-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, DAG0bB6rpNTKqrnRy0d9qSuUpiqTRZYFykl2LoIIeZWMk1bu+Oez9TASZFBzXjHD XiVicQ7ERd6dZbEYNFjr5A== 0001215811-05-000023.txt : 20050316 0001215811-05-000023.hdr.sgml : 20050316 20050316170251 ACCESSION NUMBER: 0001215811-05-000023 CONFORMED SUBMISSION TYPE: 10-K PUBLIC DOCUMENT COUNT: 5 CONFORMED PERIOD OF REPORT: 20041231 FILED AS OF DATE: 20050316 DATE AS OF CHANGE: 20050316 FILER: COMPANY DATA: COMPANY CONFORMED NAME: AMERICAN MORTGAGE ACCEPTANCE CO CENTRAL INDEX KEY: 0000878774 STANDARD INDUSTRIAL CLASSIFICATION: REAL ESTATE INVESTMENT TRUSTS [6798] IRS NUMBER: 136972380 STATE OF INCORPORATION: MA FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-K SEC ACT: 1934 Act SEC FILE NUMBER: 001-14583 FILM NUMBER: 05686299 BUSINESS ADDRESS: STREET 1: 625 MADISON AVE CITY: NEW YORK STATE: NY ZIP: 10022 BUSINESS PHONE: 2124215333 MAIL ADDRESS: STREET 1: 625 MADISON AVENUE CITY: NEW YORK STATE: NY ZIP: 10022 FORMER COMPANY: FORMER CONFORMED NAME: AMERICAN MORTGAGE INVESTORS TRUST DATE OF NAME CHANGE: 19931013 10-K 1 f10k_dec2004-amac.txt SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM 10-K (Mark One) X ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE - ----- ACT OF 1934 For the fiscal year ended December 31, 2004 OR TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES - ----- ACT OF 1934 Commission File Number 0-23972 AMERICAN MORTGAGE ACCEPTANCE COMPANY (Exact name of registrant as specified in its charter) Delaware 13-6972380 - --------------------------------------------- ----------------------------- (State or other jurisdiction of incorporation (I.R.S. Employer or organization) Identification No.) 625 Madison Avenue, New York, New York 10022 - --------------------------------------------- ----------------------------- (Address of principal executive offices) (Zip Code) Registrant's telephone number, including area code (212) 317-5700 Securities registered pursuant to Section 12(b) of the Act: Title of each class ------------------------------------------------------- Shares of Beneficial Interest, par value $.10 per share Name of each exchange on which registered: -------------------------------------------------- American Stock Exchange Securities registered pursuant to Section 12(g) of the Act: None Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes X No --- --- Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. [X] Indicate by check mark whether the registrant is an accelerated filer (as defined in Exchange Act Rule 12b-2). Yes X No --- --- The approximate aggregate market value of the voting and non-voting common equity held by non-affiliates of the Registrant as of December 31, 2004 was approximately $140,763,000 based on a price of $17.20 per share, the closing sales price for the Registrant's common shares of beneficial interest on the American Stock Exchange on that date. As of March 1, 2005 there were 8,336,803 outstanding common shares of the Registrant's shares of beneficial interest. DOCUMENTS INCORPORATED BY REFERENCE Part III: Those portions of the Registrant's Proxy Statement for the Annual Meeting of Shareholders to be held on June 9, 2005, which are incorporated into Items 10, 11, 12 and 13. Index to exhibits may be found on page 67 Page 1 of 74 TABLE OF CONTENTS AMERICAN MORTGAGE ACCEPTENCE COMPANY ANNUAL REPORT ON FORM 10-K
PAGE PART I Item 1. Business 4 Risk Factors 6 Item 2. Properties 15 Item 3. Legal Proceedings 15 Item 4. Submission of Matters to a Vote of Shareholders 15 PART II Item 5. Market for Registrant's Common Equity and Related Shareholder 16 Matters Item 6. Selected Financial Data 17 Item 7. Management's Discussion and Analysis of Financial Condition and 18 Results of Operations Item 7A. Quantitative and Qualitative Disclosures about Market Risks 30 Item 8. Financial Statements and Supplementary Data 31 Item 9. Changes in and Disagreements with Accountants on Accounting and 62 Financial Disclosure Item 9A. Disclosures Controls and Procedures 62 PART III Item 10. Directors and Executive Officers of the Company 63 Item 11. Executive Compensation 63 Item 12. Security Ownership of Certain Beneficial Owners and Management 63 Item 13. Certain Relationships and Related Transactions 63 Item 14. Principal Accounting Fees and Services 63 PART IV Item 15. Exhibits, Financial Statement Schedules and Reports on Form 8-K 63 SIGNATURES 66
2 CAUTIONARY STATEMENT FOR PURPOSES OF THE "SAFE HARBOR" PROVISIONS OF THE PRIVATE SECURITIES LITIGATION REFORM ACT OF 1995 Certain statements made in this report may constitute "forward-looking statements" within the meaning of Section 27A of the Securities Act of 1933, as amended and Section 21E of the Securities Exchange Act of 1934, as amended. Such forward-looking statements include statements regarding the intent, belief or current expectations of us and our management and involve known and unknown risks, uncertainties and other factors which may cause the actual results, performance or achievements to be materially different from any future results, performance or achievements expressed or implied by such forward-looking statements. Such factors include, among other things, the following: o Risks of investing in uninsured and non-investment grade mortgage assets and subordinated CMBS; o Competition in acquiring desirable investments; o Interest rate fluctuations and changes in prepayment rates which may affect the value of our assets; o Risks associated with investments in real estate generally and the properties which secure many of our investments; o General economic conditions, particularly as they affect the value of our assets and the credit status of our borrowers; o Dependence on our external Advisor for all services vital to our operations; o Conflicts which may arise among us and other entities affiliated with our Advisor which have similar investment policies to ours; and o Risks associated with the repurchase agreements we utilize to finance our investments and the availability of financing generally Readers are cautioned not to place undue reliance on these forward-looking statements, which speak only as of the date of this annual report. 3 PART I Item 1. Business. General - ------- American Mortgage Acceptance Company was formed on June 11, 1991 as a Massachusetts business trust. We elected to be treated as a real estate investment trust ("REIT") under the Internal Revenue Code of 1986, as amended (the "Code"). Throughout this report, the terms "we", "us", "the Company" and similar terms are meant to represent American Mortgage Acceptance Company and its consolidated subsidiaries. Additional information about us is also available at www.americanmortgageco.com. We make available, free of charge on or through our website, our annual report on Form 10-K, our quarterly reports on Form 10-Q, current reports on Form 8-K, and amendments to those reports filed or furnished pursuant to Section 13(a) or 15(d) of the Exchange Act as soon as reasonably practicable after such material is electronically filed with, or furnished to the Securities and Exchange Commission ("SEC"). Materials we file with the SEC may be read and copied at the SEC's Public Reference Room at 450 Fifth Street, N.W., Washington D.C. 20549. This information may also be obtained by calling the SEC at 1-800-SEC-0330. The SEC also maintains an Internet website that contains reports, proxy and information statements and other information regarding issuers that file electronically with the SEC at www.sec.gov. We will provide a copy of any of the foregoing documents to shareholders upon request. Business Strategy - ----------------- Since our 1999 listing on the American Stock Exchange, our goal has been to attempt to maximize the return on our asset base by investing in higher yielding assets while managing risk by maintaining a portion of our investments in government agency guaranteed or insured assets. Our business plan focuses on originating and acquiring mortgages secured by commercial properties with a focus on the multifamily sector. The mortgages may take the form of government insured first mortgages, insured mortgage pass-through certificates or insured mortgage backed securities, and uninsured mezzanine loans, construction loans, and bridge loans. Additionally, we have indirectly invested in subordinate commercial mortgage-backed securities and may invest in other real estate assets, including non-multifamily mortgages. In association with our investing activities, we may also issue guarantees of construction and permanent financing and make standby loan commitments. Investing - --------- We leverage the expertise of Related AMI Associates, Inc. (our "Advisor") and its affiliates in originating the loans and other assets in which we invest. In addition, our Advisor provides the expertise to perform both the initial underwriting of the properties which serve as direct or indirect collateral for our loans, as well as in the ongoing monitoring of those properties through construction, lease-up and stabilization. We invest in the following types of assets: GOVERNMENT INSURED AND GUARANTEED INVESTMENTS Our declaration of trust requires that 40% of our new investments be of the type we originally invested in prior to our reorganization in 1999. Generally, we seek to maintain a minimum of 40% of our investments in government insured or guaranteed investments, primarily through the acquisition of Government National Mortgage Association ("GNMA" or "Ginnie Mae") and Federal National Mortgage Association ("Fannie Mae") ("FNMA") mortgage-backed securities and pass-through certificates. We believe that government agency insured lending offers safety, liquidity and moderate yields, while also providing a strong asset base for collateralized borrowing on favorable terms. 4 MEZZANINE LOANS We originate or acquire mezzanine loans that typically finance newly stabilized or transitional commercial real estate properties. While we mainly focus on the multifamily sector, we may originate mezzanine loans for office, retail or industrial properties as well. The interest rates we offer are either fixed or floating rate. We seek properties in growing real estate markets with well capitalized developers or guarantors. We source our mezzanine loans in several ways, including: 1) issuing mezzanine debt behind an existing first mortgage loan; 2) jointly bidding with a senior lender and closing simultaneously (can be seamless to the client); 3) acquiring a mezzanine loan from a senior lender; or 4) originating the entire debt structure and selling the first mortgage to a senior lender. Mezzanine loans are subordinate to senior mortgages and may include a participating component, such as a right to a portion of the cash flow and proceeds generated from the refinancing and sale of the underlying properties. Typically, they are secured by equity interests in the borrower and have limited recourse to the borrower. BRIDGE LOANS We have two bridge loan programs. In the first, loans are typically funded in connection with the development of multifamily properties which benefit from the Low-Income Housing Tax Credit program under Section 42 of the Internal Revenue Code ("LIHTC program"). Due to the typical equity payment schedule associated with the LIHTC program, there can be periods in a construction cycle where a developer needs short-term capital and we offer bridge loans to developers with typical terms of 12 months, which are collateralized by the equity interests in the property owner. In the second program, we provide loans for properties undergoing rehabilitation by new owners when the rehabilitation process will add significant value to the property and reduce the effective loan-to-value ratio and risk of loss. Our bridge loans may include a participation component. COMMERCIAL MORTGAGE-BACKED SECURITIES ("CMBS") We currently invest indirectly in CMBS through a convertible preferred equity investment in ARCap Investors, LLC ("ARCap"). ARCap specializes in, and is a recognized industry leader in investing in, non-investment grade and unrated subordinated CMBS. The CMBS which comprise ARCap's portfolio are collateralized by a diverse range of underlying properties including multifamily, retail, office and hotel. FIRST MORTGAGE REVENUE BONDS We currently invest in taxable revenue bonds that are secured by first mortgages on affordable multifamily housing properties throughout the country. The revenue bonds generally rank on par with tax-exempt first mortgage revenue bonds that are owned by CharterMac, an affiliate of our Advisor. The proceeds from these revenue bonds are generally used for the new construction or substantial rehabilitation of affordable multifamily properties. OTHER INVESTMENTS From time to time, we may invest in assets outside of our normal investment strategy if we believe that making such an investment is advantageous in maximizing the return on our asset base. Financing - --------- We finance our investing activity primarily through borrowing from various facilities at short-term rates. We have three repurchase facilities, which we use to finance our investments, a warehouse facility that we use to finance mezzanine loans, and a line of credit with a related party that we use to purchase all types of investments. For further information about these facilities, see MANAGEMENT'S DISCUSSION AND ANALYSIS - LIQUIDITY AND CAPITAL RESOURCES and Notes 8, 9 and 10 to the consolidated financial statements. 5 In addition, we may also issue common shares to fund investing activity. We have the capacity to raise approximately $170.0 million of additional funds by issuing either common or preferred shares pursuant to a shelf registration statement filed with the SEC in 2002. From time to time, we may also issue other types of securities to raise additional capital. Competition - ----------- We compete with various financial institutions in each of our lines of business. We compete with investment banks, other REITs, mezzanine funds and pension fund advisors for loan products. Management and Governance - ------------------------- We have engaged our Advisor, an affiliate of CharterMac, to manage our day-to-day affairs. Our Advisor has subcontracted with Related Capital Company, LLC ("Related"), a subsidiary of CharterMac, to provide the services contemplated. Through our Advisor, Related offers us a core group of experienced staff and executive management personnel who provide us with services on both a full- and part-time basis. These services include, among other things, acquisition, underwriting, asset monitoring, portfolio management, finance, accounting, tax, capital markets, investor relations and public relations services. We have no employees. Our Advisor receives compensation in connection with such activities as set forth in Item 8, FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA; Item 11, EXECUTIVE COMPENSATION; and Item 13, CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS. In addition, we reimburse our Advisor and certain of its affiliates for expenses they incur in connection with their performance of services for us in accordance with our declaration of trust. We are governed by a board of trustees comprised of three independent trustees and two non-independent trustees who are affiliated with our Advisor. 