As filed with the Securities and Exchange Commission on November 30, 2001
Registration No. 333-_________
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
FORM S-2
REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933
American Mortgage Acceptance Company
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(Formerly American Mortgage Investors Trust)
(Exact name of registrant as specified in its charter)
Massachusetts
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(State or other jurisdiction of incorporation or organization)
13-6972380
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(I.R.S. Employer Identification Number)
625 Madison Avenue
New York, New York 10022
(212) 421-5333
(Address, including zip code, and telephone
number, including area code, of registrant's principal
executive offices)
Stuart J. Boesky
Chairman of the Board, President and Chief Executive Officer
American Mortgage Acceptance Company
625 Madison Avenue
New York, New York 10022
(212) 421-5333
(Name, address, including zip code, and telephone number,
including area code, of agent for service)
Copy to:
Mark Schonberger, Esq. Wayne D. Boberg, Esq.
Paul, Hastings, Janofsky & Walker LLP Winston & Strawn
399 Park Avenue 35 West Wacker Drive
New York, New York 10022 Chicago, Illinois 60601
(212) 318-6000 (312) 558-5600
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Approximate date of commencement of proposed sale to the public: As soon as
practicable, following the effective date of this Registration Statement.
If any of the securities being registered on this Form are to be offered on
a delayed or continuous basis pursuant to Rule 415 under the Securities Act of
1933 check the following box. [ ]
If the registrant elects to deliver its latest annual report to security
holders, or a complete and legal facsimile thereof, pursuant to Item 11(a)(1) of
this Form, check the following box. [ ]
If this Form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, please check the following box
and list the Securities Act registration statement number of the earlier
effective registration statement for the same offering. [ ]
If this Form is a post-effective amendment filed pursuant to Rule 462(c)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. [ ]
If this Form is a post-effective amendment filed pursuant to Rule 462(d)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. [ ]
If delivery of the prospectus is expected to be made pursuant to Rule 434,
please check the following box. [ ]
Calculation of Registration Fee
======================================================================================================================
Title of each class of Proposed maximum Proposed maximum
securities to be Amount to be offering price per aggregate offering Amount of
registered registered share(1) price registration fee
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Common Shares of Beneficial 4,025,000(2) $14.00 $56,350,000 $13,468
Interest, par value $.10 per
share
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(1) Estimated pursuant to Rule 457(c) of the Securities Act solely for the
purpose of calculating the amount of the registration fee. Estimate based on the
average of the high and low prices of the Registrant's common shares as reported
by the American Stock Exchange on November 26, 2001.
(2) Includes up to 525,000 shares of beneficial interest that the underwriters
have the option to purchase to cover over-allotments, if any.
We will amend this Registration Statement on such date or dates as may be
necessary to delay its effective date until we file a further amendment which
specifically states that this Registration Statement shall thereafter become
effective in accordance with Section 8(a) of the Securities Act of 1933 or until
this Registration Statement shall become effective on such date as the
Commission, acting according to Section 8(a), may determine.
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The information in this prospectus is not complete and may be changed. We may
not sell these securities until the registration statement filed with the
Securities and Exchange Commission is effective. This prospectus is not an offer
to sell these securities and it is not soliciting an offer to buy these
securities in any state where such offer or sale is not permitted.
SUBJECT TO COMPLETION, DATED NOVEMBER 30, 2001
PRELIMINARY PROSPECTUS
3,500,000 Common Shares
AMERICAN MORTGAGE ACCEPTANCE COMPANY
We are selling 3,500,000 common shares of beneficial interest and we will
receive all of the net proceeds from the sale. Our common shares are listed on
the American Stock Exchange under the symbol "AMC". On November 29, 2001, the
closing sale price of our common shares was $13.64.
Investing in our shares involves a high degree of risk. You should
carefully consider the information under the heading "Risk Factors" beginning on
page 11 of this prospectus before buying our common shares.
Per Share Total
--------- -----
Public offering price.................................. $ $
Underwriter discounts and commissions.................. $ $
Proceeds, before expenses, to us....................... $ $
Neither the Securities and Exchange Commission nor any state securities
commission has approved or disapproved of these securities or determined if this
prospectus is truthful or complete. Any representation to the contrary is a
criminal offense.
We have granted the underwriters an option for a period of 30 days to
purchase up to 525,000 additional common shares at the public offering price,
less the underwriting discounts, to cover over-allotments, if any. We have also
granted to Friedman, Billings, Ramsey & Co., Inc., as representative of the
underwriters, and its designated affiliates warrants to purchase up to 35,000
common shares (40,250 in the event the underwriters exercise their
over-allotment option). See "Underwriting" beginning on page 58 of this
prospectus.
We expect the common shares will be ready for delivery to purchasers on or
about , 2002.
FRIEDMAN BILLINGS RAMSEY
, 2001
Forward-Looking Statements
This prospectus contains or incorporates by reference certain
forward-looking statements. When used, statements which are not historical in
nature, including those containing words such as "anticipate," "estimate,"
"should," "expect," "believe," "intend," and similar expressions are intended to
identify forward-looking statements. These forward-looking statements are
subject to various risks and uncertainties, including those related to:
o our ability to originate or acquire loans, mortgage-backed securities
or other investments on favorable terms;
o changes in short-term interest rates;
o risks associated with investing in real estate, including changes in
business conditions and the general economy;
o potential conflicts of interest among Related AMI Associates, Inc.
(our advisor), Related Capital and us;
o our ability to obtain borrowings to finance our investments;
o illiquidity of our portfolio of loans, mortgage-backed securities or
other investments;
o increases in the prepayments on the mortgage loans securing our
mortgage-backed securities;
o changes in government regulations affecting our business; and
o our ability to maintain our qualifications as a real estate investment
trust for federal income tax purposes.
Other risks, uncertainties and factors, including those discussed under
"Risk Factors" on page 11 of this prospectus or described in reports that we
file from time to time with the Securities and Exchange Commission such as our
Forms 10-K and 10-Q, could cause our actual results to differ materially from
those projected in any forward-looking statements that we make. We are not
obligated to publicly update or revise any forward-looking statements, whether
as a result of new information, future events or otherwise.
You should rely only on the information contained in or incorporated by
reference into this prospectus. Neither we nor the underwriters have authorized
any other person to provide you with different information. If anyone provides
you with different or inconsistent information, you should not rely on it. The
information in this prospectus is current as of the date of this prospectus. Our
business, financial condition, results of operations and prospects may have
changed since that date.
2
PROSPECTUS SUMMARY
This summary highlights information in this prospectus. The summary is not
complete and does not contain all of the information you should consider before
investing in our common shares. We urge you to carefully read this entire
prospectus, including the financial statements, along with the information that
is incorporated by reference into this prospectus. You should carefully consider
the information discussed under "Risk Factors" before you decide to purchase our
shares. All references to "we," "us" or the "Company" mean American Mortgage
Acceptance Company and our wholly-owned subsidiaries. Unless otherwise
indicated, the information contained in this prospectus assumes that the
underwriters do not exercise their over-allotment option.
Our Business
We are a real estate investment trust that seeks asset diversification,
capital appreciation and income for distributions to our shareholders primarily
through the acquisition and origination of both government insured and uninsured
mortgages secured by multifamily properties. These investments may take the form
of government insured first mortgages and uninsured mezzanine loans,
construction loans and bridge loans. We may also invest in other real estate
assets, including commercial mortgage-backed securities.
At September 30, 2001, we had total assets of $99.9 million of which $97.7
million represented mortgage investments. At September 30, 2001, approximately
65% of our assets consisted of mortgages guaranteed or insured by a United
States government agency such as the Federal Housing Authority ("FHA") or the
Government National Mortgage Association ("GNMA" or "Ginnie Mae") or by Fannie
Mae. At September 30, 2001, we owned $46.9 million in Ginnie Mae certificates
and had invested $17.7 million in FHA insured first mortgage loans. We generally
seek to maintain 40% of our mortgage investments in government insured or
guaranteed investments.
At September 30, 2001, we owned $7.4 million in mezzanine loans and $5.5
million in bridge loans funded in connection with the development of multifamily
properties which benefit from the Low Income Housing Tax Credit ("LIHTC")
program under Section 42 of the Internal Revenue Code. We also owned an indirect
investment in commercial mortgage-backed securities ("CMBS") through our $20.2
million preferred equity interest in ARCap Investors L.L.C. ("ARCap").
The following chart depicts our mortgage investments as of September 30,
2001:
[graphic omitted]
Through a program with Fannie Mae, we originate construction and permanent
loans for multifamily properties on Fannie Mae's behalf. We guarantee a first
loss position and receive loss sharing and loan origination fees for loans that
we originate. As of September 30, 2001, we originated loans totaling
approximately $2.2 million and
3
have made forward commitments for an additional approximately $6.8 million.
Our maximum exposure under the Fannie Mae program and the forward commitments at
September 30, 2001 was $6.0 million. We have not acquired an interest in any of
the loans we have originated on Fannie Mae's behalf. Since we entered into the
loan program, the level of loan origination competition has increased, reducing
our projected financing volume and profitability. As a result, we are
de-emphasizing this program and evaluating the possibility of transferring our
rights and obligations in the loan program to a third party.
We finance the acquisition of our assets primarily through borrowing at
short term rates using demand repurchase agreements. Under our declaration of
trust, we may incur permanent indebtedness of up to 50% of our total market
value calculated at the time the debt is incurred. Permanent indebtedness and
working capital indebtedness may not exceed 100% of our total market value. Our
declaration of trust provides that we may not change our policy regarding
indebtedness without the consent of a majority in interest of our shareholders.
We were formed in June 1991 as a Massachusetts business trust. From
formation until April 1999, we were a closed-end, finite-life REIT not permitted
to finance or invest beyond the proceeds raised in our initial public offering.
In April 1999, we reorganized the Company into an open-ended, infinite-life REIT
authorized to issue debt and equity securities and make a broader range of
investments. Also in April 1999, we changed our name from American Mortgage
Investors Trust to American Mortgage Acceptance Company. In July 1999, we listed
our shares on the American Stock Exchange.
We have engaged Related AMI Associates, Inc., which we refer to as our
"Advisor," to manage our day-to-day affairs. Our Advisor has subcontracted its
management obligations to its affiliate, Related Capital Company, the nation's
largest non-agency financier of affordable multifamily housing. The management
team responsible for our day-to-day affairs has an average of 12 years of
experience with Related Capital and an average of 20 years experience in the
real estate industry.
Our Industry
We focus our origination and acquisition efforts on several types of
multifamily housing financing. Commercial mortgage lenders originated
multifamily housing loans totaling $26.5 billion in 2000, more than half of
which were insured or guaranteed by an agency of the United States government.
Based upon a Prudential Financial report dated May 2001, we believe that the
estimated total amount of multifamily mezzanine loan originations was $5.77
billion in 2000.
According to the National Multi Housing Council, in the year 2001 there
were 16.1 million apartment units in the United States in buildings of more than
five units valued at over $1.3 trillion. This market has increased from 15.4
million apartment units with an estimated value of $767.1 billion in 1990,
representing an average annual increase in value of 5.5% during the past decade.
Over the past 20 years the multifamily sector has delivered one of the highest
average total investment returns of all real estate property types according to
the National Council of Real Estate Investment Fiduciaries. We believe there
will continue to be a strong demand for multifamily housing related to factors
such as population growth and household formations. The National Association of
Home Builders, in its report released in February 2001, has estimated that this
demand will support production of more than 3.4 million new multifamily units
from 2001 to 2010. Improved capital market discipline, including the lower debt
ratios of America's largest apartment real estate investment trusts, bode well
for the multifamily housing industry. We believe the multifamily housing sector
will continue to be the favored sector for income-producing properties as well
as the top performer in terms of rent increases through mid-2002.
Within the multifamily sector, we focus a portion of our originations on
bridge loans that are secured by interests in affordable multifamily housing. We
believe there is a significant unmet demand for affordable multifamily housing.
According to a United States Department of Housing and Urban Development report
dated January, 2001, 4.9 million households are in need of quality affordable
housing. We believe that affordable multifamily housing provides an excellent
form of collateral, which is further described below under "Our Investment
Strategy -- Bridge Loans."
4
Our Investment Strategy
Since our 1999 reorganization, our goal has been to increase the return on
our asset base by investing in higher yielding assets while balancing our risk
by maintaining a portion of our investments in government agency guaranteed or
insured assets and maintaining a conservative capital structure.
We invest in the following types of assets:
Government Insured and Guaranteed Investments. We generally seek to
maintain approximately 40% of our mortgage investments in government insured or
guaranteed investments. We do this primarily through the acquisition or
origination of mortgage loans on multifamily properties, the principal of which
is insured by FHA, and the acquisition of Ginnie Mae mortgage-backed securities
and pass-through certificates. We may also acquire mortgage-backed securities
insured by Fannie Mae or the Federal Loan Mortgage Corporation ("Freddie Mac").
Government agency insured lending offers us safety, liquidity and moderate
yields, while also providing us with a strong asset base for collateralized
borrowing on favorable terms.
Mezzanine Loans. Mezzanine loans are subordinate to senior mortgages and
generally include a participating component, such as a right to a portion of the
cash flow and refinancing and sale proceeds from the underlying properties.
We seek to capitalize on attractive yields available through the funding of
mezzanine debt in combination with our origination of government insured
multifamily first mortgages. We believe that we are one of the few lenders in
the country who offer mezzanine loans in conjunction with agency-insured first
mortgage loans.
Our mezzanine loans typically finance newly constructed or rehabilitated
market-rate multifamily properties and generally have terms of 40 years with an
option to call the loan on 12 months notice at any time after the 10th
anniversary of the equity loan closing. These loans are typically in a
subordinated mortgage position, are secured by equity interests in the borrower
and have limited recourse to the borrower for the three years from the date of
the loan. We seek properties in growing real estate markets with well
capitalized developers or guarantors. We leverage the expertise of our Advisor
and its affiliates in both the initial underwriting of the property, as well as
in the ongoing monitoring of the property through construction, lease-up and
stabilization.
Bridge Loans. Our bridge loans are typically funded in connection with the
development of multifamily properties which benefit from the LIHTC program. We
believe that since 1989, on average, nearly one-third of each year's new
multifamily property construction contains an affordable component that produces
LIHTCs (from 1989 through 1999 the number of affordable units producing LIHTCs
ranged from 62,000 to 126,000). Due to the equity payment schedule typically
associated with LIHTC investment programs, there can be periods in a
construction cycle where a developer needs short term capital. To capitalize on
this demand, we offer bridge loans to developers with typical terms of
approximately 12 months and which are collateralized by the equity interests in
the property owner. We may also provide bridge loans for properties undergoing
rehabilitation by new owners when we believe the rehabilitation process will add
significant value to the property and reduce our effective loan-to-value ratio
and our risk of loss. Our loans may finance the initial purchase or the
subsequent rehabilitation of a property.
We focus our bridge lending on LIHTC properties because we believe that
default risks ordinarily associated with bridge lending are substantially
reduced by the presence of LIHTCs, the value of which typically averages two to
four times the principal amount of the bridge loan. The beneficial owners of
these LIHTC properties are typically Fortune 500 companies that have invested in
order to receive the tax benefits of the LIHTC which are received ratably over
an 11 year period. In the event that these properties cannot support their debt
service, the beneficial owners have an incentive to maintain the debt service so
that they can avoid foreclosure of their equity interests and the loss of the
tax benefits associated with the LIHTCs. According to Fitch IBCA, loans
underlying CMBS collateralized in part by multifamily properties that benefit
from federal LIHTCs are expected to have reduced risk of default due to indirect
collateral enhancement provided by LIHTCs.
5
Commercial Mortgage-Backed Securities. We may invest in subordinated CMBS,
which offer the advantage of significantly higher yields than government insured
and guaranteed investments. The market values of subordinated interests in CMBS
and other subordinated securities tend to be more sensitive to changes in
economic conditions than senior, rated classes. As a result of these and other
factors, subordinated interests generally are not actively traded and may not
provide holders with liquidity of investment.
We currently invest indirectly in CMBS through our convertible preferred
equity investment in ARCap. ARCap specializes in, and is a recognized industry
leader in investing in, non-investment grade and unrated subordinated CMBS. The
CMBS which comprise ARCap's portfolio are collateralized by a diverse range of
underlying properties including multifamily, retail, office and hotel.
Our Capital Structure
We seek to maintain a conservative capital structure, which we believe
distinguishes us from other more highly leveraged mortgage REITs. In this
regard, our declaration of trust limits our use of debt financing. Our permanent
indebtedness may not exceed 50% of our total market value calculated at the time
the debt is incurred. Furthermore, our permanent indebtedness, when combined
with our working capital indebtedness, may not exceed 100% of our total market
value calculated at the time the debt is incurred. As of September 30, 2001, our
indebtedness, all of which was working capital indebtedness, was $43.2 million
and our ratio of indebtedness to total market value was 43.2%.
Our Advisor
Related Capital, a financial services subsidiary of The Related Companies,
L.P., has specialized in offering debt and equity products to mid-market
multifamily owners and developers for over 29 years and has provided debt and
equity financing for over 1,200 properties valued at over $11 billion and
located in 45 states and Puerto Rico. According to the 2001 National
Multihousing Council survey, Related Capital is the third largest owner of
apartments in the United States with ownership interests in 160,860 apartment
units.
Related Capital is currently the nation's largest non-agency provider of
financing for multifamily federal LIHTC housing. In 2000, Related Capital and
its affiliated entities provided over $900 million of debt and equity financing
for affordable multifamily housing. We benefit from the marketing efforts of
Related Capital's origination groups, which offer our bridge loan program in
connection with LIHTC equity investments to developers nationally. We have
access to Related Capital's proprietary client base, which includes some of the
nation's most active and respected developers of affordable multifamily housing.
We also benefit from Related Capital's underwriting and asset management
expertise. Related Capital, through 13 asset management offices throughout the
country, currently provides asset management services for a portfolio of over
765 multifamily properties.
An affiliate of Related Capital also manages another American Stock
Exchange-listed company, Charter Municipal Mortgage Acceptance Company
("CharterMac"). CharterMac predominately invests in tax-exempt revenue bonds
that secure affordable multifamily housing properties. On October 26, 2001, a
subsidiary of CharterMac announced that it was acquiring PW Funding, Inc., a
national mortgage banking firm specializing in agency lending to multifamily
housing properties. PW Funding is a Fannie Mae Delegated Underwriting and
Servicing program lender and an FHA lender. In addition, one of PW Funding's
subsidiaries is a Freddie Mac Program Plus Lender. The acquisition is expected
to close by the end of the year, subject to Fannie Mae and Freddie Mac approval
and customary conditions. We believe that we will be able to benefit, through
our affiliation with CharterMac's manager, from the PW Funding acquisition as it
may provide us with a pipeline of product for both our bridge lending and our
mezzanine lending products.
The Related Companies, L.P. is one of the nation's largest developers of
premier multifamily and mixed-use real estate assets. Since 1972, The Related
Companies, L.P. and its predecessor, have developed 156 properties, including
142 multifamily properties and 14 commercial properties. Related Management
Company, a division of
6
The Related Companies, L.P., directly manages 153 multifamily rental properties
totaling 19,000 residential units. The Related Companies, L.P. currently has 22
fully-financed developments currently under construction, totaling $3.8 billion,
the largest of which is AOL Time Warner Center, a 2.8 million square foot mixed
use premier property located in Manhattan at the intersection of Central Park
South and Central Park West. The property will feature AOL Time Warner, Inc.'s
world headquarters, including a CNN broadcasting facility, as well as luxury
retail and restaurants, a Mandarin Oriental Hotel and super-luxury, high-rise
residential units.
General Information
We have elected to be treated as a real estate investment trust (a "REIT")
for federal income tax purposes. This treatment permits us to deduct dividend
distributions to our shareholders for federal income tax purposes, thus
effectively eliminating the "double taxation" that generally results when a
corporation earns income and distributes that income to its shareholders by way
of dividends. In order to maintain our status as a REIT, we must comply with a
number of requirements under federal income tax law that are discussed under
"Certain Federal Income Tax Considerations."
Our principal executive offices are located at 625 Madison Avenue, New
York, New York 10022. Our telephone number is (212) 421-5333.
7
The Offering
Common shares of beneficial interest offered by us..... 3,500,000 shares(1)
Common shares of beneficial interest outstanding
after this offering.................................. 7,373,630 shares(2)(3)
American Stock Exchange symbol......................... AMC
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(1) 4,025,000 shares if the underwriters exercise their over-allotment option
in full.
(2) Includes 35,000 shares that we will issue to our Advisor upon completion of
this offering (we will issue an additional 5,250 Shares to our Advisor if
the underwriters exercise their over-allotment in full) pursuant to our
advisory agreement, which entitles our Advisor to receive as compensation a
number of shares equal to 1% of all common shares issued by us.
(3) 7,903,880 shares (including 5,250 shares to be issued as described in
footnote 2 above) if the underwriters exercise their over-allotment option
in full. Does not include 383,924 common shares reserved for issuance under
our Incentive Share Option Plan. Does not include 35,000 common shares
(40,250 assuming exercise of the underwriters' over-allotment) issuable to
the representative of the underwriters upon exercise of its warrant. See
"Underwriting."
Use of Proceeds
We intend to use the net proceeds from the sale of our common shares to
acquire and originate government insured and uninsured mortgage investments
consistent with our investment policy limitations as stated in our declaration
of trust.
The net proceeds from the sale of 3,500,000 common shares will be
approximately $[ ] after deducting the underwriting discount and the estimated
expenses of the offering.
8
Summary Financial Data
The summary financial data as of December 31, 2000, 1999 and 1998 and for
the years then ended are derived from our audited financial statements for those
years. The summary financial data for the nine months ended September 30, 2000
and 2001 are derived from our unaudited financial statements for those periods.
You should read this summary financial data along with "Management's Discussion
and Analysis of Financial Condition and Results of Operations," and our audited
and unaudited financial statements and notes thereto included and incorporated
by reference in this prospectus beginning on page F-1.
Nine Months Ended September 30, Year Ended December 31,
------------------------------- --------------------------------
2001 2000 2000 1999 1998
---- ---- ---- ---- ----
Operating Data:
Mortgage loan income....................... $ 2,256,514 $ 1,188,021 $ 1,565,219 $ 2,569,901 $ 3,037,882
GNMA income................................ 1,354,307 355,962 472,693 785,591 880,680
CMBS income................................ -- 2,867,659 3,189,407 950,456 --
Equity in earnings of ARCap................ 1,788,137 -- 401,096 -- --
Temporary investment income................ 46,544 1,845,770 2,084,417 1,092,617 112,953
Other income............................... 304,345 444,828 598,307 109,017 --
Net (loss) gain on investments............. (211,572) (392,445) (227,541) 3,054,011 12,144
Interest expense........................... (1,099,607) (2,856,936) (3,371,906) (906,581) --
Other expenses............................. (793,384) (1,075,939) (1,393,935) (1,394,712) (647,047)
------------- ------------- ------------- ------------- ------------
Net income................................. $ 3,645,284 $ 2,376,920 $ 3,317,757 $ 6,260,300 $ 3,396,612
============ ============ ============ ============ ===========
Net income per share (basic and diluted)... $ 0.95 $ 0.62 $ 0.86 $ 1.63 $ 0.88
============ ============ ============ ============ ===========
Weighted average shares outstanding (basic
and diluted)............................ 3,838,630 3,838,630 3,838,630 3,841,931 3,845,101
============ ============ ============ ============ ===========
As of September 30, As of December 31,
------------------------------ -----------------------------------------------
Balance Sheet Data: 2001 2000 2000 1999 1998
-------------- -------------- -------------- -------------- --------------
Total assets.........................$ 99,912,427 $ 121,322,167 $ 70,438,313 $ 115,565,441 $ 59,993,040
Repurchase facilities payable........$ 43,191,173 $ 20,061,000 $ 12,655,940 $ 19,127,000 $ --
Total shareholders' equity...........$ 54,720,311 $ 55,453,276 $ 55,075,873 $ 57,091,365 $ 58,204,574
9
Capitalization
Our actual capitalization at September 30, 2001, and our capitalization as
adjusted to give effect to the issuance of 3,500,000 common shares in this
offering at an assumed price of $ per share (the closing price on November ,
2001), is set forth below.
September 30, 2001
---------------------------------------
Actual As Adjusted*
-------------- ----------------
Shares of beneficial interest; par value $.10 per share;
12,500,000 shares authorized; 4,213,826 issued and 3,838,630
outstanding (as adjusted 7,748,826 issued and 7,373,630
outstanding)............................................... $ 421,383 $ 774,883
Treasury shares of beneficial interest; 375,196 shares........ (37,520) (37,520)
Additional paid-in-capital.................................... 68,840,500
Distributions in excess of net income......................... (14,655,543) (14,655,543)
Accumulated other comprehensive income........................ 151,491 151,491
Total...................................................... $54,720,311 $
============ ==============
------------
* After deducting estimated underwriting discounts and commissions and
estimated offering expenses payable by us. Includes 35,000 shares that we
will issue to our Advisor (40,250 if the underwriters exercise their
over-allotment option in full) upon completion of this offering pursuant to
our advisory agreement with our Advisor. Assumes no exercise of the
underwriters' over-allotment option to purchase up to an additional 525,000
shares. Does not include 35,000 common shares (40,250 assuming exercise of
the underwriters' over-allotment) issuable to the representative of the
underwriters upon exercise of its warrant. See "Underwriting."
10
RISK FACTORS
An investment in our common shares involves a number of risks. Before
making an investment decision, you should carefully consider all of the risks
described in this prospectus. If any of the risks discussed in this prospectus
actually occur, our business, financial condition and results of operations
could be materially adversely affected. If this were to occur, the trading price
of our common shares could decline and you may lose all or part of your
investment.
Mortgage investments that are not United States government insured and
non-investment grade mortgage assets involve risk of loss
o General
We intend to continue to originate and acquire uninsured and non-investment
grade mortgage loans and mortgage assets as part of our investment strategy.
Such loans and assets may include mezzanine loans, bridge loans and CMBS. While
holding such interests, we will be subject to risks of borrower defaults,
bankruptcies, fraud and losses and special hazard losses that are not covered by
standard hazard insurance. Also, the costs of financing the mortgage loans could
exceed the return on the mortgage loans. In the event of any default under
mortgage loans held by us, we will bear the risk of loss of principal and
non-payment of interest and fees to the extent of any deficiency between the
value of the mortgage collateral and the principal amount of the mortgage loan.
To the extent we suffer such losses with respect to our investments in mortgage
loans, the value of the Company and the price of our common shares may be
adversely affected.
o Limited recourse loans may limit our recovery to the value of the
mortgaged property
Our mortgage loans are generally non-recourse, except for our mezzanine
loans, which typically have limited recourse provisions for the first three
years from the date of the loan. In addition, limited recourse against the
borrower may be further limited by applicable provisions of the laws of the
jurisdictions in which the mortgaged properties are located or by the selection
of remedies and the impact of those laws on that selection. With respect to our
non-recourse mortgage loans, in the event of a borrower default, the specific
mortgaged property and other assets, if any, pledged to secure the relevant
mortgage loan, may be less than the amount owed under the mortgage loan. As to
those mortgage loans that provide for recourse against the borrower and its
assets generally, there can be no assurance that such recourse will provide a
recovery in respect of a defaulted mortgage loan greater than the liquidation
value of the mortgaged property securing that mortgage loan.
Competition in acquiring desirable mortgage investments may limit the
availability of desirable investments which could, in turn, negatively affect
our ability to maintain our dividend distribution
We compete for mortgage asset investments with numerous public and private
real estate investment vehicles, such as mortgage banks, pension funds, real
estate investment trusts, institutional investors and individuals. Mortgages,
subordinated interests in CMBS and other investments are often obtained through
a competitive bidding process. In addition, competitors may seek to establish
relationships with the financial institutions and other firms from which we
intend to purchase such assets. Many of our anticipated competitors are larger
than us, may have access to greater capital and other resources, may have
management personnel with more experience than our officers or our Advisor and
may have other advantages over us and the Advisor in conducting certain business
and providing certain services. Competition may result in higher prices for
mortgage assets, lower yields and a narrower spread of yields over our borrowing
costs. In addition, competition for desirable investments could delay the
investment of proceeds from this offering in desirable assets, which may, in
turn, reduce earnings per share and may negatively affect our ability to
maintain our dividend distribution. There can be no assurance that we will
achieve investment results that will allow any specified level of cash
distribution.
11
Interest rate fluctuations will affect the value of mortgage assets, net income
and the common shares
o General
Interest rates are highly sensitive to many factors, including governmental
monetary and tax policies, domestic and international economic and political
considerations and other factors beyond our control. Interest rate fluctuations
can adversely affect our income and value of our common shares in many ways and
present a variety of risks, including the risk of a mismatch between asset
yields and borrowing rates, variances in the yield curve and changing prepayment
rates.
o Interest rate mismatch could occur between asset yields and borrowing
rates resulting in decreased yield
Our operating results will depend in large part on differences between the
income from our assets (net of credit losses) and our borrowing costs. We expect
that most of our assets will bear fixed interest rates and will have terms in
excess of five years. We fund the origination and acquisition of a significant
portion of our assets with borrowings which have interest rates that reset
relatively rapidly, such as monthly or quarterly. We anticipate that, in most
cases, the income from our assets will respond more slowly to interest rate
fluctuations than the cost of our borrowings, creating a mismatch between asset
yields and borrowing rates. Consequently, changes in interest rates,
particularly short-term interest rates, may influence our net income. For
example, our borrowings under our repurchase agreements bear interest at rates
that fluctuate with LIBOR. Based on the $43.2 million of borrowings outstanding
under these facilities at September 30, 2001, a 1% change in LIBOR would impact
our annual net income and cash flows by approximately $432,000. Increases in
these rates will tend to decrease our net income and market value of our net
assets. Interest rate fluctuations that result in our interest expense exceeding
interest income would result in our incurring operating losses.
o Prepayment rates can increase, thus adversely affecting yields
The value of our assets may be affected by prepayment rates on investments.
Prepayment rates are influenced by changes in current interest rates and a
variety of economic, geographic and other factors beyond our control, and
consequently, such prepayment rates cannot be predicted with certainty. To the
extent we originate mortgage loans, we expect that such mortgage loans will have
a measure of protection from prepayment in the form of prepayment lock-out
periods or prepayment penalties. However, such protection may not be available
with respect to investments which we acquire, but do not originate. In periods
of declining mortgage interest rates, prepayments on mortgages generally
increase. If general interest rates decline as well, the proceeds of such
prepayments received during such periods are likely to be reinvested by us in
assets yielding less than the yields on the investments that were prepaid. In
addition, the market value of mortgage investments may, because of the risk of
prepayment, benefit less from declining interest rates than from other
fixed-income securities. Conversely, in periods of rising interest rates,
prepayments on mortgages generally decrease, in which case we would not have the
prepayment proceeds available to invest in assets with higher yields. Under
certain interest rate and prepayment scenarios we may fail to recoup fully our
cost of acquisition of certain investments.
We are dependent on our Advisor and if our Advisor terminates our advisory
agreement, we may not be able to find an adequate replacement advisor
We have no employees, although for administrative purposes we have
appointed officers. We have entered into an advisory agreement with our Advisor
under which our Advisor provides us with all of the services vital to our
operations. We are dependent on our Advisor for the management and
administration of our business and investments. The results of our operations
will be dependent upon the availability of, and our Advisor's ability to
identify and capitalize on, investment opportunities. The agreement may be
terminated (i) without cause by our Advisor or (ii) with or without cause by a
majority of our independent trustees, each without penalty and each upon 60
days' prior written notice to the non-terminating party. If our Advisor
terminates our agreement, we may not be able to find an adequate replacement
advisor.
12
Conflicts of interest could arise among our Advisor, Related Capital and us with
respect to investment opportunities
Our Advisor has subcontracted to Related Capital the obligation to provide
the services which our Advisor is required to provide under an advisory
agreement with us. There are risks involved with this arrangement. Under our
advisory agreement, our Advisor and Related Capital are permitted to act as
advisor to any other person or entity having investment policies similar to
ours, including other real estate investment trusts. Generally, in conflict
situations with non-affiliated entities, our Advisor must present an investment
opportunity to us if the opportunity is within our investment objectives and
policies, the opportunity is of a character that could be taken by us, and we
have the financial resources to take advantage of the opportunity. However, to
the extent that other companies advised by or affiliated with our Advisor or
Related Capital have similar investment objectives to ours and have funds
available for investment at the same time as us or to the extent that an
investment is potentially suitable for us and at least one such entity,
conflicts of interest could arise as to which entity should acquire the
investment.
Related Capital effectively controls and manages a closed-end publicly held
limited partnership with similar investment objectives that may invest in
mortgages suitable for investment by us (although, barring reinvestment of
refinancing proceeds, this entity has fully invested its available funds and is
not permitted to raise additional capital). In addition, an affiliate of Related
Capital is the manager of Charter Municipal Mortgage Acceptance Company
("CharterMac"), which is an American Stock Exchange-listed company which invests
primarily in tax-exempt mortgage investments but has in the past, and may in the
future, invest in taxable mortgage investments similar to those in which we
invest. For example, CharterMac has recently acquired an interest in ARCap.
Finally Related Capital also effectively controls two Delaware limited liability
companies whose principal lines of business have been the arrangement of credit
enhancements for tax-exempt revenue bonds, although from time to time they may
invest in taxable mortgage investments similar to ours. As of the date of this
prospectus, neither entity is actively operating.
To the extent that these entities, as well as affiliated entities which may
be formed by affiliates of Related Capital in the future, have funds available
for investment at the same time as us and a potentially suitable investment is
offered to us or the affiliated entity, our Advisor will review the affiliated
entity's and our investment portfolios and will determine whether or not the
investment should be made by the affiliated company or by us based upon factors
such as the amount of funds available for investment, yield and portfolio
diversification. If the making of a mortgage loan or other mortgage investment
appears equally appropriate for these entities, the mortgage loan or other
mortgage investment will either be made by a joint venture between two or more
such entities, or will be allocated to one program on a basis of rotation with
the initial order of priority determined by the dates of formation of the
programs.
Conflicts of interest could arise in transactions where we lend to borrowers
affiliated with Related Capital
We have invested in, and may in the future invest in, mortgage investments
secured by properties in which either direct or indirect affiliates of Related
Capital own equity interests in the borrower. Our declaration of trust requires
that any transaction between our Advisor, Related Capital or any of their
affiliates and us be approved by a majority of trustees, including a majority of
the independent trustees, not otherwise interested in the transaction, as being
fair and reasonable and on terms not less favorable to us than those available
from unaffiliated third parties. As of September 30, 2001, we have 6 mortgage
investments to borrowers that are affiliates of Related Capital totaling
approximately $11,728,000. Typically, these affiliate borrowers are limited
partnerships where the general partner is either an affiliate of Related Capital
or an unaffiliated third party with a 1% general partnership interest and the
99% limited partner is a limited partnership in which an affiliate of Related
Capital owns a 1% general partnership interest and one or more Fortune 500
companies own a 99% limited partnership interest.
