and cause actual results to vary
materially from expectations include, but are not limited to the
following: further adverse changes in general economic conditions,
further changes in interest rates; and fluctuations in overall market
conditions for mortgage-backed securities.
Note 8 - Subsequent Events
In addition, on July 14, 2003, the Company announced that it entered
into a definitive agreement and plan of merger dated July 12, 2003,
with American Home Mortgage Holdings, Inc., or American Home, and
American Home Mortgage Investment Corp. (formerly called AHM New
Holdco, Inc.), or AHM Investment Corp., a wholly-owned subsidiary of
American Home, providing for the acquisition of the Company by American
Home pursuant to the merger of the Company with and into AHM Investment
Corp., with AHM Investment Corp. surviving the merger. Prior to the
merger, American Home will engage in an internal reorganization
pursuant to which American Home will merge with and into a wholly-owned
subsidiary of AHM Investment Corp. As a result of this reorganization,
AHM Investment Corp. will become the new parent company and will own
100% of the capital stock of American Home, and each outstanding share
of American Home common stock will be converted into one share of AHM
Investment Corp. common stock. In the merger, and subject to the terms
and conditions of the agreement and plan of merger, each issued and
outstanding share of the Company's common stock will be converted
automatically into and become exchangeable for a number of shares of
AHM Investment Corp. common stock equal to 107.5% of our book value per
share, subject to a collar adjustment, as set forth in the agreement
and plan of merger. The completion of the merger is subject to the
approval by the Company's stockholders and those of American Home, the
receipt of regulatory approvals and other customary conditions. Upon
the successful completion of the merger, the Company's Manager has
agreed that it will terminate its Management Agreement for a
termination fee equal to 40% of the premium over book value received by
our stockholders in the merger, not to exceed $10,000,000, which is
less than the amount the Company was originally obligated to pay the
Manager under the Management Agreement in the event of a termination
without cause by the Company.
On October 27, 2003, the Company announced that the Registration
Statement on Form S-4, Amendment #3, filed by AHM Investment Corp.
relating to the proposed acquisition of the Company by American Home
was declared effective by the SEC on October 24, 2003.
EXHIBIT 99.3
UNAUDITED PRO FORMA CONSOLIDATED CONDENSED FINANACIAL INFORMATION
The following unaudited pro forma financial statements are prepared in
accordance with SEC Regulation S-X, Article 11, "Pro Forma Financial
Information."
The following unaudited consolidated condensed financial information is based
upon the historical consolidated financial statements of each of American Home
and Apex, and should be read in conjunction with those consolidated financial
statements and related notes. The pro forma adjustments were applied to the
respective historical financial statements to reflect the reorganization of
American Home and to account for the merger of Apex as a purchase. Under
purchase accounting, the purchase cost is allocated to acquired assets and
liabilities in accordance with the relative fair values at the effective time of
the transactions.
As further discussed in the notes to the unaudited pro forma consolidated
condensed financial statements, the unaudited pro forma consolidated condensed
statements of income for the year ended December 31, 2002 and for the nine
months ended September 30, 2003 give effect to the transactions as if they were
completed on December 31, 2001.
As further discussed in the notes to the unaudited pro forma consolidated
condensed financial statements, the unaudited pro forma consolidated condensed
balance sheet presents the combined financial position of American Home and Apex
as of September 30, 2003 and the acquisition of Apex as if it were completed on
September 30, 2003.