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 document. If any of the risks discussed actually occur, our business, financial condition and results of operations, and the value of your investment, could be materially adversely affected. For convenience, we have grouped these risk factors as follows: 1. Risks related to our investments 2. Risks related to our Advisor 3. Risks related to our debt obligations 4. Risks related to our classification as a REIT and not as an investment company 5. Risks related to our common shares and our shareholders 1. RISKS RELATED TO OUR INVESTMENTS MORTGAGE INVESTMENTS THAT ARE NOT UNITED STATES GOVERNMENT INSURED AND NON-INVESTMENT GRADE MORTGAGE ASSETS INVOLVE RISK OF LOSS 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. In the event of any default under 6 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. LIMITED RECOURSE LOANS MAY LIMIT OUR RECOVERY TO THE VALUE OF THE MORTGAGED PROPERTY. Our loans are generally non-recourse, although some may have limited recourse provisions for a short period. 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 value of 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 INVESTMENTS MAY LIMIT THEIR AVAILABILITY WHICH COULD, IN TURN, NEGATIVELY AFFECT OUR ABILITY TO GENERATE NET INCOME We compete for loan investments with numerous public and private real estate investment vehicles, such as mortgage banks, pension funds, REITs, institutional investors and individuals. Mortgages, mezzanine loans, 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 competitors are larger than us, may have access to greater capital resources and other resources, and may have other advantages over us and our 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. There can be no assurance that we will achieve investment results that will allow any specified level of cash distribution. INTEREST RATE FLUCTUATIONS WILL AFFECT THE VALUE OF OUR ASSETS AND OUR ABILITY TO GENERATE NET INCOME 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 net income in many ways and present a variety of risks, including the risk of a mismatch between asset yields and borrowing rates. 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 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 fixed-rate 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. Also, as some of our investments may have variable interest rates, interest rate fluctuations could adversely affect our net income, although the variability of the income would serve to partially offset the variability of expense on our borrowings. See also Item 7A, QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK. PREPAYMENT RATES MAY NEGATIVELY AFFECT THE VALUE OF OUR INVESTMENTS. The value of our investments may be affected by prepayment rates. 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 7 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 MAY NOT ACCURATELY ASSESS INVESTMENT YIELDS, WHICH MAY NEGATIVELY AFFECT OUR EARNINGS 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 negatively affect our earnings. THERE ARE RISKS ASSOCIATED WITH INVESTMENTS IN REAL ESTATE, WHICH MAY NEGATIVELY AFFECT OUR EARNINGS We derive most of our income by investing, directly and indirectly, in debt secured by residential or commercial properties. Such investments subject us to various types and degrees of risk that could adversely affect the value of our assets and our ability to generate revenue and net income. 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: o national, regional and local economic conditions (which may be adversely affected by industry slowdowns and other factors); o local real estate conditions (such as an oversupply of housing, retail, industrial, office or other commercial space); o changes or continued weakness in specific industry segments; o construction quality, age and design; o demographic factors; o retroactive changes to building or similar codes; and o increases in operating expenses (such as energy costs). Other risks include, but are not limited to, the following: o 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; o occupancy and rent levels may be affected by construction of additional housing units and national, regional and local politics, including current or future rent stabilization and rent control laws and agreements; o federal LIHTCs and city, state and federal housing subsidy or similar programs which apply to some of the properties impose rent limitations that could adversely affect the ability to increase rents to generate the funds necessary to maintain the properties in proper condition, which is particularly important during periods of rapid inflation or declining market value of such properties; o if a loan defaults, the value of the property securing the loan (plus, for properties that generate LIHTCs, the value of the credits) may be less than the unamortized principal amount of the loan; o an owner or operator of real property may become liable for the costs of removal of certain hazardous substances released on its property without regard to whether the owner or operator knew of, or was responsible for, the release of such hazardous substances. The 8 presence of hazardous substances may adversely affect an owner's ability to operate the property; and o Certain underlying properties may be required to comply with the Americans with Disabilities Act, and must comply with fire and safety regulations, building codes, and other land use regulations. Compliance with such requirements may require property operators to make substantial capital expenditures. These conditions and events may increase the possibility that a property operator may be unable to meet its obligations to us or otherwise expose us to losses, thereby affecting our net income. We manage these risks through diligent and comprehensive underwriting, asset management and ongoing monitoring of loan and property performance. We may also obtain construction completion guarantees, personal recourse agreements and/or operating deficit guarantees. 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. We also own several properties as a result of defaults by borrowers. Excluding properties for which we have sales contracts and for which we have recovered a large portion of the investment we made upon foreclosure, as of December 31, 2004, the aggregate carrying value of these properties was approximately $25.4 million. While we are acting to improve the performance of these properties and are actively seeking buyers for them, there is no assurance that we will realize the full carrying amounts when the properties are sold. 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 RISKS ASSOCIATED WITH OUR INVESTMENT IN ARCAP, WHICH MAY NEGATIVELY AFFECT OUR EARNINGS We have invested indirectly in subordinated CMBS through our ownership of a preferred membership interest in ARCap. Subordinated CMBS of the type in which ARCap invests include "first loss" and non-investment grade subordinated interests. A first loss security is the most subordinate class in a structure and accordingly is the first to bear the loss upon a default on restructuring or liquidation of the underlying collateral and the last to receive payment of interest and principal. Such classes are subject to special risks, including a greater risk of loss of principal and non-payment of interest than more senior, rated classes. The market values of subordinated interests in CMBS and other subordinated securities tend to be more sensitive to changes in economic conditions than more senior, rated classes. As a result of these and other factors, subordinated interests generally are not actively traded and may not provide holders with liquidity of investment. In addition, our ability to transfer our membership interest in ARCap is limited by the terms of ARCap's operating agreement. PARTICIPATING INTERESTS IN MORTGAGES 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. As the operation of real estate is subject to numerous variables and risks, there can be no assurance that such interests will result in additional payments to us. 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 our investments or the credit quality of borrowers of uninsured investments. As a result, properties securing our investments may be overly concentrated in certain geographic areas and the underlying borrowers of our uninsured investments may have low credit quality. We may experience losses due to geographic concentration or low credit quality. As of December 31, 2004, 76.7% of our investments in mortgage loans, notes receivable, revenue bonds and real estate owned were secured by properties in Texas. These types of 9 investments comprised approximately 37.6% of our portfolio of investments as of December 31, 2004. We had no borrowers exceeding 10% of our portfolio of investments in mortgage loans, notes receivable and revenue bonds other than Richard Shaw, The Related Companies, L.P. and Richard Nathan who are the creditors of 12.1%, 13.9% and 14.8%, respectively, in these categories. The Related Companies, L.P. is an affiliate of our Advisor. 2. RISKS RELATED TO OUR ADVISOR WE ARE DEPENDENT ON OUR ADVISOR AND IF OUR ADVISOR TERMINATES THE 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 it 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. CONFLICTS OF INTEREST COULD ARISE AMONG US AND OR RELATED PARTIES WITH RESPECT TO INVESTMENT OPPORTUNITIES Our Advisor has subcontracted its obligation to provide services under the advisory agreement to Related, and there are risks involved with this arrangement. Under our advisory agreement, the Advisor and Related are permitted to act as advisor to other entities having investment policies similar to ours, including other REITs. 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. Additionally, CharterMac, the parent of the Advisor and Related, has in the past, and may in the future, invest in taxable mortgage investments or other investments that are similar to those in which we invest. To the extent that these existing entities, as well as affiliated entities which may be formed by affiliates of our Advisor in the future, have funds available for investment at the same time as we do and a potentially suitable investment is offered to us or the affiliated entities, our Advisor will review the affiliated entities' and our investment portfolios and will determine whether or not the investment should be made by one of the affiliated entities 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 us and these affiliated entities, the mortgage loan or other mortgage investment will either be made by a joint venture between two or more of such entities (which may include us), or will be allocated to one of such entities on a basis of rotation with the initial order of priority determined by the dates of formation of the entities. In addition, The Related Companies, LP ("TRCLP"), the principal owner of which is Stephen M. Ross, the Non-Executive Chairman and an indirect owner of a 14.3% economic interest in CharterMac, may engage in businesses which compete with our Company. In connection with CharterMac's acquisition of Related in December 2003, CharterMac and TRCLP entered into an agreement which prohibited TRCLP and its affiliates from competing with any business currently engaged in by Related other than in specified areas, including originating mezzanine loans to multifamily housing properties similar to those which secure our loans. There can be no assurance that we and TRCLP and its affiliates would not directly compete for similar products and opportunities in these areas in the future. 10 CONFLICTS OF INTEREST COULD ARISE IN TRANSACTIONS WHERE WE LEND TO OR BORROW FROM AFFILIATES OF OUR ADVISOR Every transaction entered into between us and an affiliate of our Advisor raises a potential conflict of interest. In addition to the initial determination to invest in mortgage investments secured by properties owned by an affiliate of our Advisor, such conflicts of interest with respect to these mortgage investments include, among others, decisions regarding: o whether to waive defaults of such affiliate; o whether to foreclose on a loan; and o whether to permit additional financing on the properties securing our investments other than financing provided by us. We have invested in, and may in the future invest in, mortgage investments secured by properties in which either direct or indirect affiliates of our Advisor own equity interests in the borrower. Our declaration of trust requires that any transaction between our Advisor or any of its affiliates and us be approved by a majority of our 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 December 31, 2004, we had six bridge loans with a total carrying value of approximately $12.8 million, two first mortgages with a total carrying value of approximately $2.3 million, and seven multifamily housing first mortgage bonds with a total carrying value of approximately $6.7 million to borrowers that are affiliates of our Advisor, which represents 6.2% of our total assets. In June 2004, we entered into a revolving credit facility with CharterMac, which provides up to $20.0 million in borrowings and bears interest at LIBOR plus 300 basis points. This facility is for a term of one year with a one-year optional extension and contains customary restrictions/covenants that are similar to our warehouse debt facility. 3. RISKS RELATED TO OUR DEBT OBLIGATIONS SHORT-TERM REPURCHASE AGREEMENTS INVOLVE RISK OF LOSS We finance, and expect to continue to finance, a portion of our investments through collateralized borrowing in the form of repurchase agreements, which involve us selling assets concurrently with our agreement to repurchase them at a later date and 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: 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 on short-term repurchase agreements to finance a portion of 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 these short-term borrowings on a continuous basis as they mature. 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 December 31, 2004, we had borrowings of approximately $157.6 million outstanding under the repurchase facilities, all of which typically have 30-day settlement terms. 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. OUR USE OF REPURCHASE AGREEMENTS TO BORROW MONEY MAY GIVE OUR LENDERS GREATER RIGHTS IN THE EVENT OF BANKRUPTCY. Of our total borrowings of approximately $166.1 million as of December 31, 2004, approximately $157.6 million were made using repurchase agreements which require us to pledge certain of our assets to the lender to secure our obligations thereunder. Borrowings made under repurchase agreements may qualify for special treatment under the U.S. 11 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 U.S. Bankruptcy Code and take possession of, and liquidate, the assets we pledged under these agreements without delay. HEDGING TRANSACTIONS CAN LIMIT GAINS AND INCREASE EXPOSURE TO LOSSES Hedging involves risk and 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. We intend generally to hedge as much of the interest rate risk as our Advisor determines is in our best interests given the cost of such hedging transactions. REIT provisions of 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. 