Every transaction entered into between us and a Related Capital affiliate
raises a potential conflict of interest. In addition to the initial
determination to invest in mortgage investments secured by properties owned by a
Related Capital affiliate, such conflicts of interest with respect to these
mortgage investments include, among others, decisions regarding (i) whether to
waive defaults of such Related Capital affiliate, (ii) whether to foreclose on a
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loan, and (iii) whether to permit additional financing on the properties
securing our investments other than financing provided by us.
We may not accurately assess investment yields, which may result in losses to us
Before making any investment, our Advisor will consider the expected yield
of the investment and the factors that may influence the yield actually obtained
on such investment. These considerations will affect our or our Advisor's
decision whether to purchase such an investment and the price offered for such
an investment. No assurances can be given that we or our Advisor can make an
accurate assessment of the yield to be produced by an investment. Many factors
beyond our and our Advisor's control are likely to influence the yield on the
investments, including, but not limited to, competitive conditions in the local
real estate market, local and general economic conditions and the quality of
management of the underlying property. Our Advisor's inability to accurately
assess investment yields may result in our purchasing assets that do not perform
as well as expected, which may adversely affect the price of our common shares.
In our loan program with Fannie Mae, we guarantee a first loss position
Under our loan program with Fannie Mae we may originate, on Fannie Mae's
behalf, up to $250 million in construction and permanent loans for multifamily
properties. In the event we were to originate $250 million in loans pursuant to
this program, we would guarantee a first loss position on these loans equal to
the amount lost on the loans of up to a maximum of $21.25 million. If defaults
occur on loans originated by us then we may be required to make an immediate
cash payment of up to the total amount of our first loss position. As of
September 30, 2001, we originated, on Fannie Mae's behalf, loans totaling
approximately $2.2 million and have made forward commitments for an additional
approximately $6.8 million. We also guaranteed construction loans for which we
have issued a forward commitment to originate a loan under the Fannie Mae
program, with respect to which we guarantee repayment of 100% of such
construction loans. Our maximum exposure under the Fannie Mae program and the
forward commitments at September 30, 2001 was $6.0 million. We have not acquired
an interest in any of the loans we have originated on Fannie Mae's behalf.
Volatility of values of mortgaged properties may adversely affect our mortgage
loans
Multifamily and commercial property values and net operating income derived
from such properties are subject to volatility and may be affected adversely by
a number of factors, including, but not limited to, national, regional and local
economic conditions (which may be adversely affected by industry slowdowns and
other factors); local real estate conditions (such as an oversupply of housing,
retail, industrial, office or other commercial space); changes or continued
weakness in specific industry segments; construction quality, age and design;
demographic factors; retroactive changes to building or similar codes; and
increases in operating expenses (such as energy costs). In the event net
operating income decreases, a borrower may have difficulty paying our mortgage
loan, which could result in losses to us. In addition, decreases in property
values reduce the value of the collateral and the potential proceeds available
to a borrower to repay our mortgage loans, which could also cause us to suffer
losses.
We are subject to construction completion risks
Some of our mortgages are secured by multifamily housing properties which
are still in various stages of construction. Construction of such properties
generally takes approximately 12 to 24 months. The principal risk associated
with construction lending is the risk of noncompletion of construction which may
arise as a result of: (i) underestimated initial construction costs (ii) cost
overruns during construction (iii) delays in construction (iv) failure to obtain
governmental approvals and (v) adverse weather and other unpredictable
contingencies beyond the control of the developer. If a mortgage loan is called
due to construction not being completed as required in the mortgage loan
documents, we may determine to expend additional capital in order to preserve
our investment.
In order to minimize certain risks which may occur during the construction
phase of a property, our Advisor endeavors to obtain in most instances one or
more types of security during such period, including a construction completion
guarantee from the principals of the property owner, personal recourse to the
property owner and
14
payment and performance bonding of the general contractor, if any, with respect
to a property securing our investment. In addition, our Advisor may require
principals of the property owner to provide us with an operating deficit
guarantee, covering operating deficits of a property securing an investment
during an agreed-upon period. We may not be able, however, to obtain such
security with respect to certain properties. In other cases, we may decide to
forego certain types of available security if we determine that the security is
not necessary or is too expensive to obtain in relation to the risks covered.
Bridge and mezzanine loans involve greater risks of loss than senior loans
secured by income producing properties
We have acquired and expect to continue to acquire bridge and mezzanine
loans. These types of mortgage loans are considered to involve a higher degree
of risk than long-term senior mortgage lending secured by income-producing real
property due to a variety of factors, including the loan becoming unsecured as a
result of foreclosure by the senior lender. We may not recover some or all of
our investment in such loans. In addition, bridge loans and mezzanine loans may
have higher loan to value ratios than conventional mortgage loans resulting in
less equity in the property and increasing the risk of loss of principal.
Subordinated interests are subject to increased risk of first loss or
non-investment grade subordinated interests
We have invested indirectly in subordinated CMBS through our ownership of a
preferred membership interest in ARCap Investors L.L.C. ("ARCap"). Subordinated
CMBS of the type in which ARCap invests include "first loss" and non-investment
grade subordinated interests. A first loss security is the most subordinate
class in a structure and accordingly is the first to bear the loss upon a
default on restructuring or liquidation of the underlying collateral and the
last to receive payment of interest and principal. Such classes are subject to
special risks, including a greater risk of loss of principal and non-payment of
interest than more senior, rated classes. The market values of subordinated
interests in CMBS and other subordinated securities tend to be more sensitive to
changes in economic conditions than more senior, rated classes. As a result of
these and other factors, subordinated interests generally are not actively
traded and may not provide holders with liquidity of investment. With respect to
our investment in ARCap, our ability to transfer our membership interest in
ARCap is further limited by the terms of ARCap's operating agreement.
Participating interests in mortgages may not be available and even if obtained
may not be realized
In connection with the acquisition and origination of mortgages, we have
obtained and may continue to obtain participating interests that may entitle us
to payments based upon a development's cash flow, profits or any increase in the
value of the development that would be realized upon a refinancing or sale of
the development. Competition for participating interests is dependent to a large
degree upon market conditions. Participating interests are more difficult to
obtain when mortgage financing is available at relatively low interest rates. In
the current interest rate environment, we may have greater difficulty obtaining
participating interests. Participating interests are not government insured or
guaranteed and are therefore subject to the general risks inherent in real
estate investments. Therefore, even if we are successful in investing in
mortgage investments which provide for participating interests, there can be no
assurance that such interests will result in additional payments to us.
Short-term repurchase agreements are our primary method of financing and they
involve risk of loss
We primarily finance and expect to continue to finance primarily through
collateralized borrowing in the form of repurchase agreements, which involve the
sale by us of assets concurrently with an agreement by us to repurchase such
assets at a later date at a fixed price. During the repurchase agreement period,
we continue to receive principal and interest payments on the assets. The use of
borrowing, or "leverage," to finance our assets involves a number of risks,
including the following:
15
o If we are unable to renew our borrowings at favorable rates, we may be
forced to sell assets and our profitability may be adversely affected.
We rely primarily on short-term repurchase agreements to finance our
assets. Our ability to achieve our investment objectives depends on our ability
to borrow money in sufficient amounts and on favorable terms and our ability to
renew or replace maturing short-term borrowings on a continuous basis. If we are
not able to renew or replace maturing borrowings, we would be forced to sell
some of our assets under possibly adverse market conditions, which may adversely
affect our profitability. As of September 30, 2001, we had borrowings of $43.2
million outstanding under our repurchase facilities, all of which have 30 day
settlement terms.
o A decline in the market value of our assets may result in margin calls
that may force us to sell assets under adverse market conditions.
Repurchase agreements involve the risk that the market value of the
securities sold by us may decline and that we will be required to post
additional collateral, reduce the amount borrowed or suffer forced sales of the
collateral. If forced sales were made at prices lower than the carrying value of
the collateral, we would experience additional losses. If we are forced to
liquidate our assets to repay borrowings, there can be no assurance that we will
be able to maintain compliance with the REIT asset and source of income
requirements.
o Our use of repurchase agreements to borrow money may give our lenders
greater rights in the event of bankruptcy.
Our total borrowings of $43.2 million at September 30, 2001 were made using
repurchase agreements which require us to pledge certain of our assets to the
respective lenders to secure our obligations thereunder. Borrowings made under
repurchase agreements may qualify for special treatment under the Bankruptcy
Code, which may make it difficult for us to recover our pledged assets if a
lender files for bankruptcy. In addition, if we were to file for bankruptcy,
lenders under our repurchase agreements may be able to avoid the automatic stay
provisions of the Bankruptcy Code and take possession of, and liquidate, the
assets we pledged under these agreements without delay.
o Liquidation of collateral may jeopardize our REIT status
To continue to qualify as a REIT, we must comply with requirements
regarding our assets and our sources of income. If we are compelled to liquidate
our mortgage investments to satisfy our obligations to our lenders, we may be
unable to comply with these requirements, ultimately jeopardizing our status as
a REIT. For further discussion of the asset and source of income requirements,
and the consequences of our failure to continue to qualify as a REIT, please see
the "Certain Federal Income Tax Considerations" section of this prospectus.
Hedging transactions can limit gains and increase exposure to losses
Although we have not entered into any hedging transactions to date, we may
enter into such transactions primarily to protect us from the effects of
interest rate fluctuations on floating rate debt and also to protect our
portfolio of mortgage assets from interest rate and prepayment rate
fluctuations. Hedging activities may not have the desired beneficial impact on
our results of operations or financial condition. Moreover, no hedging activity
can completely insulate us from the risks associated with changes in interest
rates and prepayment rates.
Hedging involves risk and typically involves costs, including transaction
costs. Such costs increase as the period covered by the hedging increases and
during periods of rising and volatile interest rates. Such costs will limit the
amount of cash available for distributions to shareholders. We intend generally
to hedge as much of the interest rate risk as the Advisor determines is in our
best interests given the cost of such hedging transactions.
REIT provisions of the Internal Revenue Code of 1986, as amended (the
"Code"), may limit our ability to hedge our assets and related borrowings. Any
limitation on our use of hedging techniques may result in greater interest rate
risk.
16
Risks related to loans secured by properties that benefit from LIHTCs
The success of our investments in loans secured by properties that benefit
from using LIHTCs will be based in part on the results of operations of the
underlying properties. The value of such loans and the quality of the underlying
properties as collateral for such loans may be affected by other factors, such
as property resale and other restrictive terms.
o Regulations prevent sales of underlying properties for a 15 year
period
The law governing LIHTCs generally prohibits the owners of such properties
from selling the properties during a 15 year tax credit compliance period and
then may require, unless waived, that beginning in year 14 the properties be
offered for sale for approximately a one year period of time at the same price
originally paid for them plus an annual cost of living inflation factor. The
properties will be at least 15 years old when they are sold and may not sell for
the same price as new properties. Factors outside the owner's control, such as
demand for apartments and real estate values generally, will determine whether
the properties can be sold for more than the owner invested in them or the
amount of our mortgage loan. The properties are required to be leased to
low-income tenants at restricted rentals for periods in excess of the 15 year
tax credit compliance period.
o Terms of government financings could limit revenues
If a property receives government assistance or financing, the terms of the
government assistance or financing (e.g., tenant eligibility, approvals for rent
increases, limitations on the percentage of income which low- and
moderate-income tenants may pay as rent) could limit the revenue from the
property and depress its value and thereby jeopardize the owner's ability to
repay our mortgage loan. There can be no assurance that government assistance
programs which are intended to benefit a property will be continued by the
assistance provider and that if such assistance is not continued that the
property will generate sufficient additional revenue to substitute for the
discontinued government assistance so as to meet its mortgage or operating
obligations.
Geographic concentration and the credit quality of borrowers may result in
losses
We have not established any limit upon the geographic concentration of
properties securing mortgage loans acquired or originated by us or the credit
quality of borrowers of uninsured mortgage assets acquired or originated by us.
As a result, properties securing our mortgage loans may be overly concentrated
in certain geographic areas and the underlying borrowers of our uninsured
mortgage assets may have low credit quality. We may experience losses due to
geographic concentration or low credit quality.
Changes in mortgage loan programs could adversely affect us
We could be hindered in making investments by adverse changes in the FHA
insurance, Ginnie Mae or Fannie Mae guarantee programs or rules or regulations
relating to them. Generally, once a mortgage has been endorsed for insurance or
guaranteed, subsequent amendments to the rules or regulations would not apply
retroactively to affect preexisting investments, but could affect prospective
investments. Changes to the guarantee programs could adversely affect our
ability to originate or acquire attractive investments.
There are a number of risks associated with being taxed as a REIT
Our REIT status subjects us and our shareholders to a number of risks,
including the following:
o Failure to qualify as a REIT would have adverse tax consequences
for us
In order to maintain our REIT status we must meet a number of requirements.
These requirements are highly technical and complex and often require an
analysis of various factual matters and circumstances that may not be totally
within our control. Even a technical or inadvertent mistake could jeopardize our
REIT status. Furthermore, Congress and the IRS may make changes to the tax laws
and regulations, and the courts may issue new rulings, that
17
make it more difficult or impossible for us to remain qualified as a REIT. If we
fail to qualify as a REIT, we would be subject to federal income tax at regular
corporate rates. Therefore, we would have less money available for investments
and for distributions to our shareholders. This may also have an adverse effect
on the market value of our shares. In general, we would not be able to elect
REIT status for four years after a year in which we lose our REIT status.
o As a REIT, our income can only come from limited types of sources
To qualify as a REIT, at least 75% of our gross income must come from
qualified real estate sources and 95% of our gross income must come from other
sources that are itemized in the REIT tax laws. Therefore, we may have to forego
opportunities to invest in potentially profitable businesses or assets because
they would produce income that could jeopardize our status as a REIT.
o We have certain distribution requirements
As a REIT, we must distribute to shareholders at least 90% of our REIT
taxable income (excluding capital gains). The required distribution limits the
amount we have available for other business purposes, including amounts to fund
our growth. Also, it is possible that because of the differences between the
time we actually receive revenue (such as original issue discount interest
income attributable to our investment in ARCap) or pay expenses and the period
we report those items for distribution purposes, we may have to borrow funds on
a short-term basis to meet the 90% distribution requirement.
o We are also subject to other tax liabilities
As a REIT, we may be subject to certain federal, state and local taxes on
our income and property. Any of these taxes would reduce our operating cash
flow.
For further discussion of the risks associated with REIT taxation, please
see the "Certain Federal Income Tax Considerations" section of this prospectus.
Loss of Investment Company Act exemption would adversely affect us
We intend to conduct our business so as not to become regulated as an
investment company under the Investment Company Act. If we fail to qualify for
this exemption then we would be regulated as an investment company and our
business would be materially adversely affected. Investment company regulations
would prevent us from conducting our business as described in this prospectus
by, among other restrictions, reducing our ability to use borrowings. The
Investment Company Act exempts entities that are primarily engaged in the
business of purchasing or otherwise acquiring mortgages and other liens on and
interests in real estate. Under the current interpretation of Securities
Exchange Commission staff, in order to qualify for this exemption, we must
maintain at least 55% of our assets directly in these qualifying real estate
interests. Mortgage-backed securities that do not represent all the certificates
issued with respect to an underlying pool of mortgages may be treated as
securities separate from the underlying mortgage loans and, thus, may not
qualify for purposes of the 55% requirement. Therefore, our ownership of these
mortgage-backed securities is limited by the provisions of the Investment
Company Act. In meeting the 55% requirement under the Investment Company Act, we
treat as qualifying interests mortgage-backed securities issued with respect to
an underlying pool as to which we hold all issued certificates. If the
Commission or its staff adopts a contrary interpretation, we could be required
to sell a substantial amount of our mortgage-backed securities under potentially
adverse market conditions. Further, in order to insure that we at all times
qualify for the exemption from the Investment Company Act, we may be precluded
from acquiring mortgage-backed securities whose yield is somewhat higher than
the yield on mortgage-backed securities that could be purchased in a manner
consistent with the exemption. The net effect of these factors may be to lower
our net income.
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Restrictions on share accumulation in REITs could discourage a change of control
of the Company
In order for us to qualify as a REIT, not more than 50% of the number or
value of the outstanding shares may be owned, directly or indirectly, by five or
fewer individuals during the last half of a taxable year or during a
proportionate part of a shorter taxable year.
In order to prevent five or fewer individuals from acquiring more than 50%
of our outstanding shares, and our resulting failure to qualify as a REIT, our
declaration of trust provides that, subject to certain exceptions, no person may
own, or be deemed to own by virtue of the attribution provisions of the Code,
more than 9.8% of the outstanding shares. The shares most recently acquired by a
person that are in excess of the 9.8% limit will not have any voting rights and
be deemed to have been offered for sale to us for a period subsequent to the
acquisition. Any person who acquires shares in excess of the 9.8% limit is
obliged to immediately give written notice to us and provide us with any
information we may request in order to determine the effect of the acquisition
on our status as a REIT.
While these restrictions are designed to prevent any five individuals from
owning more than 50% of our shares, they also discourage a change in control of
the Company. These restrictions may also deter tender offers that may be
attractive to shareholders or limit the opportunity for shareholders to receive
a premium for their shares if an investor makes purchases of shares to acquire a
block of shares.
Supermajority voting requirements for acquisitions and mergers could discourage
a change of control of the Company
Our declaration of trust requires that 80% of our shareholders and all of
our independent trustees approve exchange offers, mergers, consolidations or
similar transactions involving us in which our shareholders receive securities
in a surviving entity having materially different investment objectives and
policies, or that is anticipated to provide significantly greater compensation
to management, except for transactions affected because of changes in applicable
law, or to preserve tax advantages for a majority in interest of our
shareholders.
Issuances of large amounts of our shares could cause our share price to decline
As of September 30, 2001, there were 3,838,630 common shares outstanding.
This prospectus relates to the sale of up to an additional 3,500,000 common
shares, which may be increased to 4,025,000 common shares if the underwriters
fully exercise their over-allotment option. Furthermore, in connection with this
offering and the issuance of any shares in the future, the Advisor is entitled
to receive as compensation shares equal to 1% of the issuance, which shares vest
over a three year period and are restricted as to their transferability until
they vest. The Advisor will receive 35,000 shares (40,250 shares if the
underwriters exercise their overallotment option in full) in connection with
this offering. We have also granted to the representative of the underwriters
warrants to purchase up to 35,000 common shares (40,250 in the event the
underwriters exercise their over-allotment option). See "Underwriting." In
addition, we may issue common shares under our Incentive Share Option Plan,
which currently provides for the issuance of up to 383,863 common shares.
Finally, our declaration of trust permits our trustees to issue an unlimited
number of shares (subject to the consent of shareholders if required pursuant to
the rules of the American Stock Exchange).The issuance of shares could cause
dilution of our existing shares and a decrease in the market price.
The recent terrorist attacks in the United States may have a negative effect on
our earnings
The terrorist attacks which occurred in New York City and Washington D.C.
on September 11, 2001, and the subsequent military actions taken by the United
States and its allies in response, have caused significant uncertainty in the
global financial markets. While the short-term and long-term effects of these
events and their potential consequences are uncertain, they could have a
material adverse effect on general economic conditions, consumer confidence and
market liquidity. Among other things, it is possible that short-term interest
rates may be affected by these events. If short-term interest rates increase
rapidly, it would cause our borrowing costs to increase in comparison to the
interest rates we earn on our mortgage investments. If that were to happen, our
earnings would be negatively affected. In addition, the rate of prepayment on
the mortgages underlying our mortgage investments
19
could increase as a result of adverse economic conditions, changes in interest
rates and other factors, all of which could be affected by the events of
September 11, 2001 and their aftermath.
Possible Shareholder Liability
It is possible that certain states may not recognize the limited liability
of shareholders, although our declaration of trust provides that our
shareholders shall not be subject to any personal liability for our acts or
obligations. Our declaration of trust also provides that every written agreement
entered into by us shall contain a provision that our obligations are not
enforceable against our shareholders personally. No personal liability should
attach to our shareholders under any agreement containing such provision;
however, not every written agreement entered into by us contains such a
provision. In certain states, our shareholders may be held personally liable for
contract claims where the underlying agreement does not specifically exclude
shareholder liability. Our shareholders may also be held personally liable for
other claims against us, such as tort claims, claims for taxes and certain
statutory liability. Upon payment of any such liability, however, the
shareholder will, in the absence of willful misconduct on the shareholder's
part, be entitled to reimbursement from our general assets, to the extent such
assets are sufficient to satisfy the claim.
Liability relating to environmental matters may impact the value of the
underlying properties
Under various federal, state and local laws, an owner or operator of real
property may become liable for the costs of removal of certain hazardous
substances released on its property. Such laws often impose liability without
regard to whether the owner or operator knew of, or was responsible for, the
release of such hazardous substances. The presence of hazardous substances may
adversely affect an owner's ability to sell real estate or borrow using real
estate as collateral. To the extent that an owner of an underlying property
becomes liable for removal costs, the ability of the owner to make debt payments
may be reduced, which in turn may adversely affect the value of the relevant
mortgage asset held by us.
Cost of compliance with Americans With Disabilities Act and fire and safety
regulations
Certain underlying properties may be required to comply with the Americans
with Disabilities Act, which has separate compliance requirements for "public
accommodations" and "commercial facilities," but generally requires that
buildings be made accessible to disabled people. Compliance with the Americans
with Disabilities Act could require removal of access barriers and noncompliance
could result in imposition of fines by the U.S. government or an award of
damages to private litigants.
In addition, owners are required to operate properties in compliance with
fire and safety regulations, building codes, and other land use regulations.
Compliance with such requirements may require owners to make substantial capital
expenditures and these expenditures may impair an owner's ability to make debt
payments, which in turn may adversely affect the value of the relevant mortgage
asset held by us.
20
OUR COMPANY
Formation and Background
Our Company was formed on June 11, 1991 as a Massachusetts business trust.
We have elected to be treated as a real estate investment trust ("REIT") for
federal income tax purposes.
From formation until April 1999, we were a closed-end, finite-life REIT not
permitted to finance or invest beyond the proceeds raised in our initial public
offering. We invested our initial public offering proceeds primarily in
government insured mortgages and guaranteed mortgage-backed certificates. In
April 1999, we reorganized the Company into an open-ended, infinite life REIT
authorized to issue debt and equity securities and make a broader range of
investments.
In April 1999, we changed our name from American Mortgage Investors Trust
to American Mortgage Acceptance Company. Our shares of beneficial interest began
trading on the American Stock Exchange on July 1, 1999 under the symbol "AMC".
As of November 29, 2001, there were 3,838,630 common shares of beneficial
interest outstanding.
Portfolio
At September 30, 2001, we had total assets of $99.9 million of which $97.7
million represented mortgage investments. At September 30, 2001, approximately
65% of our assets consisted of mortgages guaranteed or insured by a United
States government agency such as the Federal Housing Authority ("FHA") or the
Government National Mortgage Association ("GNMA" or "Ginnie Mae") or by Fannie
Mae. At September 30, 2001, we owned $46.9 million in Ginnie Mae certificates
and had invested $17.7 million in FHA insured first mortgage loans. We generally
seek to maintain 40% of our mortgage investments in government insured or
guaranteed investments.
At September 30, 2001, we owned $7.4 million in mezzanine loans and $5.5
million in bridge loans funded in connection with the development of multifamily
properties which benefit from the Low Income Housing Tax Credit ("LIHTC")
program under Section 42 of the Internal Revenue Code. We also owned an indirect
investment in commercial mortgage-backed securities ("CMBS") through our $20.2
million preferred equity interest in ARCap Investors L.L.C. ("ARCap").
Ginnie Mae Certificates
As of September 30, 2001, our portfolio included six Government National
Mortgage Association ("GNMA" or "Ginnie Mae") certificates.
Ginnie Mae is a wholly owned United States government corporation within
the Department of Housing and Urban Development created to support a secondary
market in government-insured and guaranteed mortgage loans. Ginnie Mae
guarantees the timely payment of principal and interest on its securities, which
are backed by pools of FHA and other government agency insured or guaranteed
mortgages. Ginnie Mae certificates are backed by the full faith and credit of
the United States government. Ginnie Mae's are widely held and traded
mortgage-backed securities and therefore provide a high degree of liquidity.
The yield on the GNMA certificates will depend, in part, upon the rate and
timing of principal prepayments on the underlying mortgages in the asset pool.
Generally, as market interest rates decrease, mortgage prepayment rates increase
and the market value of interest rate sensitive obligations like the GNMA
certificates increases. As market interest rates increase, mortgage prepayment
rates tend to decrease and the relative market value of interest rate sensitive
obligations like the GNMAs tends to decrease. The effect of prepayments on yield
is greater the earlier a prepayment of principal is received. Certain of our
GNMAs that are collateralized by mortgage loans on multifamily properties are
generally less subject to prepayment because they have prepayment lockout
periods and prepayment penalties.
21
Our portfolio of Ginnie Mae certificates as of September 30, 2001 is
summarized in the table below.
Carrying Outstanding Coupon
Certificate Amount Balance Rate Final Payment
----------------------- ---------- ------------ ---------- ---------------
Western Manor $ 2,496,415 $ 2,496,416 7.125% March 2029
Elmhurst Village(1) 19,602,489 19,480,735 7.745% January 2042
Hollows Apartments(2) 8,351,495 8,372,426 7.620% January 2042
Copper Commons 2,106,586 2,111,865 8.500% August 2029
Reserve at Autumn Creek(3) 13,301,105 13,218,490 7.745% January 2042
Sun Coast Capital 1,010,715 982,697 7.000% April 2027
-------------- ------------- ---------- ---------------
Total/Weighted average $ 46,868,805 $ 46,662,629 7.711%(4) October 2040(4)
============== ============= ========== ===============
------------
(1) Construction loan certificate with a remaining balance to fund of $2,267,465.
(2) Construction loan certificate with a remaining balance to fund of $573,674.
(3) Construction loan certificate with a remaining balance to fund of $3,320,210.
(4) Weighted average based on total amount committed for the construction costs.
FHA Insured First Mortgage Loans
As of September 30, 2001, our portfolio included two FHA insured first
mortgage loans. The FHA is part of the United States Department of Housing and
Urban Development created in 1934 under the National Housing Act to insure
mortgages made to finance the construction, rehabilitation, purchase and
refinancing of multifamily residential housing and other developments. Mortgage
loans insured by the FHA generally have 40 year terms, not including any
construction period, and are backed by the full faith and credit of the United
States.
Our portfolio of FHA insured first mortgage loans as of September 30, 2001
is summarized in the table below.
Outstanding
Carrying Mortgage
Property Location Amount Balance Interest Rate Maturity
---------------------- --------------- ------------ ------------ -------------- -------------------
Columbiana Lakes Columbia, SC $ 9,099,026 $ 8,919,374 7.250% November 2035
Stony Brook Village II East Haven, CT 8,629,584 8,342,532 7.625% June 2037
------------ ------------ ---------- -----------------
Total/Weighted average $ 17,728,610 $ 17,261,906 7.4312%(1) September 2037(1)
============ ============ ========== =================
------------
(1) Weighted average based on outstanding mortgage balance.
The Columbiana Lakes FHA first mortgage was repaid on October 1, 2001,
under an agreement with the obligor of the Columbiana Lakes FHA first mortgage
and related mezzanine loan. Pursuant to the agreement, we accepted $9.6 million
in settlement of amounts due on both loans, resulting in a loss on repayment of
approximately $212,000, which was recorded during the three months ended
September 30, 2001.
Mezzanine Financing
Mezzanine loans are subordinate to senior mortgages and may include a
participating component, such as a right to a portion of the cash flow and
refinancing and sale proceeds from the underlying properties.
We seek to capitalize on attractive yields available through the funding of
mezzanine debt in combination with our origination of government insured
multifamily mortgages. We believe that we are one of the few programs in the
country that offer this mezzanine lending in connection with agency insured
first mortgage loans.
22
Our mezzanine loans typically finance newly constructed or rehabilitated
market-rate multifamily properties and generally have terms of 40 years with an
option to call the loan on 12 months notice at any time after the tenth
anniversary of the equity loan closing. These loans are typically in a
subordinated mortgage position, are secured by equity interests in the borrower
and have limited recourse to the borrower for the three years following the date
of the loan. We seek properties in growing real estate markets with well
capitalized developers or guarantors. We leverage the expertise of our Advisor
and its affiliates in both the initial underwriting of the property, as well as
in the ongoing monitoring of the property through construction, lease-up and
stabilization.
Our portfolio of mezzanine loans as of September 30, 2001, is summarized in
the table below.
Number of Outstanding Effective
Apartment Carrying Principal Interest
Property Location Units Occupancy Amount Balance Rate(3) Maturity
------------------- ------------- ----------- --------- -------- ---------- ---------- ----------------
Columbiana Lakes(2) Columbia, SC 204 98.50% $ 146,536 $ 563,000 N/A(2) November 2035(3)
Elmhurst Village Oveido, FL 313 44.70%(5) 2,415,981 2,874,000 10.00% January 2042
Hollows Apartments Greenville, NC 184 66.98%(5) 1,376,731 1,549,200 10.00% January 2042
Plaza At San
Jacinto(1) Houston, TX 132 95.50% 1,121,039 1,150,000 11.00% January 2043
Reserve at Autumn
Creek Friendswood, TX 212 30.00%(5) 1,920,791 1,987,000 10.00% January 2042
Stony Brook
Village II East Haven, CT 125 99.40% 394,960 763,909 15.33% June 2037
----- ----------- ----------- -------- ----------------
Total/Weighted average 1,170 $ 7,376,038 $ 8,887,109 10.63%(4) November 2041(4)
===== =========== =========== ========= ================
------------
(1) Funded on an earn-out basis based on property performance. Remaining committed balance is $100,000.
(2) Repaid on October 1, 2001. See "FHA Insured First Mortgage Loans" above.
(3) Interest on the mezzanine loans is based on a fixed percentage of the unpaid principal balance of the
related first mortgage loan. The amount shown is the approximate effective
rate earned on the balance of the mezzanine loan.
(4) Weighted average based on outstanding mortgage balance.
(5) Construction not complete and occupancy figure reflects current occupancy as
a ratio of total planned units.
Bridge Loans to LIHTC properties
Our bridge loans are typically funded in connection with the development of
multifamily properties which benefit from the LIHTC program. We believe that
since 1989, on average, nearly one-third of each year's new multifamily property
construction contains an affordable component that produces LIHTCs (from 1989
through 1999 the number of affordable units producing LIHTCs ranged from 62,000
to 126,000). Due to the equity payments schedule associated with the LIHTC
investment programs, there can be periods in a construction cycle where a
developer needs short term capital. To capitalize on this demand, we offer
developers bridge loans with typical terms of approximately 12 months
collateralized by the equity interests in the property owner. We may also
provide bridge loans for properties undergoing rehabilitation by new owners when
we believe the rehabilitation process will add significant value to the property
and reduce our effective loan-to-value ratio and our risk of loss. Our loans may
finance the initial purchase or the subsequent rehabilitation.
We focus our bridge lending on LIHTC properties because we believe that
default risks ordinarily associated with bridge lending are substantially
reduced by the presence of LIHTCs, the value of which typically averages two to
four times the principal amount of the bridge loan. The beneficial owners of
these LIHTC properties are typically Fortune 500 companies that have invested in
order to receive the tax benefit of the LIHTC which are received ratably over an
11 year period. In the event that these properties cannot support their debt
service, the beneficial owners have an incentive to maintain the debt service so
that they can avoid foreclosure of their equity interests and
23
the loss of the tax benefits associated with the LIHTCs. According to Fitch
IBCA, loans underlying CMBS collateralized in part by multifamily properties
that benefit from federal LIHTCs are expected to have reduced risk of default
due to indirect collateral enhancement provided by LIHTCs.
Our portfolio of bridge loans as of September 30, 2001 is summarized in the
table below.
Remaining
Number of Outstanding Committed
Apartment Carrying Principal Balance to Interest
Property Location Units Amount Balance Fund Rate Maturity
---------------- ----------------- --------- ---------- ----------- ---------- -------- -----------
Alexandrine Detroit, MI 30 $ -- $ --(1) $ 378,000 12.50% August 2002
Coronado Terrace San Diego, CA 312 -- --(1) 2,000,000 11.00% March 2003
Miami Sunset Bay Miami, FL 308 1,436,870 1,450,000 -- 12.50% March 2002
Plaza Manor National City, CA 372 -- --(1) 1,500,000 11.00% May 2002
Rancho Verde San Jose, CA 700 2,243,037 2,262,085 2,237,915 11.00% August 2002
Vista Terrace San Ysidro, CA 262 1,855,124 1,855,124 44,876 11.00% May 2002
Hills ----- ---------- ---------- ----------
Total 1,984 $5,535,031 $5,567,209 $6,160,791
===== ========== ========== ==========
------------
(1) Funded on an as needed basis.
CMBS Through our Preferred Membership Interests in ARCap Investors, L.L.C.
Through our convertible preferred membership interests in ARCap Investors
L.L.C., we have a substantial indirect investment in commercial mortgage-backed
securities ("CMBS") owned by ARCap. ARCap was formed in January 1999 by REMICap,
an experienced CMBS investment manager, and Apollo Real Estate Investors, the
real estate arm of one of the country's largest private equity investors. In
conjunction with a preferred equity offering, REMICap and ARCap merged, making
ARCap the only internally-managed investment vehicle exclusively investing in
subordinated CMBS. As of September 30, 2001, ARCap had $504.3 million in assets,
including investments in $485.0 million of CMBS. Multifamily properties underlie
approximately one-third of ARCap's CMBS.
In September 1999, we acquired a "BB+" rated subordinated CMBS from ARCap.
In connection with this acquisition, we entered into an agreement with ARCap,
which gave us the right to sell the CMBS investment to ARCap and purchase a
preferred equity position in ARCap, all based on the then fair value of the CMBS
investment. In November 2000, we exercised our right to sell the CMBS investment
to ARCap and purchased Series A Preferred Membership Interests in ARCap in the
face amount of $20 million, with a preferred dividend rate of 12%. At September
30, 2001, the carrying value of our ARCap investment was $20.2 million.
Our equity in the earnings of ARCap will generally be equal to the
preferred equity rate of 12%, unless ARCap does not have earnings and cash flows
adequate to meet this distribution requirement. ARCap has met its distribution
requirements to the Company to date. Yields on CMBS depend, among other things,
on the rate and timing of principal payments, the pass-through rate, interest
rate fluctuations and defaults on the underlying mortgages. Our interest in
ARCap is illiquid and we need to obtain the consent of the board of managers of
ARCap before we can transfer our interest in ARCap to any party other than a
current member. The carrying amount of our investment in ARCap is not
necessarily representative of the amount we would receive upon a sale of the
interest.
ARCap has informed its members that it intends to shift its focus to CMBS
fund management, whereby ARCap will manage CMBS investment funds raised from
third-party investors. ARCap will generally be a minority investor in these
funds. ARCap thereby intends to diversify its revenue base by increasing its
proportion of revenue derived from fees as opposed to interest income.