UNAUDITED PRO FORMA CONDENSED COMBINED BALANCE SHEETS
AS OF SEPTEMBER 30, 2003
<TABLE>
<CAPTION>
American
Home Apex (a)
Mortgage Mortgage Pro Forma Combined
Holdings, Inc. Capital, Inc. Adjustments Pro Forma
--------------- ------------- ----------- -----------
(In thousands)
<S> <C> <C> <C> <C>
Assets
Cash and cash equivalents $ 49,583 $ 8,708 $ (7,146) (b) $ 51,145
Fixed income trading securities, at fair value -- 22,083 -- 22,083
Fixed income securities available-for-sale, at fair value -- 1,343,636 -- 1,343,636
Mortgage loans held for sale, net 1,667,486 -- -- 1,667,486
Mortgage servicing rights, net 103,021 -- -- 103,021
Goodwill 54,930 -- 20,375 75,305
Other assets 142,632 15,859 -- 158,491
----------- ----------- ----------- -----------
Total assets $ 2,017,652 $ 1,390,286 $ 13,229 $ 3,421,167
=========== =========== =========== ===========
Liabilities
Reverse repurchase agreements $ -- $ 927,079 $ -- $ 927,079
Warehouse lines of credit 1,530,110 -- -- 1,530,110
Notes payable 66,430 -- -- 66,430
Drafts payable 49,006 -- -- 49,006
Derivative liabilities, at fair value 11,904 58,105 -- 70,009
Other liabilities 132,928 241,006 -- 373,934
----------- ----------- ----------- -----------
Total liabilities 1,790,378 1,226,190 -- 3,016,568
Commitments and Contingencies -- -- -- --
Minority Interest 727 -- -- 727
Stockholders' Equity
Common stock 173 299 (222) (b) 250
Additional paid-in-capital 101,098 331,521 (154,273) (b) 278,346
Accumulated other comprehensive loss -- (55,414) 55,414 (b) --
Retained earnings/accumulated deficit 125,276 (112,310) 112,310 (b) 125,276
----------- ----------- ----------- -----------
Total Stockholders' equity 226,547 164,096 13,229 403,872
Total liabilities and stockholders' equity $ 2,017,652 $ 1,390,286 $ 13,229 $ 3,421,167
=========== =========== =========== ===========
</TABLE>
UNAUDITED PRO FORMA CONDENSED COMBINED STATEMENTS OF INCOME
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2003
<TABLE>
<CAPTION>
American
Home Apex (a)
Mortgage Mortgage Pro Forma Combined
Holdings, Inc. Capital, Inc. Adjustments Pro Forma
--------------- ------------- ----------- -----------
(In thousands, except per share data)
<S> <C> <C> <C> <C>
Revenue
Gain on sale of mortgage loans $ 323,070 $ -- $ -- $ 323,070
Interest income, net 33,770 11,983 -- 45,753
Loan servicing fees 32,812 -- -- 32,812
Amortization and impairment (49,318) -- -- (49,318)
----------- ----------- ----------- -----------
Net loan servicing fees (loss) (16,506) -- -- (16,506)
Other 5,592 (66,356) -- (60,764)
----------- ----------- ----------- -----------
Total revenues 345,926 (54,373) -- 291,553
Expenses
Salaries, commissions and benefits, net 161,551 -- -- 161,551
Occupancy and equipment 19,642 -- -- 19,642
Data processing and communications 9,510 -- -- 9,510
Office supplies and expenses 10,427 -- -- 10,427
Marketing and promotion 8,836 -- -- 8,836
Travel and entertainment 8,000 -- -- 8,000
Professional fees 5,832 1,277 -- 7,109
Other 17,241 2,792 -- 20,033
----------- ----------- ----------- -----------
Total expenses 241,039 4,069 -- 245,108
Income before income taxes 104,887 (58,442) -- 46,445
Income taxes 43,004 -- -- 43,004
----------- ----------- ----------- -----------
Net income $ 61,883 $ (58,442) $ -- $ 3,441
=========== =========== =========== ===========
Per share data
Basic $ 3.64 $ (1.96) $ -- $ 0.14
Diluted $ 3.57 $ (1.96) $ -- $ 0.14
Weighted average number of shares
Basic 17,003 29,857 7,692 24,695
Diluted 17,358 29,857 7,692 25,050
</TABLE>
UNAUDITED PRO FORMA CONDENSED COMBINED STATEMENTS OF INCOME
FOR THE YEAR ENDED DECEMBER 31, 2002
<TABLE>
<CAPTION>
American
Home Apex (a)
Mortgage Mortgage Pro Forma Combined
Holdings, Inc. Capital, Inc. Adjustments Pro Forma
--------------- ------------- ----------- -----------
(In thousands, except per share data)
<S> <C> <C> <C> <C>
Revenue
Gain on sale of mortgage loans $ 216,595 $ -- $ -- $ 216,595
Interest income, net 23,671 74,294 -- 97,965
Loan servicing fees 25,139 -- -- 25,139
Amortization and impairment (36,731) -- -- (36,731)
----------- ----------- ----------- -----------
Net loan servicing fees (loss) (11,592) -- -- (11,592)
Other 4,147 (15,946) -- (11,799)
----------- ----------- ----------- -----------
Total revenues 232,821 58,348 -- 291,169
Expenses
Salaries, commissions and benefits, net 106,895 -- -- 106,895
Occupancy and equipment 15,506 -- -- 15,506
Data processing and communications 7,853 -- -- 7,853
Office supplies and expenses 6,511 -- -- 6,511
Marketing and promotion 7,996 -- -- 7,996
Travel and entertainment 4,587 -- -- 4,587
Professional fees 5,443 204 -- 5,647
Other 10,470 5,306 -- 15,776
----------- ----------- ----------- -----------
Total expenses 165,261 5,510 -- 170,771
Income before income taxes 67,560 52,838 -- 120,398
Income taxes 28,075 -- -- 28,075
----------- ----------- ----------- -----------
Net income $ 39,485 $ 52,838 $ -- $ 92,323
=========== =========== =========== ===========
Per share data
Basic $ 2.72 $ 2.02 $ -- $ 4.16
Diluted $ 2.65 $ 2.01 $ -- $ 4.09
Weighted average number of shares
Basic 14,509 26,206 7,692 22,201
Diluted 14,891 26,300 7,692 22,583
</TABLE>
NOTES TO UNAUDITED CONDENSED PRO FORMA CONSOLIDATED
FINANCIAL STATEMENTS
(In thousands, except per share amounts)
(a) On December 3, 2003, American Home completed its internal reorganization and
subsequent acquisition of Apex. The reorganization, which resulted in AHM
Investment Corp. becoming the new parent company of American Home, was
consummated by merging American Home with and into a subsidiary of AHM
Investment Corp. The acquisition of Apex was consummated by merging Apex with
and into AHM Investment Corp. Pursuant to the reorganization, each share of
American Home common stock has been converted into one share of AHM Investment
Corp. common stock, and pursuant to the merger with Apex, each share of Apex
common stock has been converted into 0.25762 share of AHM Investment Corp.