4. RISKS RELATED TO OUR CLASSIFICATION AS A REIT AND NOT AS AN INVESTMENT COMPANY OUR REIT STATUS SUBJECTS US AND OUR SHAREHOLDERS TO RISKS Our REIT status subjects us and our shareholders to a number of risks including the following: 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 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 common 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. 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. 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. 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. 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. 12 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 of 1940. If we fail to qualify for this exemption, 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 document by, among other restrictions, reducing our ability to borrow. 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 SEC 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, 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 SEC 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 those that could be purchased in a manner consistent with the exemption. The net effect of these factors may be to lower our net income. 5. RISKS RELATED TO OUR COMMON SHARES AND OUR SHAREHOLDERS RESTRICTIONS ON SHARE ACCUMULATION IN REITS COULD DISCOURAGE A CHANGE OF CONTROL OF OUR COMPANY In order for us to qualify as a REIT, not more than 50% of the number or value of our 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 a 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 will 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 our 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 OUR 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. 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. 13 ISSUANCES OF LARGE AMOUNTS OF OUR COMMON SHARES COULD CAUSE OUR SHARE PRICE TO DECLINE Our declaration of trust permits our trustees to issue an unlimited number of shares (subject to SEC registration requirements and the consent of shareholders if required pursuant to the rules of the American Stock Exchange). In connection with the issuance of any common shares in the future, our Advisor is entitled to receive as compensation common shares equal to 1% of the issuance. The issuance of common shares could cause dilution of our existing common shares and a decrease in the market price. OUR SHAREHOLDERS MAY HAVE PERSONAL LIABILITY FOR OUR ACTS AND OBLIGATIONS 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. 14 Item 2. Properties. As a result of foreclosure, we own three properties subject to sales contracts, one property held for sale and one property held and used. See Note 7 for further discussion of these properties. Item 3. Legal Proceedings. On October 27, 2003, prior to taking possession of the real estate collateral supporting a loan investment, we were named in a lawsuit, Concord Gulfgate, Ltd. vs. Robert Parker, Sunrise Housing Ltd., and American Mortgage Acceptance Company, Cause No. 2003-59290 in the State District Court of Harris County, Texas. The suit claims, among other causes of action against the respective defendants, that we conducted wrongful foreclosure in that the loan guarantor did not derive any benefit from our loan and that the limited partners of the loan guarantor did not authorize the loan transaction. The suit seeks, among other relief, actual, consequential, exemplary, and punitive damages, a declaration that the loan made by us is unenforceable, and that we were involved in a conspiracy to defraud the loan guarantor. The suit is currently in the discovery phase. A trial date has not been set. We filed a countersuit on November 25, 2003 against the limited partners of the loan guarantor seeking to recover unpaid taxes and misappropriated property receipts. We are currently unable to determine the possible outcome of the litigation. Item 4. Submission of Matters to a Vote of Shareholders. None. 15 PART II Item 5. Market for the Registrant's Common Equity and Related Shareholder Matters. As of March 1, 2005, there were 245 registered shareholders owning 8,336,803 shares. Our common shares have been listed on the American Stock Exchange since July 1, 1999, under the symbol "AMC". Prior to July 1, 1999, there was no established public trading market for our shares. The high and low common share prices for each quarterly period in the past two fiscal years in which the shares were traded is as follows:
2004 2003 --------------------- --------------------- Quarter Ended Low High Low High - ------------------- --------- --------- --------- --------- March 31 $ 16.15 $ 18.31 $ 13.60 $ 16.06 June 30 $ 12.86 $ 17.86 $ 14.93 $ 17.99 September 30 $ 13.65 $ 17.02 $ 13.50 $ 17.94 December 31 $ 15.70 $ 18.05 $ 15.40 $ 16.97
The last reported sale price of our common shares on the American Stock Exchange on March 1, 2005 was $16.62. The following table provides information related to our Incentive Share Option Plan as of December 31, 2004:
Equity Compensation Plan Information (a) (b) (c) Number of securities Number of remaining available for securities to be future issuance under issued upon exercise Weighted-average equity compensation of outstanding exercise price of plans (excluding options, warrants outstanding options, securities reflected and rights warrants and rights in column (a) ---------------------- --------------------- ----------------------- Equity compensation plans 100,000 $15.03 733,680 approved by security holders Equity compensation plans not approved by security holders -- -- -- ---------------------- --------------------- ----------------------- Totals 100,000 $15.03 733,680 ---------------------- --------------------- -----------------------
16 Distributions - ------------- Cash distributions per share for the years ended December 31, 2003 and 2004 are as set forth in the following table:
Total Amount Cash Distribution Distributed for Quarter Ended Date Paid Per Share (in thousands) - ----------------- ----------- ------------- -------------- March 31, 2003 5/15/03 $ 0.40 $ 2,546 June 30, 2003 8/14/03 0.40 3,335 September 30, 2003 11/14/03 0.40 3,335 December 31, 2003 2/12/04 0.40 3,335 ------ ------- Total for 2003 $1.60 $12,551 ====== ======= March 31, 2004 5/13/04 $ 0.40 $ 3,335 June 30, 2004 8/12/04 0.40 3,334 September 30, 2004 11/11/04 0.40 3,334 December 31, 2004 2/14/05 0.40 3,334 ------ ------- Total for 2004 $ 1.60 $13,337 ====== =======
There are no material legal restrictions upon our present or future ability to make distributions in accordance with the provisions of our declaration of trust. Future distributions paid by us will be at the discretion of our trustees and will depend on our actual cash flow, our financial condition, capital requirements, REIT requirements and such other factors as the trustees deem relevant. There were no share repurchases during the fourth quarter of 2004. Other information required by this item, as well as additional information regarding our share repurchase program and share compensation paid to our independent trustees, is included in note 13 to our consolidated financial statements. Item 6. Selected Financial Data. The information set forth below presents our selected financial data. Additional financial information is set forth in the audited financial statements and footnotes thereto contained in Item 8, FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.
(In thousands except per share amounts) Year ended December 31, ---------------------------------------------------- OPERATIONS 2004 2003 2002 2001 2000 - ---------- --------- -------- -------- -------- ------- Total revenues $ 15,909 $ 15,051 $ 10,458 $ 5,698 $ 7,910 ========= ======== ======== ======== ======= Net income $ 11,273 $ 11,884 $ 9,660 $ 5,187 $ 3,318 ========= ======== ======== ======== ======= Net income per share, basic and diluted $ 1.35 $ 1.52 $ 1.61 $ 1.35 $ .86 ========= ======== ======== ======== ======= Distributions per share $ 1.60 $ 1.60 $ 1.51 $ 1.45 $ 1.45 ========= ======== ======== ======== ======= December 31, ---------------------------------------------------- FINANCIAL POSITION 2004 2003 2002 2001 2000 - ------------------ --------- -------- -------- -------- ------- Total assets $ 349,033 $327,107 $195,063 $101,982 $70,438 ========= ======== ======== ======== ======= Repurchase facilities payable $ 157,633 $149,529 $ 87,880 $ 43,610 $12,656 ========= ======== ======== ======== ======= Warehouse facility payable $ 3,827 $ 34,935 $ 8,788 $ -- $ -- ========= ======== ======== ======== ======= Line of credit due to related party $ 4,600 $ -- $ -- $ -- $ -- ========= ======== ======== ======== ======= Mortgages payable on real estate owned $ 56,993 $ 15,993 $ -- $ -- $ -- ========= ======== ======== ======== =======
17 Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations. Forward-Looking Statements - -------------------------- Certain statements made in this report may constitute "forward-looking statements" within the meaning of Section 27A of the Securities Act of 1933, as amended and Section 21E of the Securities Exchange Act of 1934, as amended. Such forward-looking statements include statements regarding the intent, belief or current expectations of us and our management and involve known and unknown risks, uncertainties and other factors which may cause the actual results, performance or achievements to be materially different from any future results, performance or achievements expressed or implied by such forward-looking statements. Such factors include, among other things, the following: o Risks of investing in uninsured and non-investment grade mortgage assets and subordinated CMBS; o Competition in acquiring desirable investments; o Interest rate fluctuations and changes in prepayment rates which may affect the value of our assets; o Risks associated with investments in real estate generally and the properties which secure many of our investments; o General economic conditions, particularly as they affect the value of our assets and the credit status of our borrowers; o Dependence on our external Advisor for all services vital to our operations; o Conflicts which may arise among us and other entities affiliated with our Advisor which have similar investment policies to ours; and o Risks associated with the repurchase agreements we utilize to finance our investments and the availability of financing generally Readers are cautioned not to place undue reliance on these forward-looking statements, which speak only as of the date of this annual report. Factors Affecting Comparability - ------------------------------- In 2003, several of our loans defaulted and we subsequently foreclosed upon and now own the properties. In certain instances this required us to invest additional capital to acquire senior mortgage positions and subsequently foreclose on those positions to acquire the real estate securing the loans. Additionally, the sale of some of the properties did not qualify as a sale for accounting purposes and the first mortgage debt secured by the purchaser is reflected in our financial statements. As a result of the foreclosures, we now have a significant amount of real estate owned and mortgage loans payable on our balance sheet. This results in a reduction of certain interest income, the recognition of rental income and income from real estate owned, and the depreciation of certain of the foreclosed properties, none of which was recorded prior to the second half of 2003 (See REAL ESTATE OWNED below). 18 Investment Activity - ------------------- During the years ended December 31, 2004 and 2003, we made the following investments:
(In thousands) December 31, 2004 December 31, 2003 -------------------------- -------------------------- Weighted Weighted Average Average Amount Interest Rate Amount Interest Rate ---------- ------------- ---------- ------------- FNMA certificates $ 34,823 5.60% $ 39,960 5.48% Mezzanine loans 8,500 11.64% 3,293 16.50% Bridge loans/notes receivable 4,517 12.96% 15,007 11.82% Variable rate bridge loans -- -- 16,039 LIBOR + 4.09% Taxable revenue bonds -- -- 7,672 8.69% Mortgage loans -- -- 1,011 11.00% ---------- ---------- Total $ 47,840 $ 82,982 ========== ==========
During 2004, the composition of our investment portfolio shifted to include a larger proportion of debt securities and a smaller proportion of other debt instruments. This change resulted from the relative availability of investment opportunities, the ability to obtain leverage on those assets to allow further investment and the timing of cash flows related to the liquidation of other assets in our portfolio. Our declaration of trust requires that 40% of our new investments be of the type we originally invested in prior to our reorganization in 1999. Generally, we seek to maintain at least 40% of our investments in government-insured or guaranteed investments. At December 31, 2004, we owned approximately $194.6 million in GNMA and FNMA certificates, representing approximately 55.8% of our assets. Results of Operations COMPARISON OF YEARS ENDED DECEMBER 31, 2004 AND 2003 The following is a summary of our operations for the year ended December 31, 2004 compared to 2003:
(In thousands) Year Ended December 31, ---------------------------------- 2004 2003 Change ------- ------- ------ Total revenues $15,909 $15,051 5.7% Total expenses 10,830 5,653 91.6 Total other income 6,194 2,486 149.2 ------- ------- ------- Net income $11,273 $11,884 (5.1%) ======= ======= =======
For the year ended December 31, 2004, as compared to the year ended December 31, 2003, revenues and other income have increased mainly due to an increase in acquisitions and additional fundings of GNMA and FNMA certificates and revenues generated by foreclosed properties. Expenses have also increased for these periods due to an increase in expenses related to the foreclosed properties, higher interest costs, general and administrative expenses and depreciation recorded for real estate owned. 19 REVENUES Changes in the components of our revenue in 2004 as compared to 2003 were as follows:
% Change from Prior Year ------------------ Interest income Debt securities 11.1% Mortgage loans (30.4) Notes receivable (19.6) Revenue bonds 319.2 Temporary investments (23.6) Rental income 100.0 Other revenues 5.4 ------------------ Total revenues 5.7% ==================
At December 31, 2004 and 2003 we had the following investments:
December 31, 2004 December 31, 2003 -------------------------- -------------------------- Weighted Weighted Carrying Average Carrying Average Amount Interest Rate Amount Interest Rate ---------- ------------- ---------- ------------- Debt securities 194,587 6.47% 167,260 6.80% Mortgage loans 21,376 11.68% 13,864 11.80% Notes receivable 23,111 9.43% 35,946 7.96% Revenue bonds 6,672 8.69% 7,586 8.69%