24
Loan Origination Program with Fannie Mae
In March 2000, we entered into a loan origination program with Fannie Mae
in which we originate, on Fannie Mae's behalf, construction and permanent loans
for multifamily properties and receive loss sharing and loan origination fees.
Fannie Mae is the United States' largest source of financing for residential
mortgages and the largest investor in multifamily mortgages.
Under this program, we may originate up to $250 million in loans of no more
than $6 million each over a two year period, which may be extended for up to two
additional one year periods. In the event we were to originate $250 million in
loans pursuant to this program, we would guarantee a first loss position on
these loans equal to the amount lost on the loans of up to a maximum of $21.25
million. We also guaranteed construction loans for which we have issued a
forward commitment to originate a loan under the Fannie Mae program, with
respect to which we guarantee repayment of 100% of such construction loans. As
of September 30, 2001, we originated loans, on Fannie Mae's behalf, totaling
approximately $2.2 million and have made forward commitments for an additional
approximately $6.8 million. Our maximum exposure under the Fannie Mae program
and the forward commitments at September 30, 2001 was $6.0 million. We have not
acquired an interest in any of the loans we have originated on Fannie Mae's
behalf.
Since we entered into the loan program, the level of loan origination
competition has increased, reducing our projected financing volume and
profitability. As a result, we are de-emphasizing this program and evaluating
the possibility of transferring our rights and obligations in the loan program
to a third party.
In order to conduct the program, we organized AMAC/FM Corporation, a
Delaware corporation that we wholly own. From time to time, we expect to make
capital contributions or loans to AMAC/FM in order to ensure that it has
sufficient net worth to satisfy its obligations under the Fannie Mae program. On
April 4, 2000, we transferred the Stony Brook Village II Apartments FHA first
mortgage loan with a principal balance at September 30, 2001 of $8.3 million to
AMAC/FM. AMAC/FM is treated, for federal income tax purposes, as a taxable REIT
subsidiary.
The following table provides information relating to the loans we have
originated on Fannie Mae's behalf.
Loss
Number of Sharing Fee
Property Location Apartment Units Loan Amount (annual rate)
---------------- --------------- -------------- -------------
Valley View Cedar Rapids, IA 96 $ 2,187,000 0.36%
Hillside Apartments(1) Minden, LA 60 1,278,000 0.28%
Alexandrine Square(1) Detroit, MI 30 342,000 0.40%
Maple Ridge Apartments(1) Jackson, MI 69 1,137,000 0.52%
Cameron Creek Apartments(1) Dade County, FL 148 3,000,000 0.35%
Desert View Apartments(1) Coolidge, AZ 372 1,011,000 0.52%
---- ------------
Total 775 $ 8,955,000
==== ============
------------
(1) Currently a construction loan with First Union National Bank, which AMAC
has fully guaranteed. Once the underlying property achieves 90% occupancy
for a period of 90 days and net income of 1.15x debt service, this
construction loan will be replaced by permanent financing through our loan
program with Fannie Mae.
Investment Policy
General
Our investment policy has been formulated to maximize the return on our
asset base by investing in a diversified portfolio of insured and a limited
amount of uninsured mortgage assets. Our declaration of trust sets forth our
limitations regarding investments in uninsured assets. Consistent with our
policy of maintaining our status
25
as a REIT for federal income tax purposes, substantially all of our assets will
consist of qualified REIT assets under the Code.
Certain Investment Policy Limitations Under our Declaration of Trust
Generally, we intend to invest in mortgage investments, which can generally
be categorized into investments insured or guaranteed by an agency of the United
States or by Fannie Mae and investments that are not insured or guaranteed.
However, for purposes of our investment policy as set forth in our declaration
of trust, we also distinguish between investments we were authorized to make
prior to our April 1999 reorganization and investments we became authorized to
make upon approval of the reorganization.
Prior to our reorganization in 1999, we were generally restricted by our
declaration of trust to investments in FHA insured first mortgages,
mortgage-backed securities guaranteed by Fannie Mae or the Federal Home Loan
Mortgage Corporation ("Freddie Mac"), and collateralized mortgage obligations
("CMOs") collateralized by guaranteed and insured mortgages or mortgage
certificates. We were, however, permitted to invest up to 7% of our total assets
in non-interest bearing uninsured loans made to developers in connection with
insured mortgage loans made by us.
Subsequent to our reorganization, we broadened our investment policy to
include uninsured mortgage loans, including construction loans, loans
subordinate to a lien on the related real property ("mezzanine loans"), loans
secured by junior liens and used as temporary financing ("bridge loans"),
mortgage derivatives (including IOs), interests in CMBS and other subordinated
mortgage investments.
Investments that we became authorized to make upon approval of our April
1999 reorganization may not comprise, in the aggregate, more than 60% of all of
our mortgage investments. Stated differently, at least 40% of our mortgage
investments must be investments that we were authorized to make prior to our
April 1999 reorganization. Mortgage loans that we originate with the intent of
later securitizing may be accumulated without limit.
Financing
General
We finance at short-term borrowing rates through the use of repurchase
agreements. Under a repurchase agreement, we sell securities to a lender and
agree to repurchase those securities in the future for a price that is higher
than the original sales price. The difference in the sale price we receive and
the repurchase price we pay represents interest paid to the lender. Although
structured as a sale and repurchase obligation, a repurchase agreement operates
as a financing under which we effectively pledge our securities as collateral to
secure a short-term loan which is equal in value to a specified percentage of
the market value of the pledged collateral. We retain beneficial ownership of
the pledged collateral, including the right to distributions. At the maturity of
a repurchase agreement, we are required to repay the loan and concurrently
receive back our pledged collateral from the lender or, with the consent of the
lender, we renew such agreement at the then prevailing financing rate. The
repurchase agreements may require us to pledge additional assets to the lender
in the event the market value of the existing pledged collateral declines.
Repurchase agreements are generally short-term in nature. Should the
providers of the repurchase agreements decide not to renew them at maturity, we
must either refinance these obligations or be in a position to retire the
obligations. If, during the term of a repurchase agreement, a lender should file
for bankruptcy, we might experience difficulty recovering our pledged assets and
may have an unsecured claim against the lender's assets.
Existing Repurchase Facilities
In February 2000, we entered into a $60 million FHA repurchase facility
with Nomura Asset Capital Corporation. This repurchase facility was renewed for
$40 million in February 2001, for a term of one year with a one-time option to
increase the facility to $60 million. This facility enables us to borrow up to
90% of the fair
26
market value of FHA first mortgage loans that we own with a qualified hedge (80%
without a qualified hedge). Generally, this facility bears interest at LIBOR
plus 1.25%. As of September 30, 2001, there was no outstanding balance on this
facility.
In February 2000, we also entered into a repurchase facility with Nomura
Securities International, Inc. This repurchase facility enables us to borrow up
to 95% of the fair market value of GNMA certificates and other qualified
mortgage securities that we own. Generally, this facility bears interest at
LIBOR plus 0.50%. As of September 30, 2001, the amount outstanding under this
facility was $43,191,173, and the weighted average interest rate was 4.07%. All
amounts outstanding as of September 30, 2001 had 30 day settlement terms.
Limitations on Indebtedness Under our Declaration of Trust
Our declaration of trust restricts our ability to borrow with respect to
permanent and working capital indebtedness.
For purposes of our debt restriction, "permanent indebtedness" means all of
our indebtedness except:
o "working capital indebtedness";
o trade payables; and
o subordinated Advisor fees.
Also, for purposes of our debt restriction, "working capital indebtedness"
means:
o debt with a term no longer than five years utilized to acquire and
originate mortgage investments intended to be pooled as part of an
issuance of collateralized mortgage obligations or pass through
certificates sponsored by us or our subsidiaries, the proceeds of
which will be used to repay such indebtedness and
o debt used to pay distributions to shareholders and operating
expenses, including fees to the Advisor.
We may incur permanent indebtedness of up to 50% of the greater of, and may
incur working capital indebtedness plus permanent indebtedness of up to 100% of
the greater of:
o the sum of the aggregate market value of all of our outstanding
shares of beneficial interest and all of our indebtedness (not
including debt of unconsolidated subsidiaries) and
o the aggregate value of our assets as determined by the Advisor based
upon third party or management appraisals and other criteria as the
Board of Trustees determines in its sole discretion (calculated at
the time debt is incurred).
At September 30, 2001, our indebtedness, all of which was working capital
indebtedness, was $43.2 million and our ratio of indebtedness to total market
value was 43.2%.
Competition
We compete for mortgage asset investments with numerous public and private
real estate investment vehicles, such as mortgage banks, pension funds, real
estate investment trusts, institutional investors and individuals. Mortgages,
subordinated interests in CMBS and other investments are often obtained through
a competitive bidding process. In addition, competitors may seek to establish
relationships with the financial institutions and other firms from which we
intend to purchase such assets.
27
Our business is also affected by competition to the extent that the
properties underlying the instruments from which we derive interest and,
ultimately, principal payments may be subject to the effects of differing rental
rates and relative levels of amenities from comparable neighboring properties.
Employees
As of November 29, 2001, we had no employees; although for administrative
purposes we have designated officers. All services are performed for us by the
Advisor and its affiliates. The Advisor receives compensation in connection with
such activities. In addition, we reimburse the Advisor and certain of its
affiliates for expenses incurred in connection with the performance by their
employees of services for us.
Legal Proceedings
We are not a party to any material pending legal proceedings.
28
MANAGEMENT
We are run by a Board of Trustees comprised of three independent trustees
and two trustees affiliated with Related Capital Company, a nationwide, fully
integrated real estate financial services firm. We do not have any employees but
we designate officers for administrative purposes. We engaged the Advisor, an
affiliate of Related Capital, to manage our day-to-day affairs. The Advisor
subcontracted with Related Capital to provide the services contemplated. Through
the Advisor, Related Capital offers us a core group of experienced staff and
executive management providing services on both a full and part-time basis.
These services include, among other things, acquisition, financial, accounting,
capital markets, asset monitoring, portfolio management, investor relations and
public relations services. The management team that provides us with investment
advice has an average of 12 years of experience with Related Capital and an
average of 20 years in the real estate industry. We believe that we benefit
significantly from our relationship with Related Capital, as it provides us with
resources not generally available to smaller-capitalized, self-managed
companies.
Our Trustees and Executive Officers
Our trustees and executive officers are as follows:
Year First Became Term
Name Age Office Held Trustee or Officer Expires
----------------- --- ------------------------------------------------ --------------------- ---------
Stuart J. Boesky 45 Chairman of the Board of Trustees, 1991 2002
Chief Executive Officer, and President
Peter T. Allen 55 Trustee (independent) 1991 2002
Arthur P. Fisch 59 Trustee (independent) 1991 2002
Alan P. Hirmes 46 Trustee and Senior Vice President 1991 2002
Scott M. Mannes 42 Trustee (independent) 2001 2002
Michael I. Wirth 43 Senior Vice President and Chief Financial Officer 2000 --
Steven B. Wendel 39 Senior Vice President 1999 --
Mark J. Schlacter 51 Senior Vice President 1993 --
Denise L. Kiley 41 Senior Vice President 1999 --
Marc D. Schnitzer 40 Senior Vice President 1999 --
Gary Parkinson 52 Controller 1997 --
John J. Sorel 40 Vice President 1999 --
Teresa Wicelinski 35 Secretary 1998 --
STUART J. BOESKY is a trustee and is our Chairman, President and Chief
Executive Officer and is the President and Director of our Advisor. Mr. Boesky
practiced real estate and tax law in New York City with the law firm of Shipley
& Rothstein from 1984 until February 1986 when he joined Related Capital. From
1983 to 1984, Mr. Boesky practiced law with the Boston law firm of Kaye,
Fialkow, Richmond & Rothstein (which subsequently merged with Stroock & Stroock
& Lavan) and from 1978 to 1980 was a consultant specializing in real estate at
the accounting firm of Laventhol & Horwath. Mr. Boesky is the sole shareholder
of one of the general partners of Related Capital. Mr. Boesky graduated from
Michigan State University with a Bachelor of Arts degree and from Wayne State
School of Law with a Juris Doctor degree. He then received a Master of Laws
degree in Taxation from Boston University School of Law. Mr. Boesky also serves
on the Board of Directors of Aegis Realty, Inc. ("Aegis") and the Board of
Trustees of Charter Municipal Mortgage Acceptance Company ("CharterMac"), which
are both advised by affiliates of our Advisor.
PETER T. ALLEN is an independent trustee and is the President of Peter
Allen & Associates, Inc., a real estate development and management firm, in
which capacity he has been responsible for the leasing, refinancing and
29
development of major commercial properties. Mr. Allen has also been an Adjunct
Professor of the Graduate School of Business at the University of Michigan since
1981. Mr. Allen received a Bachelor of Arts Degree in history/economics from
DePauw University and a Masters in Business Administration with Distinction from
the University of Michigan. Mr. Allen has been an independent trustee since 1991
and is a member of the Audit and Compensation Committees. Mr. Allen also serves
on the Board of Trustees of CharterMac and on the Board of Directors of Aegis.
ARTHUR P. FISCH is an independent trustee and has been an attorney in
private practice specializing in real property and securities law since October
1987, with Arthur P. Fisch, P.C. and Fisch & Kaufman. From 1975 until 1987, Mr.
Fisch was employed by E.F. Hutton & Company, serving as First Vice President in
the Direct Investment Department from 1981 until 1987 and associate general
counsel from 1975 to 1980 in the legal department. As First Vice President, he
was responsible for the syndication and acquisition of residential real estate.
Mr. Fisch received a B.B.A. from Bernard Baruch College of the City University
of New York and a Juris Doctor degree from New York Law School. Mr. Fisch is
admitted to practice law in New York and Pennsylvania. Mr. Fisch has been an
independent trustee since 1997 and is a member of the Audit and Compensation
Committees. Mr. Fisch also serves on the Board of Directors of Aegis and the
Board of Trustees of CharterMac.
ALAN P. HIRMES is a trustee and is our Senior Vice President and is the
Senior Vice President of the Advisor. Mr. Hirmes is also the sole shareholder of
one of the general partners of Related Capital and is a Senior Managing Director
of Related Capital, where he is responsible for overseeing the portfolio
management, finance and accounting departments and the joint venture development
program. Mr. Hirmes has been a certified public accountant in New York since
1978. Prior to joining Related Capital in October 1983, Mr. Hirmes was employed
by Weiner & Co., certified public accountants. Mr. Hirmes graduated from Hofstra
University with a Bachelor of Arts degree. Mr. Hirmes also serves on the Board
of Trustees of CharterMac and the Board of Directors of Aegis.
SCOTT M. MANNES is an independent trustee and co-founder of Drawbridge
Capital LLC, an investment firm that operates as an advisor and service provider
to, and investor in, the specialty finance industry. Prior to Drawbridge, Mr.
Mannes was a key participant in the development and evolution of the investment
banking and merchant banking operations during his nine-year career at
ContiFinancial Corporation, most notably as Co-President of ContiFinancial
Services Corporation. Mr. Mannes was instrumental in developing the investment
banking, merchant banking and venture capital activities for ContiFinancial,
including managing the acquisition of assets and investment banking
relationships to promote the company's securitization activities and managing
the acquisition of equity interests in affiliate residential and commercial loan
origination companies. Prior to joining ContiFinancial Corporation in 1990, Mr.
Mannes spent seven years with Financial Guaranty Insurance Company developing
the first financial guaranties applied to sub-prime mortgage loan
securitizations. Mr. Mannes is a graduate of the State University at Albany and
received an MPA in Public Administration from the Rockefeller School of Public
Affairs and Policy.
MICHAEL I. WIRTH is our Chief Financial Officer and Senior Vice President.
Mr. Wirth is also a senior vice president of Related Capital. Mr. Wirth joined
Related Capital in August 2000. Prior to joining Related Capital, Mr. Wirth was
a vice president in the real estate group at CGA Investment Management where he
was responsible for the underwriting, investment and management of all
commercial real estate debt investments. Prior to CGA, Mr. Wirth spent 4 years
as a senior manager at Deloitte & Touche in the realty consulting group and
technology solutions practice and 5 years as a senior manager and national
director to the financial services industry at The Roulac Group of Deloitte &
Touche. Mr. Wirth received a Bachelors degree in Business Administration from
Georgia State University. He has been a Certified Public Accountant since 1986.
STEVEN B. WENDEL is our Senior Vice President and is responsible for the
origination and acquisition of our mortgage products. Mr. Wendel is also a
Senior Vice President of Related Capital. Prior to joining Related Capital in
June 1999, Mr. Wendel was a Managing Director of the commercial loan origination
and securitization program at ContiFinancial Corporation. From 1989 until 1992,
Mr. Wendel was a senior associate of the structured
30
finance/MBA rotational program at Coopers & Lybrand. From 1987 until 1989, he
was a consultant at Martin E. Segal Company, and from 1984 until 1987, he was a
pricing analyst at Metropolitan Life Insurance Company. Mr. Wendel received a
Masters in Business Administration from the Stern School of Business
Administration at New York University and a Bachelor of Arts in economics from
the University of Pennsylvania.
MARK J. SCHLACTER is our Senior Vice President and is responsible for our
FHA mortgage acquisitions program. Mr. Schlacter is also a Vice President of
Related Capital and has been with Related Capital since June 1989. Prior to
joining Related Capital, Mr. Schlacter gained 16 years of direct real estate
experience covering retail and residential construction, single and multifamily
mortgage origination and servicing, commercial mortgage origination and
servicing, property acquisition and financing and mortgage lending program
underwriting and development. He was a Vice President with Bankers Trust Company
from 1986 until June 1989, and held various positions with Citibank, Anchor
Savings Bank and the Pyramid Companies from 1972 to 1986. Mr. Schlacter holds a
Bachelor of Arts degree in Political Science from Pennsylvania State University.
DENISE L. KILEY is our Senior Vice President. Ms. Kiley is also a Managing
Director of Related Capital, and is the Director of Related Capital's
underwriting and asset management groups. Ms. Kiley is responsible for
overseeing the investment underwriting and approval of all real estate
properties invested in Related Capital sponsored corporate, public and private
equity and debt funds. Prior to joining Related Capital in 1990, Ms. Kiley
gained experience acquiring, financing and managing the assets of multifamily
residential properties. From 1981 through 1985 she was an auditor with a
national accounting firm. Ms. Kiley holds a Bachelor of Science degree in
Accounting from Boston College and is a Member of the Affordable Housing
Roundtable.
MARC D. SCHNITZER is our Senior Vice President. Mr. Schnitzer is also a
Managing Director of Related Capital and the Director of Related Capital's Tax
Credit Group. Mr. Schnitzer received a Master of Business Administration degree
from The Wharton School of The University of Pennsylvania in December 1987, and
joined Related Capital in January 1988. From 1983 to 1986, Mr. Schnitzer was a
financial analyst in the Fixed Income Research Department of The First Boston
Corporation in New York. Mr. Schnitzer received a Bachelor of Science degree,
summa cum laude, in Business Administration from the School of Management at
Boston University.
GARY PARKINSON is our controller. Mr. Parkinson is also an Assistant Vice
President of Related Capital. Mr. Parkinson has been certified public accountant
in New York since 1987. Prior to joining Related Capital in September 2000, Mr.
Parkinson was employed by American Real Estate Partners, L.P. from July 1991
until September 2000, by Integrated Resources, Inc. from August 1988 until July
1991 and by Ernst and Young from September 1984 until August 1988. Mr. Parkinson
graduated from Northeastern University and The Johnson Graduate School of
Business at Cornell University.
JOHN SOREL is our Vice President and is a Vice President of Related
Capital. Mr. Sorel is responsible for overseeing loan servicing and construction
risk management for us. Prior to joining Related Capital in November 1999, Mr.
Sorel was a Vice President for BankBoston in their real estate department from
1993 until 1999, where he originated and managed corporate and construction loan
facilities for the low income housing tax credit industry. From 1991 until 1993,
Mr. Sorel worked as an Assistant Vice President for Recoll Management. Mr. Sorel
holds a Bachelor of Arts degree in economics from Syracuse University.
TERESA WICELINSKI is our Secretary. Ms. Wicelinski joined Related Capital
in June 1992, and prior to that date was employed by Friedman, Alprin & Green,
certified public accountants. Ms. Wicelinski graduated from Pace University with
a Bachelor of Business Science in accounting.
Our Advisor
The directors and executive officers of our Advisor, Related AMI
Associates, Inc., are set forth below. These officers of the Advisor may also
provide services to us on behalf of the Advisor.
31
Name Age Offices Held
------------------------- -------------- -----------------------
Stuart J. Boesky 45 Director and President
Michael Brenner 56 Director
Alan P. Hirmes 46 Senior Vice President
Gary Parkinson 52 Treasurer
Teresa Wicelinski 35 Secretary
Biographical information with respect to Messrs. Boesky, Hirmes and
Parkinson and Ms. Wicelinski is set forth above.
MICHAEL J. BRENNER is a Director of our Advisor, and is the Executive Vice
President and Chief Financial Officer of The Related Companies, L.P. Prior to
joining The Related Companies, L.P. in 1996, Mr. Brenner was a partner with
Coopers & Lybrand, having served as managing partner of its Industry Programs
and Client Satisfaction initiatives from 1993-1996, managing partner of the
Detroit group of offices from 1986-1993 and Chairman of its National Real Estate
Industry Group from 1984-1986. Mr. Brenner graduated summa cum laude from the
University of Detroit with a Bachelors degree in Business Administration and
from the University of Michigan with a Masters of Business Administration, with
distinction. Mr. Brenner also serves on the Board of Directors of Aegis and the
Board of Trustees of CharterMac.
Related Capital's Experience
Our Advisor has subcontracted its management obligations to Related
Capital, a financial services subsidiary of The Related Companies, L.P., which
is one of the nation's largest developers of premier multifamily and mixed-use
real estate assets and largest sponsor of real estate investment programs for
retail and institutional investors.
The predecessor to The Related Companies, L.P. was founded in 1972 by
Stephen M. Ross to engage in the business of providing real estate based
financial, acquisition, development and management services. Its real estate
related products include affordable multifamily properties, luxury apartments,
commercial office properties and retail centers located in 45 states and nearly
every major market in the U.S. and Puerto Rico.
Related Capital has sponsored 22 public and 234 private real estate
investment programs that have raised nearly $5 billion from more than 106,000
investors. Related Capital is the nation's leading non-agency financier of
affordable multifamily housing. These programs have accounted for the
acquisition of over 1,200 properties with a valuation , at cost, of over $11
billion. Related Capital's portfolio, in the aggregate, consists of
approximately 160,860 residential apartment units, 31 shopping centers and 5
regional malls. Related Capital provides asset monitoring services for the
properties within its portfolio, which include the weekly review of occupancies,
regular site visits, monitoring of financial and operating reports, regulatory
compliance checks and independent periodic analysis of local marketplace
conditions.
The Related Companies L.P. development division is a leading developer and
acquirer of luxury housing, government-assisted housing, entertainment-enhanced
retail, commercial and mixed-use properties. The development division operates
through seven principal business units organized by geographic market and
product type. The development division as a whole has developed or acquired over
40,000 market rate and affordable housing units and 4.6 million square feet of
commercial and retail space and remains one of the country's most active
developers. The Related Companies L.P. currently has 22 fully-financed
developments under construction, totaling $3.8 billion, the largest of which is
AOL Time Warner Center, a 2.8 million square foot mixed use premier property
located in Manhattan at the intersection of Central Park South and Central Park
West. The property will feature AOL Time Warner, Inc.'s world headquarters,
including a CNN broadcasting facility, as well as luxury retail and restaurants,
a Mandarin Oriental Hotel and super-luxury, high-rise residential units.
32
The Related Companies L.P. property management division provides property
management services. It directly manages approximately 153 multifamily rental
properties totaling 19,000 residential units and 3.7 million square feet of
commercial and retail space from its New York offices.
Advisory Agreement
We entered into an Advisory Agreement with the Advisor pursuant to which
the Advisor is obligated to use its best efforts to seek out and present to us,
whether through its own efforts or those of third parties retained by it,
suitable and a sufficient number of investment opportunities which are
consistent with our investment policies and objectives and consistent with such
investment programs as the Board of Trustees may adopt from time to time in
conformity with our declaration of trust.
Although our Board of Trustees has continuing exclusive authority over our
management, the conduct of our affairs and the management and disposition of our
assets, the Board of Trustees has delegated to the Advisor, subject to the
supervision and review of the Board of Trustees and consistent with the
provisions of our declaration of trust, the power and duty to:
o obtain for us, furnish and supervise the services necessary to
perform any ministerial functions in connection with the
management of our day-to-day operations subject to the supervision
of the trustees;
o seek out and present to us, whether through its own efforts or
those of third parties retained by it, suitable and a sufficient
number of investment opportunities which are consistent with our
investment objectives and policies as adopted by the trustees from
time to time;
o exercise absolute discretion, subject to the trustees' review, in
decisions to originate, acquire, retain, sell or negotiate for the
prepayment or restructuring of mortgages and our other
investments;
o recommend investment opportunities consistent with our investment
objectives and policies and negotiate on our behalf with respect
to potential investments or their disposition;
o upon request, cause an affiliate to serve as the mortgagee of
record for our mortgages if such affiliate is qualified to do so
and in that capacity to hold escrows on behalf of mortgagors in
connection with the servicing of mortgages;
o obtain for us such other services as may be required in acquiring
or disposing of investments, disbursing and collecting our funds,
paying the debts and fulfilling our obligations, and handling,
prosecuting and settling any of our claims, including foreclosing
and otherwise enforcing mortgages and other liens securing
investments;
o obtain for us such services as may be required for property
management, mortgage brokerage and servicing, and other activities
relating to our investment portfolio;
o evaluate, structure and negotiate potential prepayments or sales
of mortgages and other investments and, if applicable, coordinate
with government agencies and other third parties;
o monitor annual participating interest payments, monitor operations
and expenses of the properties underlying our mortgage
investments, and verify computations of annual participating
interest payments;
o from time to time, or as requested by the trustees, make reports
to us as to its performance.
The Advisory Agreement is renewed annually, subject to the approval of a
majority of our trustees. The Advisor may terminate the Advisory Agreement
without cause and we may terminate the Advisory Agreement with
33
or without cause with approval from a majority of our independent trustees. Such
terminations would be without penalty, and must be upon 60 days' written notice
prior to the end of any term. The current advisory agreement expires on April 6,
2002 and was amended on November 29, 2001 to permit the Advisor to continue to
receive origination points of up to 1% of the principal amount of loans we
originate (payable by the borrowers) without an overall cap on the aggregate
amount of such points which it may receive. Previously, the Advisor was only
entitled to origination points on the first $100 million of principal amount of
loans that we originated. See "Advisor Compensation - Origination points",
below.
Advisor Compensation
Pursuant to the terms of the Advisory Agreement, the Advisor is entitled to
receive the fees and other compensation set forth below:
Types of Compensation Amount
-------------------------------------- --------------------------------------------------------------------------
Asset management fee.................. .625% on original mortgage investments owned by us prior to April 6, 1999.
.355% on original mortgage investments acquired by us after April 6, 1999.
.355% on investment grade additional mortgage investments.
.750% on non-investment grade additional mortgage investments.
1.000% on unrated additional mortgage investments.
"Original mortgage investments" means investments authorized under our
investment policy prior to our April 1999 reorganization, which
principally include mortgages and other mortgage related securities
insured or guaranteed by Fannie Mae, Freddie Mac, Ginnie Mae or FHA and
uninsured loans made to borrowers under an insured or guaranteed loan.
"Additional mortgage investments" means uninsured mortgage loans,
construction loans, bridge loans, mezzanine loans, mortgage derivatives
and subordinated interests (including subordinated interests in CMBS).
Annual incentive fee.................. Equal to the product of:
(A) 25% of the dollar amount by which
(1) (a) funds from our operations
(before the annual incentive
fee) per share (based on the
weighted average number of
shares outstanding) plus
(b) gains (or minus losses)
from debt restructuring and
sales of property per share
(based on the weighted
average number of shares
outstanding), exceed
(2) an amount equal to
(a) the weighted average of
(i) $20 (the price per share
in our initial public
offering) and (ii) the prices
per share of any secondary
offerings by us multiplied by
(b) the ten-year U.S.
Treasury Rate plus 2% per
annum,
multiplied by
(B) the weighted average number of
shares outstanding during such year.
The Advisor will not receive an
annual incentive fee in any fiscal
year unless shareholders have
received a minimum annual
distribution of $1.45 per share for
34
Types of Compensation Amount
-------------------------------------- -------------------------------------
that fiscal year.
Origination points................... Advisor receives, with respect to
each mortgage investment originated
by us, a portion of the origination
points paid by borrowers equal to up
to 1% of the principal amount and we
receive the portion of the
origination points paid by borrowers
in excess of 1% of the principal
amount of such mortgage investment.
Operating expense reimbursement....... We reimburse direct expenses incurred
by the Advisor.
The fees and other compensation payable to our Advisor are subject to the
overall cap on operating expenses contained in our declaration of trust. Subject
to increase by our independent trustees, our annual operating, general and
administrative expenses (exclusive of the expense of raising capital, interest
payments, taxes, non-cash expenditures and expenses for originating, acquiring,
servicing, or disposing of our investments), may not exceed the greater of (i)
2% of our average invested assets or (ii) 25% of our net income.
The Advisor is also permitted to earn miscellaneous compensation which may
include construction fees, escrow interest, property management fees, leasing
commissions and insurance brokerage fees. The payment of any such compensation
is generally limited to the competitive rate for the services being performed.
To the extent that we participate with a third party in any mortgage
investments, the Advisor may receive special servicer fees and other
compensation from such third party. If we foreclose on a property securing a
mortgage and sell the property and if the Advisor provides substantial services
in the sales effort then the Advisor or one of its affiliates will be entitled
to a subordinated real estate commission equal to up to 3% of the gross sales
price of the property.
Payments made to the Advisor and its affiliates for 2000, 1999, 1998 and
the nine months ended September 30, 2001 were as follows:
Nine Months Ended
Year Ended December 31, September 30, 2001
------------------------------------------- ------------------
2000 1999 1998
---------- --------- ----
Expense reimbursement $374,751 $255,616 $120,029 $232,935
Asset management fees 386,112 335,682 362,280 184,897
Annual incentive fees(1) 0 122,270 0 0
-------- -------- -------- --------
Total $760,863 $713,568 $482,309 $417,832
======== ======== ======== ========
--------------
(1) Annual incentive fee is calculated on an annual basis and is only
payable to Advisor for years in which our shareholders have received a
minimum annual distribution of $1.45 per share.
The Advisor is also entitled to receive as compensation that number of
shares equal to 1% of all shares issued by us, including shares issued in this
offering. Any such shares issued to the Advisor become vested and transferable
in three equal installments over the first three anniversaries of the issuance.
The Advisor may receive options to acquire shares pursuant to our Incentive
Share Option Plan, but only if our distributions in any year exceed $1.45 per
share, and the Compensation Committee of the Board of Trustees determines to
grant such options.
Other Advisory Agreement Terms
The Advisor may engage in other business activities related to real estate,
mortgage investments or other investments whether similar or dissimilar to those
made by us, or act as advisor to any other person or entity having investment
policies similar or dissimilar to our investment policy. Before the Advisor, its
partners, their officers and directors, and any person controlled by the
partners of the Advisor or their officers and directors may take advantage
35
of an opportunity for their own account or present or recommend it to others
(except for the presentation and recommendation of equally suitable investment
opportunities to affiliated entities, which are governed by procedures described
below), they are obligated to present such investment opportunity to us if the
opportunity is of a character which could be taken by us and is within our
investment objectives and policies and we have the financial resources to take
advantage of the opportunity.
To the extent that affiliated entities have funds available for investment
at the same time as us and a potentially suitable investment is offered to us or
the affiliated entity, conflicts of interest will arise as to which entity
should acquire the investment. Upon such a conflict, our Advisor will review the
affiliated entity's and our investment portfolios and will determine whether or
not the investment should be made by the affiliated company or by us based upon
factors such as the amount of funds available for investment, yield and
portfolio diversification. If the making of a mortgage loan or other mortgage
investment appears equally appropriate for these entities, the mortgage loan or
other mortgage investment will either be made by a joint venture between two or
more such entities, or will be allocated to one program on a basis of rotation
with the initial order of priority determined by the dates of formation of the
programs.
The declaration of trust and Advisory Agreement provide that we will
indemnify the Advisor and its affiliates under certain circumstances.
The Advisor is entitled to subcontract its obligations under the Advisory
Agreement to an affiliate. In accordance with the foregoing, the Advisor's
rights have been assigned to, and its obligations have been assumed by, Related
Capital.
Incentive Share Option Plan
We have adopted an Incentive Share Option Plan to attract and retain
qualified persons as trustees and officers and to provide incentive to and more
closely align the financial interests of our Advisor and its employees and
officers with the interests of our shareholders by providing the Advisor with
substantial financial interest in our success. The Compensation Committee, which
is comprised of Messrs. Allen and Fisch, administers the Plan. Pursuant to the
Plan, if our distributions per share in the immediately preceding calendar year
exceed $1.45 per share, the Compensation Committee has the authority to issue
options to purchase, in the aggregate, that number of shares which is equal to
three percent of the shares outstanding as of December 31 of the immediately
preceding calendar year, provided that the Compensation Committee may only
issue, in the aggregate, options to purchase a maximum number of shares over the
life of the Plan equal to 383,863 shares (10% of the shares outstanding on
December 31, 1999).
If the Compensation Committee does not grant the maximum number of options
in any year, then the excess of the number of authorized options over the number
of options granted in such year will be added to the number of authorized
options in the succeeding year and will be available for grant by the
Compensation Committee in such succeeding year.
All options granted by the Compensation Committee will have an exercise
price equal to or greater than the fair market value of the share on the date of
the grant. The maximum option term is ten years from the date of grant. All
share options granted pursuant to the Plan may vest immediately upon issuance or
in accordance with the determination of the Compensation Committee. No options
were granted for the years ended December 31, 1999 and 2000.
36
MARKET PRICE OF AND DISTRIBUTIONS ON OUR COMMON SHARES OF BENEFICIAL INTEREST
(a) Market Information. Our common shares began trading on the American
Stock Exchange on July 1, 1999, under the symbol "AMC." Prior to July 1, 1999,
there was no established public trading market for the Company's shares. The
following table sets forth the high and low sale prices for each quarterly
period in which the common shares were traded.
2001 2000 1999
Sale Prices Sale Prices Sale Prices
----------------------- ------------------------- --------------------------
High Low High Low High Low
--------- --------- --------- --------- --------- -----------
1st Quarter $ 11.250 $ 7.500 $ 9.000 $ 7.875 -- --
2nd Quarter $ 12.000 $ 9.600 $ 9.688 $ 8.125 -- --
3rd Quarter $ 15.500 $ 10.930 $ 8.938 $ 7.875 $ 13.875 $ 9.750
4th Quarter (through $ 14.750 $ 13.500 $ 8.938 $ 7.250 $ 11.500 $ 8.500
November 29, 2001)
(b) Shareholders. The approximate number of holders of our common shares as
of the date of this prospectus is 3,500.