common stock, based on the calculation detailed below.
The transaction was accounted for as a purchase by American Home. For purposes
of preparing the unaudited pro forma consolidated financial information, we have
made the following adjustments to the historical balance sheets of
American Home and Apex, as if the transaction occurred on September 30, 2003.
The exchange ratio and the purchase price were computed using the daily
volume-weighted averages of the trading prices of American Home's common stock
for the ten trading days prior to December 3, 2003 (the "consummation date of
the transaction"). The income statement presentation was prepared as if the
transaction occurred prior to January 1, 2002. The purchase accounting
adjustments relating to the transaction are detailed below.
(b) Adjustments represent the issuance of 7,692 shares of AHM Investment Corp.
common stock, based on a closing price of $23.15 on December 3, 2003 and the
daily volume-weighted averages of the trading prices of American Home's common
stock of $21.906 for the ten trading days prior to December 3, 2003. The
calculated exchange ratio reflected in the pro forma adjustments is 0.25762
shares of AHM Investment Corp. common stock for each share of Apex common stock.
The exchange ratio calculation is subject to collars based on the American Home
average price and the net book value per share of Apex. The American Home
average price is calculated by taking the average of the daily volume weighted
averages of the trading prices of American Home common stock for the ten
consecutive days ending on and including the trading day immediately preceding
the closing date. The net book value per share of Apex used in the calculation
of the exchange ratio is adjusted for the termination fee payable to TCW upon
consummation of the merger and termination of the management contract.
The average price of American Home common stock from November 18, 2003 through
December 2, 2003 used in the exchange ratio calculation was $21.906. The book
value per share used in the exchange ratio calculation was $5.23906, which
included a $5.0 million adjustment to the actual Apex book value per share of
$5.40596 to reflect the termination fee paid to TCW upon consummation of the
merger and termination of the management contract. Pursuant to the merger
agreement, the exchange ratio calculation reflected in the pro forma adjustments
is as follows:
Adjusted net book value per share (A)...............$5.23906
Multiplier (B)...................................... 1.07500
----------
Numerator (C) = (A)X(B).............................$5.63199
Denominator (D)....................................$21.86164
Exchange ratio (C)/(D)...............................0.25762
The pro forma adjustments to cash and cash equivalents include $7.1 million of
transaction-related expenses, consisting of a $5.0 million termination fee paid
to TCW Management and $2.1 million for legal and outside consulting fees.
The allocation of the value of the issued shares between common stock and
additional paid-in-capital is as follows:
Shares............................................ 7,692
Price............................................. $23.15
----------
Value of shares................................... $178,064
----------
Direct costs of registering and issuing shares.... (739)
----------
Value of shares, net of direct costs.............. $177,325
==========
Allocation to common stock
Shares............................................ 7,692
Par value......................................... $0.01
----------
Common stock...................................... $77
==========
Allocation to additional paid-in-capital
Shares............................................ 7,692
Price less direct costs and par value ............ $23.04
----------
Additional paid-in-capital........................ $177,248
==========
The direct costs of registering and issuing the AHM Investment Corp. common
stock totaling $739 thousand are recognized as a reduction to additional
paid-in-capital. In addition, the adjustments include the effect of the
elimination of Apex's stockholders' equity in conjunction with the transaction.