Interest income from debt securities increased, primarily due to the continued advances on the Ellington Plaza GNMA certificate and the purchase of eight FNMA certificates during 2004, partially offset by the repayment of the Autumn Creek GNMA certificate. Interest income from mortgage loans decreased, primarily due to the receipt of additional interest due upon repayment of the Stonybrook II first mortgage and mezzanine loan in 2003, with no comparable items in 2004, and the reduction of interest received from certain foreclosed properties due to the reclassification of these assets to real estate owned. Interest income from notes receivable decreased, primarily due to the default of required debt service payments from foreclosed properties (See REAL ESTATE OWNED below). Interest income from revenue bonds relates to taxable revenue bonds purchased in October 2003 and the increase in 2004 reflects a full year of ownership as compared to two months in 2003. Rental income was recorded for the year ended December 31, 2004 due to the reclassification of the Plaza at San Jacinto property as Real Estate Owned - Held and Used (see REAL ESTATE OWNED below). 20 EXPENSES Changes in components of our expenses in 2004 as compared to 2003 were as follows:
% Change from Prior Year ------------------- Interest 57.7% General and administrative 89.7 Fees to Advisor 7.9 Property operations 100.0 Depreciation 100.0 Amortization and other 9.3 ------------------- Total expenses 91.6% ===================
At December 31, 2004, excluding mortgages on real estate owned, we had total debt of approximately $166.1 million with a weighted average interest rate of 2.76% per year, including the effect of a swap agreement put into place in April 2003. At December 31, 2003, we had a comparable balance of approximately $184.5 million with a weighted average interest rate of 1.80% per year. Interest expense increased, primarily due to the borrowings stemming from the increased investment base. This increase can also be attributed to the interest rate swap agreement, which was outstanding for all of 2004 and a steady increase in LIBOR during 2004. During 2004, LIBOR increased 1.30%. General and administrative expenses increased, primarily due to the increase in legal fees related to foreclosed properties, the increase in accounting fees related to Sarbanes-Oxley consulting services, and the increase of certain other administrative costs. Property operations were recorded for the year ended December 31, 2004 due to the reclassification of the Plaza at San Jacinto as Real Estate Owned - Held and Used (see REAL ESTATE OWNED below). Depreciation expense was recorded for the year ended December 31, 2004 relating to the reclassification of foreclosed properties from Real Estate Owned-Held for Sale to Real Estate Owned-Held and Used. Depreciation was captured for the 2004 periods, as well as retroactively to the initial foreclosure dates of the properties (see REAL ESTATE OWNED below). OTHER INCOME Other income increased, due to the increase in net operating income recognized from the operations of foreclosed properties (see REAL ESTATE OWNED below). REAL ESTATE OWNED During 2003, five loans defaulted and we foreclosed upon and took ownership of the underlying properties. We reclassified our investments in these foreclosed properties as Real Estate Owned-Held for Sale on our balance sheet and recognized income from the operations of these properties. As a result of these unusual circumstances, there was a substantial decrease in interest income from these loans, as noted above. During the time we owned the real estate, certain circumstances have occurred that warranted the reclassification of most of these assets. The following is the December 31, 2004 classification of our real estate owned portfolio: o REAL ESTATE OWNED - HELD AND USED During 2004, we reclassified one of the unsold properties as Real Estate Owned - Held and Used because we have not sold it within the one-year time frame required by generally accepted accounting 21 principles ("GAAP"). As a result, we recorded depreciation on the property in 2004, as well as retroactively for the full year that the property was classified as Held for Sale. We also recognize the property's rental income and operational expenses in separate line items on the income statement. During February 2005, this property was sold (see Note 17 to our consolidated financial statements). During 2004, we reclassified our Real Estate Owned - Subject to Sales Contract properties to Real Estate Owned - Held and Used (see below). o REAL ESTATE OWNED - SUBJECT TO SALES CONTRACTS In the fourth quarter of 2003, we sold three of the properties and provided 100% financing to the buyer, via a bridge loan. Per the terms of that loan, we received 100% of the properties' cash flow until permanent financing was put in place in December 2004 (see below). Due to our providing 100% financing to the buyer, these transactions did not constitute a sale in accordance with GAAP and, therefore, we continued to classify the properties as Real Estate Owned - Subject to Sales Contracts on the balance sheet. During December 2004, UBS Real Estate Investments, Inc. provided permanent first mortgage financing in the amount of $41.0 million for these properties. We restructured the remaining balance due from the borrower of approximately $13.4 in the form of a mezzanine loan. This sale still does not constitute a sale in accordance with GAAP. We have reclassified these properties on our balance sheet as Real Estate Owned - Held and Used; and have recorded depreciation on the properties in 2004, as well as retroactively for the period since foreclosure. We have recognized income associated with the properties as income from real estate owned on the income statement up to the date of refinancing. We will recognize income associated with $13.4 million mezzanine loan as rental income on future income statements. o REAL ESTATE OWNED - HELD FOR SALE One remaining property in our real estate owned portfolio, Autumn Creek, will continue to remain as Real Estate Owned - Held for Sale as we continue to market the real estate. We have changed the marketing strategy of this asset in order to reflect marketplace behavior. There have been circumstances that arose during 2004 that have warranted us to seek foreclosure of another property to protect our investment. The Northbrooke mezzanine loan defaulted by ceasing to make required debt service payments and we are currently in the process of determining the necessary steps for foreclosure. We expect to fully recover our investment. We have focused on increasing the occupancy level and operating income of all of the properties owned to projected stabilization levels. The weighted average occupancy rate on the stabilized properties at the time of foreclosure was 81.4% and the weighted average occupancy rate on these same properties at December 31, 2004 was 95.9%. As a result, we have experienced increasing yields on several of these foreclosed assets. While property level operations continue to improve, we are actively seeking to sell or refinance the properties with third parties so that we can redeploy the capital invested into higher yielding investments. OTHER ITEMS The loss on the repayment of debt securities in 2003 related to the write-off of a purchase premium upon repayment of a GNMA certificate. COMPARISON OF YEARS ENDED DECEMBER 31, 2003 AND 2002 The following is a summary of our operations for the year ended December 31, 2003 compared to 2002: 22
(In thousands) Year Ended December 31, ------------------------------------- 2003 2002 Change ---------- --------- ---------- Total revenues $15,051 $10,458 43.9% Total expenses 5,653 3,812 48.3 Total other income 2,486 3,014 (17.5) ---------- --------- ---------- Net income $11,884 $9,660 23.0% ========== ========= ==========
For the year ended December 31, 2003, as compared to the year ended December 31, 2002, revenues and other income increased mainly due to increases in investment activity during 2003, as well as the reclassification of certain foreclosed assets into real estate owned. Expenses also increased for these periods due to increased borrowing activity to fund investments, as well as higher general and administrative expenses related to the foreclosure of real estate properties. REVENUES Changes in components of our revenues in 2003 as compared to 2002 were as follows:
Year Ended December 31 % Change from Prior Year ------------------ Interest income Debt securities 51.9% Mortgage loans 26.7 Notes receivable 39.5 Revenue bonds 100.0 Temporary investments 10.0 Other revenues (0.6) ------------------ Total revenues 43.9% ==================
Interest income from debt securities increased, primarily due to the purchase of three additional GNMA certificates in the latter part of 2002, and the purchase of fifteen FNMA certificates during 2003. Interest income from mortgage loans increased, primarily due to the additional interest and prepayment penalties received, as well as the recognition of deferred loan origination fees from the repayment of the Stonybrook II first mortgage and mezzanine loans in 2003. Interest income from notes receivable increased, due to the initial funding of ten notes receivable during 2003, partially offset by the default of required debt service payments from the Concord at Gessner, Concord at Little York, and Concord at Gulfgate notes (See REAL ESTATE OWNED above). Interest income from revenue bonds, arose from our first purchase of taxable revenue bonds in October 2003. Rental income increased, primarily due to the net operating income from the operations of foreclosed properties, while we recorded no such income in 2002. 23 EXPENSES Changes in components of our expenses in 2003 as compared to 2002 were as follows:
Year Ended December 31 % Change from Prior Year ------------------ Interest 107.5% General and administrative 33.9 Fees to Advisor 19.2 Amortization and other (0.8) ------------------ Total expenses 48.3% ==================
Interest expense increased, due to the increased borrowings on our warehouse facility and additional borrowings under the repurchase facility, which were used to fund investments, as well as the addition of an interest rate swap agreement put into place in March 2003 to mitigate the impact of interest rate fluctuations on our cash flows and earnings. The weighted average interest rate on borrowings was 1.80% in 2003, compared to 2.10% in 2002. The rate decrease was primarily due to a steady decrease in LIBOR during 2002 and 2003. General and administrative increased primarily due to increased legal fees on foreclosed properties and an increase in excise taxes due to the annual distribution obligation falling below the minimum threshold. Fees to Advisor increased, primarily due to an increase in asset management fees due to a higher asset base and an increase in overhead reimbursements. These increases were partially offset by decreased incentive management fees as none were earned by the Advisor in 2003. OTHER ITEMS A loss on the repayment of debt securities in the amount of approximately $391,000, relating to the write-off of a purchase premium upon repayment of one GNMA certificate and a gain of approximately $18,000 for the sale of a vacant lot at Concord at Gessner, were recorded for the year ended December 31, 2003. During 2002, the Company had a gain of approximately $614,000, resulting from the sale of one GNMA certificate. Funds from Operations - --------------------- Funds from operations ("FFO"), represents net income or loss (computed in accordance with GAAP), excluding gains (or losses) from sales of property, excluding depreciation and amortization related to real property and including funds from operations for unconsolidated joint ventures calculated on the same basis. FFO is calculated in accordance with the National Association of Real Estate Investment Trusts ("NAREIT") definition. FFO does not represent cash generated from operating activities in accordance with GAAP and is not necessarily indicative of cash available to fund cash needs. FFO should not be considered as an alternative to net income as an indicator of the Company's operating performance or as an alternative to cash flows as a measure of liquidity. Our management considers FFO a supplemental measure of operating performance, and, along with cash flows from operating activities, financing activities, and investing activities, it provides investors with an indication of our ability to incur and service debt, make capital expenditures, and to fund other cash needs. For the years ended December 31, 2003 and 2002, FFO was equal to net income, as we did not record depreciation expense on any of our assets. 24 The following table reconciles net income to FFO for the year ended December 31, 2004:
(In thousands) Year Ended December 31, 2004 ----------------- Net income $ 11,273 Add back: depreciation of real property 2,143 --------- FFO $ 13,416 ========= Cash flows from: Operating activities $ 13,986 ========= Investing activities $ (22,546) ========= Financing activities $ 9,206 ========= Weighted average shares outstanding: Basic 8,336 ========= Diluted 8,343 =========