(c) Distributions. We have paid cash distributions on a quarterly basis. We
intend to continue to distribute to our shareholders an amount equal to at least
90% of our taxable income before deductions of dividends paid and excluding net
capital gains in order to maintain our REIT status for federal income tax
purposes. Cash dividends since the first quarter of 1999 are as follows:
Cash Distribution Total Amount
For Quarter Ended Date Paid Per Share Distributed
--------------------------- ----------------- ----------- -------------------
March 31, 2001............. May 15, 2001 $.3625 $1,391,503
June 30, 2001.............. August 14, 2001 .3625 1,391,503
September 30, 2001......... November 14, 2001 .3625 1,391,504
----- ---------
Total for 2001.......... $1.0875 $4,174,510
======= ==========
March 31, 2000............. May 15, 2000 $.3625 $1,391,504
June 30, 2000.............. August 14, 2000 .3625 1,391,504
September 30, 2000......... November 14, 2000 .3625 1,391,504
December 31, 2000.......... February 14, 2001 .3625 1,391,503
----- ---------
Total for 2000.......... $1.4500 $5,566,015
======= ==========
March 31, 1999............. May 15, 1999 $.3575 $1,372,661
June 30, 1999.............. August 14, 1999 .3615 1,387,912
September 30, 1999......... November 14, 1999 .3625 1,391,504
December 31, 1999.......... February 14, 2000 .3625 1,391,503
----- ---------
Total for 1999.......... $1.4440 $5,543,580
======= ==========
37
SELECTED CONSOLIDATED FINANCIAL DATA
The operating data for the years ended December 31, 1996, 1997, 1998, 1999
and 2000 and the balance sheet data as of December 31, 1996, 1997, 1998, 1999
and 2000 are derived from our audited financial statements and notes thereto.
The operating data for the nine months ended and the balance sheet data as of
September 30, 2000 and 2001 are derived from our unaudited financial statements
and notes thereto. In the opinion of management, the unaudited financial
statements contain all adjustments (consisting of only normal recurring
adjustments) necessary to present fairly the financial position of the Company
as of September 30, 2001 and 2000 and its results of operations for the nine
months ended September 30, 2001 and 2000. However, the operating results for the
interim periods may not be indicative of the results for the full year.
For the Nine Months
Ended September 30, Year Ended December 31,
------------------------- -------------------------------------------------------------------
Operating data 2001 2000 2000 1999(1) 1998 1997 1996
----------- ---------- ----------- ---------- ---------- ----------- -----------
Mortgage loan income ...... $ 2,256,514 $ 1,188,021 $ 1,565,219 $2,569,901 $3,037,882 $ 3,118,027 $ 2,866,017
GNMA income ............... 1,354,307 355,962 472,693 785,591 880,680 975,599 1,306,658
CMBS income ............... -- 2,867,659 3,189,407 950,456 -- -- --
Equity in earnings of ARCap 1,788,137 -- 401,096 -- -- -- --
Temporary investment income 46,544 1,845,770 2,084,417 1,092,617 112,953 151,228 252,140
Other income .............. 304,345 444,828 598,307 109,017 -- -- --
--------- --------- --------- --------- --------- --------- ---------
Total revenues ............ 5,749,847 6,702,240 8,311,139 5,507,582 4,031,515 4,244,854 4,424,815
Total expenses ............ 1,892,991 3,932,875 4,765,841 2,301,293 647,047 632,304 721,209
--------- --------- --------- --------- --------- --------- ---------
Income before other gain .. 3,856,856 2,769,365 3,545,298 3,206,289 3,384,468 3,612,550 3,703,606
(loss)
Total other (loss) gain ... (211,572) (392,445) (227,541) 3,054,011 12,144 (66,735) (415,975)
--------- --------- --------- --------- --------- --------- ---------
Net income ................ $ 3,645,284 $ 2,376,920 $ 3,317,757 $6,260,300 $3,396,612 $ 3,545,815 $ 3,287,631
========= ========= ========= ========= ========= ========= =========
Net income per share
(basic and diluted) .... $ 0.95 $ 0.62 $ 0.86 $ 1.63 $ 0.88 $ 0.92 $ 0.83
========= ========= ========= ========= ========= ========= =========
Weighted average shares
outstanding (basic and
diluted) ............... 3,838,630 3,838,630 3,838,630 3,841,931 3,845,101 3,851,029 3,972,625
Distributions to
shareholders .............. $ 4,174,510 $ 4,174,512 $ 5,566,015 $5,543,580 $5,566,903 $ 5,575,532 $ 5,569,283
Distribution per share .... $ 1.09 $ 1.09 $ 1.45 $ 1.44 $ 1.45 $ 1.45 $ 1.45
========= ========= ========= ========= ========= ========= =========
September 30, December 31,
-------------------------- --------------------------------------------------------------------
Balance Sheet Data 2001 2000 2000 1999 1998 1997 1996
----------- ------------ ----------- ------------ ----------- ----------- -----------
Total assets .............. $99,912,427 $121,322,167 $70,438,313 $115,565,441 $59,993,040 $61,645,922 $63,147,215
Repurchase facility payable $43,191,173 $ 20,061,000 $12,655,940 $ 19,127,000 -- -- --
Total liabilities ......... $45,192,116 $ 65,868,891 $15,362,440 $ 58,474,076 $ 1,788,466 $ 1,259,997 $ 986,551
Total shareholders' equity $54,720,311 $ 55,453,276 $55,075,873 $ 57,091,365 $58,204,574 $60,385,925 $62,160,664
----------- ------------ ----------- ------------ ----------- ----------- -----------
------------
(1) The results for the year ended December 31, 1999 reflect a gain on repayment
of two mortgage loans.
38
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Liquidity and Capital Resources
During the nine months ended September 30, 2001, cash and cash equivalents
decreased approximately $530,000 primarily due to proceeds from repurchase
facilities payable of $30,535,000 and cash provided by operating activities of
$3,291,000, offset by investments in mortgage loans of $19,794,000, investments
in GNMA certificates of $6,556,000, an increase in notes receivable of
$4,139,000 and distributions to shareholders of $4,175,000.
Effective February 15, 2000, we entered into a $60 million FHA repurchase
facility with the Nomura Asset Capital Corporation, with a term of one year.
This agreement enables us to borrow up to 90% with a qualified hedge or 80%
without a qualified hedge of the fair market value of FHA loans in which we
invest. This facility was renewed February 15, 2001, for $40 million, with a one
time option to increase to $60 million, a one year term, and interest at LIBOR
plus 1.25%. As of September 30, 2001, there was no outstanding balance on this
facility. As of December 31, 2000, $7,138,940 was outstanding under this
facility.
Also, effective February 15, 2000, we entered into a repurchase facility
with Nomura Securities International Inc. This facility enables us to borrow up
to 95% of the fair market value of qualified mortgage securities that we own.
Borrowings bear interest at LIBOR plus 0.50%. As of September 30, 2001 and
December 31, 2000, the amount outstanding under this facility was $43,191,173
and $5,517,000 and the weighted average interest rates were 4.07% and 7.12%,
respectively.
In order to qualify as a REIT under the Code, we must, among other things,
distribute at least 90% of our taxable income. We believe that we are in
compliance with the REIT-related provisions of the Code.
We expect that cash generated from our investments will meet our needs for
short-term liquidity, and will be sufficient to pay all of our expenses and make
distributions to our shareholders in amounts sufficient to retain our REIT
status in the foreseeable future.
We completed a loan program with Fannie Mae which has agreed to fully fund
the origination of $250 million of delegated underwriter and servicer loans for
apartment properties that qualify for low income housing tax credits under
Section 42 of the Code. Under the program, we will originate and contract, on
Fannie Mae's behalf, for individual loans of up to $6 million dollars each over
a two-year period and will work with American Property Financing, an
unaffiliated mortgage servicing company, which will underwrite and service the
loans for Fannie Mae. Each property in the program will benefit from 9% low
income housing tax credits for no less than 90% of its units. We will guarantee
a first loss position of up to $21.25 million depending on the aggregate
principal amount of the loans we originate under this program and will receive
guarantee, loan origination and other fees. As of September 30, 2001, we
originated, on Fannie Mae's behalf, loans totaling approximately $2.2 million
and have made forward commitments for an additional approximately $6.8 million.
Our maximum guaranty at September 30, 2001 under the Fannie Mae program and the
forward commitments is $6.0 million.
In November 2001, a distribution of $1,391,503 ($0.3625 per share), which
was declared in September 2001, was paid to the shareholders of record for the
quarter ended September 30, 2001.
Management is not aware of any trends or events, commitments or
uncertainties, which have not otherwise been disclosed that will or are likely
to impact liquidity in a material way.
39
Results of Operations
Three and Nine Month Period Ended September 30, 2001, Compared to Three
and Nine Month Period Ended September 30, 2000
The net income for the three and nine months ended September 30, 2001 and
2000 was $1,090,107 and $1,243,277 and $3,645,284 and $2,376,920, respectively.
The total of our annual operating expenses may not exceed the greater of (i) 2%
of our average invested assets or (ii) 25% of our net income, unless such excess
is approved by the independent trustees. On an annualized basis, there was no
such excess for the nine months ended September 30, 2001 and 2000.
Interest income from mortgage loans increased approximately $1,068,000 for
the nine months ended September 30, 2001 as compared to 2000 primarily due to
interest earned on the additional principal advances to The Hollows, Elmhurst
Village and Autumn Creek prior to their conversion to GNMA certificates and on
Stonybrook (while held by our wholly owned subsidiary AMAC/FM Corporation),
partially offset by the repayment of the Town and Country mortgage loan.
Interest income from mortgage loans decreased approximately $151,000 for the
three months ended September 30, 2001 as compared to 2000 primarily due to the
conversion of the Hollows, Elmhurst Village and Autumn Creek loans to GNMA
certificates.
Interest income from GNMA certificates increased approximately $742,000 and
$998,000 for the three and nine months ended September 30, 2001, primarily due
to the conversion of three mortgage loans to GNMA certificates.
Interest income from commercial mortgage-backed security-related investment
in the amount of approximately $960,000 and $2,868,000 was recorded for the
three and nine months ended September 30, 2000; such investment was sold in
October 2000.
Interest income from temporary investments decreased approximately $604,000
and $1,799,000 for the three and nine months ended September 30, 2001 as
compared to 2000 primarily due to the reduced balances of temporary investments
and termination of the deposits with brokers held as collateral for short sales.
Interest income from notes receivable in the amount of approximately
$127,000 and $234,000 was recorded for the three and nine months ended September
30, 2001; such investments were made after September 2000.
Equity in earnings of ARCap in the amount of $604,000 and $1,788,000 was
recorded for the three and nine months ended September 30, 2001. This investment
was acquired in October 2000.
Other income in the amount of $40,000 and $70,000 was recorded for the
three and nine months ended September 30, 2001 due to the guaranty and loan
origination fees earned on loans in the Fannie Mae loan program.
Other income for the three and nine months ended September 30, 2000
included approximately $295,000 of interest income from a note receivable from
AMAC/FM effective January 1, 2001. AMAC/FM is consolidated for financial
reporting purposes. Any interest due from AMAC/FM to AMAC for the three and nine
months ended September 30, 2001 was eliminated in consolidation.
Interest expense decreased approximately $582,000 and $1,757,000 for the
three and nine months ended September 30, 2001 as compared to 2000 due to the
termination of the Bear Stearns Repurchase Facility and closing out of
government securities sold short positions partially offset by higher interest
expenses related to the Nomura repurchase facilities due to higher outstanding
balance.
General and administrative expenses decreased approximately $195,000 and
$258,000 for the three and nine months ended September 30, 2001 as compared to
2000 primarily due to a decrease in asset management fees payable to the Advisor
due to the sale of commercial mortgage-backed security-related investment and a
decrease in the reimbursements of certain administrative and other costs
incurred by the Advisor on our behalf.
40
Amortization decreased approximately $21,000 and $25,000 for the three and
nine months ended September 30, 2001 due to the deferred costs relating to the
repurchase facility with Nomura Asset Capital Corporation being fully amortized.
A gain on the repayment of mortgage loans in the amount of approximately
$14,000 was recorded for the nine months ended September 30, 2000, relating to
the repayment of the Town & Country mezzanine loan and FHA insured mortgage loan
on January 21, 2000. A gain of approximately $58,000 was recognized during the
nine months ended September 30, 2000 from the repayment of a GNMA certificate. A
loss of approximately $212,000 was recognized during the three months ended
September 30, 2001 relating to the repayment of the Columbiana Lakes FHA first
mortgage loan and related mezzanine loan.
A net loss on the commercial mortgage-backed security-related investment
and government securities sold short in the amount of approximately $464,000 was
recorded for the nine months ended September 30, 2000. These positions were
liquidated in October of 2000.
Distributions
Of the total distributions of $4,174,510 and $4,174,512 for the nine months
ended September 30, 2001 and 2000, respectively, $317,654 ($.08 per share or
7.61%) and $1,836,883 ($0.48 per share or 44%), respectively, represented a
return of capital determined in accordance with generally accepted accounting
principles. As of September 30, 2001, the aggregate amount of the distributions
made since the commencement of the initial public offering representing a return
of capital, in accordance with generally accepted accounting principles, totaled
$14,435,381. The portion of the distributions which constituted a return of
capital was significant during the initial acquisition stage in order to
maintain level distributions to shareholders.
Year Ended December 31, 2000, Compared to Year Ended December 31, 1999
Interest income from mortgage loans decreased approximately $1,005,000 for
the year ended December 31, 2000 as compared to 1999 primarily due to the
repayment of the Town and Country mortgage loan, contribution of Stonybrook FHA
Loan to an unconsolidated subsidiary and the recognition in 1999 of additional
interest income related to the Columbiana loan, which had been reserved in 1998.
This was partially offset by increases due to the three new loans acquired
during 2000.
Interest income from GNMA certificates decreased approximately $313,000 for
the year ended December 31, 2000 as compared to 1999 primarily due to the
repayment of one of the GNMA certificates in January 2000.
Interest income from commercial mortgage-backed security-related investment
increased approximately $2,239,000 for the year ended December 31, 2000 due to a
longer holding period for the investment.
Interest income from note receivable increased approximately $361,000 for
the year ended December 31, 2000 primarily due to a loan made to an
unconsolidated subsidiary in March 2000.
Interest income from temporary investments increased $992,000 for the year
ended December 31, 2000 as compared to 1999 due to an increase in the amounts
invested.
Dividend income in the amount of $401,000 was reported for the year ended
December 31, 2000 due to the investment in ARCap preferred stock.
Other income increased approximately $128,000 for the year ended December
31, 2000 as compared to 1999 due to a loan origination fee and the interest
income of a bridge loan.
Interest expense increased $2,465,000 for the year ended December 31, 2000
as compared to 1999 due to the repurchase facilities and the US treasury note
transactions.
41
General and administrative expenses increased approximately $280,000 for
the year ended December 31, 2000 as compared to 1999 due to a usage fee for the
Nomura repurchase facilities, increased asset management fees and increased
advertising. This was partially offset by a decrease in the incentive management
fee.
Amortization costs in the amount of $85,000 were expensed for the year
ended December 31, 2000 relating to Nomura deferred costs of the Nomura
repurchase facilities.
A net loss on the commercial mortgage-backed security-related investment
and government security sold short position in the amount of approximately
$300,000 was recorded for the year ended December 31, 2000, as opposed to
$218,000 for 1999. This was due to fluctuations in the market values of those
positions during 1999 and 2000, until their sale on October 31, 2000.
Year Ended December 31, 1999, Compared to Year Ended December 31, 1998
Interest income from mortgage loans decreased approximately $468,000 for
the year ended December 31, 1999 as compared to 1998 primarily due to the
repayment of the Cove and Oxford mortgage loans on March 1, 1999 which was
partially offset by increases due to the receipt of Additional Interest relating
to Columbiana and the accrual of Additional Interest (received in January 2000)
relating to Town and Country, both of which had been fully reserved and reversed
from interest in 1998.
Interest income from REMIC and GNMA certificates decreased approximately
$95,000 for the year ended December 31, 1999 as compared to 1998 primarily due
to the repayment of one of the REMICs in October 1998 and a decrease in the
balances of the GNMA certificates due to principal payments received during 1999
and 1998.
Interest income from commercial mortgage-backed security-related investment
in the amount of approximately $950,000 was recorded for the year ended December
31, 1999; such investment was made on September 30, 1999.
Interest income from note receivable in the amount of approximately $86,000
was recorded for the year ended December 31, 1999 relating to a loan made in May
1999 which was repaid in September 1999.
Interest income from temporary investments increased approximately $980,000
for the year ended December 31, 1999 as compared to 1998 primarily due to
proceeds from the repayment of the Cove and Oxford mortgage loans on March 1,
1999 which were temporarily invested in 1999.
Other income in the amount of approximately $23,000 was recorded for the
year ended December 31, 1999 relating primarily to origination points (fees)
relating to the note receivable.
Interest expense in the amount of approximately $907,000 was recorded for
the year ended December 31, 1999 relating to interest on a repurchase facility
payable entered into on September 30, 1999 and interest on a government security
sold short on September 30, 1999.
General and administrative expenses increased approximately $388,000 for
the year ended December 31, 1999 as compared to 1998 primarily due to an
incentive fee payable to the Advisor, an increase in the reimbursements of
certain administrative and other costs incurred by the Advisor on our behalf and
an increase in public relations expenses due to the reorganization of the
Company.
Organization costs in the amount of approximately $365,000 were expensed
for the year ended December 31, 1999 relating to the reorganization of the
Company.
A net loss on the commercial mortgage-backed security-related investment
and government security sold short position in the amount of approximately
$218,000 was recorded for the year ended December 31, 1999 due to changes in the
fair values of such positions since they originated on September 30, 1999.
42
A gain on repayment of mortgage loans in the amount of approximately
$3,273,000 was recorded for the year ended December 31, 1999 relating to the
repayment of the Cove and Oxford mortgage loans on March 1, 1999.
Distributions
Of the total distributions paid of $5,566,015 and $5,543,580 for the years
ended December 31, 2000 and 1999, respectively, $2,248,259 ($.59 per share or
40%) and $686,445 ($.18 per share or 12%), respectively, represented a return of
capital determined in accordance with generally accepted accounting principles.
As of December 31, 2000, the aggregate amount of the distributions made since
the commencement of the initial public offering representing a return of
capital, in accordance with generally accepted accounting principles, totaled
$14,117,727. The portion of the distributions which constituted a return of
capital was made in order to maintain level distributions to shareholders.
Recently Issued Accounting Standards
SFAS No. 133, "Accounting for Derivative Instruments and Hedging
Activities" establishes accounting and reporting standards for derivative
instruments, including certain derivative instruments embedded in other
contracts, and for hedging activities. This statement was implemented by the
Company on January 1, 2001. Because the Company does not utilize derivatives,
implementation of this statement did not have a material effect on the Company's
financial statements.
In July 2001, the Financial Accounting Standards Board issued Statement No.
141, "Business Combinations" (SFAS 141) and Statement No. 142, "Goodwill and
Other Intangible Assets" (SFAS 142). These statements establish new standards
for accounting and reporting for business combinations and for goodwill and
intangible assets resulting from business combinations. SFAS 141 applies to all
business combinations initiated after June 30, 2001; the Company is required to
implement SFAS 142 on January 1, 2002. Management believes that implementation
of these statements will not have a material impact on the Company's financial
statements.
In August of 2001, the FASB issued SFAS No. 143, "Accounting for Asset
Retirement Obligations" (effective January 1, 2003) and SFAS No. 144,
"Accounting for the Impairment or Disposal of Long Lived Assets" (effective
January 1, 2002). SFAS No. 143 requires the recording of the fair value of a
liability for an asset retirement obligation in the period in which it is
incurred. SFAS No. 144 supercedes existing accounting literature dealing with
impairment and disposal of long-lived assets, including discontinued operations.
It addresses financial accounting and reporting for the impairment of long-lived
assets and for long-lived assets to be disposed of, and expands current
reporting for discontinued operations to include disposals of a "component" of
an entity that has been disposed of or is classified as held for sale. The
Company is in the process of evaluating the financial statement impact of the
adoption these two standards.
Inflation
Inflation did not have a material effect on our results for the periods
presented.
Quantitative and Qualitative Disclosures About Market Risk
Market risk is the exposure to loss resulting from changes in interest
rates, changes in spreads on CMBS, foreign currency exchange rates, commodity
prices and equity prices. The primary market risk to which our investments are
exposed is interest rate risk which is highly sensitive to many factors,
including governmental monetary and tax policies, domestic and international
economic and political considerations and other factors beyond our control.
Our borrowings under repurchase agreements bear interest at rates that
fluctuate with LIBOR. Based on the $43.2 million of borrowings outstanding under
these facilities at September 30, 2001, a 1% change in LIBOR would impact our
annual net income and cash flows by approximately $432,000.
43
Cash flows and income from our other financial instruments, consisting
primarily of mortgage loans, a preferred equity interest, GNMA certificates, and
cash and cash equivalents, would not be significantly affected by changes in
interest rates, because most of these instruments bear interest at fixed rates,
and are not subject to financing or hedged.
Cash and cash equivalents and the mortgage loans are carried at historical
cost, and so their carrying values are not impacted by changes in interest
rates. The GNMA investments are adjusted to market value through comprehensive
income in the equity statement, but changes in their value have not historically
been significant to shareholders' equity. The preferred equity interest is
carried on the equity method; although changes in interest rates would not
directly impact the carrying value of this asset, they might adversely affect
the ability of the underlying entity to meet its preferred distribution
requirements.
44
DESCRIPTION OF SECURITIES
The summary of the terms of our shares of beneficial interest set forth
below does not purport to be complete and is subject to and qualified in its
entirety by reference to our declaration of trust, as amended and restated from
time to time.
General
Our authorized capital consists of 12,500,000 shares of beneficial
interest, par value $0.10 per share. All of our authorized and issued capital is
designated as common shares. We have not designated any of our shares of
beneficial interest as preferred shares. As of November 14, 2001, we had
outstanding 3,838,630 common shares. In addition, we have reserved 383,924
common shares for issuance under our Incentive Share Option Plan. We may sell
and issue as many shares of beneficial interest as the trustees determine in
their sole discretion. A majority of the trustees, including a majority of the
independent trustees, are authorized to determine from time to time the number
of authorized shares that will be sold and issued. The Board of Trustees may
classify any unissued shares in one or more classes or series of beneficial
interests.
Common Shares of Beneficial Interest
All common shares of beneficial interest have equal voting, dividend,
distribution, liquidation, redemption and other rights and have one vote per
share on all matters submitted to a vote of the shareholders. Common shares will
be validly issued, fully paid and non-assessable by us or on our behalf upon
receipt of full consideration for which they have been issued or without
additional consideration if issued by way of share dividend, share split, or
upon the conversion of convertible debt, and will not be subject to redemption
by us (except in the case of a redemption to prevent a violation of the
concentration of ownership provisions of the Code applicable to REITs). Unless
otherwise permitted by the Board of Trustees, the common shares do not entitle
the shareholders to preference, preemptive, appraisal, conversion or exchange
rights of any kind.
Preferred Shares of Beneficial Interest
As of September 30, 2001, we have not designated any of our shares of
beneficial interest as preferred shares. The Board of Trustees may classify any
unissued preferred shares of beneficial interest and reclassify any previously
classified but unissued preferred shares of any series from time to time, in one
or more series of shares. The Board of Trustees has no present plans to
designate any preferred shares.
Restrictions on Transfer
In order for us to qualify as a REIT, our shares must be beneficially owned
by 100 or more persons for at least 335 days of a taxable year of 12 months or
during a proportionate part of a shorter taxable year. Also, not more than 50%
of the number or value of the outstanding shares may be owned, directly or
indirectly, by five or fewer individuals (as defined in the Internal Revenue
Code of 1986, as amended, to include certain exempt entities) during the last
half of a taxable year or during a proportionate part of a shorter taxable year
(other than during its first taxable year). In order to prevent five or fewer
individuals from acquiring more than 50% of our outstanding shares, and a
resulting failure to qualify as a REIT, we intend to limit the ownership and
transfer of shares in order to comply with such limitations.
Certain transfers or purchases may be prohibited by the Board of Trustees
to ensure our continued qualification as a REIT under the Code. The Board of
Trustees may require each proposed transferee of shares to deliver a statement
or affidavit setting forth the number of shares, if any, already owned, directly
or indirectly, by such transferee and may refuse to permit any transfer of
shares which would cause an accumulation of shares that would jeopardize our
status as a REIT.
Our declaration of trust provides that the Board of Trustees may redeem
shares in order to maintain our REIT status. The redemption price is determined
in good faith by our independent trustees.
45
Our declaration of trust provides that, subject to certain exceptions, if
at any time, a person becomes an owner of, or is deemed to own by virtue of the
attribution provisions of the Code, more than 9.8% of the outstanding shares,
then the shares most recently acquired by such person which are in excess of the
9.8% limit (the "Excess Shares") will have the following characteristics:
o not have any voting rights;
o not be deemed outstanding for the purpose of determining a quorum
at the annual meeting or any special meeting of shareholders or
for determining the number of outstanding shares for purposes of
determining a "majority of the outstanding shares" in connection
with a shareholders' vote without a meeting;
o any dividends or distributions with respect to the Excess Shares
will be held by us in a savings account for the benefit of the
holders of such Excess Shares until such time as the Excess Shares
cease to be Excess Shares; and
o Excess Shares shall be deemed to have been offered for sale to us
or our designee for a period of 120 days from the date of (i) the
transfer that created the Excess Shares, if we had actual
knowledge of the transfer or (ii) if we do not have actual
knowledge of the transfer, the determination by the trustees in
good faith that a transfer creating Excess Shares has taken place.
The price for such Excess Shares shall be their fair market value
as of the date of either (i) or (ii) above.
After we give notice of our intention to purchase the Excess Shares such
shares shall have no further rights beyond the right of the shareholder to
receive payment for them.
Any person who acquires Excess Shares is obliged to immediately give
written notice to us and provide us with any information we may request in order
to determine the effect of the acquisition on our status as a REIT.
Restrictions on Certain Conversion Transactions
Our declaration of trust requires that 80% in interest of the shareholders
and all the independent trustees approve "conversion transactions," which are
exchange offers, mergers, consolidations or similar transactions involving us in
which the shareholders receive securities in a surviving entity having a
substantially longer duration or materially different investment objectives and
policies, or that is anticipated to provide significantly greater compensation
to management, except for any such transaction affected because of changes in
applicable law, or to preserve tax advantages for a majority in interest of the
shareholders. It should be noted that standards such as "substantially longer
duration," "materially different investment objectives and policies" or
"provides significantly greater compensation to management" are not defined and
are by their nature potentially ambiguous. Any ambiguities will be resolved by
the Board of Trustees (a majority of whom are independent trustees).
Certain Provisions of our Declaration of Trust.
Our organizational document, our declaration of trust, binds each trustee
and each shareholder. Each shareholder is deemed to have agreed to the terms of
our declaration of trust by electing to become a shareholder.
Shareholder Meetings
An annual meeting of shareholders will be held not less than 30 days after
delivery of the annual report, but in no event later than June 30 of each year.
Special meetings may be called by the Chairman of the Board, by the President,
by a majority of the trustees or by a majority of the independent trustees, or
by shareholders holding, in the aggregate, not less than 10% of the outstanding
common shares. At any meeting of shareholders, each shareholder is entitled to
one vote for each common share owned of record (other than Excess Shares) on the
applicable record date. In general, the presence in person or by proxy of a
majority of the outstanding common shares shall constitute a quorum, and a
majority vote of the shareholders will be binding on all our shareholders.
46
Shareholder Voting Rights
Except as otherwise provided, all common shares shall have equal voting
rights. Shareholders do not have cumulative voting rights.
Excess Shares are not entitled to any voting rights and are not considered
outstanding for the purpose of determining a quorum.
All elections for trustees are decided by a plurality vote at a meeting or
without a meeting provided that at least a majority of the outstanding shares
cast a vote in such election. Unless otherwise provided by our declaration of
trust, all other questions are decided by a majority of the votes cast at a
meeting at which a quorum is present or a majority of outstanding shares cast,
without a meeting.
Each shareholder entitled to vote may do so (i) at a meeting, in person, by
written proxy or by a signed writing or consent directing the manner in which
the shareholder desires that the shareholder's vote be cast (which must be
received by the trustees prior to such meeting) or (ii) without a meeting, by a
signed writing or consent directing the manner in which the shareholder desires
that the shareholder's vote be cast (which must be received by the trustees
prior to the date the votes of the shareholders are to be counted).
Any or all trustees may be removed, with or without cause, by the
affirmative vote of the holders of at least a majority of the outstanding shares
entitled to vote.
Shareholder Lists
An alphabetical list of names, record addresses and business telephone
numbers of all shareholders with the number of shares held by each, is
maintained as part of our books and records at our principal office. Such list
is updated at least quarterly, and is open for inspection by a shareholder or
the shareholder's designated agent upon such shareholder's request. Such list
will be mailed to any shareholder requesting the list within 10 days of the
request. We may require the shareholder requesting such shareholder's list to
represent that the list is not requested for a commercial purpose unrelated to
the shareholder's interest in us.
Inspection of Books and Records
Any shareholder and any designated representative thereof is permitted
access to all of our records at all reasonable times, and may inspect and copy
any of them. In addition, our books and records are open for inspection by state
securities administrators upon reasonable notice and during normal business
hours at our principal place of business.
Trustees
A majority of the trustees must at all times be independent trustees.
Independent trustees are trustees who are not affiliated with the Advisor, not
serving as a director or trustee for more than three other REITs organized by
our sponsor and not performing other services for us except as trustees. Our
declaration of trust requires that we have not less than three nor more than
nine trustees as fixed from time to time by the Board of Trustees. On June 12,
2001, the Board of Trustees fixed the number of trustees at five.
A trustee may be removed by a majority of the other trustees only for
cause. A trustee may be removed, with or without cause, by vote of the majority
of the outstanding shares entitled to vote. Any vacancy, except a vacancy
created by the removal of a trustee by the shareholders, may be filled by a
majority of the remaining trustees, except that independent trustees must
nominate replacements for vacancies in independent trustee positions. Vacancies
caused as a result of the removal of a trustee by the shareholders must be
filled by the shareholders. Each trustee serves a term of one year.
47
No bond is required to secure the performance of a trustee unless the Board
of Trustees so provide or as required by law. The trustees are empowered to fix
the compensation of all officers whom they select. The independent trustees will
be paid $10,000 per year. Non-independent trustees will not be compensated by
us.
None of the Advisor, the trustees nor their affiliates may vote any shares
held by them on matters submitted to the shareholders regarding the removal of
or on any transaction between us and the Advisor, the trustees or their
affiliates. Shares held by the Advisor, the trustees and their affiliates may
not be included in determining the number of outstanding shares entitled to vote
on these matters, nor in the shares actually voted thereon.
Amendment of the Declaration of Trust
Our declaration of trust may be amended by the vote of the holders of a
majority of the outstanding common shares and a majority of the trustees,
including a majority of the independent trustees, except that the amendment of
the provision contained in our declaration of trust regarding supermajority
shareholder approval of certain roll-up or conversion transactions requires the
vote of the holders of 80% of the outstanding shares. Notwithstanding the
foregoing, a majority of the trustees, including a majority of the independent
trustees, are authorized to amend our declaration of trust without the consent
of shareholders (i) to the minimum extent necessary, based on an opinion of
counsel, to comply with the provisions of the Code applicable to REITs, the
regulations thereunder, and any ruling on or interpretation of the Code or the
regulations thereunder (ii) to delete or add any provision required to be
deleted or added by the Securities and Exchange Commission or a state "blue sky"
commissioner, which addition or deletion is deemed by such official to be for
the benefit or protection of shareholders or (iii) to clarify any ambiguities or
correct any inconsistencies.
Responsibility of Trustees
The Board of Trustees is responsible for our general policies and for such
general supervision and management of our business as may be necessary to insure
that such business conforms to the provisions of our declaration of trust.
The trustees are accountable to the shareholders as fiduciaries and are
required to perform their duties in good faith and in a manner each trustee
believes to be in our best interest and our shareholders, with such care,
including reasonable inquiry, as a prudent person in a like position would use
under similar circumstances.
Our declaration of trust provides that the trustees shall have full,
absolute and exclusive power, control, management and authority over our assets
and over our business and affairs to the same extent as if the trustees were the
sole owners thereof in their own right. The trustees have the power to enter
into commitments to make any investment, purchase or acquisition or to exercise
any power authorized by our declaration of trust, including the power to retain
an advisor and to delegate any of the trustees' powers and duties to an advisor.
The trustees have the responsibility to establish written policies on
investments and borrowings and shall monitor our and the Advisor's
administrative procedures, investment operations and performance to assure that
such policies are carried out. A majority in interest of the shareholders must
approve any change in our investment objectives.
Indemnification
We agreed to indemnify and hold harmless our trustees, our Advisor and
their affiliates who are performing services on our behalf ("Indemnified
Parties") against expense or liability, including attorneys' fees and
disbursements, in any action arising out of any act performed or omitted to be
performed by them in connection with our operation or business; provided, that,
(i) our trustee or the Advisor has determined, in good faith, that the course of
conduct which caused the loss or liability was in our best interests (ii) such
liability or loss was not the result of negligence or misconduct on the part of
the Indemnified Party and (iii) such indemnification or agreement to hold
harmless is recoverable only out of our assets and not from the shareholders. In
addition, our declaration of trust contains provisions limiting the personal
liability of our trustees, officers and shareholders.
48
We do not indemnify the Indemnified Parties for any liability imposed by a
judgment, and costs associated with a judgment, including attorneys' fees,
arising from or out of a violation of state or federal securities laws. However,
we may indemnify the Indemnified Parties for settlements and related expenses of
lawsuits alleging securities laws violations and for expenses incurred in
successfully defending such lawsuits, but only if: (a) a court either (i)
approves the settlement and finds that indemnification of the settlement and
related costs should be made or (ii) approves indemnification of litigation
costs if there has been a successful defense or (b) there has been a dismissal
on the merits with prejudice (without a settlement).
Possible Shareholder Liability
It is possible that certain states may not recognize the limited liability
of shareholders, although our declaration of trust provides that our
shareholders shall not be subject to any personal liability for our acts or
obligations. Our declaration of trust also provides that every written agreement
entered into by us shall contain a provision that our obligations are not
enforceable against our shareholders personally. No personal liability should
attach to our shareholders under any agreement containing such a provision;
however, not every written agreement entered into by us contains such a
provision. In certain states, our shareholders may be held personally liable for
claims against us (such as contract claims where the underlying agreement does
not specifically exclude shareholder liability, claims for taxes, certain
statutory liability and tort claims). Upon payment of any such liability,
however, the shareholder will, in the absence of willful misconduct on the
shareholder's part, be entitled to reimbursement from our general assets, to the
extent such assets are sufficient to satisfy the claim.
Transfer Agent and Registrar
EquiServe Trust Company N.A., c/o EquiServe American Mortgage Acceptance
Company, P.O. Box 40310, Providence, RI 02940-3010, is the transfer agent and
registrar for our shares. Its telephone number is (800) 730-6001.
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CERTAIN FEDERAL INCOME TAX CONSIDERATIONS
The following discussion summarizes the material federal income tax
considerations to you as a prospective holder of shares. The following
discussion is for general information purposes only, is not exhaustive of all
possible tax considerations and is not intended to be and should not be
construed as tax advice. For example, this summary does not give a detailed
discussion of any state, local or foreign tax considerations. In addition, this
discussion is intended to address only those federal income tax considerations
that are generally applicable to all our shareholders. It does not discuss all
of the aspects of federal income taxation that may be relevant to you in light
of your particular circumstances or to certain types of shareholders who are
subject to special treatment under the federal income tax laws including,
without limitation, insurance companies, tax-exempt entities, financial
institutions or broker-dealers, foreign corporations and persons who are not
citizens or residents of the United States.
The information in this section is based on the Internal Revenue Code of
1986, as amended, which is referred to as the Code, existing, temporary and
proposed regulations under the Code, the legislative history of the Code,
current administrative rulings and practices of the IRS and court decisions, all
as of the date hereof. No assurance can be given that future legislation,
regulations, administrative interpretations and court decisions will not
significantly change current law or adversely affect existing interpretations of
current law. Any such change could apply retroactively to transactions preceding
the date of the change. In addition, we have not received, and do not plan to
request, any rulings from the IRS concerning our tax treatment. Thus no
assurance can be provided that the statements set forth herein (which do not
bind the IRS or the courts) will not be challenged by the IRS or that such
statements will be sustained by a court if so challenged.
EACH PROSPECTIVE PURCHASER OF SHARES IS ADVISED TO CONSULT WITH HIS OR HER OWN
TAX ADVISOR REGARDING THE SPECIFIC TAX CONSEQUENCES TO HIM OR HER OF THE
PURCHASE, OWNERSHIP AND SALE OF SHARES OF AN ENTITY ELECTING TO BE TAXED AS A
REIT, INCLUDING THE FEDERAL, STATE, LOCAL AND FOREIGN AND OTHER TAX CONSEQUENCES
OF SUCH PURCHASE, OWNERSHIP, SALE AND ELECTION AND OF POTENTIAL CHANGES IN
APPLICABLE TAX LAWS.
Taxation of the Company
General. We elected to be taxed as a REIT under Sections 856 through 860 of
the Code, commencing with our taxable year ended December 31, 1991. We believe
that we have been organized, and have operated, in such a manner so as to
qualify for taxation as a REIT under the Code and intend to conduct our
operations so as to continue to qualify for taxation as a REIT. No assurance,
however, can be given that we have operated in a manner so as to qualify or will
be able to operate in such a manner so as to remain qualified as a REIT.
Qualification and taxation as a REIT depend upon our ability to meet on a
continuing basis, through actual annual operating results, the required
distribution levels, diversity of share ownership and the various qualification
tests imposed under the Code discussed below, the results of which will not be
reviewed by counsel. Given the highly complex nature of the rules governing
REITs, the ongoing importance of factual determinations, and the possibility of
future changes in our circumstances, no assurance can be given that the actual
results of our operations for any one taxable year have satisfied or will
continue to satisfy such requirements.
The following is a general summary of the Code provisions that govern the
federal income tax treatment of a REIT and its shareholders. These provisions of
the Code are highly technical and complex. This summary is qualified in its
entirety by the applicable Code provisions, Treasury Regulations and
administrative and judicial interpretations thereof, all of which are subject to
change prospectively or retroactively.
If we qualify for taxation as a REIT, we generally will not be subject to
federal corporate income taxes on our net income that is currently distributed
to shareholders. This treatment substantially eliminates the "double taxation"
(at the corporate and shareholder levels) that generally results from investment
in a corporation. However, we will be subject to federal income tax as follows:
first, we will be taxed at regular corporate rates on any undistributed REIT
taxable income, including undistributed net capital gains. Second, under certain
circumstances, we may be subject to the "alternative minimum tax" on our items
of tax preference. Third, if we have (a) net
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income from the sale or other disposition of "foreclosure property", which is,
in general, property acquired on foreclosure or otherwise on default on a loan
secured by such real property or a lease of such property, which is held
primarily for sale to customers in the ordinary course of business or (b) other
nonqualifying income from foreclosure property, we will be subject to tax at the
highest corporate rate on such income. Fourth, if we have net income from
prohibited transactions such income will be subject to a 100% tax. Prohibited
transactions are, in general, certain sales or other dispositions of property
held primarily for sale to customers in the ordinary course of business other
than foreclosure property. Fifth, if we should fail to satisfy the 75% gross
income test or the 95% gross income test (as discussed below), but nonetheless
maintain our qualification as a REIT because certain other requirements have
been met, we will be subject to a 100% tax on an amount equal to (a) the gross
income attributable to the greater of the amount by which we fail the 75% or 95%
test multiplied by (b) a fraction intended to reflect our profitability. Sixth,
if we should fail to distribute during each calendar year at least the sum of
(a) 85% of our REIT ordinary income for such year, (b) 95% of our REIT capital
gain net income for such year, and (c) any undistributed taxable income from
prior periods, we would be subject to a 4% excise tax on the excess of such
required distribution over the amounts actually distributed. Seventh, as
provided in temporary regulations, if we acquire any asset from a C corporation
(i.e., a corporation generally subject to full corporate level tax) in a
transaction in which the basis of the asset in our hands is determined by
reference to the basis of the asset (or any other property) in the hands of the
C corporation, the "built-in gain" associated with the asset would be
immediately subject to tax. However, if we make the proper election on our tax
return for the year in which we acquire any such asset, we instead would be
subject to tax at the highest corporate rate if we dispose of such asset during
the 10 year period beginning on the date that we acquired that asset, to the
extent of such property's "built-in gain" (the excess of the fair market value
of such property at the time of our acquisition over the adjusted basis of such
property at such time). We also will incur a 100% excise tax on transactions
with a taxable REIT subsidiary that are not conducted on an arm's-length basis.
Requirements for Qualification. A REIT is a corporation, trust or
association (1) which is managed by one or more trustees or directors, (2) the
beneficial ownership of which is evidenced by transferable shares, or by
transferable certificates of beneficial interest, (3) which would be taxable as
a domestic corporation, but for Sections 856 through 859 of the Code, (4) which
is neither a financial institution nor an insurance company subject to certain
provisions of the Code, (5) that has the calendar year as its taxable year, (6)
the beneficial ownership of which is held by 100 or more persons, (7) during the
last half of each taxable year not more than 50% in value of the outstanding
stock of which is owned, directly or indirectly, by five or fewer individuals
(as defined in the Code to include certain entities), and (8) which meets
certain other tests, described below, regarding the nature of its income and
assets. The Code provides that conditions (1) through (5), inclusive, must be
met during the entire taxable year and that condition (6) must be met during at
least 335 days of a taxable year of 12 months, or during a proportionate part of
a taxable year of less than 12 months.
We may redeem, at our option, a sufficient number of shares or restrict the
transfer thereof to bring or maintain the ownership of the shares in conformity
with the requirements of the Code. In addition, our declaration of trust
includes restrictions regarding the transfer of our stock that are intended to
assist us in continuing to satisfy requirements (6) and (7). Moreover, if we
comply with regulatory rules pursuant to which we are required to send annual
letters to holders of our capital stock requesting information regarding the
actual ownership of our capital stock, and we do not know, or exercising
reasonable diligence would not have known, whether we failed to meet requirement
(7) above, we will be treated as having met the requirement.
The Code allows a REIT to own wholly-owned subsidiaries which are
"qualified REIT subsidiaries." The Code provides that a qualified REIT
subsidiary is not treated as a separate corporation, and all of its assets,
liabilities and items of income, deduction and credit are treated as assets,
liabilities and items of income, deduction and credit of the REIT. Thus, in
applying the requirements described herein, our qualified REIT subsidiaries will
be ignored, and all assets, liabilities and items of income, deduction and
credit of such subsidiaries will be treated as our assets, liabilities and items
of income, deduction and credit.
For taxable years beginning on or after January 1, 2001, a REIT may also
hold any direct or indirect interest in a corporation that qualifies as a
"taxable REIT subsidiary", as long as the REIT's aggregate holdings of taxable
REIT subsidiary securities do not exceed 20% of the value of the REIT's total
assets. A taxable REIT subsidiary is a fully taxable corporation that generally
is permitted to engage in businesses, own assets, and earn income that, if
engaged
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in, owned, or earned by the REIT, might jeopardize REIT status or result in the
imposition of penalty taxes on the REIT. To qualify as a taxable REIT
subsidiary, the subsidiary and the REIT must make a joint election to treat the
subsidiary as a taxable REIT subsidiary. A taxable REIT subsidiary also includes
any corporation (other than a REIT or a qualified REIT subsidiary) in which a
taxable REIT subsidiary directly or indirectly owns more than 35% of the total
voting power or value. See "Asset Tests" below. A taxable REIT subsidiary will
pay tax at regular corporate income rates on any taxable income it earns.
Moreover, the Code contains rules, including rules requiring the imposition of
taxes on a REIT at the rate of 100% on certain reallocated income and expenses,
to ensure that contractual arrangements between a taxable REIT subsidiary and
its parent REIT are at arm's-length. An election has been made to treat AMAC/FM
Corporation as a taxable REIT subsidiary as of January 1, 2001.
In the case of a REIT which is a partner in a partnership, Treasury
Regulations provide that the REIT will be deemed to own its proportionate share
of each of the assets of the partnership and will be deemed to be entitled to
the income of the partnership attributable to such share. In addition, the
character of the assets and items of gross income of the partnership will retain
the same character in the hands of the REIT for purposes of Section 856 of the
Code, including satisfying the gross income and assets tests (as discussed
below). Thus, our proportionate share of the assets, liabilities, and items of
gross income of any partnerships in which we own an interest are treated as our
assets, liabilities and items of gross income for purposes of applying the
requirements described herein.
Income Tests. In order to maintain qualification as a REIT, we must satisfy
annually certain gross income requirements. First, at least 75% of our gross
income (excluding gross income from prohibited transactions) for each taxable
year must be derived directly or indirectly from investments relating to real
property or mortgages on real property (including "rents from real property"
and, in certain circumstances, interest) or from certain types of qualified
temporary investments. Second, at least 95% of our gross income (excluding gross
income from prohibited transactions) for each taxable year must be derived from
such real property investments, dividends, interest and gain from the sale or
disposition of stock or securities.
Interest will qualify as interest on obligations secured by mortgages on
real property or on interests in real property in satisfying the gross income
requirements for a REIT described above only if several conditions are met.
Interest on obligations secured by mortgages on real property or on interests in
real property will be treated as qualifying income to the extent that the fair
market value of the property that secures the loan has a value greater than or
equal to the highest principal amount, including accrued interest, of such loan
outstanding during the REIT taxable year. To the extent the fair market value of
such property at the time of issuance and when the loan is acquired is less than
the highest principal amount, including accrued interest, of such loan
outstanding during the REIT taxable year, only a proportionate part of the
interest on such loan shall be treated as qualifying income. For purposes of the
gross income requirements, interest includes only amounts that represent
compensation for the use or forbearance of money, and does not include a charge
for services. Interest includes income from a REMIC, as long as at least 95% of
the assets of the REMIC are interests in real property. If less than 95% of the
assets of a REMIC consist of real estate, income accrued by the REIT will be
treated as interest from a mortgage in the proportion in which assets of the
REMIC consist of real estate assets. Subject to certain exceptions, interest
does not include amounts received or accrued, directly or indirectly, if the
amount depends, in whole or in part, on the income or profits of any person. One
exception to this rule is that amounts may be based on the gross receipts or
sales of a person, and still constitute interest for these purposes. The second
exception would be available if the REIT receives or accrues amounts that would
be excluded from interest because the borrower receives or accrues an amount
based on the income or profits of any person; in such case, only a proportionate
part of the amount received or accrued by the REIT is excluded from being
treated as interest. Third, if the borrower derives substantially all of its
gross income with respect to the property subject to the mortgage from the
leasing of its property to tenants, an amount based on the net income or profits
of the borrower may be treated as interest if the borrower receives or accrues
amounts that would qualify as rents from real property had such amounts been
received by the REIT.
Rents received by us will qualify as "rents from real property" in
satisfying the gross income requirements for a REIT described above only if
several conditions are met.
We believe that substantially all of our interest income will be qualifying
income under the gross income tests.
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If we fail to satisfy one or both of the 75% or 95% gross income tests for
any taxable year, we may nevertheless qualify as a REIT for such year if such
failure was due to reasonable cause and not willful neglect, we disclosed the
nature and amounts of our items of gross income in a schedule attached to our
return, and any incorrect information on the schedule was not due to fraud with
intent to evade tax. It is not possible, however, to state whether in all
circumstances we would be entitled to the benefit of this relief provision. Even
if this relief provision applied, a 100% penalty tax would be imposed on the
amount by which we failed the 75% or 95% test (whichever amount is greater),
less an amount which generally reflects expenses attributable to earning the
nonqualified income.
Subject to certain safe harbor exceptions, any gain realized by us on the
sale of any property held as inventory or other property held primarily for sale
to customers in the ordinary course of business will be treated as income from a
prohibited transaction that is subject to a 100% penalty tax. Such prohibited
transaction income may also have an adverse effect upon our ability to satisfy
the income tests for qualification as a REIT. Under existing law, whether
property is held as inventory or primarily for sale to customers in the ordinary
course of a trade or business is a question of fact that depends on all the
facts and circumstances with respect to the particular transaction.
Asset Tests. At the close of each quarter of our taxable year, we must also
satisfy the following tests relating to the nature of our assets. At least 75%
of the value of our total assets must be represented by real estate assets,
including (1) our allocable share of mortgage and other real estate assets held
by partnerships in which we own an interest or held by our qualified REIT
subsidiaries and (2) stock or debt instruments held for not more than one year
purchased with the proceeds of an offering of equity securities or a long-term
(at least five years) debt offering by us, cash, cash items and government
securities. In addition, not more than 25% of our total assets may be
represented by securities other than those in the 75% asset class. Not more than
20% of the value of our total assets may be represented by securities of one or
more taxable REIT subsidiaries (as defined above under "Requirements for
Qualification"). Except for investments included in the 75% asset class,
securities in a taxable REIT subsidiary or qualified REIT subsidiary and certain
partnership interests and debt obligations, (1) not more than 5% of the value of
our total assets may be represented by securities of any one issuer, (2) we may
not hold securities that possess more than 10% of the total voting power of the
outstanding securities of a single issuer and (3) we may not hold securities
that have a value of more than 10% of the total value of the outstanding
securities of any one issuer.
We believe that substantially all of our assets consist and, after the
offering, will consist of (1) mortgages, (2) stock or debt investments that earn
qualified temporary investment income, (3) other qualified real estate assets,
and (4) cash, cash items and government securities. We may also invest in
securities of other entities, provided that such investments will not prevent us
from satisfying the asset and income tests for REIT qualification set forth
above.
After initially meeting the asset tests at the close of any quarter, we
will not lose our status as a REIT for failure to satisfy the asset tests at the
end of a later quarter solely by reason of changes in asset values. If we
inadvertently fail one or more of the asset tests at the end of a calendar
quarter because we acquire securities or other property during the quarter, we
can cure this failure by disposing of sufficient nonqualifying assets within 30
days after the close of the calendar quarter in which it arose.
Annual Distribution Requirement. With respect to each taxable year, we must
distribute to our shareholders as dividends (other than capital gain dividends)
at least 90% of our taxable income. Specifically, we must distribute an amount
equal to (1) 90% of the sum of our "REIT taxable income" (determined without
regard to the deduction for dividends paid and by excluding any net capital
gain), and any after-tax net income from foreclosure property, minus (2) the sum
of certain items of "excess noncash income" such as income attributable to
leveled stepped rents, cancellation of indebtedness and original issue discount.
REIT taxable income is generally computed in the same manner as taxable income
of ordinary corporations, with several adjustments, such as a deduction allowed
for dividends paid, but not for dividends received.
We will be subject to tax on amounts not distributed at regular United
States federal corporate income tax rates. In addition, a nondeductible 4%
excise tax is imposed on the excess of (1) 85% of our ordinary income for the
year plus 95% of capital gain net income for the year and the undistributed
portion of the required distribution for the prior year over (2) the actual
distribution to shareholders during the year (if any). Net operating losses
generated by us may be carried forward but not carried back and used by us for
20 years to reduce REIT taxable income and the
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amount that we will be required to distribute in order to remain qualified as a
REIT. As a REIT, our net capital losses may be carried forward for five years
(but not carried back) and used to reduce capital gains.
In general, a distribution must be made during the taxable year to which it
relates to satisfy the distribution test and to be deducted in computing REIT
taxable income. However, we may elect to treat a dividend declared and paid
after the end of the year (a "subsequent declared dividend") as paid during such
year for purposes of complying with the distribution test and computing REIT
taxable income, if the dividend is (1) declared before the regular or extended
due date of our tax return for such year and (2) paid not later than the date of
the first regular dividend payment made after the declaration, but in no case
later than 12 months after the end of the year. For purposes of computing the 4%
excise tax, a subsequent declared dividend is considered paid when actually
distributed. Furthermore, any dividend that is declared by us in October,
November or December of a calendar year, and payable to shareholders of record
as of a specified date in such quarter of such year will be deemed to have been
paid by us (and received by shareholders) on December 31 of such calendar year,
but only if such dividend is actually paid by us in January of the following
calendar year.
For purposes of complying with the distribution test for a taxable year as
a result of an adjustment in certain of our items of income, gain or deduction
by the IRS, we may be permitted to remedy such failure by paying a "deficiency
dividend" in a later year together with interest and a penalty. Such deficiency
dividend may be included in our deduction of dividends paid for the earlier year
for purposes of satisfying the distribution test. For purposes of the 4% excise
tax, the deficiency dividend is taken into account when paid, and any income
giving rise to the deficiency adjustment is treated as arising when the
deficiency dividend is paid.
We believe that we have distributed and intend to continue to distribute to
our shareholders in a timely manner such amounts sufficient to satisfy the
annual distribution requirements. However, it is possible that timing
differences between the accrual of income and its actual collection, and the
need to make non-deductible expenditures (such as principal payments on debt)
may cause us to recognize taxable income in excess of our net cash receipts,
thus increasing the difficulty of compliance with the distribution requirement.
In order to meet the distribution requirement, we might find it necessary to
arrange for short-term, or possibly long-term, borrowings.
Failure to Qualify. If we fail to qualify as a REIT for any taxable year,
and if certain relief provisions of the Code do not apply, we would be subject
to federal income tax (including applicable alternative minimum tax) on our
taxable income at regular corporate rates. Distributions to shareholders in any
year in which we fail to qualify will not be deductible by us nor will they be
required to be made. As a result, our failure to qualify as a REIT would reduce
the cash available for distribution by us to our shareholders. In addition, if
we fail to qualify as a REIT, all distributions to shareholders will be taxable
as ordinary income, to the extent of our current and accumulated earnings and
profits. Subject to certain limitations of the Code, corporate distributees may
be eligible for the dividends-received deduction.
If our failure to qualify as a REIT is not due to reasonable cause but
results from willful neglect, we would not be permitted to elect REIT status for
the four taxable years after the taxable year for which such disqualification is
effective. In the event we were to fail to qualify as a REIT in one year and
subsequently requalify in a later year, we might be required to recognize
taxable income based on the net appreciation in value of our assets as a
condition to requalification. In the alternative, we may be taxed on the net
appreciation in value of our assets if we sell assets within ten years of the
date we requalify as a REIT under federal income tax laws.
Taxation of Taxable U.S. Shareholders
As used herein, the term "U.S. shareholder" means a holder of shares who
(for United States federal income tax purposes) (1) is a citizen or resident of
the United States, (2) is a corporation, partnership, or other entity treated as
a corporation or partnership for federal income tax purposes created or
organized in or under the laws of the United States or of any political
subdivision thereof (unless, in the case of a partnership, Treasury regulations
are adopted that provide otherwise), (3) is an estate the income of which is
subject to United States federal income taxation regardless of its source or (4)
is a trust whose administration is subject to the primary supervision of a
United States
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court and which has one or more United States persons who have the authority to
control all substantial decisions of the trust or a trust that has a valid
election to be treated as a U.S. person in effect.
As long as we qualify as a REIT, distributions made to our U.S.
shareholders out of current or accumulated earnings and profits (and not
designated as capital gain dividends) will be taken into account by them as
ordinary income and corporate shareholders will not be eligible for the
dividends-received deduction as to such amounts.
Distributions that are properly designated as capital gain dividends will
be taxed as gains from the sale or exchange of a capital asset held for more
than one year (to the extent they do not exceed our actual net capital gain for
the taxable year) without regard to the period for which the shareholder has
held its shares. However, corporate shareholders may be required to treat up to
20% of certain capital gain dividends as ordinary income under the Code.
Distributions in excess of our current and accumulated earnings and profits
will constitute a non-taxable return of capital to a shareholder to the extent
that such distributions do not exceed the adjusted basis of the shareholder's
shares, and will result in a corresponding reduction in the shareholder's basis
in the shares. Any reduction in a shareholder's tax basis for its shares will
increase the amount of taxable gain or decrease the deductible loss that will be
realized upon the eventual disposition of the shares. We will notify
shareholders at the end of each year as to the portions of the distributions
which constitute ordinary income, capital gain or a return of capital. Any
portion of such distributions that exceed the adjusted basis of a U.S.
shareholder's shares will be taxed as capital gain from the disposition of
shares, provided that the shares are held as capital assets in the hands of the
U.S. shareholder.
Aside from the different income tax rates applicable to ordinary income and
capital gain dividends, regular and capital gain dividends from us will be
treated as dividend income for most other federal income tax purposes. In
particular, such dividends will be treated as "portfolio" income for purposes of
the passive activity loss limitation (including all individuals) and
shareholders generally will not be able to offset any "passive losses" against
such dividends. Dividends will be treated as investment income for purposes of
the investment interest limitation contained in Section 163(d) of the Code,
which limits the deductibility of interest expense incurred by noncorporate
taxpayers with respect to indebtedness attributable to certain investment
assets.
In general, dividends paid by us will be taxable to shareholders in the
year in which they are received, except in the case of dividends declared at the
end of the year, but paid in the following January, as discussed above.
In general, a domestic shareholder will realize capital gain or loss on the
disposition of shares equal to the difference between (1) the amount of cash and
the fair market value of any property received on such disposition and (2) the
shareholder's adjusted basis of such shares. Such gain or loss will generally be
short-term capital gain or loss if the shareholder has not held such shares for
more than one year and will be long-term capital gain or loss if such shares
have been held for more than one year. Loss upon the sale or exchange of shares
by a shareholder who has held such shares for six months or less (after applying
certain holding period rules) will be treated as long-term capital loss to the
extent of distributions from us required to be treated by such shareholder as
long-term capital gain.
We may elect to retain and pay income tax on net long-term capital gains.
If we make such an election, you, as a holder of shares, will (1) include in
your income as long-term capital gains your proportionate share of such
undistributed capital gains and (2) be deemed to have paid your proportionate
share of the tax paid by us on such undistributed capital gains and thereby
receive a credit or refund for such amount. As a holder of shares you will
increase the basis in your shares by the difference between the amount of
capital gain included in your income and the amount of tax you are deemed to
have paid. Our earnings and profits will be adjusted appropriately.
Backup Withholding
We will report to our domestic shareholders and the IRS the amount of
dividends paid during each calendar year, and the amount of tax withheld, if
any, with respect thereto. Under the backup withholding rules, a shareholder may
be subject to backup withholding at the rate of up to 30.5% (30% for 2002) with
respect to dividends paid unless such holder (a) is a corporation or comes
within certain other exempt categories and, when
55
required, demonstrates this fact, or (b) provides a taxpayer identification
number, certifies as to no loss of exemption from backup withholding and
otherwise complies with the applicable requirements of the backup withholding
rules. Amounts withheld as backup withholding will be creditable against the
shareholder's income tax liability. In addition, we may be required to withhold
a portion of capital gain distributions made to any shareholders who fail to
certify their non-foreign status to us. Additional issues may arise pertaining
to information reporting and backup withholding with respect to Non-U.S.
Shareholders (persons other than U.S. shareholders, further described below).
Non-U.S. Shareholders should consult their tax advisors with respect to any such
information and backup withholding requirements.
Taxation of Non-U.S. Shareholders
The following discussion is only a summary of the rules governing United
States federal income taxation of Non-U.S. Shareholders such as nonresident
alien individuals, foreign corporations, foreign partnerships or other foreign
estates or trusts. Prospective Non-U.S. Shareholders should consult with their
own tax advisors to determine the impact of federal, state and local income tax
laws with regard to an investment in shares, including any reporting
requirements.
Distributions that are not attributable to gain from sales or exchanges by
us of United States real property interests and not designated by us as capital
gains dividends will be treated as dividends of ordinary income to the extent
that they are made out of our current or accumulated earnings and profits. Such
distributions ordinarily will be subject to a withholding tax equal to 30% of
the gross amount of the distribution unless an applicable tax treaty reduces or
eliminates that tax. Certain tax treaties limit the extent to which dividends
paid by a REIT can qualify for a reduction of the withholding tax on dividends.
Distributions in excess of our current and accumulated earnings and profits will
not be taxable to a Non-U.S. Shareholder to the extent that they do not exceed
the adjusted basis of the shareholder's shares, but rather will reduce the
adjusted basis of such shares. To the extent that such distributions exceed the
adjusted basis of a Non-U.S. Shareholder's shares, they will give rise to tax
liability if the Non-U.S. Shareholder would otherwise be subject to tax on any
gain from the sale or disposition of his shares, as described below.
For withholding tax purposes, we are currently required to treat all
distributions as if made out of our current or accumulated earnings and profits
and thus intend to withhold at the rate of 30% (or a reduced treaty rate if
applicable) on the amount of any distribution (other than distributions
designated as capital gain dividends) made to a Non-U.S. Shareholder. Under
regulations, we would not be required to withhold at the 30% rate on
distributions we reasonably estimate to be in excess of our current and
accumulated earnings and profits. If it cannot be determined at the time a
distribution is made whether such distribution will be in excess of current and
accumulated earnings and profits, the distribution will be subject to
withholding at the rate applicable to ordinary dividends. However, the Non-U.S.
Shareholder may seek from the IRS a refund of such amounts from the IRS if it is
subsequently determined that such distribution was, in fact, in excess of our
current or accumulated earnings and profits, and the amount withheld exceeded
the Non-U.S. Shareholder's United States tax liability, if any, with respect to
the distribution.
For any year in which we qualify as a REIT, distributions that are
attributable to gain from sales or exchanges by us of United States real
property interests will be taxed to a Non-U.S. Shareholder under the provisions
of the Foreign Investment in Real Property Tax Act of 1980 ("FIRPTA"). Under
FIRPTA, a Non-U.S. Shareholder is taxed as if such gain were effectively
connected with a United States business. Non-U.S. Shareholders would thus be
taxed at the normal capital gain rates applicable to U.S. shareholders (subject
to applicable alternative minimum tax and a special alternative minimum tax in
the case of non-resident alien individuals). Also, distributions subject to
FIRPTA may be subject to a 30% branch profits tax in the hands of a corporate
Non-U.S. Shareholder not entitled to treaty relief or exemption. We are required
by applicable regulations to withhold 35% of any distribution that could be
designated by us as a capital gains dividend regardless of the amount actually
designated as a capital gain dividend. This amount is creditable against the
Non-U.S. Shareholder's FIRPTA tax liability.
Gain recognized by a Non-U.S. Shareholder upon a sale of shares generally
will not be taxed under FIRPTA if we are a "domestically controlled REIT,"
defined generally as a REIT in which at all times during a specified testing
56
period less than 50% in value of the shares was held directly or indirectly by
foreign persons. It is anticipated that we will continue to be a "domestically
controlled REIT" after the offering. Therefore, the sale of shares will not be
subject to taxation under FIRPTA. However, because our shares are publicly
traded, no assurance can be given that we will continue to qualify as a
"domestically controlled REIT." If the gain on the sale of shares were to be
subject to taxation under FIRPTA, the Non-U.S. Shareholder would be subject to
the same treatment as U.S. Shareholders with respect to such gain (subject to
applicable alternative minimum tax, special alternative minimum tax in the case
of nonresident alien individuals and possible application of the 30% branch
profits tax in the case of foreign corporations) and the purchaser would be
required to withhold and remit to the Internal Revenue Service 10% of the
purchase price. Gain not subject to FIRPTA will be taxable to a Non-U.S.
Shareholder if (1) investment in the shares is effectively connected with the
Non-U.S. Shareholder's United States trade or business, in which case the
Non-U.S. Shareholder will be subject to the same treatment as U.S. Shareholders
with respect to such gain, or (2) the Non-U.S. Shareholder is a nonresident
alien individual who was present in the United States for 183 days or more
during the taxable year and such nonresident alien individual has a "tax home"
in the United States, in which case the nonresident alien individual will be
subject to a 30% tax on the individual's capital gain.
Taxation of Tax-Exempt Shareholders
Tax-exempt entities, including qualified employee pension and profit
sharing trusts and individual retirement accounts ("Exempt Organizations"),
generally are exempt from federal income taxation. However, they are subject to
taxation on their unrelated business taxable income ("UBTI"). While investments
in real estate may generate UBTI, the Service has issued a published ruling to
the effect that dividend distributions by a REIT to an exempt employee pension
trust do not constitute UBTI, provided that the shares of the REIT are not
otherwise used in an unrelated trade or business of the exempt employee pension
trust. Based on that ruling, amounts distributed by us to Exempt Organizations
generally should not constitute UBTI. However, if an Exempt Organization
finances its acquisition of our shares with debt, a portion of its income from
us, if any, will constitute UBTI pursuant to the "debt-financed property" rules.
Furthermore, social clubs, voluntary employee benefit associations, supplemental
unemployment benefit trusts, and qualified group legal services plans that are
exempt from taxation under paragraphs (7), (9), (17), and (20), respectively, of
Code Section 501(c) are subject to different UBTI rules, which generally will
require them to characterize distributions from us as UBTI.
In addition, a pension trust that owns more than 10% of our shares is
required to treat a percentage of the dividends from us as UBTI (the "UBTI
Percentage") in certain circumstances. The UBTI Percentage is our gross income
derived from an unrelated trade or business (determined as if we were a pension
trust) divided by our total gross income for the year in which the dividends are
paid. The UBTI rule applies only if (i) the UBTI Percentage is at least 5% (ii)
we qualify as a REIT by reason of the modification of the 5/50 Rule that allows
the beneficiaries of the pension trust to be treated as holding our shares in
proportion to their actuarial interests in the pension trust and (iii) either
(A) one pension trust owns more than 25% of the value of our shares or (B) a
group of pension trusts individually holding more than 10% of the value of our
shares collectively owns more than 50% of the value of our shares.
While an investment in our shares by an Exempt Organization generally is
not expected to result in UBTI except in the circumstances described in the
preceding paragraph, any gross UBTI that does arise from such an investment will
be combined with all other gross UBTI of the Exempt Organization for a taxable
year and reduced by the sum of all deductions attributable to the UBTI and
$1,000. Any amount then remaining will constitute UBTI on which the Exempt
Organization will be subject to tax. If the gross income taken into account in
computing UBTI exceeds $1,000, the Exempt Organization is obligated to file a
tax return for such year on IRS Form 990-T. We, our Board of Trustees, and any
of our or their affiliates do not intend to undertake the preparation or filing
of IRS Form 990-T for any Exempt Organization in connection with an investment
by such Exempt Organization in the shares. Generally, IRS Form 990-T must be
filed with the Service by April 15 of the year following the year in which it
relates.
57
Other Tax Considerations
Entity Classification. Certain of our investments are held through ARCap
Investors, L.L.C., a limited liability company that has elected to be taxed as a
partnership. If such limited liability company were treated as an association,
the entity would be taxable as a corporation and therefore would be subject to
an entity level tax on its income. In such a situation, the character of our
assets and items of gross income would change and might preclude us from
qualifying as a REIT.
We believe that ARCap Investors, L.L.C. is properly treated as a
partnership for tax purposes (and not as an association taxable as a
corporation).
UNDERWRITING
Friedman, Billings, Ramsey & Co., Inc. is acting as representative of the
underwriters. Subject to the terms and conditions contained in the underwriting
agreement, we have agreed to sell to each underwriter, and each underwriter has
agreed to purchase from us the number of shares set forth opposite its name
below. The underwriting agreement provides that the obligation of the
underwriters to pay for and accept delivery of our shares is subject to approval
of certain legal matters by their counsel and to certain other conditions. The
underwriters are obligated to take and pay for all shares offered (other than
those covered by the over-allotment option described below) if any of the shares
are taken.
Underwriter Number of Shares
------------------------------------------ ------------------------
Friedman, Billings, Ramsey & Co., Inc.
[ ]
-------------------
Total 3,500,000
===================
The following table shows the per share and total underwriting discount we
will pay to the underwriters. The amounts are shown assuming both no exercise
and full exercise of the underwriters' option to purchase 525,000 additional
shares to cover over-allotments.
No Exercise Full Exercise
--------------------- ----------------------
Per Share $ $
Total $ $
Each of our officers and directors has agreed with the representatives, for
a period of 120 days after the date of this prospectus, subject to certain
exceptions, not to sell any shares or any securities convertible into or
exchangeable for shares owned by them, without the prior written consent of the
representatives. However, the representatives may, in their sole discretion and
at any time without notice, release all or any portion of the securities subject
to these agreements.
The underwriters propose to offer our shares directly to the public at $
per share and to certain dealers at this price less a concession not in excess
of $ per share. The underwriters may allow, and the dealers may reallow, a
concession not in excess of $ per share to certain dealers.
We expect to incur expenses of approximately $ in connection with this
offering.
We have granted the underwriters an option exercisable for 30 days after
the date of this prospectus to purchase up to 525,000 additional shares to cover
over-allotments, if any, at the public offering price less the underwriting
58
discounts set forth on the cover page of this prospectus. If the underwriters
exercise this option, the underwriters will have a firm commitment, subject to
certain conditions, to purchase all of the shares covered by the option.
We have agreed to grant to Friedman, Billings, Ramsey & Co., Inc., as
representative of the underwriters, and its designated affiliates warrants
representing the right to acquire up to a number of common shares equal to 1% of
the common shares issued to the public in this offering. These warrants will
allow the representative to acquire 35,000 common shares (40,250 in the event
the underwriters exercise their over-allotment option) at an exercise price per
share equal to the public offering price of a common share offered in this
offering. The warrants will be exercisable on the closing date of this offering
and have a term of five years. The warrants enable the representative of the
underwriters to profit from a rise in the market price of our common shares.