Since not all companies calculate FFO in a similar fashion, our calculation presented above may not be comparable to similarly titled measures reported by other companies. Liquidity and Capital Resources - ------------------------------- SOURCES OF FUNDS We expect that cash generated from our investments, as well as our borrowing capacity, will meet our needs for short-term liquidity and will be sufficient to pay all expenses and distributions to our shareholders in amounts sufficient to retain our REIT status in the foreseeable future. In order to qualify as a REIT under the Internal Revenue Code, as amended, 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 finance our investing activity primarily through borrowing from various facilities at short-term rates. At December 31, 2004, we had approximately $38.3 million available to borrow, contractually, under our debt facilities without exceeding limits imposed by debt covenants and our declaration of trust. In August 2005, our warehouse facility will mature. We are seeking to replace this facility with a similar one with similar terms and are currently in negotiations with financial institutions to develop such a facility. From time to time, we may also issue common shares or other equity to fund investing activity. In April 2003, we completed a public offering of 1,955,000 common shares for net proceeds of approximately $27.5 million, which were used to fund investments. We have capacity to raise approximately $170.0 million of additional funds by issuing either common or preferred shares pursuant to a shelf registration statement filed with the SEC in 2002. If market conditions warrant, we may seek to raise additional funds for investment through further offerings, although the timing and amount of such offerings cannot be determined at this time. SUMMARY OF CASH FLOWS During the year ended December 31, 2004, as compared to the year ended December 31, 2003, the net change in cash and cash equivalents increased by approximately $9.0 million. Operating cash flows improved by $2.2 million primarily due to 25 higher cash earnings and favorable variances in timing of receivables collected. A decrease in net cash used in investing activities (approximately $101.1 million) and a corresponding decrease in net cash provided by financing activities (approximately $94.3 million) were due to a higher level of investing activity in debt securities, mortgage loans, and mezzanine and bridge loans during the 2003 period. The lower level of investing in 2004 corresponded to the decrease in net borrowings. During the year ended December 31, 2003, as compared to the year ended December 31, 2002, the net change in cash and cash equivalents decreased approximately $17.8 million. Operating cash flows improved by approximately $2.8 million primarily due to higher earnings. An increase in net cash used in investing activities (approximately $49.3 million) and an increase in net cash provided by financing activities (approximately $28.7 million) were due to an increase in proceeds received from repurchase and warehouse facilities used for purchases of mortgage loans and debt securities. OTHER We are 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. Distributions - ------------- Of the total distributions of approximately $13.3 million and approximately $12.6 million for the years ended December 31, 2004 and 2003, respectively, approximately $2.1 million ($.25 per share or 15.48%) represented a return of capital for the year ended December 31, 2004 and approximately $667,000 ($.08 per share or 5.31%) represented a return of capital for the year ended December 31, 2003, determined in accordance with GAAP. As of December 31, 2004, the aggregate amount of the distributions made since our initial public offering representing a return of capital, in accordance with GAAP, totaled approximately $17.2 million. The portion of the distributions which constituted a return of capital was more significant in our initial years in order to permit us to maintain level distributions to shareholders while we were in the process of investing the proceeds from our initial public offering. Application of Critical Accounting Policies - ------------------------------------------- Our consolidated financial statements are based on the selection and application of GAAP, which requires us to make estimates and assumptions that affect the reported amounts of assets, liabilities, revenues and expenses. These estimates and assumptions sometimes involve future events which cannot be determined with absolute certainty. Therefore, our determination of estimates requires that we exercise our judgment. While we have used our best estimates based on the facts and circumstances available to us at the time, different results may actually occur and any such differences could be material to our financial statements. We believe the following policies may involve a higher degree of judgment and complexity and represent the critical accounting policies used in the preparation of our financial statement: o valuation of investments in debt securities; o assessment of impairment of mortgage loans and notes; o classification of mezzanine loan investments; and o classification and valuation of real estate owned. VALUATION OF INVESTMENTS IN DEBT SECURITIES SFAS No. 115, ACCOUNTING FOR CERTAIN INVESTMENTS IN DEBT AND EQUITY SECURITIES, provides guidance on determining the valuation of investments owned. The initial classification of our investments in the "available for sale" category rather than as "held to maturity" is due to our intent to sell these securities if the terms of a particular offer are deemed favorable to us. We have sold these securities in the past and from time to time, we may look to sell these securities in the future if it is opportunistic for us to do so. Because of this classification, we must carry our investments at estimated fair value. GNMA and FNMA DUS Certificates are relatively liquid investments. We use third-party quoted market prices as our primary source of valuation information. 26 ASSESSMENT OF IMPAIRMENT OF MORTGAGE LOANS AND NOTES SFAS No. 114, ACCOUNTING BY CREDITORS FOR IMPAIRMENT OF A LOAN, establishes standards regarding impairment issues related to our mortgage loans and notes receivable. Our portfolio of mortgage loans and notes is periodically evaluated for impairment to establish appropriate loan loss reserves, if necessary. Our Advisor has a credit review committee which meets monthly and reviews the status of each loan and note and maintains a "watch list" of loans (including loans for which we have issued guarantees) for which the underlying property may be experiencing construction cost overruns, delays in construction completion, occupancy shortfalls, lower than expected debt service coverage ratios, or other matters which might cause the borrower to be unable to make scheduled interest and principal payments. If a loan is experiencing difficulties, members of this credit committee work with the borrower to try to resolve the issues, which could include extending the loan term, making additional advances, or reducing required payments. If, in the judgment of our management, it is determined that it is probable that we will not receive all contractually required payments when they are due, the loan or note would be deemed impaired, and a loan loss reserve established. As of December 31, 2004, our management had determined that no loan required a loss reserve. CLASSIFICATION OF MEZZANINE LOAN INVESTMENTS Our mezzanine loan investments bear interest at fixed or variable rates, and some also include provisions that allow us to participate in a percentage of the underlying property's cash flows from operations and proceeds from a sale or refinancing. At the inception of each such investment, our management must determine whether such investment should be accounted for as a loan, joint venture or as real estate, using the guidance contained in the Third Notice to Practitioners issued by the AICPA. Although the accounting methodology does not affect our cash flows from these investments, this determination affects the balance sheet classification of the investments as well as the classification, timing and amounts of reported earnings. Accounting for the investment as real estate is required if we expect that the amount of profit, regardless of its nature, is over 50 percent of the property's total expected residual profit. If a mezzanine investment were accounted for as an investment in real estate, our balance sheet would show the underlying property and its related senior debt (if such debt were not also held by us), and the income statement would include the property's rental revenues, operating expenses and depreciation. If we expect to receive less than 50 percent of the property's residual profit, then loan or joint venture accounting is applied. Loan accounting is appropriate: o if the borrower has a substantial equity investment in the property; o if we have recourse to substantial assets of the borrower; o if the property is generating sufficient cash flow to service normal loan amortization; or o if certain other conditions are met. Under loan accounting, we recognize interest income as earned and additional interest from participations as received. Joint venture accounting would require that we only record our share of the net income from the underlying property. Our management must exercise judgment in making the required accounting determinations. For each mezzanine arrangement, we project total cash flows over the loan's term and our share in those cash flows, and consider the borrower's equity, the contractual cap, if any, on total yield to us over the term of the loan, market yields on comparable loans, borrower guarantees, and other factors in making an assessment of the proper accounting. To date, we have determined that all mezzanine investments should be accounted for as loans. CLASSIFICATION AND VALUATION OF REAL ESTATE OWNED The accounting for the foreclosure, ownership and subsequent sale of real estate is governed by: o SFAS No. 15, ACCOUNTING BY DEBTORS AND CREDITORS FOR TROUBLED DEBT RESTRUCTURINGS; 27 o SFAS No. 144, ACCOUNTING FOR THE SALE OR DISPOSAL OF LONG-LIVED ASSETS; and o SFAS No. 66, ACCOUNTING FOR SALES OF REAL ESTATE. During 2003, we exercised our rights under subordinated promissory notes and other documents to take possession of certain real estate collateral. We have also purchased the first mortgage loans on all of the respective properties, except for Autumn Creek, and acquired the real estate at foreclosure auctions. Three of the properties were subsequently sold, although the transaction did not meet the sale criteria of SFAS No. 66, despite the fact that the purchaser later secured permanent first-mortgage financing. When a loan is in the process of foreclosure, it is our policy to initially reclassify the balance of the loan into Real Estate Owned-Held for Sale at the lower of fair value of the real estate, less estimated disposal costs or the carrying amount of the loan, and to cease accrual of interest. We obtain independent appraisals of all foreclosed real estate to assist management in evaluating property values. To date, no losses have been recorded upon foreclosure. It is our intent to sell foreclosed properties within a short time period. Due to the Held for Sale classification, we do not initially depreciate the properties. If we do not sell a property or do not meet sale criteria within the permissible timeframe for Held for Sale classification, we reclassify the property into Real Estate Owned-Held and Used or Subject to Sales Contract categories and account for it as an operating asset. Depreciation is recorded for the asset including a retroactive adjustment for the full period that the property was classified as Real Estate Owned-Held for Sale. Income from property operations is recorded provided realization and collectibility of the amounts are considered likely. Likewise, interest income on notes receivable for properties sold that do not meet the criteria for sale recognition is recorded to the extent that collectibility is considered likely. This accounting for real estate owned requires substantial judgment as to the fair value of the assets, the likelihood of collecting income and our ability to sell the properties. As of December 31, 2004, we believe that the amounts reported are fairly stated and realizable. Commitments, Contingencies and Off Balance Sheet Arrangements - ------------------------------------------------------------- We have no unconsolidated subsidiaries, special purpose off-balance sheet financing entities, or other off-balance sheet arrangements. The following table reflects our maximum exposure and carrying amount as of December 31, 2004, for guarantees we have entered into:
(In thousands) Maximum Carrying Exposure Amount - --------------------------------- ------------- ------------ Stabilization loan guarantees (1) $12,270 $ -- FNMA loan program (2) 3,221 -- ------- ----------- $15,491 $ -- ======= ===========
(1) These guarantees provide credit enhancement to developers during construction and lease-up of new properties for a fee. We issued these guarantees as a means to address an undeserved market for credit and to establish and maintain relationships with developers. We believe there is little risk associated with the guarantees and expect no liquidity requirements in the near term. (2) These indemnification agreements relate to a program we initiated and have since discontinued. We believe the risk of any cost associated with the indemnity agreement is minimal. The maximum exposure amount is not indicative of any expected losses under the guarantees. For full description of these guarantees, see Note 16 to the consolidated financial statements. 28 Contractual Obligations - ----------------------- In conducting business, we enter into various contractual obligations. Detail of these obligations, including expected settlement periods, is contained below.
Payments Due by Period (In thousands) Less than More than Total 1 Year 1 - 3 Years 3 - 5 Years 5 Years ---------- ----------- ----------- ------------ ------------ Debt: Lines of credit: Repurchase facilities $157,633 $157,633 $ -- $ -- $ -- Warehouse facility 3,827 3,827 -- -- -- Revolving facility 4,600 4,600 -- -- -- Mortgage loan on real estate owned (1) 15,993 15,993 -- -- -- Mortgage loan on real estate owned (2) 41,000 469 1,671 1,984 36,876 Funding Commitments: Funding commitment for mezzanine/preferred stock (3) 74,500 74,500 -- -- -- Standby and forward bridge loan commitments 2,104 2,104 -- -- -- Standby and forward mezzanine loan commitments 379 -- 379 -- -- Forward GNMA commitments 2,279 2,279 -- -- -- ---------- ----------- ----------- ------------ ------------ Total $302,315 $261,405 $ 2,050 $ 1,984 $ 36,876 ========== =========== =========== ============ ============