Dilution to our common shares will occur if the warrants are exercised at a time
when the exercise price is less than the market price of our common shares at
the time of exercise. In addition, the terms upon which we will be able to
obtain additional equity capital may be adversely affected because the holders
of the warrants can be expected to exercise the warrants at a time when we would
likely be able to obtain any needed capital on terms more favorable to us than
those provided in the warrants.
We have agreed to indemnify the underwriters against certain liabilities,
including liabilities under the Securities Act of 1933, as amended, or to
contribute to payments the underwriters may be required to make in respect
thereof.
In connection with this offering, the underwriters are permitted to engage
in certain transactions that stabilize the price of our shares. These
transactions consist of bids or purchases for the purpose of pegging, fixing or
maintaining the price of our shares. If the underwriters create a short position
in our shares in connection with this offering by selling more than 525,000
shares, the underwriters may reduce that short position by purchasing our shares
in the open market. In general, purchases of a security for the purpose of
stabilization or to reduce a short position could cause the price of the
security to be higher than it might be in the absence of those purchases.
Neither we nor the underwriters make any representation or prediction as to the
direction or magnitude of any effect that the transactions described above may
have on the price of our shares. In addition, neither we nor the underwriters
make any representation that the underwriters will engage in those transactions
or that those transactions, once commenced, will not be discontinued without
notice.
The representatives or their affiliates may provide us with investment
banking, financial advisory, or commercial banking services in the future, for
which they may receive customary compensation.
EXPERTS
The financial statements of American Mortgage Acceptance Company as of
December 31, 2000 and 1999 and for the years then ended included and
incorporated by reference in this prospectus from the Annual Report on Form 10-K
of American Mortgage Acceptance Company for the year ended December 31, 2000
have been audited by Deloitte & Touche LLP, independent auditors, as stated in
their report included and incorporated by reference herein, and have been so
included in reliance upon the report of such firm given upon their authority as
experts in accounting and auditing.
The financial statements of ARCap Investors, L.L.C. incorporated in this
prospectus by reference from the Annual Report on Form 10-K of American Mortgage
Acceptance Company for the year ended December 31, 2000 have been audited by
Deloitte & Touche LLP, independent auditors, as stated in their report appearing
therein, and have been so included in reliance upon the report of such firm
given upon their authority as experts in accounting and auditing.
The statements of income, changes in shareholders' equity, and cash flows
of American Mortgage Acceptance Company (formerly American Mortgage Investors
Trust) for the year ended December 31, 1998, have been included herein and in
the registration statement in reliance upon the report, also appearing elsewhere
herein, of KPMG LLP, independent accountants, and upon the authority of said
firm as experts in accounting and auditing.
LEGAL MATTERS
The validity of the common shares of beneficial interest offered hereby
will be passed upon for us by Goodwin Procter LLP, Boston, Massachusetts. The
description of certain federal income tax consequences in "Certain Federal
Income Tax Considerations" is based on an opinion of Paul, Hastings, Janofsky &
Walker LLP, New York, New York. Certain legal matters in connection with this
offering will be passed upon for the underwriters by Winston & Strawn, Chicago,
Illinois.
WHERE YOU CAN FIND MORE INFORMATION
We file annual, quarterly and special reports, proxy statements and other
information with the Securities and Exchange Commission. You may read and copy
the materials we file at the Commission's Public Reference Room at 450 Fifth
Street, N.W., Washington, D.C. 20549, as well as at the Commission's regional
offices at Citicorp
59
Center, 500 West Madison Street, Room 1400, Chicago, Illinois 60661-2511. Please
call the Commission at 1-800-SEC-0330 for further information on the operation
of the Public Reference Rooms. Our Commission filings are also available to the
public from the Commission's World Wide Web site on the Internet at
http://www.sec.gov. This site contains reports, proxy and information statements
and other information regarding issuers that file electronically with the
Commission. You may also read and copy this information at the National
Association of Securities Dealers, Inc., 1735 K Street, N.W., Washington, D.C.
20006.
We maintain a website on the world wide web at
http://www.americanmortgageco.com. The information contained in our website is
not part of this prospectus and you should not rely on it in deciding whether to
invest in our common shares.
We have filed a registration statement, of which this prospectus is a part,
covering the offered securities. As allowed by Commission rules, this prospectus
does not include all of the information contained in the registration statement
and the included exhibits, financial statements and schedules. We refer you to
the registration statement, the included exhibits, financial statements and
schedules for further information. This prospectus is qualified in its entirety
by such other information.
INCORPORATION OF CERTAIN DOCUMENTS BY REFERENCE
The Commission allows us to "incorporate by reference" information into
this prospectus, which means that we can disclose important information to you
by referring you to another document filed separately with the Commission under
the Securities Exchange Act of 1934 (the "Exchange Act"). The information
incorporated by reference is deemed to be part of this prospectus, except for
any information superseded by information in this prospectus. We have filed our
annual report on Form 10-K for the year ended December 31, 2000 and our
quarterly reports on Form 10-Q for the three months ended March 31, 2001, June
30, 2001 and September 30, 2001 with the Commission (File No. 0-23972), and
those documents are incorporated herein by reference.
Any documents we file pursuant to Section 13(a), 13(c), 14 or 15(d) of the
Exchange Act after the date of this prospectus and prior to the termination of
the offering of the securities to which this prospectus relates will
automatically be deemed to be incorporated by reference in this prospectus and
to be part hereof from the date of filing those documents. Any statement
contained in this prospectus or in a document incorporated by reference shall be
deemed to be modified or superseded for all purposes to the extent that a
statement contained in this prospectus or in any other document which is also
incorporated by reference modifies or supersedes that statement.
You may obtain copies of all documents which are incorporated in this
prospectus by reference (other than the exhibits to those documents which are
not specifically incorporated by reference herein) without charge by writing or
calling American Mortgage Acceptance Company, 625 Madison Avenue, New York, New
York, 10022, telephone number (212) 421-5333.
60
FINANCIAL INFORMATION
Index to Financial Statements
Unaudited Financial Statements: Page
Balance Sheets of the Company as of September 30, 2001 and
December 31, 2000 F-2
Statements of Income of the Company for the three and nine
months ended September 30, 2001 and 2000 F-3
Statements of Shareholders' Equity of the Company for the
nine months ended September 30, 2001 F-4
Statements of Cash Flows of the Company for the nine months
ended September 30, 2001 and 2000 F-5
Notes to Unaudited Consolidated Financial Statements of
the Company F-7
Audited Financial Statements:
Independent Auditors' Report - Deloitte & Touche LLP F-15
Independent Auditors' Report - KPMG LLP F-16
Consolidated Balance Sheets as of December 31, 2000 and F-17
1999
Consolidated Statements of Income for the years ended
December 31, 2000, 1999 and 1998 F-18
Consolidated Statements of Changes in Shareholders'
Equity for the years ended December 31, 2000, 1999 and
1998 F-19
Consolidated Statements of Cash Flows for the years
ended December 31, 2000, 1999 and 1998 F-21
Notes to Financial Statements F-23
F-1
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
AMERICAN MORTGAGE ACCEPTANCE COMPANY AND SUBSIDIARIES
Consolidated Balance Sheets
================ =================
September 30, December 31,
2001 2000
---------------- -----------------
(Unaudited)
ASSETS
Investments in mortgage loans $ 25,104,648 $ 31,828,733
Investments in GNMA certificates-
available for sale 46,868,805 5,851,219
Investment in ARCap 20,238,637 20,041,733
Investment in unconsolidated subsidiary 0 1,149,182
Cash and cash equivalents 1,102,239 1,632,652
Notes receivable 5,535,031 8,677,843
Accrued interest receivable 426,368 680,728
Other assets 636,699 576,223
------------ ------------
Total assets $ 99,912,427 $ 70,438,313
============ ============
LIABILITIES AND SHAREHOLDERS' EQUITY
Liabilities:
Repurchase facilities payable $ 43,191,173 $ 12,655,940
Accrued interest payable 29,934 27,850
Accounts payable and accrued expenses 395,349 278,760
Due to Advisor and affiliates 184,157 1,008,387
Distributions payable 1,391,503 1,391,503
------------ ------------
Total liabilities 45,192,116 15,362,440
------------ ------------
Commitments and contingencies
Shareholders' equity:
Shares of beneficial interest; $.10 par value;
12,500,000 shares authorized; 4,213,826 issued
and 3,838,630 outstanding 421,383 421,383
Treasury shares of beneficial interest;
375,196 shares (37,520) (37,520)
Additional paid-in capital 68,840,500 68,840,500
Distributions in excess of net income (14,655,543) (14,126,317)
Accumulated other comprehensive gain (loss) 151,491 (22,173)
------------ ------------
Total shareholders' equity 54,720,311 55,075,873
------------ ------------
Total liabilities and shareholders' equity $ 99,912,427 $ 70,438,313
============ ============
See accompanying notes to financial statements
F-2
AMERICAN MORTGAGE ACCEPTANCE COMPANY AND SUBSIDIARIES
Consolidated Statements of Income
(Unaudited)
============================== =========================
Three Months Ended Nine Months Ended
September 30, September 30,
------------------------------ -------------------------
2001 2000 2001 2000
-----------------------------------------------------------
Revenues:
Interest income:
Mortgage loans $ 349,575 $ 500,295 $ 2,256,514 $1,188,021
GNMA certificates 859,754 117,701 1,354,307 355,962
Commercial mortgage-
backed security-related
investment 0 960,467 0 2,867,659
Notes receivable 126,943 0 233,882 0
Temporary investments 19,783 624,146 46,544 1,845,770
Equity in earnings of ARCap 604,356 0 1,788,137 0
Other income 39,677 298,660 70,463 444,828
--------- --------- --------- ---------
Total revenues 2,000,088 2,501,269 5,749,847 6,702,240
--------- --------- --------- ---------
Expenses:
Interest 462,600 1,044,215 1,099,607 2,856,936
General and administrative 230,622 425,520 758,156 1,015,710
Amortization 5,187 26,227 35,228 60,229
--------- --------- --------- ---------
Total expenses 698,409 1,495,962 1,892,991 3,932,875
--------- --------- --------- ---------
Other gain (loss):
Net gain (loss) on repayments
of GNMA certificates and
mortgage loans (211,572) (8,371) (211,572) 71,991
Net gain (loss) on commercial
mortgage-backed security-
related investment and
government securities sold
short 0 246,341 0 (464,436)
--------- --------- --------- ---------
Total other gain (loss) (211,572) 237,970 (211,572) (392,445)
--------- --------- --------- ---------
Net income $1,090,107 $1,243,277 $3,645,284 $2,376,920
========= ========= ========= =========
Net income per share
(basic and diluted) $ .28 $ .32 $ .95 $ .62
========= ========= ========= =========
Weighted average
shares outstanding
(basic and diluted) 3,838,630 3,838,630 3,838,630 3,838,630
========= ========= ========= =========
See accompanying notes to financial statements
F-3
AMERICAN MORTGAGE ACCEPTANCE COMPANY AND SUBSIDIARIES
Consolidated Statement of Changes in Shareholders' Equity
(Unaudited)
Treasury Shares of
Shares of Beneficial Interest Beneficial Interest Additional Distributions
----------------------------- ------------------- Paid-in in Excess
Shares Amount Shares Amount Capital of Net Income
----------- ---------- --------- --------- ----------- -------------
Balance at January 1, 2001 4,213,826 $421,383 (375,196) $(37,520) $68,840,500 $(14,126,317)
Comprehensive income:
Net income 0 0 0 0 0 3,645,284
Other comprehensive income:
Net unrealized gain on GNMA
Certificates:
Net unrealized holding gain arising
during the period
Comprehensive income
Distributions 0 0 0 0 0 (4,174,510)
--------- ------- -------- ------- ---------- -----------
Balance at September 30, 2001 4,213,826 $421,383 (375,196) $(37,520) $68,840,500 $(14,655,543)
========= ======= ======== ======= ========== ===========
Accumulated Other
Comprehensive Comprehensive
Income Income (Loss) Total
------------- ----------------- ------------
Balance at January 1, 2001 $ (22,173) $55,075,873
Comprehensive income:
Net income $3,645,284 0 3,645,284
Other comprehensive income:
Net unrealized gain on GNMA
Certificates:
Net unrealized holding gain arising
during the period 173,664 173,664 173,664
---------
Comprehensive income $3,818,948
=========
Distributions 0 (4,174,510)
-------- ----------
Balance at September 30, 2001 $ 151,491 $54,720,311
======== ==========
See accompanying notes to financial statements.
F-4
AMERICAN MORTGAGE ACCEPTANCE COMPANY AND SUBSIDIARIES
Consolidated Statements of Cash Flows
(Unaudited)
=============================
Nine Months Ended
September 30,
-----------------------------
2001 2000
------------- --------------
Cash flows from operating activities:
Net income $ 3,645,284 $ 2,376,920
Adjustments to reconcile net income to net cash
provided by operating activities:
Gain on commercial mortgage-backed
security-related investment 0 (996,801)
Loss on government securities sold short 0 1,461,237
Net loss (gain) on repayments of GNMA
Certificates and mortgage loans 211,572 (71,991)
Equity in earnings of ARCap, in excess of
distributions received (196,904) 0
Equity income in unconsolidated subsidiary 0 (17,209)
Amortization - deferred financing costs 35,228 60,229
Amortization expense-loan premium and
origination costs 41,066 148,521
Accretion of GNMA discount (16,413) (16,813)
Accretion of deferred income (39,473) (16,587)
Accretion of discount on commercial
mortgage-backed security-related investment 0 (455,959)
Amortization of deferred costs relating to
the CMBS-related investment 0 7,485
Purchase of government security 0 (37,299,201)
Government security sold short 0 33,541,350
Changes in operating assets and liabilities:
Deposit with broker as collateral for security
sold short 0 3,048,541
Accrued interest receivable 254,360 254,967
Other assets 6,079 19,196
Due to Advisor and affiliates (797,634) (103,149)
Accounts payable and accrued expenses 116,589 133,145
Accrued interest payable 2,084 (66,648)
Deferred costs relating to the CMBS-related
investment 0 (54,116)
------------ ------------
Net cash provided by operating activities 3,261,838 1,953,117
------------ ------------
Cash flows from investing activities:
Increase in investment in mortgage loans (19,794,035) (15,548,160)
Proceeds from repayments of mortgage loans 0 9,975,438
Periodic principal payments of mortgage loans 193,512 68,315
Funding of notes receivable (4,138,655) 0
Principal repayments of GNMA Certificates 244,103 3,874,003
Increase in investment in GNMA Certificates (6,556,117) 0
Costs relating to repayment of mortgage loan 0 (59,583)
Increase in other assets (59,285) (335,903)
------------ ------------
Net cash used in investing activities (30,110,477) (2,025,890)
------------ ------------
See accompanying notes to financial statements.
F-5
AMERICAN MORTGAGE ACCEPTANCE COMPANY AND SUBSIDIARIES
Consolidated Statements of Cash Flows
(Unaudited)
(continued)
==============================
Nine Months Ended
September 30,
------------------------------
2001 2000
-------------- --------------
Cash flows from financing activities:
Proceeds from repurchase facilities payable 30,535,233 2,056,000
Repayments of repurchase facilities payable 0 (1,122,000)
Distribution paid to shareholders (4,174,510) (4,174,512)
Increase in deferred loan costs (42,497) (159,631)
Secured borrowings 0 8,794,081
----------- -----------
Net cash provided by financing activities 26,318,226 5,393,938
----------- -----------
Net (decrease) increase in cash and cash
equivalents (530,413) 5,321,165
Cash and cash equivalents at the beginning
of the period 1,632,652 3,802,298
----------- -----------
Cash and cash equivalents at the end of the
period $ 1,102,239 $ 9,123,463
=========== ===========
Supplemental information:
Interest paid $ 1,097,524 $ 2,818,753
=========== ===========
Conversion of FHA mortgage loans to
GNMA certificates:
Investment in GNMA certificates $(34,515,534)
Decrease in investment in mortgage loans 34,515,534
-----------
$ 0
===========
Consolidation of former unconsolidated subsidiary:
Increase in investment in mortgage loans $8,353,294
Decrease in notes receivable (7,264,092)
Decrease in investment in unconsolidated
subsidiary (1,089,202)
-----------
$ 0
===========
Adjustments due to contribution of mortgage loan
to unconsolidated subsidiary:
Increase in investment in unconsolidated subsidiary $ 1,140,000
Increase in note receivable 7,264,093
Decrease in investments in mortgage loans (8,404,093)
-----------
$ 0
===========
See accompanying notes to financial statements.
F-6
AMERICAN MORTGAGE ACCEPTANCE COMPANY AND SUBSIDIARIES
Notes to Consolidated Financial Statements
September 30, 2001
(Unaudited)
Note 1 - General
American Mortgage Acceptance Company (formerly American Mortgage Investors
Trust) (the "Company") was formed on June 11, 1991 as a Massachusetts business
trust for the primary purpose of investing in government-insured mortgages and
guaranteed mortgage-backed certificates. The Company elected to be treated as a
real estate investment trust ("REIT") under the Internal Revenue Code of 1986,
as amended.
On April 6, 1999, the Company received the necessary consent from its
shareholders to approve proposals (the "Proposals") to, among other things,
restructure the Company from a closed-ended, finite-life REIT to a publicly
traded, open-ended, infinite-life operating REIT. In addition to restructuring
the Company, the Proposals, among other matters, permit the Company to modify
its investment objectives, to incur a specified amount of indebtedness and to
list the Company's shares on a national exchange.
Effective April 26, 1999, upon authorization by the Board of Trustees, the
Company's name was changed from American Mortgage Investors Trust to American
Mortgage Acceptance Company.
The Company's business plan focuses on government insured and uninsured
mortgages secured by multifamily properties, which may take the form of
government insured first mortgages and uninsured mezzanine loans, construction
loans and bridge loans. Additionally, the Company has indirectly invested in
subordinate commercial mortgage-backed securities and may invest in other real
estate assets, including non-multifamily mortgages.
The Company had been governed by a board of trustees comprised of two
independent trustees and one trustee who is affiliated with Related Capital
Company ("Related"), a nationwide, fully integrated real estate financial
services firm. Effective June 12, 2001, at its annual meeting, the Company added
two additional trustees, one an independent trustee, the other an affiliate of
Related, bringing the total number of trustees to five. The Company has engaged
Related AMI Associates, Inc. (the "Advisor"), an affiliate of Related, to manage
its day-to-day affairs.
The consolidated financial statements include the accounts of the Company and
two wholly owned subsidiaries which it controls: AMAC Repo Seller and, effective
January 2001, AMAC/FM Corporation. All intercompany accounts and transactions
have been eliminated in consolidation. Unless otherwise indicated, the "Company"
as hereinafter used, refers to American Mortgage Acceptance Company and its
subsidiaries.
The consolidated financial statements of the Company have been prepared without
audit. In the opinion of management, the financial statements contain all
adjustments (consisting of only normal recurring adjustments) necessary to
present fairly the financial position of the Company as of September 30, 2001
and the results of its operations and its cash flows for the three and nine
months ended September 30, 2001 and 2000. However, the operating results for the
interim periods may not be indicative of the results for the full year.
Certain information and footnote disclosures normally included in annual
financial statements prepared in accordance with accounting principles generally
accepted in the United States of America ("GAAP") have been condensed or
omitted. It is suggested that these financial statements should be read in
conjunction with the financial statements and notes thereto included in the
Company's Form 10-K for the year ended December 31, 2000.
The preparation of financial statements in conformity with GAAP requires the
Advisor to make estimates and assumptions that affect the reported amounts of
assets and liabilities and the disclosure of contingent assets and liabilities
at the date of the financial statements as well as the reported amounts of
revenues and expenses during the reporting period. Actual results could differ
from those estimates.
F-7
AMERICAN MORTGAGE ACCEPTANCE COMPANY AND SUBSIDIARIES
Notes to Consolidated Financial Statements
September 30, 2001
(Unaudited)
SFAS No. 133, "Accounting for Derivative Instruments and Hedging Activities"
establishes accounting and reporting standards for derivative instruments,
including certain derivative instruments embedded in other contracts, and for
hedging activities. It was implemented by the Company on January 1, 2001.
Because the Company does not utilize derivatives, implementation of this
statement did not have a material effect on the Company's financial statements.
In July 2001, the Financial Accounting Standards Board issued Statement No. 141,
"Business Combinations (SFAS 141) and Statement No. 142, "Goodwill and Other
Intangible Assets" (SFAS 142). These statements establish new standards for
accounting and reporting for business combinations and for goodwill and
intangible assets resulting from business combinations. SFAS 141 applies to all
business combinations initiated after June 30, 2001; the Company is required to
implement SFAS 142 on January 1, 2002. Management believes that implementation
of these statements will not have a material impact on the Company's financial
statements.
In August of 2001, the FASB issued SFAS No, 143, "Accounting for Asset
Retirement Obligations" (effective January 1, 2003) and SFAS No. 144,
"Accounting for the Impairment or Disposal of Long Lived Assets" (effective
January 1, 2002). SFAS No. 143 requires the recording of the fair value of a
liability for an asset retirement obligation in the period in which it is
incurred. SFAS No. 144 supercedes existing accounting literature dealing with
impairment and disposal of long-lived assets, including discontinued operations.
It addresses financial accounting and reporting for the impairment of long-lived
assets and for long-lived assets to be disposed of, and expands current
reporting for discontinued operations to include disposals of a "component" of
an entity that has been disposed of or is classified as held for sale. The
Company is in the process of evaluating the financial statement impact of the
adoption these two standards.
Certain prior year amounts have been reclassified to conform to the current year
presentation.
F-8
AMERICAN MORTGAGE ACCEPTANCE COMPANY AND SUBSIDIARIES
Notes to Consolidated Financial Statements
September 30, 2001
(Unaudited)
Note 2 - Investments in Mortgage Loans
Information relating to investments in mortgage loans as of September 30, 2001
is as follows
Periodic Payment
Property Description Final Maturity Date Call Date (F) Interest Rate (C) Terms Prior Liens
-------- ----------- ------------------- ------------- ----------------- ---------------- -----------
First Mortgage Loans (D):
Stabilized Properties
---------------------
Columbiana Lakes
Columbia, SC (J) 204 Units 11/35 7.250% (A) $ -
Stony Brook II
East Haven, CT 125 Units 6/37 12/06 7.625% (A) -
Subtotal First Mortgage Loans
Mezzanine Loans (E):
Stabilized Properties
---------------------
Columbiana Lakes
Columbia, SC (J) 224 Units 11/35 4/99 20.670% (B) 8,919,374
Stony Brook II
East Haven, CT 125 Units 6/37 12/06 15.330% (B) 8,342,532
Plaza at San Jacinto
Houston, TX (G) 132 Units 1/43 6/11 11.000% (B) 6,638,000
Subtotal Stabilized Mezzanine Loans
Properties in Construction
--------------------------
The Hollows
Greenville, NC 184 Units 1/42 TBD 10.000% (B) 8,372,426 (H)
Elmhurst Village
Oveido, FL 313 Units 1/42 TBD 10.000% (B) 19,480,735 (H)
The Reserve at Autmn Creek
Friendswood, TX 212 Units 1/42 TBD 10.000% (B) 13,218,490 (H)
Interest Income
Face Amount of Carrying Amount Earned Applicable
Property Mortgages of Mortgages (I) to the Period
-------- -------------- ---------------- -----------------
First Mortgage Loans (D):
Stabilized Properties
---------------------
Columbiana Lakes
Columbia, SC (J) $ 8,919,374 $ 9,099,026 $ 426,528
Stony Brook II
East Haven, CT 8,342,532 8,629,584 380,748
------------------------------------------------
Subtotal First Mortgage Loans 17,261,906 17,728,610 807,276
------------------------------------------------
Mezzanine Loans (E):
Stabilized Properties
---------------------
Columbiana Lakes
Columbia, SC (J) 563,000 146,536 175,000
Stony Brook II
East Haven, CT 763,909 394,960 117,870
Plaza at San Jacinto
Houston, TX (G) 1,150,000 1,121,039 225
------------------------------------------------
Subtotal Stabilized Mezzanine Loans 2,476,909 1,662,535 293,095
------------------------------------------------
Properties in Construction
--------------------------
The Hollows
Greenville, NC 1,549,200 1,376,731 220,875
Elmhurst Village
Oveido, FL 2,874,000 2,415,981 585,754
The Reserve at Autmn Creek
Friendswood, TX 1,987,000 1,920,791 349,514
------------------------------------------------
Subtotal Construction Mezzanine Loans 6,410,200 5,713,503 1,156,143
------------------------------------------------
Subtotal Mezzanine Loans 8,887,109 7,376,038 1,449,238
------------------------------------------------
Total Mortgage Loans $26,149,015 $ 25,104,648 $ 2,256,514
================================================
F-9
AMERICAN MORTGAGE ACCEPTANCE COMPANY AND SUBSIDIARIES
Notes to Consolidated Financial Statements
September 30, 2001
(Unaudited)
(A) Requires monthly payments of principal and interest based on a 40 year
amortization period. Loans are subject to 5-year lockouts against prepayments,
as well as a prepayment penalty structure during the second 5-year term of the
loans.
(B) Interest only payments are due monthly, with loan balance due at maturity.
(C) Interest on the mezzanine loans is based on a fixed percentage of the unpaid
principal balance of the related first mortgage loan (prior liens). The amount
shown is the approximate effective rate earned on the balance of the mezzanine
loan. The mezzanine loans also provide for payments of additional interest based
on a percentage of cash flow remaining after debt service (generally 50%) and
participation in sale or refinancing proceeds (generally 25%)
(D) Interest and principal payments on first mortgage loans are insured by the
U.S. Department of Housing and Urban Development.
(E) The principal balance of the mezzanine loans is secured by the partnership
interests of the entity that owns the underlying property and a third mortgage
deed of trust. Interest payments on the mezzanine loans are secured by a second
mortgage deed of trust and are guaranteed for the first thirty six months after
construction completion by an entity related to the general partner of the
entity that owns the underlying property.
(F) Loans are subject to mandatory prepayment at the option of the Company 10
years after construction completion, with one year's notice.
(G) The funding of this mezzanine loan is based on property level operational
achievements. There is a remaining amount to fund of $100,000. The Company does
not hold the first mortgage loan relating to this mezzanine loan.
(H) The first mortgage loans related to those properties were converted into
GNMA Certificates and are held by the Company (see Note 3).
(I) Carrying amounts of mortgage loans include unamortized origination costs and
fees.
(J) During the third quarter of 2001, the Company arrived at a negotiated
settlement with the borrower under the Columbiana Lakes loans. Under this
agreement, the Company received approximately $9.3 million on October 1, 2001,
in full settlement of the first mortgage loan and mezzanine loan, resulting in a
loss on repayment of approximately $212,000, which was recorded during the third
quarter of 2001.
F-10
AMERICAN MORTGAGE ACCEPTANCE COMPANY AND SUBSIDIARIES
Notes to Consolidated Financial Statements
September 30, 2001
(Unaudited)
Note 3 - Investments in GNMA Certificates-Available for Sale
Information relating to investments in GNMA certificates as of September 30,
2001 is as follows:
Amortized Unrealized
Date Purchased/ Principal at Cost at Gain (Loss) at Balance at
Certificate Final Payment Stated September September September September
Name Number Payment Date Interest Rate 30,2001 30,2001 30,2001 30,2001
---- ----------- --------------- ------------- ------------ --------- -------------- ----------
Bear Stearns 0355540 7/27/94 7.125% $2,496,416 $2,482,644 $ 13,771 $2,496,415
3/15/29
Malone Mortgage 0382486 7/28/94 8.500% 2,111,865 2,180,680 (74,094) 2,106,586
8/15/29
SunCoast Capital Group, Ltd. G22412 6/23/97 7.000% 982,697 982,339 28,376 1,010,715
4/20/27
Hollows Apts. 511908 5/29/01 7.620% 8,372,426 8,372,426 (20,931) 8,351,495
7/15/02
Elmhurst Village 549390 6/28/01 7.745% 19,480,735 19,480,735 121,754 19,602,489
4/15/04
Reserve at Autumn Creek 448747 6/28/01 7.745% 13,218,490 13,218,490 82,615 13,301,105
7/15/02
-----------------------------------------------------------
Total $46,662,629 $46,717,314 $151,491 $46,868,805
===========================================================
Interest Income
Earned Applicable
Name to the Period
---- -------------
Bear Stearns $148,629
Malone Mortgage 135,576
SunCoast Capital Group, Ltd. 57,646
Hollows Apts. 251,509
Elmhurst Village 468,681
Reserve at Autumn Creek 292,266
--------------
Total $1,354,307
==============
F-11
AMERICAN MORTGAGE ACCEPTANCE COMPANY AND SUBSIDIARIES
Notes to Consolidated Financial Statements
September 30, 2001
(Unaudited)
The amortized cost, unrealized gain and fair value for the investment in GNMA
Certificates at September 30, 2001 and December 31, 2000 were as follows:
September 30, December 31,
2001 2000
----------------- --------------
Amortized cost $46,717,314 $5,873,392
Gross unrealized gain (loss) 151,491 (22,173)
--------------------------------
Fair Value $46,868,805 $5,851,219
========== =========
Note 4 - Commercial Mortgage-Backed Security-Related Investment and Short Sale;
Investment in ARCap
On September 30, 1999, the Company acquired from ARCap Investors, L.L.C.
("ARCap") a "BB+" rated subordinated commercial mortgage-backed security
("CMBS") from a Chase Manhattan Bank-First Union Nation Bank Commercial Mortgage
Trust. The CMBS investment, which was purchased for $35,622,358, had a face
amount of $50,399,711 and an annual coupon rate of 6.4%. The Company purchased
the CMBS investment using cash and debt provided through the Bear Stearns
Repurchase Facility (see Note 5). In connection with this acquisition, the
Company entered into an agreement with ARCap. Under the agreement, the Company
had the right to sell the CMBS investment to ARCap and purchase a preferred
equity position in ARCap, all based on the then fair value of the CMBS
investment.
This investment was accounted for as a trading asset and carried at estimated
fair value, with changes in fair value included in earnings. Interest income was
accrued as it became receivable, and included accretion of discounts, computed
using the effective yield method, after considering estimated prepayments and
credit losses. The Company recognized gains on this investment totaling $996,801
during the nine months ended September 30, 2000 due to marked-to-market
adjustments.
On September 30, 1999, in order to mitigate the potential income statement
effect of changes in the fair value of its CMBS investment caused by changes in
interest rates, the Company entered into a short sale involving the sale of a
U.S. Treasury Note with a face amount of $39,327,000 and an annual coupon rate
of 5.625% borrowed from Bear Stearns & Co., Inc. ("Bear Stearns"). On March 16,
2000, the Company replaced the borrowed security by purchasing such security
through Bear Stearns, and entered into an additional short sale contract
involving the sale of a U.S. Treasury Note with a face amount of $34,512,000 and
an annual coupon rate of 6.0% borrowed from Bear Stearns. Short sale positions
were carried at estimated fair value, with changes in fair value included in
earnings. The Company recognized losses on these positions totaling $1,461,237
during the nine months ended September 30, 2000 due to marked-to-market
adjustments.
On November 1, 2000, the Company, in accordance with the agreement with ARCap,
sold the CMBS investment to ARCap and repaid its borrowing under the Bear
Stearns Repurchase Facility (see Note 5), closed out its short sale position and
purchased a preferred equity interest in ARCap in the face amount of
$20,000,000, with a preferred dividend rate of 12%. This preferred equity
interest was recorded at $19,640,637, representing the fair value of the CMBS
investment at the date of the transaction, less the Bear Stearns Repurchase
Facility repayment plus approximately $3.5 million in cash paid to ARCap.
NOTE 5 - Repurchase Facilities
On September 30, 1999, the Company entered into a repurchase facility with Bear
Stearns (the "Bear Stearns Repurchase Facility"), whereby Bear Stearns advanced
$19,568,000 in cash towards the purchase of a CMBS-related investment (see Note
4). The Bear Stearns Repurchase Facility had a variable interest rate based on
the one-month LIBOR rate plus 1.5%, which was adjusted on the first day of each
month. The Bear Stearns Repurchase Facility was repaid November 1, 2000 in
connection with the CMBS sale discussed in Note 4.
Effective February 15, 2000, the Company entered into a $60 million FHA
repurchase facility with Nomura Asset Capital Corporation (the "Nomura
Repurchase Facility") with a term of one year. This facility enables
F-12
AMERICAN MORTGAGE ACCEPTANCE COMPANY AND SUBSIDIARIES
Notes to Consolidated Financial Statements
September 30, 2001
(Unaudited)
the Company to borrow up to 90% with a qualified hedge or 80% without a
qualified hedge of the fair market value of FHA loans owned by the Company. The
Nomura Repurchase Facility was renewed February 15, 2001 for $40 million, with a
one time option to increase to $60 million, a one year term and interest at
LIBOR plus 1.25%. As of September 30, 2001, there was no outstanding balance. As
of December 31, 2000, $7,138,940 was outstanding under The Nomura Repurchase
Facility and the interest rate was 7.87%. Deferred costs relating to the Nomura
Repurchase Facility are being amortized using the straight-line method over 364
days, which is the term of the facility.
Effective February 15, 2000, the Company also entered into a repurchase facility
with Nomura Securities International Inc. (the "Nomura Securities Repurchase
Facility"). This facility enables the Company to borrow up to 95% of the fair
market value of GNMA Certificates and other qualified mortgage securities owned
by the Company. Borrowings bear interest at LIBOR plus 0.50%. As of September
30, 2001 and December 31, 2000, the amount outstanding under this facility was
$43,191,173 and $5,517,000 and interest rates were 4.07% and 7.12%,
respectively. Deferred costs of $101,169 relating to the Nomura Securities
Repurchase Facility are being amortized using the straight-line method over five
years. As of September 30, 2001, all GNMA certificates owned by the Company were
pledged as collateral.
NOTE 6 - Related Party Transactions
The costs incurred to related parties for the three and nine months ended
September 30, 2001 and 2000 were as follows, all of which are paid to the
Advisor:
Three Months Ended Nine Months Ended
September 30, September 30,
2001 2000 2001 2000
----------------------------- ---------------------------
Expense reimbursement $ 61,000 $ 102,130 $232,935 $291,103
Asset management fees 60,517 120,733 184,897 350,835
-------- ------- ------- -------
$ 121,517 $222,863 $417,832 $641,938
======== ======= ======= =======
Note 7 - Earnings Per Share
Basic net income per share in the amount $.28 and $.32 and $.95 and $.62 for the
three and nine months ended September 30, 2001 and 2000, respectively, equals
net income for the periods ($1,090,107 and $1,243,277 and $3,645,284 and
$2,376,920, respectively), divided by the weighted average number of shares
outstanding which was 3,838,630 for each period.
Because the Company had no dilutive securities outstanding during the three and
nine months ended September 30, 2001 or 2000, diluted net income per share is
the same as basic net income per share.
F-13
AMERICAN MORTGAGE ACCEPTANCE COMPANY AND SUBSIDIARIES
Notes to Consolidated Financial Statements
September 30, 2001
(Unaudited)
Note 8 - Commitments and Contingencies
The Company completed a loan program with Fannie Mae which has agreed to fully
fund the origination of $250 million of Delegated Underwriter and Servicer loans
for apartment properties that qualify for low income housing tax credits under
Section 42 of the Internal Revenue Code (see Note 9). Under the loan program,
the Company will originate and contract for individual loans of up to $6 million
dollars each over a two-year period and will work with American Property
Financing, an unaffiliated third party, which will underwrite and service the
loans for Fannie Mae. Each property in the transaction will benefit from 9% low
income housing tax credits for no less than 90% of its units. The Company will
guaranty a first loss position of up to $21.25 million, depending on the
aggregate principal amount of the loans the Company originates under this
program and will receive guaranty, loan origination and other fees. The Company
also guaranteed construction loans for which it has issued a forward commitment
to originate a loan under the Fannie Mae program, with respect to which it
guarantees repayment of 100% of such construction loans. As of September 30,
2001, the Company had originated loans totaling approximately $2.2 million under
the Fannie Mae program and has made forward commitments for an additional
approximate $6.8 million. The Company's maximum exposure under the Fannie Mae
program and the forward commitments at September 30, 2001 is $6.0 million.
Note 9 - Investment in Unconsolidated Subsidiary and Note Receivable
As discussed in Note 8, the Company has entered into an agreement with Fannie
Mae whereby the Company will provide first loss protection ("First Loss
Obligation") on certain loans funded by Fannie Mae pursuant to a Master
Financing and Loss Sharing Agreement. Through a consolidated subsidiary, AMAC/FM
Corporation ("AMAC/FM"), and pursuant to a Guaranty and Security Agreement with
Fannie Mae, the payment of the First Loss Obligation is guaranteed and secured
by AMAC/FM's pledge and grant to Fannie Mae of a security interest on certain
assets of AMAC/FM.
AMAC/FM was capitalized by a contribution by the Company to AMAC/FM of the
mortgage loan secured by Stony Brook Village II Apartments with a principal
amount of $8,404,092. This contribution was recorded by AMAC/FM as a $7,264,093
loan from the Company via a subordinated promissory note, with a stated interest
rate of 7.75% and a $1,140,000 capital contribution through the issuance of
AMAC/FM non-voting common stock. During 2000, the Company accounted for its
$1,140,000 investment in AMAC/FM under the equity method of accounting, because
all of AMAC/FM's voting common shares were held by the Advisor and, therefore,
the Company did not control AMAC/FM.
During January 2001, all of the voting common stock of AMAC/FM, previously owned
by the Advisor, was purchased by the Company, the effect of which is to make
AMAC/FM a wholly owned, consolidated subsidiary of the Company. This change was
implemented as a result of the REIT Modernization Act of 1999, which allows
REITs to directly own taxable REIT subsidiaries, beginning after the year 2000.
Note 10 - Subsequent Events.
In November 2001, a distribution of $1,391,503, ($0.3625 per share) which was
declared in September 2001, was paid to shareholders for the quarter ended
September 30, 2001.
F-14
INDEPENDENT AUDITORS' REPORT
To the Board of Trustees
And Shareholders of
American Mortgage Acceptance Company
New York, New York
We have audited the accompanying consolidated balance sheets of
American Mortgage Acceptance Company and subsidiary (the "Company") as of
December 31, 2000 and 1999, and the related consolidated statements of income,
changes in shareholders' equity and cash flows for the years then ended. These
financial statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
We conducted our audits in accordance with auditing standards
generally accepted in the United States of America. Those standards require that
we plan and perform the audit to obtain reasonable assurance about whether the
financial statements are free of material misstatement. An audit includes
examining, on a test basis, evidence supporting the amounts and disclosures in
the financial statements. An audit also includes assessing the accounting
principles used and significant estimates made by management, as well as
evaluating the overall financial statement presentation. We believe that our
audits provide a reasonable basis for our opinion.
In our opinion, such consolidated financial statements present fairly, in all
material respects, the financial position of American Mortgage Acceptance
Company and subsidiary as of December 31, 2000 and 1999, and the results of
their operations and their cash flows for the years then ended in conformity
with accounting principles generally accepted in the United States of America.
/s/ DELOITTE & TOUCHE LLP
New York, New York
March 16, 2001
F-15
INDEPENDENT AUDITORS' REPORT
----------------------------
To the Board of Trustees
American Mortgage Acceptance Company:
We have audited the accompanying statements of income, changes in
shareholders' equity, and cash flows of American Mortgage Acceptance Company
(formerly American Mortgage Investors Trust) for the year ended December 31,
1998. These financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these financial
statements based on our audit.
We conducted our audit in accordance with auditing standards
generally accepted in the United States of America. Those standards require that
we plan and perform the audit to obtain reasonable assurance about whether the
financial statements are free of material misstatement. An audit includes
examining, on a test basis, evidence supporting the amounts and disclosures in
the financial statements. An audit also includes assessing the accounting
principles used and significant estimates made by management, as well as
evaluating the overall financial statement presentation. We believe that our
audit provides a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present
fairly, in all material respects, the results of operations and cash flows of
American Mortgage Acceptance Company for the year ended December 31, 1998, in
conformity with accounting principles generally accepted in the United States of
America.
/s/ KPMG LLP
New York, New York
January 15, 1999
F-16
See accompanying notes to financial statements
AMERICAN MORTGAGE ACCEPTANCE COMPANY AND SUBSIDIARY
CONSOLIDATED BALANCE SHEETS
ASSETS
December 31,
2000 1999
---------- -----------
Investments in mortgage loans $31,828,733 $ 28,893,482
Investments in GNMA certificates-available for sale 5,851,219 9,464,437
Investment in ARCap 20,041,733 0
Investment in unconsolidated subsidiary 1,149,182 0
Commercial mortgage-backed security-related investment 0 34,347,403
Deposit with broker as collateral for security sold short 0 37,733,101
Cash and cash equivalents 1,632,652 3,802,298
Notes receivable 8,677,843 0
Accrued interest receivable 680,728 1,180,115
Other assets 576,223 144,605
---------- -----------
Total assets $70,438,313 $115,565,441
========== ===========
LIABILITIES AND SHAREHOLDERS' EQUITY
Liabilities:
Repurchase facilities payable $12,655,940 $ 19,127,000
Accrued interest payable 27,850 407,952
Accounts payable and accrued expenses 278,760 122,397
Due to Advisor and affiliates 1,008,387 433,265
Distributions payable 1,391,503 1,391,503
Government security sold short 0 36,991,959
---------- -----------
Total liabilities 15,362,440 58,474,076
---------- -----------
Commitments and contingencies
Shareholders' equity:
Shares of beneficial interest; $.10 par value; 12,500,000
shares authorized; 4,213,826 issued and 3,838,630
outstanding 421,383 421,383
Treasury shares of beneficial interest;
375,916 shares (37,520) (37,520)
Additional paid-in capital 68,840,500 68,840,500
Distributions in excess of net income (14,126,317) (11,878,059)
Accumulated other comprehensive loss (22,173) (254,939)
---------- -----------
Total shareholders' equity 55,075,873 57,091,365
---------- -----------
Total liabilities and shareholders' equity $70,438,313 $115,565,441
========== ===========
F-17
See accompanying notes to financial statements
AMERICAN MORTGAGE ACCEPTANCE COMPANY AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF INCOME
Years Ended December 31,
2000 1999 1998
----------------------------------------------
Revenues:
Interest income:
Mortgage loans $1,565,219 $2,569,901 $3,037,882
REMIC and GNMA certificates and the
FHA Insured Project Loan 472,693 785,591 880,680
Commercial mortgage-backed
security-related investment 3,189,407 950,456 0
Note receivable 446,625 85,786 0
Temporary investments 2,084,417 1,092,617 112,953
Equity in earnings of ARCap 401,096 0 0
Other income 151,682 23,231 0
--------- --------- ---------
Total revenues 8,311,139 5,507,582 4,031,515
--------- --------- ---------
Expenses:
Interest 3,371,906 906,581 0
General and administrative 1,309,398 1,029,840 642,047
Amortization 84,537 0 5,000
Organization costs 0 364,872 0
--------- --------- ---------
Total expenses 4,765,841 2,301,293 647,047
--------- --------- ---------
Other gain (loss):
Net loss on commercial
mortgage-backed security-
related investment and
government security sold short (299,555) (217,699) 0
Gain on repayment of
mortgage loans and GNMA
certificates 72,014 3,271,710 12,144
--------- --------- ---------
Total other gain (loss) (227,541) 3,054,011 12,144
--------- --------- ---------
Net income $3,317,757 $6,260,300 $3,396,612
========= ========= =========
Net income per share
(basic and diluted) $ .86 $ 1.63 $ .88
========= ========= =========
Weighted average
shares outstanding
(basic and diluted) 3,838,630 3,841,931 3,845,101
========= ========= =========
F-18
AMERICAN MORTGAGE ACCEPTANCE COMPANY AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY
FOR THE YEARS ENDED DECEMBER 31, 2000, 1999 AND 1998
Treasury Shares of
Shares of Beneficial Interest Beneficial Interest Additional Distributions
----------------------------- ----------------------- Paid-in in Excess
Shares Amount Shares Amount Capital of Net Income
---------- ---------- --------- ----------- ---------- -------------
Balance at December 31, 1997 4,087,583 $408,759 (248,339) $ (24,834) $68,849,725 $(9,021,323)
Comprehensive income:
Net income 3,396,612
Other comprehensive loss:
Net unrealized holding gain arising
during the period
Less: reclassification adjustment for
gains included in net income
Other comprehensive loss
Comprehensive income
Issuance of shares of beneficial interest 85,207 8,521 0 0 1,328,465 0
Distributions 0 0 0 0 0 (5,566,903)
Purchase of treasury shares 0 0 (85,206) (8,521) (1,328,460) 0
--------- -------- -------- ------- ----------- -----------
Balance at December 31, 1998 4,172,790 417,280 (333,545) (33,355) 68,849,730 (11,191,614)
Comprehensive income:
Net income 6,260,300
Other comprehensive loss:
Net unrealized holding loss arising
during the period
Add: reclassification adjustment for
losses included in net income
Other comprehensive loss
Comprehensive income
Issuance of shares of beneficial interest 41,036 4,103 0 0 629,834 0
Purchase of treasury shares 0 0 (41,651) (4,165) (639,064) 0
Distributions 0 0 0 0 0 (6,946,745)
--------- -------- -------- ------- ----------- -----------
Balance at December 31, 1999 4,213,826 421,383 (375,196) (37,520) 68,840,500 (11,878,059)
Accumulated
Other
Comprehen- Comprehen-
sive sive
Income Income Total
---------- ------------ -----------
Balance at December 31, 1997 $173,598 $60,385,925
Comprehensive income:
Net income $3,396,612 3,396,612
---------
Other comprehensive loss:
Net unrealized holding gain arising
during the period 1,079
Less: reclassification adjustment for
gains included in net income (12,144)
---------
Other comprehensive loss (11,065) (11,065) (11,065)
---------
Comprehensive income $3,385,547
=========
Issuance of shares of beneficial interest 0 1,336,986
Distributions 0 (5,566,903)
Purchase of treasury shares 0 (1,336,981)
-------- ----------
Balance at December 31, 1998 162,533 58,204,574
Comprehensive income:
Net income $6,260,300 6,260,300
Other comprehensive loss:
Net unrealized holding loss arising
during the period (418,964)
Add: reclassification adjustment for
losses included in net income 1,492
---------
Other comprehensive loss (417,472) (417,472) (417,472)
---------
Comprehensive income $5,842,828
=========
Issuance of shares of beneficial interest 0 633,937
Purchase of treasury shares 0 (643,229)
Distributions 0 (6,946,745)
-------- ----------
Balance at December 31, 1999 (254,939) 57,091,365
(continued)
F-19
AMERICAN MORTGAGE ACCEPTANCE COMPANY AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY
FOR THE YEARS ENDED DECEMBER 31, 2000, 1999 AND 1998
Treasury Shares of
Shares of Beneficial Interest Beneficial Interest Additional Distributions
----------------------------- ----------------------- Paid-in in Excess
Shares Amount Shares Amount Capital of Net Income
---------- ---------- --------- ----------- ---------- -------------
Comprehensive income:
Net income 3,317,757
Other comprehensive income:
Net unrealized holding gain arising
during the period
Less: reclassification adjustment for
gains included in net income
Other comprehensive income
Comprehensive income
Distributions (5,566,015)
-----------
Balance at December 31, 2000 4,213,826 $ 421,383 (375,196) $ (37,520) $68,840,500 $(14,126,317)
========= ========= ========= ========= ========== ===========
Accumulated
Other
Comprehen- Comprehen-
sive sive
Income Income Total
---------- ------------ -----------
Comprehensive income:
Net income $3,317,757 3,317,757
Other comprehensive income:
Net unrealized holding gain arising
during the period 291,175
Less: reclassification adjustment for
gains included in net income (58,409)
---------
Other comprehensive income 232,766 232,766 232,766
---------
Comprehensive income $3,550,523
=========
Distributions 0 (5,566,015)
-------- ----------
Balance at December 31, 2000 $ (22,173) $55,075,873
======== ==========
See accompanying notes to financial statements.
F-20
AMERICAN MORTGAGE ACCEPTANCE COMPANY AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS
Years Ended December 31,
---------------------------------------------
2000 1999 1998
------------- ----------- -----------
Cash flows from operating activities:
Net income $ 3,317,757 $ 6,260,300 $ 3,396,612
Adjustments to reconcile net income to net
cash provided by (used in) operating activities:
Unrealized (gain) loss on commercial mortgage-
backed security-related investment (1,496,017) 1,419,016 0
Unrealized (gain) loss on government security
sold short 1,795,572 (1,201,317) 0
Gain on repayment of mortgage loans (13,582) (3,273,202) 0
Equity in earnings of ARCap (401,096) 0 0
Equity in income of unconsolidated subsidiary (9,182) 0 0
Amortization expense-organization costs 0 5,000
Amortization - deferred financing costs 92,022 0 0
Amortization expense-loan premium and
origination costs 163,371 337,590 553,608
Accretion of GNMA discount (22,356) (23,145) (26,272)
Accretion of discount on commercial
mortgage-backed security-related investment (652,968) (144,061) 0
(Gain) on repayment of REMIC certificates 0 0 (12,986)
(Gain) loss on repayment of GNMA certificates (58,432) 1,492 842
Government security sold short 33,541,350 38,193,276 0
Purchase of government securities sold short (72,328,881) 0 0
Changes in operating assets and liabilities:
Investment in commercial mortgage-
backed security-related investment 36,764,227 (35,622,358) 0
Deposit with broker as collateral for security
sold short 37,733,101 (37,733,101) 0
Accrued interest receivable 499,388 (413,413) (264,775)
Other assets 18,863 (33,159) 0
Due to Advisor and affiliates 575,122 (1,281,829) 504,220
Accounts payable and
accrued expenses 240,402 49,025 24,249
Accrued interest payable (380,102) 407,952 0
----------- ----------- ---------
Net cash provided by (used in) operating
activities 39,378,559 (33,056,934) 4,180,498
----------- ----------- ---------
Cash flows from investing activities:
Increase in investment in mortgage loans (21,486,788) (829,204) 0
Proceeds from repayments of mortgage loans 9,995,170 20,841,545 273,757
Periodic principal payments of mortgage loans 62,069 0 0
Increase in note receivable (7,413,750) (1,900,000) 0
Repayment of note receivable 6,000,000 1,900,000 0
Investment in ARCap preferred stock (20,000,000) 0 0
(Increase) decrease in other assets (375,178) (111,446) 4,826
Principal repayments of GNMA certificates 3,926,772 442,746 413,254
Principal repayments of REMIC certificates 0 0 1,806,973
Costs relating to repayment of mortgage loan (59,583) 0 0
----------- ----------- ---------
Net cash provided by (used in) investing activities (29,351,288) 20,343,641 2,498,810
----------- ----------- ---------
(continued)
See accompanying notes to financial statements.
F-21
AMERICAN MORTGAGE ACCEPTANCE COMPANY AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS
(continued)
Years Ended December 31,
---------------------------------------------
2000 1999 1998
------------- ----------- -----------
Cash flows from financing activities:
Proceeds from repurchase facilities payable 13,698,940 19,568,000 0
Repayments of repurchase facilities payable (20,170,000) (441,000) 0
Increase in deferred loan costs (159,842) 0 0
Distributions paid to shareholders (5,566,015) (5,555,242) (5,566,903)
Proceeds from issuance of shares of
beneficial interest 0 633,937 1,336,986
Purchase of treasury shares 0 (643,229) (1,336,981)
----------- ----------- ---------
Net cash provided by (used in)
financing activities (12,196,917) 13,562,466 (5,566,898)
----------- ----------- ---------
Net increase (decrease) in cash and cash
equivalents (2,169,646) 849,173 1,112,410
Cash and cash equivalents at the beginning
of the year $ 3,802,298 $ 2,953,125 $1,840,715
=========== =========== =========
Cash and cash equivalents at the end of
the year $ 1,632,652 $ 3,802,298 $2,953,125
=========== =========== =========
Supplemental information:
Interest paid $ 3,752,008 $ 498,629 $ 0
=========== =========== =========
Adjustments due to contribution
of mortgage loan to unconsolidated
subsidiary:
Increase in investment in unconsolidated
subsidiary $1,140,000
Increase in note receivable 7,264,092
Decrease in investment in mortgage loans (8,404,092)
----------
$ 0
----------
See accompanying notes to financial statements.
F-22
AMERICAN MORTGAGE ACCEPTANCE COMPANY AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 1 - General
American Mortgage Acceptance Company (formerly American Mortgage
Investors Trust) (the "Company") was formed on June 11, 1991 as a Massachusetts
business trust for the primary purpose of investing in government-insured
mortgages and guaranteed mortgage-backed certificates. The Company elected to be
treated as a real estate investment trust ("REIT") under the Internal Revenue
Code of 1986, as amended (the "Code").
On April 6, 1999, the Company received the necessary consent from its
shareholders to approve proposals (the "Proposals") to, among other things,
restructure the Company from a closed-ended, finite-life REIT to a publicly
traded, open-ended, infinite-life operating REIT. In addition to restructuring
the Company, the Proposals, among other matters, permit the Company to modify
its investment objectives, to incur a specified amount of indebtedness and to
list the Company's shares on a national exchange.
As a result of the adoption of the Proposals, the Company was liable
for the transaction expenses. Such expenses amounted to approximately $365,000
and are classified as organization costs in the accompanying statements of
income.
Effective April 26, 1999, upon authorization by the Board of
Trustees, the Company's name was changed from American Mortgage Investors Trust
to American Mortgage Acceptance Company.
The Company's business plan focuses on three types of mortgage
products: 1) origination of participating FHA insured multifamily mortgages, 2)
origination of construction and permanent mortgage financing for affordable
multifamily housing pursuant to a new venture with Federal National Mortgage
Association "Fannie Mae"), and 3) acquisition of direct and indirect
subordinated interests in commercial mortgage-backed securities.
The current composition of the Company's investment portfolio
reflects the recent change in the Company's business plan and is not comparable
to its investment portfolio prior to April 1999. Furthermore, the Company is
still in the process of implementing its new business plan and, therefore, the
current portfolio should not be considered indicative of the composition of the
portfolio that might be expected in the future.
The Company is governed by a board of trustees comprised of two
independent trustees and one trustee who is affiliated with Related Capital
Company ("Related"). The Company has engaged Related AMI Associates, Inc. (the
"Advisor"), an affiliate of Related, to manage its day-to-day affairs.
Note 2 - Accounting Policies
a) Basis of Presentation
The consolidated financial statements of the Company are prepared on
the accrual basis of accounting in accordance with accounting principles
generally accepted in the United States of America ("GAAP"). The preparation of
financial statements in conformity with GAAP requires the Manager to make
estimates and assumptions that affect the reported amounts of assets and
liabilities and the disclosure of amortized assets and liabilities at the date
of the financial statements as well as the reported amounts of revenues and
expenses during the reporting period. Actual results could differ from those
estimates. The consolidated financial statements include the accounts of the
Company and one wholly owned subsidiary, AMAC Repo/Seller. All intercompany
accounts and transactions have been eliminated in consolidation. Unless
otherwise indicated, the "Company" as herein after used, refers to American
Mortgage Acceptance Company and its subsidiary.
b) Investments in Mortgage Loans
The Company accounts for its investments in mortgage loans under the
provisions of Statement of Financial Accounting Standards ("SFAS") No. 114,
"Accounting by Creditors for Impairment of a Loan" ("SFAS 114"). Under SFAS 114,
a loan is impaired when, based on current information and events, it is probable
that a creditor will be unable to collect all amounts due according to the
contractual terms of the loan agreement. SFAS No. 114 requires lenders to
measure impaired loans based on: (i) the present value of expected future cash
flows discounted at the loans' effective interest rate; (ii) the loan's
observable market price; or (iii) the fair value of the collateral if the loan
is collateral-dependent. An allowance for loan losses is maintained if the
measure of an impaired loan is less than its recorded investment. Adjustments to
the allowance are made through corresponding charges or credits to the provision
for loan losses.
Interest on mortgage loans is recognized on the accrual basis.
Interest which was accrued but not received is reversed from income if deemed to
be uncollectible.
c) Investments in Mortgage-Backed Securities
The Company accounts for its investments in mortgage-backed securities
under the provisions of SFAS No. 115 "Accounting for Certain Investments in Debt
and Equity Securities".
At the date of acquisition, the Company elected to designate its GNMA
certificates as available-for-sale securities. Available-for-sale securities are
carried at fair value with net unrealized gain (loss) reported as a separate
component of other comprehensive income until realized. A decline in the market
value of any available-for-sale security below cost that is deemed other than
temporary is charged to earnings resulting in the establishment of a new cost
basis for the security. Premiums and discounts are amortized or accreted over
the life of the related security as an adjustment to interest income using the
effective yield method. Dividend and interest income are recognized when earned.
Realized gains and losses on securities are included in earnings and are derived
using the specific identification method for determining the cost of the
securities sold.
F-23
AMERICAN MORTGAGE ACCEPTANCE COMPANY AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
d) Investment in ARCap
The Company's preferred equity investment in ARCap Investors, L.L.C.
("ARCap") is accounted for using the equity method because the Company has the
ability to exercise significant influence, but not control, over ARCap's
operating and financial policies.
e) Cash and Cash Equivalents
Cash and cash equivalents include cash in banks and temporary
investments in short-term instruments with original maturity dates equal to or
less than three months.
f) Loan Origination Costs
Acquisition fees and other direct expenses incurred for activities
performed to originate or acquire mortgage loans have been capitalized and are
included in Investment in Mortgage Loans in the balance sheets. Loan origination
costs are being amortized to interest income using the effective yield method
over the lives of the respective mortgages.
g) Fair Value of Financial Instruments
As described above, the Company's GNMA certificates are carried at
estimated fair values. The Company has determined that the fair value of its
remaining financial instruments, including its mortgage loans and cash and cash
equivalents, notes receivable, investment in ARCap, and secured borrowings
approximate their carrying values at December 31, 2000 and 1999. The fair value
of investments in mortgage loans and GNMA certificates are based on actual
market price quotes or by determining the present value of the projected future
cash flows using appropriate discount rates, credit losses and prepayment
assumptions. Other financial instruments carry interest rates which are deemed
to approximate market rates.
h) Income Taxes
The Company has qualified as a REIT under the Code. A REIT is
generally not subject to federal income tax on that portion of its REIT taxable
income ("Taxable Income") which is distributed to its shareholders provided that
at least 95% of Taxable Income is distributed and provided that such income
meets certain other conditions. Accordingly, no provision for federal income
taxes is required. The Company may be subject to state taxes in certain
jurisdictions.
During 2000, the Company declared distributions of $1.45 per share.
For federal income tax purposes, $1.20 and $.25 of the distributions were
reported as ordinary income and return of capital, respectively, to shareholders
for 2000.
i) Comprehensive Income
SFAS No. 130, "Reporting Comprehensive Income," requires the Company
to classify items of "other comprehensive income", such as unrealized gains and
losses on its investment in GNMA certificates, by their nature in the financial
statements and display the accumulated balance of other comprehensive income
(loss) separately from shareholders' equity in the shareholders' equity section
of the balance sheets. In accordance with SFAS No. 130, cumulative unrealized
gains and losses on securities available-for-sale are classified as accumulated
other comprehensive income in shareholders' equity and current period unrealized
gains and losses are included as a component of comprehensive income.
j) Use of Estimates
The preparation of financial statements in conformity with GAAP
requires the Advisor to make estimates and assumptions that affect the reported
amounts of assets and liabilities and the disclosure of contingent assets and
liabilities at the date of the financial statements as well as the reported
amounts of revenues and expenses during the reporting period. Actual results
could differ from those estimates.
k) Segment Information
SFAS No. 131, "Disclosures About Segments of an Enterprise and
Related Information", requires enterprises to report certain financial and
descriptive information about their reportable operating segments, and certain
enterprise-wide disclosures regarding products and services, geographic areas
and major customers. The Company is an investor in mortgage products and
operates in only one reportable segment. The Company does not have or rely upon
any major customers. All of the Company's investments are secured by real estate
properties located in the United States; accordingly, all of its revenues were
derived from U.S. operations.
l) New Pronouncements
In December of 1999, the staff of the Securities and Exchange
Commission issued Staff Accounting Bulletin No. 101, "Revenue Recognition in
Financial Statements". This bulletin summarizes certain of the staff's views in
applying generally accepted accounting principles to revenue recognition in
financial statements. The Company's management believes that the guidance
expressed in the bulletin does not affect the Company's correct revenue
recognition policies.
SFAS No. 133, "Accounting for Derivative Instruments and Hedging
Activities" establishes accounting and reporting standards for derivative
instruments, including certain derivative instruments embedded in other
contracts, and for hedging activities. It is effective for the Company beginning
with the first quarter of 2001. Because the Company does not currently utilize
derivatives, implementation of this statement has not had a material effect on
the Company's financial statements.
F-24
AMERICAN MORTGAGE ACCEPTANCE COMPANY AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
In September of 2000, the FASB issued SFAS No. 140, "Accounting for Transfers of
Financial Assets and Extinguishment of Liabilities". This statement replaces
SFAS No. 125 which had the same name. It revises the standards for accounting
for securitizations and other transfers of financial assets and collateral and
requires certain disclosures, but it carries over most of SFAS No. 125's
provisions without reconsideration. The Company's management does not believe
that application of this statement will have a material impact on the Company's
financial statements.
l) Reclassifications
Certain amounts in the 1999 and 1998 financial statements have been
reclassified to conform to the 2000 presentation.
F-25
AMERICAN MORTGAGE ACCEPTANCE COMPANY
NOTES TO FINANCIAL STATEMENTS
Note 3 - Investments in Mortgage Loans
Information relating to investments in mortgage loans as of December 31, 2000
and 1999 is as follows:
Accum
-ulated
Date of Amor-
Invest- Amounts Advanced tization-
ment/ ------------------------------------ Additional
Final Interest Out- Loans
Matu Rate on Total standing Origi- and
Descrip -rity Mortgage Mortgage Additional Amounts Loan nation Origina-
Property -tion Date Loan (A) Loans Loans (B) Advanced Balance Costs tion Costs
-------- ------- ------- --------- --------- ---------- -------- -------- ------ ----------
Town & 330 4/94 7.375%- $ 9,348,000 $1,039,000 $10,387,000 $ (C) $ 0 $ 0
Country IV Apt. 5/29 9.167%
Apts. Units (D) (E) (F)
Urbana, IL
Columbiana 204 4/94 (E) 9,106,099 563,000 9,669,099 9,524,355 537,558 498,412
Lakes Apts. Apt. 5/29
Columbia, Units (C) (M)
SC (H)
Stony Brook 125 12/95 7.75%- (I) 763,909 763,909 763,909 413,492 428,736
Village II Apt. 6/37 9.128%
Apts. Units (C) (F)
East Haven,
CT (H)
Hollows 184 4/00 7.875%- 3,564,064 1,549,200 5,113,264 5,113,264 (197,829) (12,305)
Apts. Apt. 1/42 9.3232%
Greenville, Units (J)
SC
Elmhurst 313 6/00 8.00%- 7,694,310 2,874,000 10,568,310 10,568,310 (495,940) (15,439)
Village Apt. 1/42 9.3232%
Oveida, FL Units (K)
Reserve at 212 8/00 8.00%- 4,583,939 1,987,000 6,570,939 6,570,939 (71,955) (2,034)
Autumn Apt. (M) 9.202%
Creek Units (L)
Friends-
wood, TX
-----------------------------------------------------------------------------
Total $34,296,412 $8,776,109 $43,072,521 $32,540,777 $185,326 $897,370
=============================================================================
Interest
Earned Less
Balance at Balance at by the 2000 Net
December December Company Amor- Interest
Property 31, 2000(G) 31, 1999 for 2000 tization Earned
-------- ----------- ---------- --------- -------- --------
Town & $ 0 $ 9,936,476 $ 168,643 $ (14,470) $ 154,173
Country IV
Apts.
Urbana, IL
Columbiana 9,563,501 9,705,686 533,987 (89,701) 444,286
Lakes Apts.
Columbia,
SC (H)
Stony Brook 748,665 9,251,320 278,010 (88,978) 189,032
Village II
Apts.
East Haven,
CT (H)
Hollows 4,927,740 0 185,087 12,305 197,392
Apts.
Greenville,
SC
Elmhurst 10,087,809 0 371,060 15,439 386,499
Village
Oveida, FL
Reserve at 6,501,018 0 191,803 2,034 193,837
Autumn
Creek
Friends-
wood, TX
----------------------------------------------------------------
Total $31,828,733 $28,893,482 $1,728,590 $(163,371) $1,565,219
================================================================
F-26
AMERICAN MORTGAGE ACCEPTANCE COMPANY AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(A) The minimum interest rate shown represents base interest, which is fully
insured by HUD ("Base Interest"). The additional interest rate represents
interest which is not contingent upon cash flow and is secured by partnership
interests in the partnerships which own the Developments ("Additional
Interest").
(B) Additional loans are non-interest bearing.
(C) The operations of Town and Country had not been able to support the payment
of Additional Interest for the period July 1, 1997 through December 31, 1999
which amounted to $411,911. Accordingly, the accrued interest income that was
doubtful of collection was fully reserved and excluded from interest income from
mortgage loans in previous quarters. On January 21, 2000, the general partner of
the Town and Country obligor, in exchange for the waiving of the prepayment
penalty and future Additional Interest repaid the additional loan and Additional
Interest due through January 21, 2000 in the amounts of $1,039,000 and $421,273,
respectively. As a result, the Additional Interest which had been fully reserved
was deemed to be fully collectible and recorded as interest income in the fourth
quarter of 1999. On March 31, 2000, the Town and Country obligor fully repaid
the FHA insured mortgage and accrued Base Interest in the amounts of $8,934,581
and $53,040, respectively, resulting in a gain on the repayment in the amount of
$28,165 (including a $45,000 loan termination fee due from the Company to the
loan servicing agent and unamortized origination costs).
(D) The Mortgages have terms of 40 years, subject to mandatory prepayment at any
time after 10 years and upon one year's notice.
(E) The interest rates for Columbiana are 7.9%-8.678% during the permanent loan
period and was 7.4% during the construction period. In addition to the interest
rate during the permanent loan period, the Company will be entitled to 25% of
the cash flow remaining after payment of 8.678% interest. The operations of
Columbiana had not been able to support the payment of Additional Interest for
the period October 1, 1997 through June 30, 1998 which amounted to $48,760.
Accordingly, the accrued interest income that was deemed doubtful of collection
was fully reserved and reversed from interest income from mortgage loans in the
fourth quarter of 1998. As a result of the Company's final advance and
conversion of the construction loan to a permanent loan during the second
quarter of 1999, Columbiana was able to repay construction period advances from
the developer as well as Additional Interest due to the Company through the
second quarter. As a result, the Additional Interest which had been fully
reserved was recorded as interest income in the second quarter of 1999.
(F) In addition to the interest rate, the Company is entitled to 40% of the cash
flow remaining after payment of Base and Additional Interest.
(G) Aggregate cost for federal income tax purposes is $29,766,598.
(H) In order for the Company to exercise an acceleration option it must
terminate the mortgage insurance contract with FHA not later than the
accelerated payment date and, in certain circumstances, must terminate the
mortgage insurance contract upon the exercise of the acceleration option. Since
the exercise of such option would be at the Company's discretion, it is intended
to be exercised only where the value of the underlying property has increased by
an amount which would justify accelerating payment in full and assuming the
risks of foreclosure if the mortgagor failed to make the accelerated payment.
(I) The Company contributed the FHA portion of this loan to capitalize AMAC/FM,
an unconsolidated subsidiary. The principal amount contributed was $8,404,092
(See Note 12). The Company retained the additional loan.
(J) The interest rates for Hollows Apartments are 9.6083% per annum during the
permanent loan period and 7.875% during the construction period. The Note rate
of 7.875% is fully insured by HUD, and is secured by a first mortgage deed of
trust. Payments in excess of the Note rate, up to a rate of 9.6083%, are secured
by a second mortgage deed of trust and are guaranteed until August 2004 by an
entity related to the general partner of the partnership which owns Hollows
Apartments. The principal balance of the Additional Loan is secured by a third
mortgage deed of trust. In addition to the interest rate during the permanent
loan period, the Company is entitled to 50% of cash flow, if any, remaining
after the payment of debt service and 25% of the sale or refinancing proceeds.
The total loan is comprised of the mortgage loan of $8,946,100 and the
additional loan of $1,549,200. As of December 31, 2000, $3,564,064 of the
mortgage loan and the full amount of the additional loan had been funded. Both
loans mature in January, 2042, have 5-year lockouts against prepayment, and have
a prepayment penalty structure during the second 5-year period of the loans.
(K) The interest rates for Elmhurst Village are 9.3232% per annum during the
permanent loan period and 8% during the construction period. The Note rate of 8%
is fully insured by HUD, and is secured by a first mortgage deed of trust.
Payments in excess of the Note rate, up to a rate of 9.3232%, are secured by a
second mortgage deed of trust and are guaranteed until December 2004 by an
entity related to the general partner of the partnership which owns the Elmhurst
Village Apartments. The principal balance of the Additional Loan is secured by a
third mortgage deed of trust. In addition to the interest rate during the
permanent loan period, the Company is entitled to 50% of cash flow, if any,
remaining after the payment of debt service and 25% of the sale or refinancing
proceeds. The total loan is comprised of the mortgage loan of $21,748,200 and
the additional loan of $2,874,000. As of December 31, 2000, $7,694,310 of the
mortgage loan and the full amount of the additional loan had been funded. Both
loans mature in January, 2042 and have 5-year lockouts against prepayment, as
well as a prepayment penalty structure during the second 5-year period of the
loans.
(L) The interest rates for the Reserve at Autumn Creek are 9.202% during the
permanent loan period and 8% during the construction period. The Note rate of 8%
is fully insured by HUD and is secured by a first mortgage deed of trust.