(1) Represents a non-recourse mortgage loan on Real Estate Owned-Held for Sale (Autumn Creek). We purchased the mortgage at an auction in February 2005. (See Notes 7 and 17). (2) Represents a first mortgage on properties we report as Real Estate Owned - Held and Used (Concord Properties) as a sale of the properties did not meet the criteria for sale recognition in accordance with GAAP. The debt is non-recourse with respect to AMAC, the debt service is paid from the cash flows of the properties and we will not be required to satisfy the obligation. (See Note 7). (3) Funding of this commitment has a remote likelihood of occurrence. Recently Issued Accounting Standards - ------------------------------------ In December 2004, the Financial Accounting Standards Board issued SFAS No. 123(R), SHARE-BASED PAYMENT. As we already follow the fair value provisions set forth in SFAS No. 123, this statement is expected to have an immaterial impact on our financial statements. There are no other new pending accounting pronouncements which we are required to adopt that would have a significant impact on our consolidated financial statements. Inflation - --------- Inflation did not have a material effect on our results for the periods presented. 29 Item 7A. Quantitative and Qualitative Disclosures about Market Risk Market risk is the exposure to loss resulting from changes in interest rates, foreign currency exchange rates, commodity prices and equity prices. The primary market risk to which our investments are exposed to 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. INTEREST RATE RISK Interest rate fluctuations can adversely affect our income in many ways and present a variety of risks, including the risk of mismatch between asset yields and borrowing rates. Our operating results depend in large part on differences between the income from our assets (net of credit losses) and our borrowing costs. Most of our assets generate fixed returns and have terms in excess of five years. We fund the origination and acquisition of a significant portion of these assets with borrowings which have variable interest rates that reset relatively rapidly, such as monthly or quarterly. In most cases, the income from assets will respond more slowly to interest rate fluctuations than the cost of borrowings, creating a mismatch between asset yields and borrowing rates. Consequently, changes in interest rates, particularly short-term interest rates, may influence our net income. Our borrowings under repurchase and warehouse agreements bear interest at rates that fluctuate with LIBOR. Various financial vehicles exist which would allow our management to mitigate the impact of interest rate fluctuations on our cash flows and earnings. During March 2003, upon our management's analysis of the interest rate environment and the costs and risks of such strategies, we entered into an interest rate swap in order to hedge against increases in the floating interest rate on our repurchase facilities. The swap is a five-year agreement with Bank of America whereby we pay Bank of America a fixed 3.48% on a notional amount of $30.0 million. In return, Fleet pays us a floating rate equivalent to the 30-day LIBOR rate on the same notional amount. A possible risk of such swap agreements is the possible inability of Bank of America to meet the terms of the contracts with us; however, there is no current indication of such an inability. Based on the $136.1 million unhedged portion of $166.1 million of borrowings outstanding at December 31, 2004, a 1% change in LIBOR would impact our annual net income and cash flows by approximately $1.4 million. However, since the interest income from some of our loans is also based on LIBOR, a 1% increase in LIBOR would increase our annual net income and cash flows from such loans by approximately $157,000. Because the value of our debt securities fluctuate with changes in interest rates, rate fluctuations will also affect the market value of our net assets. 30 Item 8. Financial Statements and Supplementary Data. Page --------- (a) 1. Financial Statements Report of Independent Registered Public Accounting Firm 32 Consent of Independent Registered Public Accounting Firm 33 Management's Report on the Effectiveness of Internal Control over Financial Reporting 34 Report of Independent Registered Public Accounting Firm 35 Consolidated Balance Sheets as of December 31, 2004 and 2003 37 Consolidated Statements of Income for the years ended December 31, 2004, 2003 and 2002 38 Consolidated Statements of Shareholders' Equity for the years ended December 31, 2004, 2003 and 2002 39 Consolidated Statements of Cash Flows for the years ended December 31, 2004, 2003 and 2002 40 Notes to Consolidated Financial Statements 42 (a) 2. Financial Statement Schedules ----------------------------- All schedules have been omitted because they are not required or because the required information is contained in the financial statements or notes thereto. 31 REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM To the Board of Trustees And Shareholders of American Mortgage Acceptance Company New York, New York We have audited the accompanying consolidated balance sheets of American Mortgage Acceptance Company and subsidiaries (the "Company") as of December 31, 2004 and 2003, and the related consolidated statements of income, shareholders' equity, and cash flows for each of the three years in the period ended December 31, 2004. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on the financial statements based on our audits. We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, such consolidated financial statements present fairly, in all material respects, the financial position of American Mortgage Acceptance Company and subsidiaries as of December 31, 2004 and 2003, and the results of their operations and their cash flows for each of the three years in the period ended December 31, 2004, in conformity with accounting principles generally accepted in the United States of America. We have also audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the effectiveness of the Company's internal control over financial reporting as of December 31, 2004, based on the criteria established in INTERNAL CONTROL--INTEGRATED FRAMEWORK issued by the Committee of Sponsoring Organizations of the Treadway Commission and our report dated March 16, 2005 expressed an unqualified opinion on management's assessment of the effectiveness of the Company's internal control over financial reporting and an unqualified opinion on the effectiveness of the Company's internal control over financial reporting. DELOITTE & TOUCHE LLP New York, New York March 16, 2005 32 CONSENT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM We consent to the incorporation by reference in Registration Statement No. 33-87440 of American Mortgage Acceptance Company on Form S-3 and in Registration Statement No. 33-118572 of American Mortgage Acceptance Company on Form S-8 of our report dated March 16, 2005 relating to the consolidated financial statements of American Mortgage Acceptance Company and management's report on the effectiveness of internal control over financial reporting appearing in this Annual Report on Form 10-K of American Mortgage Acceptance Company for the year ended December 31, 2004. /s/ DELOITTE & TOUCHE LLP New York, New York March 16, 2005 33 MANAGEMENT'S REPORT ON THE EFFECTIVENESS OF INTERNAL CONTROL OVER FINANCIAL REPORTING The management of American Mortgage Acceptance Company is responsible for establishing and maintaining adequate internal control over financial reporting. Our internal control system was designed to provide reasonable assurance to our management and Board of Trustees regarding the preparation and fair presentation of published financial statements. All internal control systems, no matter how well designed, have inherent limitations. Therefore, even those systems determined to be effective can provide only reasonable assurance with respect to financial statement preparation and presentation. American Mortgage Acceptance Company management assessed the effectiveness of the Company's internal control over financial reporting as of December 31, 2004. In making this assessment, management used the criteria set forth by the Committee of Sponsoring Organizations of the Treadway Commission ("COSO") in INTERNAL CONTROL - INTEGRATED FRAMEWORK. Based upon our assessment we believe that, as of December 31, 2004, our internal control over financial reporting is effective in accordance with those criteria. Deloitte & Touche, LLP, our independent auditors, have issued an audit report on our assessment of the Company's internal control over financial reporting, which appears on page 35. /s/ Stuart J. Boesky /s/ Alan P. Hirmes - -------------------- ------------------ Stuart J. Boesky Alan P. Hirmes Chief Executive Officer Chief Financial Officer 34 REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM To the Board of Trustees And Shareholders of American Mortgage Acceptance Company New York, New York We have audited management's assessment, included in the accompanying "Management's Report on Internal Controls over Financial Reporting", that American Mortgage Acceptance Company together with its consolidated subsidiaries (the "Company") maintained effective internal control over financial reporting as of December 31, 2004, based on the criteria established in "INTERNAL CONTROL--INTEGRATED FRAMEWORK" issued by the Committee of Sponsoring Organizations of the Treadway Commission. The Company's management is responsible for maintaining effective internal control over financial reporting and for its assessment of the effectiveness of internal control over financial reporting. Our responsibility is to express an opinion on management's assessment and an opinion on the effectiveness of the Company's internal control over financial reporting based on our audit. We conducted our audit in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether effective internal control over financial reporting was maintained in all material respects. Our audit included obtaining an understanding of internal control over financial reporting, evaluating management's assessment, testing and evaluating the design and operating effectiveness of internal control, and performing such other procedures as we considered necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinions. A company's internal control over financial reporting is a process designed by, or under the supervision of, the company's principal executive and principal financial officers, or persons performing similar functions, and effected by the company's board of trustees, management, and other personnel to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company's internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company's assets that could have a material effect on the financial statements. Because of the inherent limitations of internal control over financial reporting, including the possibility of collusion or improper management override of controls, material misstatements due to error or fraud may not be prevented or detected on a timely basis. Also, projections of any evaluation of the effectiveness of the internal control over financial reporting to future periods are subject to the risk that the controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate. 35 In our opinion, management's assessment that the Company maintained effective internal control over financial reporting as of December 31, 2004, is fairly stated, in all material respects, based on the criteria established in "INTERNAL CONTROL--INTEGRATED FRAMEWORK" issued by the Committee of Sponsoring Organizations of the Treadway Commission. Also in our opinion, the Company maintained, in all material respects, effective internal control over financial reporting as of December 31, 2004, based on the criteria established in "INTERNAL CONTROL--INTEGRATED FRAMEWORK" issued by the Committee of Sponsoring Organizations of the Treadway Commission. We have also audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the consolidated balance sheet as of December 31, 2004 and the related consolidated statements of income, shareholders' equity and cash flows for the year ended December 31, 2004 of the Company and our report dated March 16, 2005 expressed an unqualified opinion on those financial statements. /s/ DELOITTE & TOUCHE LLP New York, New York March 16, 2005 36 AMERICAN MORTGAGE ACCEPTANCE COMPANY AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS (In thousands, except per share amounts)
ASSETS December 31, ---------------------- 2004 2003 --------- --------- Investments in debt securities $ 194,587 $ 167,260 Investments in mortgage loans, net 21,376 13,864 Notes receivable, net 23,111 35,946 Investments in revenue bonds 6,672 7,586 Investment in ARCap 20,240 20,240 Real Estate Owned - Held and Used, net 60,211 -- Real Estate Owned - Subject to Sales Contracts, net -- 51,616 Real Estate Owned - Held for Sale 17,924 25,802 Cash and cash equivalents 2,674 2,028 Other assets 2,238 2,765 --------- --------- Total assets $ 349,033 $ 327,107 ========= ========= LIABILITIES AND SHAREHOLDERS' EQUITY Liabilities: Repurchase facilities payable $ 157,633 $ 149,529 Warehouse facility payable 3,827 34,935 Line of credit - due to related party 4,600 -- Mortgages payable on real estate owned 56,993 15,993 Accounts payable and accrued expenses 1,344 1,830 Due to Advisor and affiliates 770 590 Distributions payable 3,334 3,335 --------- --------- Total liabilities 228,501 206,212 --------- --------- Commitments and contingencies Shareholders' equity: Shares of beneficial interest; $.10 par value; 25,000 shares authorized; 8,716 issued and 8,337 outstanding in 2004 and 8,713 issued and 8,338 outstanding in 2003 871 871 Treasury shares of beneficial interest at par; 379 shares in 2004 and 375 shares in 2003 (38) (38) Additional paid-in capital 126,800 126,779 Share based compensation (16) (29) Distributions in excess of net income (17,202) (15,138) Accumulated other comprehensive income 10,117 8,450 --------- --------- Total shareholders' equity 120,532 120,895 --------- --------- Total liabilities and shareholders' equity $ 349,033 $ 327,107 ========= =========
See accompanying notes to consolidated financial statements. 37 AMERICAN MORTGAGE ACCEPTANCE COMPANY AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF INCOME (In thousands except per share amounts)
Years Ended December 31, ----------------------------------- 2004 2003 2002 -------- -------- -------- Revenues: Interest income: Debt securities $ 9,734 $ 8,765 $ 5,769 Mortgage loans 1,808 2,597 2,050 Notes receivable 2,546 3,166 2,270 Revenue bonds 633 151 -- Temporary investments 42 55 50 Rental income 812 -- -- Other revenues 334 317 319 -------- -------- -------- Total revenues 15,909 15,051 10,458 -------- -------- -------- Expenses: Interest 4,017 2,548 1,228 General and administrative 1,740 917 685 Fees to Advisor 1,956 1,812 1,520 Property operations 563 -- -- Depreciation 2,143 -- -- Amortization and other 411 376 379 -------- -------- -------- Total expenses 10,830 5,653 3,812 -------- -------- -------- Other income: Equity in earnings of ARCap 2,400 2,400 2,400 Income from real estate owned 3,794 459 -- Net (loss) gain on sale or repayment of debt securities and land parcel -- (373) 614 -------- -------- -------- Total other income 6,194 2,486 3,014 -------- -------- -------- Net income $ 11,273 $ 11,884 $ 9,660 ======== ======== ======== Net income per share (basic and diluted) $ 1.35 $ 1.52 $ 1.61 ======== ======== ======== Dividends per share $ 1.60 $ 1.60 $ 1.51 ======== ======== ======== Weighted average shares outstanding Basic 8,336 7,803 6,018 ======== ======== ======== Diluted 8,343 7,815 6,018 ======== ======== ========
See accompanying notes to consolidated financial statements. 38 AMERICAN MORTGAGE ACCEPTANCE COMPANY AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY FOR THE YEARS ENDED DECEMBER 31, 2004, 2003 AND 2002 (In thousands)