Payments in excess of the Note rate, up to a rate of 9.202%, are secured by a
second mortgage deed of trust and are guaranteed until January 2005 by an entity
related to the general partner of the partnership which owns The Reserve at
Autumn Creek. The principal balance of the Additional Loan is secured by a third
mortgage deed of trust. In addition to the interest rate during the permanent
loan period, the Company is entitled to 50% of cash flow, if any, remaining
after the payment of debt service and 25% of the sale or refinancing proceeds.
The total loan is compromised of the mortgage loan of $16,538,700 and the
additional loan of $1,987,000. As of December 31, 2000, $4,583,939 of the
mortgage loan and the full amount of the additional loan had been funded. Both
loans mature in December 2041 and have 5 year lockouts against prepayment, as
well as a prepayment penalty structure during the second 5 year period of the
loans.
F-27
AMERICAN MORTGAGE ACCEPTANCE COMPANY AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(M) Pledged as collateral in connection with a secured credit repurchase
facility with Nomura Asset Capital Corporation (See Note 6).
Further information relating to investments in mortgage loans for the years
ended December 31, 2000, 1999 and 1998 is as follows:
2000 1999 1998
------------ ------------ -------------
Reconciliation of mortgage loans:
Balance at beginning of period $28,893,482 $45,965,488 $46,792,853
Advances made during the period 22,252,512 829,204 0
Loan origination fees (net of acquisition
expenses) (765,724) 4,723 0
Proceeds from repayment of mortgage loans (9,995,170) (20,841,545) (273,757)
Periodic principal payments of mortgage loans (62,069) 0 0
Loan contributed to unconsolidated subsidiary (8,404,092) 0 0
Excess of proceeds over carrying value of
mortgage loans 13,582 3,273,202 0
Costs relating to repayment of mortgage loan 59,583 0 0
Amortization of acquisition expenses (38,680) (103,318) (180,692)
Amortization of additional loans (124,691) (234,272) (372,916)
---------- ---------- ----------
Investments in mortgage loans - December 31, $31,828,733 $28,893,482 $45,965,488
========== ========== ==========
F-28
AMERICAN MORTGAGE ACCEPTANCE COMPANY
NOTES TO FINANCIAL STATEMENTS
Note 4 - Investments in GNMA Certificates-Available for Sale
Information relating to investments in GNMA Certificates as of December 31, 2000
and 1999 is as follows:
Accum-
Date Original ulated
Purchased Purchase Amorti-
/Final Stated Price Principal at Discount at zation at
Certificate Payment Interest Including December December December
Seller Number Date Rate Discount 31, 2000 31, 2000 31, 2000
------ ----------- ---------- ---------- -------- ----------- ------------- -----------
GNMA Certificates
-----------------
Bear Stearns 0355540 7/27/94 7.125% $ 2,407,102 $2,516,855 $(232,809) $126,289
3/15/29
Malone Mortgage 0382486 7/28/94 8.500% 2,197,130 2,124,715 (7,967) 4,511
8/15/29
Goldman Sachs 0328502 7/29/94 8.250% 3,928,615 0 0 0
7/15/29
SunCoast Capital Group, Ltd. G22412 6/23/97 7.000% 1,981,566 1,193,511 (7,832) 6,092
4/20/27
----------------------------------------------------------
Total $10,514,413 $5,835,081 $(248,608) $136,892
==========================================================
Loan Unrealized Interest
Origination Gain Earned
Costs at Loss at Balance at Balance at by the Net
December December December December Company 2000 Interest
31, 2000 31, 2000 31, 2000 31, 1999 for 2000 Accretion Earned
Seller ---------- ------------ --------------- --------- ----------- --------- ------
------
Bear Stearns $77,865 $ 9,975 $2,498,175 $2,431,778 $180,128 $19,775 $199,903
Malone Mortgage 72,162 (33,516) 2,159,906 2,168,686 181,179 706 181,885
Goldman Sachs 0 0 0 3,565,054 0 13 13
SunCoast Capital Group, Ltd. 0 1,368 1,193,138 1,298,919 89,030 1,862 90,892
---------------------------------------------------------------------------------------------------
Total $150,027 $(22,173) $5,851,219 $9,464,437 $450,337 $22,356 $472,693
===================================================================================================
F-29
AMERICAN MORTGAGE ACCEPTANCE COMPANY AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The amortized cost, unrealized gain and fair value for the investment in GNMA
Certificates at December 31, 2000 and 1999 were as follows:
December 31,
------------------------------
2000 1999
------------ ------------
Amortized cost $5,873,392 $9,719,376
Gross unrealized gain (loss) (22,173) (254,939)
--------- ---------
Fair Value $5,851,219 $9,464,437
========= =========
For the year ended December 31, 2000, there were gains and losses of
$741 and $119,895, respectively, (including acquisition fees and expenses) on
principal repayments of GNMA certificates. For the year ended December 31, 1999,
there were gains and losses of $1,790 and $3,282, respectively, (including
acquisition fees and expenses) on principal repayments of REMIC and GNMA
certificates.
Due to the complexity of the GNMA structure and the uncertainty of
future economic and other factors that affect interest rates and mortgage
prepayments, it is not possible to predict the effect of future events upon the
yield to maturity or the market value of the GNMA Certificates upon any sale or
other disposition or whether the Company, if it chose to, would be able to
reinvest proceeds from prepayments at favorable rates relative to the coupon
rate.
Note 5 - Commercial Mortgage-Backed Security-Related Investment and Short Sale;
Investment in ARCap
On September 30, 1999, the Company acquired from ARCap a "BB+" rated
subordinated commercial mortgage-backed security ("CMBS") from a Chase Manhattan
Bank-First Union Nation Bank Commercial Mortgage Trust. The CMBS investment,
which was purchased for $35,622,358, has a face amount of $50,399,711 and an
annual coupon rate of 6.4%. This investment was accounted for as a trading asset
and carried at estimated fair value, with changes in fair value included in
earnings. The Company purchased the CMBS investment using cash and debt provided
through the Bear Stearns Repurchase Facility (see Note 6). In connection with
this acquisition, the Company entered into an agreement (the "Agreement") with
ARCap. Under the Agreement, the Company had the right to sell the CMBS
investment to ARCap and purchase a preferred equity position in ARCap, all based
on the then fair value of the CMBS investment.
This investment was accounted for as a trading asset and carried at
estimated fair value, with changes in fair value included in earnings. Interest
income was accrued as it became receivable, and included accretion of discounts,
computed using the effective yield method, after considering estimated
prepayments and credit losses. The Company recognized gains on this investment
totaling $1,496,017 in 2000 and losses of $1,419,016 in 1999, due to
mark-to-market adjustments.
On September 30, 1999, in order to mitigate the potential income
statement effect of changes in the fair value of its CMBS investment caused by
changes in interest rates, the Company entered into a short sale involving the
sale of a U.S. Treasury Note with a face amount of $39,327,000 and an annual
coupon rate of 5.625% borrowed from Bear Stearns & Co., Inc. ("Bear Stearns").
On March 16, 2000, the Company replaced the borrowed security by purchasing such
security through Bear Stearns, and entered into an additional short sale
contract involving the sale of a U.S. Treasury Note with a face amount of
$34,512,000 and an annual coupon rate of 6.0% borrowed from Bear Stearns. On
November 1, 2000, the Company terminated the short sale in connection with its
sale of the associated CMBS investment. The Company earned $1,498,627 and
$471,262 on short sale proceeds held by Bear Stearns during 2000 and 1999,
respectively (included in interest income from temporary investments) and
incurred interest of $1,757,648 and 547,025 on its short sale contracts during
2000 and 1999, respectively (included in interest expense. Short sale positions
were carried at estimated fair value, with changes in fair value included in
earnings. The Company recognized losses on these positions totaling $1,795,572
in 2000 and gains of $1,201,317 in 1999 due to mark-to-market adjustments.
On November 1, 2000, the Company, in accordance with the Agreement,
sold the CMBS investment to ARCap and repaid its borrowing under the repurchase
facility (see Note 6), closed out its short sales position and purchased a
preferred equity interest in ARCap in the face amount of $20,000,000, with a
preferred dividend rate of 12%. This preferred equity interest was recorded at
$19,640,637, representing the fair value of the CMBS investment at the date of
the transaction, less the Bear Stearns Repurchase Facility repayment plus
approximately $3.5 million in cash paid to ARCap.
Summarized information for ARCap as of December 31, 2000 and the year then ended
is as follows:
Investment securities - trading $214,000,516
Investment securities - available for sale 76,092,175
Other assets 20,249,212
-----------
Total assets $310,341,903
===========
Repurchase agreements and other liabilities $133,314,684
Members' equity 177,027,219
-----------
Total liabilities and equity $310,341,903
===========
Total revenues $ 19,931,055
Total expenses 8,105,265
-----------
Net income $ 11,825,790
===========
F-30
AMERICAN MORTGAGE ACCEPTANCE COMPANY AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 6 - Repurchase Facilities
On September 30, 1999, the Company entered into a repurchase facility
with Bear Stearns (the "Bear Stearns Repurchase Facility"), whereby Bear Stearns
advanced $19,568,000 in cash towards the purchase of the CMBS-related investment
(see Note 5). The Bear Stearns Repurchase Facility had a variable interest rate
based on the one-month LIBOR rate plus 1.5%, which is adjusted on the first day
of each month. The Bear Stearns Repurchase Facility was repaid November 1, 2000
in connection with the CMBS sale discussed above.
Effective February 15, 2000, the Company entered into a $60 million
FHA repurchase facility (the "Nomura Repurchase Facility") with Nomura Asset
Capital Corporation. This agreement enables the Company to borrow up to 90% with
a qualified hedge or 80% without a qualified hedge of the fair market value of
FHA loans owned by the Company. The Nomura Repurchase Facility has a term of 364
days and bears interest at LIBOR plus 1.25%. As of December 31, 2000, the amount
outstanding under this facility was $7,138,940, and the interest rate was 7.87%.
Deferred costs of $79,815 relating to the Nomura Repurchase Facility are being
amortized using the straight-line method over 364 days, which is the term of the
facility.
Effective February 15, 2000, the Company entered into a repurchase
facility with Nomura Securities International, Inc. (the "Nomura Securities
Repurchase Facility"). This agreement enables the Company to borrow up to 95% of
the fair market value of qualified mortgage securities owned by the Company.
Borrowings bear interest at LIBOR plus 0.50%. As of December 31, 2000, the
amount outstanding under this facility was $5,517,000, and the interest rate was
7.12%. Deferred costs of $79,815 relating to the Nomura Securities Repurchase
Facility are being amortized using the straight-line method over five years.
Note 7 - Related Party Transactions
Prior to the adoption of the Proposals on April 6, 1999, the Company
had an agreement with the Advisor pursuant to which the Advisor received
compensation consisting primarily of (i) asset management fees calculated as
.625% of total assets invested by the Company; (ii) a subordinated incentive fee
based on the economic gain on the sale of Mortgage Investments; (iii)
reimbursement of certain administrative and other costs incurred by the Advisor
on behalf of the Company; and (iv) certain other fees. In addition, with respect
to Mortgage Loans acquired by the Company, the Advisor was entitled to receive
loan placement fees paid by borrowers equal to up to 1.5% of the principal
amount of each mortgage loan.
As a result of the adoption of the Proposals (see Note 1), the Board
of Trustees amended the Advisory Agreement between the Company and the Advisor
to, among other matters, reflect the Proposals and change the Advisory
Agreement's fee structure to (a) eliminate the acquisition and disposition fees
payable to the Advisor; (b) modify the annual asset management fee payable to
the Advisor as set forth below; and (c) include an annual incentive fee payable
to the Advisor as also set forth below. The modified annual asset management fee
is calculated as follows: (i) .355% for investments in Mortgage Loans; (ii)
.355% for certain investment grade investments; (iii) .750% for certain
non-investment grade investments; (iv) 1.000% for unrated investments; and (v)
.625% for investments held prior to the adoption of the Proposals. The annual
incentive fee is calculated as follows: subject to a minimum annual distribution
being made to shareholders from cash available for distribution of approximately
$1.45 per Share, the Advisor will be entitled to receive incentive compensation
for each fiscal year in an amount equal to the product of (A) 25% of the dollar
amount by which (1)(a) Funds From Operations of the Company (before the
incentive fee) per Share (based on the weighted average number of Shares
outstanding) plus (b) gains (or minus losses) from debt restructuring and sales
of property per Share (based on the weighted average number of Shares
outstanding), exceed (2) an amount equal to (a) the weighted average of the
price per Share of the initial offering (i.e. $20 per Share) and the prices per
Share of any secondary offerings by the Company multiplied by (b) the ten-year
U.S. Treasury rate plus two percent per annum multiplied by (B) the weighted
average number of Shares outstanding during such fiscal year. For any period
less than a fiscal year during which the amended Advisory Agreement is in
effect, the incentive fee will be prorated according to the proportion which
such period bears to a full fiscal year, taking into account, however, the
Company's cash available for distribution for the entire fiscal year.
In addition, the Advisory Agreement's fee structure was also changed
so that with respect to the first $100 million of new Mortgage Loans acquired by
the Company, the Advisor will receive origination points paid by borrowers equal
to up to 1% of the principal amount of each Mortgage Loan and the Company will
receive origination points paid by borrowers in excess of 1%. After the first
$100 million of additional Mortgage Loans is acquired, the Company will retain
100% of the origination points paid by borrowers.
The costs incurred to related parties for the years ended December
31, 2000, 1999 and 1998 were as follows:
Years Ended December 31,
----------------------------------------
2000 1999 1998
----------- ------------- ------------
Expense reimbursement $374,751 $255,616 $120,029
Asset management fees 386,112 335,682 362,280
Incentive fee 0 122,270 0
------- ------- -------
$760,863 $713,568 $482,309
======= ======= =======
Asset management fees, the incentive management fee and expense
reimbursements owed to the Advisor and its affiliates amounting to approximately
$243,000 and $431,000 were accrued and unpaid at December 31, 2000 and 1999,
respectively.
On May 19, 1999, the Company made a loan in the amount of $1,900,000
to Patterson Hope `98 Urban Renewal L.L.C. (the "Borrower"), an entity in which
an affiliate of the Advisor is a member. The note bore interest at 12% which was
payable, along with the principal, at maturity on September 15, 1999. The note
was secured by all of the membership interest in the Borrower, was guaranteed by
Related Capital Company and could
F-31
AMERICAN MORTGAGE ACCEPTANCE COMPANY AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
be prepaid in whole or in part at any time. In September 1999, the loan was
repaid and the Advisor and the Company each received origination points in the
amount of $19,000. The Company earned interest income of approximately $86,000
from this loan.
Note 8 - Earnings Per Share
Basic net income per share in the amount of $.86, $1.63 and $.88 for
the years ended December 31, 2000, 1999 and 1998, respectively, equals net
income for the periods ($3,317,757, $6,260,300 and $3,396,612, respectively),
divided by the weighted average number of shares outstanding for the periods
(3,838,630, 3,841,931 and 3,845,101, respectively).
Because the Company has no dilutive securities outstanding at
December 31, 2000, diluted net income per share is the same as basic net income
per share.
Note 9 - Capital Shares
In December 1992, the Company issued 10,000 shares of beneficial
interest at $20 per share in exchange for $200,000 cash from the Advisor.
On March 29, 1993, the Company commenced a public offering (the
"Offering") through Related Equities Corporation, an Affiliate of the Advisor,
and other broker-dealers on a "best efforts" basis, for up to 10,000,000 of its
shares of beneficial interest, at an initial offering price of $20 per share.
The Offering terminated November 30, 1994, with a total of 3,809,601 shares sold
to the public, either through the Offering or the Company's dividend
reinvestment plan (the "Reinvestment Plan"), representing Gross Proceeds ("the
"Gross Proceeds") of $76,192,021 (before volume discounts of $40,575).
The Reinvestment Plan became effective March 29, 1993. During the
offering period, the price per share purchased pursuant to the Reinvestment Plan
equaled $20. From November 30, 1994 (the termination of the offering period)
until November 30, 1997, the price per share under the Reinvestment Plan was
lowered to $19. Effective November 30, 1997, the Board adopted a policy to
adjust the reinvestment price annually to reflect the net asset value of a share
of the Company's shares of beneficial interest. Since November 30, 1994, 355,744
shares have been sold through the Reinvestment Plan, the proceeds of which (the
"Reinvestment Proceeds") were restricted for use in connection with the
Company's redemption plan and were not included in Gross Proceeds.
The Redemption Plan became effective on November 30, 1994. Under the
Redemption Plan, Eligible Shares could not be presented to the Company for
redemption. Eligible Shares were shares acquired directly from the Company or
through the Reinvestment Plan owned by the original holder. The Company was
required to redeem such Eligible Shares presented from redemption for cash to
the extent it had sufficient Reinvestment Proceeds.
Through the quarter ended March 31, 1997, the redemption price
pursuant to the Redemption Plan was $19 per Eligible Share. For the quarter
ended June 30, 1997, the Board of Trustees reduced the $19 redemption price to
$17.47 to reflect that shareholders had received, through that date, $1.53 in
return of capital distributions. The Board subsequently adopted a policy to
adjust the redemption price annually to reflect the then net asset value of a
share of the Company's shares of beneficial interest.
Pursuant to the Redemption Plan, 375,916 shares have been redeemed
for an aggregate price of $6,575,799.
During the Offering, the Advisor received 38,481 restricted shares
(including 717 from the Reinvestment Plan) in addition to the 10,000 purchased
which the Advisor (pursuant to the terms of the Offering) valued at $14.75 per
share. As a result of shares being redeemed, the Advisor was required to return
172 shares as of December 31, 1994; no additional shares were required to be
returned since then.
As a result of the adoption of the Proposals (see Note 1), the
Company's Reinvestment Plan and Redemption Plan have been terminated, effective
with the distribution for the quarter ended March 31, 1999. The final
reinvestment of shares occurred on May 15, 1999. The final redemption of shares
occurred on May 24, 1999. In addition, in connection with the listing of the
Company's Shares on the American Stock Exchange, fractional shares totaling
approximately 612 were redeemed on July 1, 1999.
F-32
AMERICAN MORTGAGE ACCEPTANCE COMPANY AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 10 - Selected Quarterly Financial Data (unaudited)
2000 Quarter Ended
--------------------------------------------------------------------------------
March 31 June 30 September 30 December 31
-------------- ----------------- ------------ -----------
Revenues:
Interest income:
Mortgage loans $ 491,400 $ 196,326 $ 500,295 $ 377,315
GNMA certificates 119,631 118,630 117,701 116,731
Commercial mortgage-backed
security-related investment 950,662 956,530 960,467 321,748
Note receivable 0 146,168 131,381 169,076
Temporary investments 547,104 674,520 624,146 238,647
Dividend income 0 0 0 401,096
Other income 0 0 167,279 (15,597)
---------- ---------- --------- ---------
Total revenues 2,108,797 2,092,174 2,501,269 1,609,016
---------- ---------- --------- ---------
Expenses:
Interest 909,107 903,614 1,044,215 514,970
General and administrative 332,220 257,970 425,520 293,688
Amortization 13,651 20,350 26,227 24,309
---------- ---------- --------- ---------
Total expenses 1,254,978 1,181,934 1,495,962 832,967
---------- ---------- --------- ---------
Other gain (loss):
Net gain (loss) on commercial
mortgage-backed security-related
investment and government
security sold short (457,042) (253,735) 246,341 164,881
Gain (loss) on repayment of mortgage loans
and GNMA certificates 86,439 (6,077) (8,371) 23
---------- ---------- --------- ---------
Total other gain (loss) (370,603) (259,812) 237,970 164,904
---------- ---------- --------- ---------
Net income $ 483,216 $ 650,428 $1,243,277 $ 940,953
========== ========== ========= =========
Net income per share
(basic and diluted) $ .13 $ .17 $ .32 $ .25
========== ========== ========= =========
F-33
AMERICAN MORTGAGE ACCEPTANCE COMPANY AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1999 Quarter Ended
--------------------------------------------------------------------------------
March 31 June 30 September 30 December 31
-------------- ----------------- ------------ -----------
Revenues:
Interest income:
Mortgage loans $ 548,365 $ 666,585 $ 465,994 $ 888,957
GNMA certificates 199,646 196,898 195,315 193,732
Commercial mortgage-backed
security-related investment 0 0 10,187 940,269
Note receivable 0 26,860 58,926 0
Temporary investments 96,528 262,386 221,459 512,244
Other income 0 4,231 19,000 0
--------- ---------- --------- ---------
Total revenues 844,539 1,156,960 970,881 2,535,202
--------- ---------- --------- ---------
Expenses:
Interest 0 0 6,061 900,520
General and administrative 137,534 298,729 250,841 342,736
Organization costs 0 348,413 16,405 54
--------- ---------- --------- ---------
Total expenses 137,534 647,142 273,307 1,243,310
--------- ---------- --------- ---------
Other gain (loss):
Net unrealized loss on commercial
mortgage-backed security-related
investment and government
security sold short 0 0 0 (217,699)
Gain (loss) on repayment of mortgage loans
and GNMA certificates 3,273,116 (331) (485) (590)
--------- ---------- --------- ---------
Total other gain (loss) 3,273,116 (331) (485) (218,289)
--------- ---------- --------- ---------
Net income $3,980,121 $ 509,487 $697,089 $1,073,603
========= ========== ========= =========
Net income per share
(basic and diluted) $ 1.03 $ .13 $ .18 $ .28
========= ========== ========= =========
Note 11 - Commitments and Contingencies
The Company completed a loan venture with Federal National Mortgage
Association ("Fannie Mae") which has agreed to fund the origination of $250
million of Delegated Underwriter and Servicer loans for apartment properties
that qualify for low income housing tax credits under Section 42 of the Internal
Revenue Code. Under the loan venture, the Company will originate and contract
for individual loans of up to $6 million dollars each over a two-year period and
will work with American Property Financing, which will underwrite and service
the loans for Fannie Mae. Each property in the transaction will benefit from 9%
low income housing tax credits for no less than 90% of its units. The Company
will guaranty a first loss position of up to 10% of the pool of $250 million and
will receive guaranty and other fees. As of December 31, 2000, the Company
originated four loans totaling $4,937,511 under this loan venture.
Note 12 - Investment in Unconsolidated Subsidiary and Note Receivable
The Company has entered into an agreement with the Federal National
Mortgage Association ("Fannie Mae") whereby the company will provide first loss
protection ("First Loss Obligation") on certain loans originated by Fannie Mae
pursuant to a Master Financing and Loss Sharing Agreement (See Note 11). Through
an unconsolidated subsidiary, AMAC/FM Corporation ("AMAC/FM"), and pursuant to a
Guaranty and Security Agreement with Fannie Mae, the payment of the First Loss
Obligation is guaranteed and secured by AMAC/FM's pledge and grant to Fannie Mae
of a security interest on certain assets of AMAC/FM.
AMAC/FM was capitalized by a contribution by the Company to AMAC/FM
of the mortgage loan secured by Stony Brook Village II Apartments with a
principal amount of $8,404,092. This contribution was recorded by AMAC/FM as a
$7,264,093 loan from the Company via a subordinated promissory note, with a
stated interest rate of 7.75% and a $1,140,000 capital contribution through the
issuance of AMAC/FM non-voting common stock. The Company accounts for its
$1,140,000 investment in AMAC/FM under the equity method of accounting, because
all of AMAC/FM's voting common shares are held by the Advisor and, therefore,
the Company does not control AMAC/FM.
During January, 2001, all of the voting common stock of AMAC/FM,
previously owned by the Advisor, was purchased by the Company, the effect of
which is to make AMAC/FM a wholly owned subsidiary of the Company. This change
was possible due to a change in federal REIT legislation passed in December
1999, allowing REITS to directly own taxable subsidiaries, beginning after the
year 2000.
F-34
AMERICAN MORTGAGE ACCEPTANCE COMPANY AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 13 - Subsequent Event
On February 15, 2001, the Company renewed the Nomura Repurchase
Facility with Nomura Asset Capital Corporation. Under the new terms, the Company
may borrow up to $40 million, with a one time option to increase total
borrowings to $60 million. The renewed facility bears interest at LIBOR plus
$1.25% and matures February 15, 2002.
F-35
============================================================== ====================================================
No dealer, salesperson or other person is authorized to
distribute any information or to represent anything not
contained in this prospectus. You must not rely on any
unauthorized information or representations. This prospectus
is an offer to sell our shares of beneficial interest only
under circumstances and in jurisdictions where it is lawful
to do so. The information combined in this 3,500,000 COMMON SHARES
prospectus is current only as of its date.
TABLE OF CONTENTS
PROSPECTUS SUMMARY................................... 3
RISK FACTORS......................................... 11
OUR COMPANY.......................................... 21
MANAGEMENT........................................... 29
MARKET PRICE OF AND DISTRIBUTIONS
ON OUR COMMON SHARES OF BENEFICIAL _____________________
INTEREST............................................. 37
PROSPECTUS
SELECTED CONSOLIDATED FINANCIAL _____________________
DATA................................................. 38
MANAGEMENT'S DISCUSSION AND
ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS................................ 39
DESCRIPTION OF SECURITIES............................ 45
CERTAIN FEDERAL INCOME TAX
CONSIDERATIONS....................................... 50
FRIEDMAN BILLINGS RAMSEY
UNDERWRITING......................................... 58
EXPERTS.............................................. 59
LEGAL MATTERS........................................ 59
WHERE YOU CAN FIND MORE
INFORMATION.......................................... 59
INCORPORATION OF CERTAIN DOCUMENTS
BY REFERENCE......................................... 60
INDEX TO CONSOLIDATED FINANCIAL
STATEMENTS........................................... F-1 , 2001
============================================================== ====================================================
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 14. Other Expenses of Issuance and Distribution
SEC registration fee....................................... $ 13,468
Transfer agent and registrar fees.......................... 3,500*
Printing expenses.......................................... 80,000*
Accountants' fees.......................................... **
American Stock Exchange listing fee........................ 17,500*
Counsel fees............................................... **
Miscellaneous.............................................. **
------------
Total............................................. $
============
-----------------
* Estimated.
** To be supplied by amendment.
ITEM 15. Indemnification of Directors and Officers
In our declaration of trust, we agree to indemnify and hold harmless our
trustees, our Advisor and their affiliates who are performing services on our
behalf ("Indemnified Parties") against expense or liability, including
attorneys' fees and disbursements, in any action arising out of any act
performed or omitted to be performed by them in connection with our operation or
business; provided, that, (i) our trustees or the Advisor has determined, in
good faith, that the course of conduct which caused the loss or liability was in
our best interests (ii) such liability or loss was not the result of negligence
or misconduct on the part of the Indemnified Party and (iii) such
indemnification or agreement to hold harmless is recoverable only out of our
assets and not from the shareholders. In addition, our declaration of trust
contains provisions limiting the personal liability of our trustees, officers
and shareholders.
We shall not indemnify the Indemnified Parties for any liability imposed by
a judgment, and costs associated with a judgment, including attorneys' fees,
arising from or out of a violation of state or federal securities laws. However,
we may indemnify the Indemnified Parties for settlements and related expenses of
lawsuits alleging securities laws violations and for expenses incurred in
successfully defending such lawsuits, but only if: (a) a court either (i)
approves the settlement and finds that indemnification of the settlement and
related costs should be made or (ii) approves indemnification of litigation
costs if there has been a successful defense or (b) there has been a dismissal
on the merits with prejudice (without a settlement).
We purchased and maintain insurance on behalf of our trustees and officers
against liability asserted against such trustees and officers in their
capacities as such.
II-1
ITEM 16. Exhibits
Exhibit
Number Description of Document
------------- -----------------------------------------------------------------
1.1* Form of Underwriting Agreement between the Registrant and
Friedman, Billings, Ramsey & Co., Inc.
4.1** Specimen of Common Share Certificate of Registrant.
4.2* Form of warrant to be issued to the representative of the
underwriters.
5.1** Opinion of Goodwin Procter LLP.
8.1** Opinion of Paul, Hastings, Janofsky & Walker LLP as to tax matters.
10.1 Rockport Mortgage Corporation Mortgage Note in the principal
amount of $8,500,000 dated December 15, 1995 (incorporated herein
by reference to Exhibit 10(a) to Form 8-K dated December 15, 1995
filed with the Securities and Exchange Commission pursuant to the
Securities Exchange Act of 1934 (Commission File No. 0-23972)).
10.2 Equity Loan Note in the principal amount of $1,039,000 dated
December 15, 1995 (incorporated herein by reference to Exhibit
10(b) to Form 8-K dated December 15, 1995 filed with the
Securities and Exchange Commission pursuant to the Securities
Exchange Act of 1934 (Commission File No. 0-23972)).
10.3 Subordinated Promissory Note by SCI-ROEV East Haven Land Limited
Partnership, dated December 15, 1995 (incorporated herein by
reference to Exhibit 10(c) to Form 8-K dated December 15, 1995
filed with the Securities and Exchange Commission pursuant to the
Securities Exchange Act of 1934 (Commission File No. 0-23972)).
10.4 Limited Operating Guaranty between SCI Real Estate Development,
Ltd., and Euro General East Haven, Inc., and the Company dated
December 15, 1995 (incorporated herein by reference to Exhibit
10(d) to Form 8-K dated December 15, 1995 filed with the Securities
and Exchange Commission pursuant to the Securities Exchange Act
of 1934 (Commission File No. 0-23972)).
10.5 Amended and Restated Advisory Services Agreement, effective as of
April 6, 1999 (incorporated herein by reference to Exhibit 10(z)
to Form 10-Q dated September 30, 1999 filed with the Securities
and Exchange Commission pursuant to the Securities Exchange Act
of 1934 (Commission File No. 0-23972)).
10.6** First Amendment to Amended and Restated Advisory Services Agreement
between Related AMI
Associates, Inc. and the Company dated November 29, 2001.
10.7** Settlement and Escrow Agreement between Related Mortgage
Corporation, Columbiana Lakes
Limited Partnership, the Company, et al. dated June 7, 2001.
23.1** Consent of Deloitte & Touche LLP.
23.2** Consent of KPMG LLP.
23.3** Consent of Deloitte & Touche LLP regarding ARCap Investors L.L.C.
23.4** Consent of Goodwin Procter LLP (included in exhibit 5.1 to this
registration statement).
23.5** Consent of Paul, Hastings, Janofsky & Walker LLP (included in
exhibit 8.1 to this registration statement).
24.1 Power of Attorney (included on page II-4 of this Registration
Statement).
------------------------------------
* To be supplied by amendment.
** Filed herewith.
ITEM 17. Undertakings
Insofar as indemnification for liabilities arising under the Securities Act
of 1933 may be permitted to directors, officers and controlling persons of the
registrant pursuant to the foregoing provisions, or otherwise, the registrant
has been advised that in the opinion of the Securities and Exchange Commission
such indemnification is against public policy as expressed in the Act and is,
therefore, unenforceable. In the event that a claim for indemnification against
such liabilities (other than the payment by the registrant of expenses incurred
or paid by a director, officer or
II-2
controlling person of the registrant in the successful defense of any action,
suit or proceeding) is asserted by such director, officer or controlling person
in connection with the securities being registered, the registrant will, unless
in the opinion of its counsel the matter has been settled by controlling
precedent, submit to a court of appropriate jurisdiction the question whether
such indemnification by it is against public policy as expressed in the Act and
will be governed by the final adjudication of such issue.
The undersigned registrant hereby undertakes that:
(1) For the purposes of determining any liability under the
Securities Act of 1933, the information omitted from the form
of prospectus filed as part of this registration statement in
reliance upon Rule 430A and contained in a form of prospectus
filed by the registrant pursuant to Rule 424(b)(1) or (4) or
497(h) under the Securities Act shall be deemed to be part of
this registration statement as of the time it was declared
effective.
(2) For the purpose of determining any liability under the
Securities Act of 1933, each post-effective amendment that
contains a form of prospectus shall be deemed to be a new
registration statement relating to the securities offered
therein, and the offering of such securities at that time
shall be deemed to be the initial bona fide offering thereof.
II-3
POWER OF ATTORNEY
KNOW ALL PERSONS BY THESE PRESENTS, that each person whose signature
appears below constitutes and appoints Stuart J. Boesky, Alan P. Hirmes, and
Michael I. Wirth, or any of them, as his or her true and lawful attorney-in-fact
and agent, with full power of substitution and resubstitution, for him or her
and in his or her name, place, and stead, in any and all capacities, to sign any
and all amendments (including post-effective amendments) to this Registration
Statement, and to file the same, with all exhibits thereto, and other documents
in connection therewith, with the Securities and Exchange Commission, granting
unto said attorney-in-fact and agent full power and authority to do and perform
each and every act and thing requisite and necessary to be done in connection
therewith as fully to all intents and purposes as he or she might or could do in
person, hereby ratifying and confirming all that said attorney-in-fact and
agent, or of his or her substitute or substitutes, may lawfully do or cause to
be done by virtue hereof.
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, as amended, the
registrant certifies that it has reasonable grounds to believe that it meets the
requirements for filing on Form S-2 and has duly caused this registration
statement to be signed on its behalf by the undersigned, thereunto duly
authorized, in the City of New York, State of New York, on the 30th day of
November, 2001.
AMERICAN MORTGAGE ACCEPTANCE COMPANY
By: /s/ Stuart J. Boesky
---------------------
Stuart J. Boesky
Trustee, Chairman of the Board,
President and Chief Executive Officer
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, as amended,
this registration statement has been signed by the following persons in the
capacities and on the dates indicated.
/s/ Stuart J. Boesky
----------------------------------
Stuart J. Boesky Trustee, Chairman of the Board, President November 30, 2001
and Chief Executive Officer (principal
executive officer)
/s/ Peter T. Allen
----------------------------------
Peter T. Allen Trustee November 30, 2001
/s/ Arthur P. Fisch
----------------------------------
Arthur P. Fisch Trustee November 30, 2001
/s/ Alan P. Hirmes
----------------------------------
Alan P. Hirmes Trustee November 30, 2001
/s/ Scott M. Mannes
----------------------------------
Scott M. Mannes Trustee November 30, 2001
/s/ Michael I. Wirth
---------------------------------- Senior Vice President and
Michael I. Wirth Chief Financial November 30, 2001
Officer (principal financial and
accounting officer)
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EXHIBIT INDEX
Exhibit Number Description of Document
-------------- -----------------------
4.1 Specimen of Common Share Certificate of Registrant
5.1 Opinion of Goodwin Procter LLP
8.1 Opinion of Paul, Hastings, Janofsky & Walker LLP as to
tax matters
10.6 First Amendment to Amended and Restated Advisory
Services Agreement between Related AMI Associates, Inc.
and the Company dated November 29, 2001
10.7 Settlement and Escrow Agreement between Related
Mortgage Corporation, Columbiana Lakes Limited
Partnership, the Company, et. al dated June 7, 2001
23.1 Consent of Deloitte & Touche LLP
23.2 Consent of KPMG LLP
23.3 Consent of Deloitte & Touche LLP regarding ARCap
Investors L.L.C.
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