Treasury Shares of Shares of Beneficial Interest Beneficial Interest ----------------------------- ---------------------------- Shares Amount Shares Amount ------------ ------------- ------------ ------------ Balance at January 1, 2002 4,214 $ 421 (375) $ (38) Comprehensive income: Net income Other comprehensive income: Unrealized holding gain on investments Less: reclassification adjustment for gain included in net income Total other comprehensive income Comprehensive income Issued common shares 2,525 253 Distributions ------------------------------------------------------------- Balance at December 31, 2002 6,739 674 (375) (38) Comprehensive income: Net income Other comprehensive income: Net unrealized loss on interest rate derivatives Unrealized holding loss on investments Plus: reclassification adjustment for loss included in net income Total other comprehensive loss Comprehensive income Issuance of share options Amortization of share option costs Common shares issued 1,974 197 Distributions ------------------------------------------------------------- Balance at December 31, 2003 8,713 871 (375) (38) Comprehensive income: Net income Other comprehensive income: Net unrealized gain on interest rate derivatives Unrealized holding gain on investments Total other comprehensive income Comprehensive income Issuance of share options Amortization of share option costs Common shares issued to trustees 3 Purchase of treasury shares (4) Distributions ------------------------------------------------------------- Balance at December 31, 2004 8,716 $ 871 (379) $ (38) ============================================================= Additional Distributions Paid-in Shared Based in Excess Capital Compensation of Net Income -------------- --------------- ----------------- Balance at January 1, 2002 $ 68,841 $(14,505) Comprehensive income: Net income 9,660 Other comprehensive income: Unrealized holding gain on investments Less: reclassification adjustment for gain included in net income Total other comprehensive income Comprehensive income Issued common shares 30,629 Distributions (9,626) ----------------------------------------------------------- Balance at December 31, 2002 99,470 (14,471) Comprehensive income: Net income 11,884 Other comprehensive income: Net unrealized loss on interest rate derivatives Unrealized holding loss on investments Plus: reclassification adjustment for loss included in net income Total other comprehensive loss Comprehensive income Issuance of share options 51 $ (51) Amortization of share option costs 22 Common shares issued 27,258 Distributions (12,551) ----------------------------------------------------------- Balance at December 31, 2003 126,779 (29) (15,138) Comprehensive income: Net income 11,273 Other comprehensive income: Net unrealized gain on interest rate derivatives Unrealized holding gain on investments Total other comprehensive income Comprehensive income Issuance of share options 34 (34) Amortization of share option costs 47 Common shares issued to trustees 40 Purchase of treasury shares (53) Distributions (13,337) ----------------------------------------------------------- Balance at December 31, 2004 $126,800 $ (16) $(17,202) =========================================================== Accumulated Other Comprehensive Comprehensive Income Income Total --------------- ----------------- ----------- Balance at January 1, 2002 $ 560 $ 55,279 Comprehensive income: Net income $ 9,660 9,660 Other comprehensive income: Unrealized holding gain on investments 8,757 Less: reclassification adjustment for gain included in net income (614) -------- Total other comprehensive income 8,143 8,143 8,143 Comprehensive income $ 17,803 ======== Issued common shares 30,882 Distributions (9,626) --------------------------------- Balance at December 31, 2002 8,703 94,338 Comprehensive income: Net income $ 11,884 11,884 Other comprehensive income: Net unrealized loss on interest rate derivatives (278) Unrealized holding loss on investments (348) Plus: reclassification adjustment for loss included in net income 373 -------- Total other comprehensive loss (253) (253) (253) -------- Comprehensive income $ 11,631 ======== Issuance of share options Amortization of share option costs 22 Common shares issued 27,455 Distributions (12,551) ---------------------------------------------------- Balance at December 31, 2003 8,450 120,895 Comprehensive income: Net income $ 11,273 11,273 Other comprehensive income: Net unrealized gain on interest rate derivatives 407 Unrealized holding gain on investments 1,260 -------- Total other comprehensive income 1,667 1,667 1,667 -------- Comprehensive income $ 12,940 ======== Issuance of share options Amortization of share option costs 47 Common shares issued to trustees 40 Purchase of treasury shares (53) Distributions (13,337) ---------------------------------------------------- Balance at December 31, 2004 $ 10,117 $120,532 =================================
See accompanying notes to consolidated financial statements. 39 AMERICAN MORTGAGE ACCEPTANCE COMPANY AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS (In thousands)
Years Ended December 31, ----------------------------------- 2004 2003 2002 --------- --------- --------- Cash flows from operating activities: Net income $ 11,273 $ 11,884 $ 9,660 Adjustments to reconcile net income to net cash provided by operating activities: Depreciation expense 2,143 -- -- Net loss (gain) on sale of assets or repay- ment of debt securities and land parcel -- 373 (614) Equity in earnings of ARCap, in excess of distributions received -- -- 6 Amortization - deferred financing costs 266 170 6 Amortization - deferred compensation costs 47 22 -- Amortization - loan premium and origination costs and fees (205) (518) (89) Accretion of discounts and premiums on debt securities 112 157 23 Other non-cash expense 40 -- -- Changes in operating assets and liabilities: Accrued interest receivable 273 (936) (599) Other assets 64 8 743 Due to Advisor and affiliates 179 (100) 359 Accounts payable and accrued expenses 225 91 (586) Accrued interest payable (431) 639 39 --------- --------- --------- Net cash provided by operating activities 13,986 11,790 8,948 --------- --------- --------- Cash flows from investing activities: Net proceeds from sale of land -- 37 -- Funding and purchase of mortgage loans (8,802) (50,680) (4,665) Repayment of mortgage loans 1,306 9,463 -- Funding and purchase of notes receivable (8,308) (23,906) (22,307) Repayment of notes receivable 21,286 5,746 7,683 Mortgage loan origination fees (net of acquisition expenses) 46 187 169 Principal repayments of debt securities 17,787 8,539 526 Investment in debt securities (43,943) (62,290) (55,768) Additions to real estate owned (2,809) (3,166) -- Purchase of revenue bonds -- (7,586) -- Principal repayment of revenue bonds 891 -- -- --------- --------- --------- Net cash used in investing activities (22,546) (123,656) (74,362) --------- --------- --------- (continued)
40 AMERICAN MORTGAGE ACCEPTANCE COMPANY AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS (In thousands) (continued)
Years Ended December 31, ----------------------------------- 2004 2003 2002 --------- --------- --------- Cash flows from financing activities: Proceeds from refinancing of Real Estate Owned 41,000 -- -- Proceeds from repurchase facilities 27,613 115,818 100,750 Repayments of repurchase facilities (19,509) (54,169) (56,480) Proceeds from warehouse facility 1,245 26,147 8,788 Repayments of warehouse facility (32,353) -- -- Proceeds from line of credit - due to related party 15,361 -- -- Repayments of line of credit - due to related party (10,761) -- -- Deferred financing costs -- -- (669) Distributions paid to shareholders (13,337) (11,761) (8,471) Treasury stock purchases (53) -- -- Issuance of common shares -- 27,455 30,882 --------- --------- --------- Net cash provided by financing activities 9,206 103,490 74,800 --------- --------- --------- Net increase (decrease) in cash and cash equivalents 646 (8,376) 9,386 Cash and cash equivalents at the beginning of the year 2,028 10,404 1,018 --------- --------- --------- Cash and cash equivalents at the end of the year $ 2,674 $ 2,028 $ 10,404 ========= ========= ========= Supplemental information: Interest paid $ 3,822 $ 2,546 $ 1,163 ========= ========= ========= Non-cash investing and financing activities: Conversion of mortgage loans, notes receivable, and assumption of debt on real estate owned $ -- $ 72,748 $ -- ========= ========= =========
See accompanying notes to consolidated financial statements. 41 AMERICAN MORTGAGE ACCEPTANCE COMPANY AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS NOTE 1 - Summary of Significant Accounting Policies a) Consolidation and Basis of Presentation The consolidated financial statements include the accounts of American Mortgage Acceptance Company and its wholly-owned subsidiaries. All intercompany accounts and transactions have been eliminated in consolidation. Unless otherwise indicated, we herein refer to American Mortgage Acceptance Company and its subsidiaries as "AMAC," "we", "us", "our", and "our Company". We are externally managed by Related AMI Associates, Inc., which acts as our Advisor. We operate in one business segment. Effective October 2003, we dissolved one subsidiary due to the assignment of certain obligations under the Fannie Mae loan program to CharterMac Mortgage Capital Corp. ("CMC") (see Note 16). We had formed the subsidiary to manage this program. Our consolidated financial statements 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 us 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. Certain amounts from prior years have been reclassified to conform to the 2004 presentation. b) Revenue Recognition We derive our revenues from a variety of sources as follows: o INTEREST INCOME ON DEBT SECURITIES - We recognize interest on GNMA and FNMA certificates on the accrual basis as it becomes due. Interest income also includes the amortization or accretion of premiums and discounts arising at the purchase date, using the effective yield method. o INTEREST INCOME FROM MORTGAGE LOANS AND NOTES RECEIVABLE - We recognize interest on mortgage loans and notes receivable on the accrual basis as it becomes due. We amortize deferred loan origination costs and fees over the life of the applicable loan as an adjustment to interest income, using the interest method. Certain mortgage loans contain provisions that allow us to participate in a percentage of the underlying property's excess cash flows from operations and excess proceeds from a sale or refinancing. This income is recognized on the accrual basis as it becomes due. o INTEREST INCOME ON REVENUE BONDS - Interest income from revenue bonds is recognized on the accrual basis as it becomes due. o INTEREST INCOME ON TEMPORARY INVESTMENTS - Interest income from temporary investments, such as cash in banks and short-term instruments, is recognized on the accrual basis as it becomes due. o RENTAL INCOME - Rental income is recognized on properties classified as held and used. Income or loss from the operations of real estate owned is accrued monthly. o INCOME FROM REAL ESTATE OWNED - Income or loss from the operations of real estate owned is accrued monthly and included, net, in income from real estate owned, for properties that are not recorded as held and used (See Note 7). 42 AMERICAN MORTGAGE ACCEPTANCE COMPANY AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS o OTHER REVENUES o STANDBY LOAN COMMITMENT FEES - We receive fees for issuing standby loan commitments. If we do not expect to fund the commitment, we recognize the fee ratably over the commitment period. If we determine that it is possible or probable that a commitment will be exercised, we defer the fee and, if the commitment is exercised, amortize it over the life of the loan as an adjustment to interest income; if the commitment expires unexercised, we recognize it upon expiration. o STABILIZATION GUARANTEE AND LOAN ADMINISTRATION FEES - We receive fees from borrowers for guaranteeing construction loans made by third-party lenders for the period between construction completion and funding of the permanent loan. We receive these fees in advance and amortize them over the guarantee periods. We also receive loan administration fees on these guaranteed loans, on a monthly basis during the guarantee period. We recognize these fees when due. o FNMA LOAN GUARANTEE FEES - We receive monthly loss sharing/guarantee fees related to the FNMA loan program (see Note 16) and recognize them when due. c) Investments in Debt and Debt Securities We account for our investments in debt securities pursuant to SFAS No. 115, ACCOUNTING FOR CERTAIN INVESTMENTS IN DEBT AND EQUITY SECURITIES ("SFAS No. 115"). For investments classified as available for sale, we record changes in fair value in other comprehensive income unless we consider an investment impaired, or a decline in fair value to be other than temporary (see IMPAIRMENT below). 1. Debt Securities We classify our investments in GNMA and FNMA certificates as available for sale debt securities and use third-party quoted market prices as our primary source of valuation. 2. Mortgage Loans and Notes Receivable We classify these investments as held to maturity and, accordingly, carry them at cost, including unamortized loan origination costs and fees. 3. Revenue Bonds We classify our investments in revenue bonds as available for sale debt securities. Because revenue bonds have a limited market, we estimate fair value for each bond as the present value of its expected cash flows using a discount rate for comparable investments. 4. Impairment For investments in mortgage loans and notes receivable, we follow the provisions of Statement of Financial Accounting Standards No. 114, ACCOUNTING BY CREDITORS FOR IMPAIRMENT OF A LOAN ("SFAS No. 114"). Under SFAS No. 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. 43 AMERICAN MORTGAGE ACCEPTANCE COMPANY AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Our portfolio of mortgage loans and notes is periodically evaluated for possible impairment to establish appropriate loan loss reserves, if necessary. If, in our judgment, we determine that it is probable that we will not receive all contractually required payments when they are due, we deem the loan or note impaired and establish a loan loss reserve. For any investments classified as available for sale, a decline in market value below cost that we deem other than temporary is charged to earnings. If, in the judgment of our Advisor, it is determined probable that we will not receive all contractual payments required when due, the bond is deemed impaired and is written down to its then estimated fair value, with the amount of the write-down accounted for as a realized loss. 5. Gain or Loss on Sale Realized gains and losses on securities are included in earnings and are recorded on the trade date and calculated as the difference between the amount of cash received and the carrying cost of the specific investment, including any unamortized discounts, premiums, origination costs and fees. d) Investment in ARCap We account for our preferred equity investment in ARCap Investors, LLC ("ARCap") using the equity method pursuant to Accounting Principles Board Opinion No. 18, THE EQUITY METHOD OF ACCOUNTING FOR INVESTMENTS IN COMMON STOCK ("APB No. 18") as interpreted by AICPA Statement of Position 78-9, ACCOUNTING FOR INVESTMENTS IN REAL ESTATE VENTURES, EITF Issue D-46, ACCOUNTING FOR LIMITED PARTNERSHIP INVESTMENTS and EITF 03-16, ACCOUNTING FOR INVESTMENTS IN LIMITED LIABILITY COMPANIES. Our equity in the earnings of ARCap is accrued at the preferred dividend rate of 12%, which equals the income allocated to us under ARCap's operating agreement, unless ARCap does not have earnings and cash flows adequate to meet this dividend requirement. e) Real Estate Owned Real estate owned consists of properties of which we took possession by exercising our rights under subordinated promissory notes and other documents. In some cases, we also purchased the first mortgage loans on the properties before foreclosing on the real estate collateral. We recorded these properties at the lower of fair value of the real estate, less estimated disposal costs, or the carrying amount of the foreclosed loan. The determination of fair value of the real estate is based on independent appraisals. These properties fall into three classifications: o Held for Sale - properties for which we are actively seeking a buyer o Held and Used - properties for which we are actively seeking a buyer, but have held for longer than one year. o Subject to Sales Contracts - properties for which the buyer has not contributed sufficient equity to qualify for sale treatment pursuant to Statement of Financial Accounting Standards No. 66, ACCOUNTING FOR SALES OF REAL ESTATE ("SFAS No. 66"). When the foreclosure process is complete and we own the property, it is classified as Held for Sale and the net income or loss from operations of the property is included in other income. As it is our intent to sell those properties in the near term, we do not initially depreciate the assets. We apply the same accounting for properties classified as Subject to Sales Contracts. For properties later classified as Held and Used and for properties Subject To Sales Contracts, if full sale recognition is not achieved within one year, we record depreciation on the asset, including an initial retroactive adjustment for the entire period we owned the property. On the properties classified as Held and Used, we record operating revenues and expenses separately. 44 AMERICAN MORTGAGE ACCEPTANCE COMPANY AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Our portfolio of real estate owned is periodically evaluated for possible impairment. If, in our judgment, we determine that the property's fair value is below its carrying value, we will deem the property impaired and it will be written down to its then estimated fair value, with the amount of the write-down accounted for as a realized loss. f) 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. g) Loan Origination Costs and Fees Acquisition fees and other direct expenses incurred for activities performed to originate mortgage loans are capitalized and are included in Investment in Mortgage Loans, net of any fees received from borrowers for loan originations. They are amortized on a straight-line basis over the period of the loans. h) Repurchase Facilities We finance our investments in debt securities using repurchase facilities, under which we sell the certificates to three counterparties under an agreement requiring us to repurchase them for a fixed price on a fixed date, generally 30 days from the sale date. We account for these transactions as collateralized borrowings; accordingly, the securities remain on our balance sheet with the proceeds from the sales recorded as debt. The difference between the sale proceeds and the fixed repurchase price is recorded as interest expense ratably over the period between the sale and repurchase dates. i) Stock Options We account for stock options we issue under the fair value based method pursuant to Statement of Financial Accounting Standards No. 123, ACCOUNTING FOR STOCK-BASED COMPENSATION ("SFAS No. 123"). We estimate the fair value of each option grant using the Black-Scholes option-pricing model. j) Interest Rate Derivative We account for our interest rate swap agreement under SFAS No. 133, ACCOUNTING FOR DERIVATIVE INSTRUMENTS AND HEDGING ACTIVITIES ("SFAS No. 133"). At inception, we designated this swap as a cash flow hedge on the variable interest payments of our floating rate financing. Accordingly, we record the swap at fair market value, and record changes in market value in other comprehensive income to the extent the hedge is effective. This hedge has been effective through December 31, 2004. We record the net amounts receivable or payable under the swap agreement as a component of interest expense. k) Fair Value of Financial Instruments As described above, our debt securities, revenue bonds, and interest rate derivatives are carried at estimated fair values. We have determined that the fair value of our remaining financial instruments, including mortgage loans and cash and cash equivalents, notes receivable, and secured borrowings approximate their carrying values at December 31, 2004 and 2003. The fair value of investments in mortgage loans, revenue bonds, notes receivable, and debt securities 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. 45 AMERICAN MORTGAGE ACCEPTANCE COMPANY AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS l) Income Taxes We have qualified as a REIT under the Internal Revenue Code (the "Code"). A REIT is generally not subject to federal income tax on that portion of its REIT taxable income ("Taxable Income") which is distributed to its shareholders provided that at least 90% of Taxable Income is distributed and provided that such income meets certain other conditions. Accordingly, no provision for federal income taxes is required. We may be subject to state taxes in certain jurisdictions. m) New Accounting Pronouncements The following pronouncements issued in 2002 and 2003 relate to disclosure only or had no material impact on our financial statements: o SFAS No. 145, RESCISSION OF FASB STATEMENTS NO. 4, 44 AND 64, AMENDMENT OF FASB STATEMENT NO. 13 AND TECHNICAL CORRECTIONS, issued in April 2002. o SFAS No. 146, ACCOUNTING FOR COSTS ASSOCIATED WITH EXIT OR DISPOSAL ACTIVITIES, issued in July 2002. o SFAS No. 148, ACCOUNTING FOR STOCK-BASED COMPENSATION-TRANSITION AND DISCLOSURE, issued in December 2002. o SFAS No. 149, AMENDMENT OF STATEMENT 133 ON DERIVATIVE INSTRUMENTS AND HEDGING ACTIVITIES, issued in April 2003. o SFAS No. 150, ACCOUNTING FOR CERTAIN FINANCIAL INSTRUMENTS WITH CHARACTERISTICS OF BOTH LIABILITIES AND EQUITY, issued in May 2003. o FASB Interpretation No. 45, GUARANTORS' ACCOUNTING AND DISCLOSURE ARE REQUIREMENTS FOR GUARANTEES, INCLUDING INDIRECT GUARANTEES OF INDEBTEDNESS TO OTHERS, issued in November 2002. o FASB Interpretation No. 46(R), CONSOLIDATION OF VARIABLE INTEREST ENTITIES, issued in December 2003. In December 2004, the FASB issued Statement of Financial Accounting Standards No. 123(R), SHARE-BASED PAYMENT, which replaces SFAS No. 123 and which we are required to adopt by the third quarter of 2005. As we have been accounting for share-based payments following the fair value provisions of SFAS No. 123, we expect our adoption of this standard will not be significant. 46 AMERICAN MORTGAGE ACCEPTANCE COMPANY AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS NOTE 2 - Investments in Debt Securities - Available for Sale Information relating to our debt securities owned as of December 31, 2004 is as follows: (In thousands)
Date Purchased/ Amoritzed Certificate Final Stated Cost at Name Number Payment Date Interest Rate December 31, 2004 - --------------------------------- ----------- --------------- ------------- ----------------- GNMA CERTIFICATES Western Manor (1)(2) 355540 7/27/94 7.125% $ 2,441 3/15/29 SunCoast Capital Group, Ltd.(1) G002412 6/23/97 7.000% 120 4/20/27 Reserve at Autumn Creek (1)(3) 448748 6/28/01 7.745% -- 1/15/42 Elmhurst Village (1) 549391 6/28/01 7.745% 21,504 1/15/42 Village at Marshfield (1) 519281 3/11/02 7.475% 21,242 1/15/42 Cantera Crossing (1) 532663 3/28/02 6.500% 6,350 6/1/29 Filmore Park (1) 536740 3/28/02 6.700% 1,425 10/15/42 Northbrooke (1) 548972 5/24/02 7.080% 13,955 8/1/43 Ellington Plaza (1) 585494 7/26/02 6.835% 35,463 6/1/44 Burlington (1) 595515 11/1/02 5.900% 6,713 4/15/31 FNMA DUS CERTIFICATES Cambridge (1) 385971 4/11/03 5.560% 3,616 3/1/33 Bayforest (1) 381974 4/21/03 7.430% 4,240 10/1/28 Coventry Place (1) 384920 5/9/03 6.480% 781 3/1/32 Rancho de Cieto (1) 385229 5/13/03 6.330% 2,566 9/1/17 Elmwood Gardens (1) 386113 5/15/03 5.350% 5,474 5/1/33 30 West (1) 380751 5/27/03 6.080% 1,333 10/1/16 Jackson Park (1) 386139 5/30/03 5.150% 2,741 6/1/18 Unrealized Gain (Loss) at Balance at Interest Income Name December 31, 2004 December 31, 2004 in 2004 - --------------------------------- ----------------- ----------------- --------------- GNMA CERTIFICATES Western Manor (1)(2) $ (33) $ 2,408 $ 190 SunCoast Capital Group, Ltd.(1) 7 127 12 Reserve at Autumn Creek (1)(3) -- -- 67 Elmhurst Village (1) 3,137 24,641 1,669 Village at Marshfield (1) 1,020 22,262 1,433 Cantera Crossing (1) 698 7,048 423 Filmore Park (1) 138 1,563 94 Northbrooke (1) 1,592 15,547 975 Ellington Plaza (1) 4,151 39,614 2,208 Burlington (1) 311 7,024 391 FNMA DUS CERTIFICATES Cambridge (1) (42) 3,574 194 Bayforest (1) 4 4,244 254 Coventry Place (1) (10) 771 43 Rancho de Cieto (1) (68) 2,498 125 Elmwood Gardens (1) (71) 5,403 287 30 West (1) (51) 1,282 62 Jackson Park (1) (6) 2,735 139
47 AMERICAN MORTGAGE ACCEPTANCE COMPANY AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS NOTE 2 - Continued
Date Purchased/ Amoritzed Certificate Final Stated Cost at Name Number Payment Date Interest Rate December 31, 2004 - --------------------------------- ----------- --------------- ------------- ----------------- Courtwood (1) 386274 6/26/03 4.690% 1,740 6/1/33 Sultana (1) 386259 6/30/03 4.650% 4,046 6/1/23 Buena (1) 386273 6/30/03 4.825% 3,007 6/1/33 Allegro (1) 386324 6/30/03 5.380% 2,543 7/1/33 Village West (1) 386243 6/30/03 4.910% -- 6/1/21 Westwood/Monterey (1) 386421 9/15/03 5.090% 2,687 8/1/33 Euclid (1) 386446 9/15/03 5.310% 2,346 8/1/33 Edgewood (1) 386458 9/15/03 5.370% 2,329 9/1/33 Bayou Pointe 387066 9/21/04 5.650% 1,708 8/1/22 Pomono (1) 386995 9/21/04 6.220% 5,902 7/1/34 Maple Street 387093 10/4/04 5.750% 1,497 10/1/22 Seabreeze Co-op (1) 387139 11/12/04 5.360% 1,957 11/1/34 Orchard Street (1) 387158 11/22/04 5.480% 3,136 11/1/22 Indiana Seniors 387171 12/15/04 5.380% 7,850 12/1/29 Beach Grove 387114 12/21/04 5.620% 1,280 9/1/34 York 386631 12/29/04 5.490% 12,584 8/1/33 -------------- Total $184,576 ============== 2003 Total $158,533 ============== Unrealized Gain (Loss) at Balance at Interest Income Name December 31, 2004 December 31, 2004 in 2004 - --------------------------------- ----------------- ----------------- --------------- Courtwood (1) (134) 1,606 80 Sultana (1) (267) 3,779 188 Buena (1) (210) 2,797 140 Allegro (1) (81) 2,462 136 Village West (1) -- -- 22 Westwood/Monterey (1) 105 2,792 152 Euclid (1) 107 2,453 134 Edgewood (1) 94 2,423 133 Bayou Pointe (4) 1,704 25 Pomono (1) (79) 5,823 83 Maple Street (2) 1,495 19 Seabreeze Co-op (1) 6 1,963 14 Orchard Street (1) (7) 3,129 18 Indiana Seniors (103) 7,747 18 Beach Grove (19) 1,261 2 York (172) 12,412 4 ------------------------------------------------- Total $10,011 $194,587 $ 9,734 ================================================= 2003 Total $ 8,727 $167,260 $ 8,765 =================================================
(1) These GNMA and FNMA DUS certificates are partially or wholly-pledged as collateral for borrowings under the repurchase facilities (see Note 8). (2) During January 2005, this GNMA certificate was paid off at par. (3) During 2004, we received proceeds of approximately $16.0 million from HUD in relation to the paydown of this certificate. 48 AMERICAN MORTGAGE ACCEPTANCE COMPANY AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS The amortized cost, unrealized gain and fair value for the investment in debt securities at December 31, 2004 and 2003 were as follows:
(In thousands) December 31, ------------------------------ 2004 2003 --------- ---------- Amortized cost $ 184,576 $ 158,533 Unrealized gains 11,370 10,040 Unrealized losses (1,359) (1,313) --------- --------- Net unrealized gain 10,011 8,727 --------- --------- Fair value $ 194,587 $ 167,260 ========= =========
The fair value and gross unrealized losses of our debt securities aggregated by length of time that individual debt securities have been in a continuous unrealized loss position, at December 31, 2004, and 2003 is summarized in the table below:
(Dollars in thousands) December 31, 2004 December 31, 2003 -------------------------------------- -------------------------------------- Less than 12 Months Less than 12 Months 12 Months or More Total 12 Months or More Total --------- --------- ------- --------- --------- ------- Number of securities 11 7 18 13 -- 13 Fair value $46,055 $16,832 $62,887 $34,480 $ -- $34,480 Gross unrealized loss $ 515 $ 844 $ 1,359 $ 1,313 $ -- $ 1,313
These unrealized losses are as a result of increases in interest rates subsequent to the acquisition of the securities. All of the debt securities are performing according to their terms. Furthermore, the Company has the intent and ability to hold these securities to maturity, or at least until interest rates change such that the fair value is no longer less than book value. Accordingly, the Company has concluded that these impairments are temporary. At December 31, 2004, 26 of these debt securities, with a fair value of approximately $169.9 million are partially or wholly pledged as collateral under the Company's repurchase facilities (see Note 8). 49 AMERICAN MORTGAGE ACCEPTANCE COMPANY AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Note 3 - Investments in Mortgage Loans Information relating to our investments in mortgage loans as December 31, 2004 is as follows:
(Dollars in thousands) FINAL MATURITY LIFETIME PROPERTY DESCRIPTION DATE CALL DATE (B) INTEREST RATE INTEREST CAP (D) - -------- ----------- -------- ------------- ------------- ---------------- FIRST MORTGAGE LOANS: Sunset Gardens Eagle Pass, TX Multifami1y 10/04(A) N/A 11.50% N/A Alexandrine (H) Detroit, MI Multifamily N/A N/A 11.00% N/A Desert View (I) Coolidge, AZ Multifamily 5/06 N/A 10.00% N/A Subtotal First Mortgage Loans MEZZANINE LOANS (J): The Hollows (K) Greenville, NC Multifamily 1/42 1/12 10.00% (C) 16% Northbrooke (L)(M)(N) Harris County, TX Multifamily 8/43 7/13 11.50% (C) 14% Elmhurst Village (L)(M) Oveido, FL Multifamily 1/42 3/19 10.00% (C) 16% Club at Brazos (K)(O) Rosenberg, TX Multifamily 5/43 4/13 10.00% (C) 14% Del Mar Villas Dallas, TX Multifamily 10/05 N/A LIBOR + 4.625% (P) Mountain Valley Dallas, TX Multifamily N/A N/A LIBOR + 4.750% (P) Villas at Highpoint Lewisville, TX Multifamily 4/33 TBD 14.57% N/A Villas at Highpoint Lewisville, TX Multifamily 4/33 TBD 23.76% N/A The Pines Las Vegas, NV Multifamily 9/07 N/A LIBOR + 8.75% N/A Sawmill Plaza Columbus, OH Shopping Center 10/14 N/A 13.50% N/A Champaign Offices Champaign, IL Office Center 10/11 N/A 10.67% N/A Subtotal Mezzanine Loans Total Mortgage Loans SHARE OF EXCESS SALE OR EXCESS OPERATING REFINANCING PERIODIC PROPERTY CASH FLOWS PROCEEDS PAYMENT TERMS PRIOR LIENS - -------- ---------------- -------------- ------------- ----------- FIRST MORTGAGE LOANS: Sunset Gardens Eagle Pass, TX N/A N/A (G) -- Alexandrine (H) Detroit, MI N/A N/A (G) -- Desert View (I) Coolidge, AZ N/A N/A (G) -- Subtotal First Mortgage Loans MEZZANINE LOANS (J): The Hollows (K) Greenville, NC 50% 25% (G) $ 8,839 Northbrooke (L)(M)(N) Harris County, TX 50% 50% (G) 13,807 Elmhurst Village (L)(M) Oveido, FL 50% 25% (G) 21,496 Club at Brazos (K)(O) Rosenberg, TX 50% 25% (G) 14,275 Del Mar Villas Dallas, TX N/A N/A (G) 5,559 Mountain Valley Dallas, TX N/A N/A (G) N/A Villas at Highpoint Lewisville, TX N/A N/A (G) 18,800 Villas at Highpoint Lewisville, TX N/A N/A (G) 18,800 The Pines Las Vegas, NV N/A N/A (G) 10,000 Sawmill Plaza Columbus, OH N/A N/A (G) 16,000 Champaign Offices Champaign, IL N/A N/A (G) 26,000 Subtotal Mezzanine Loans Total Mortgage Loans OUTSTANDING CARRYING FACE AMOUNT OF UNAMORTIZED AMOUNT OF INTEREST INCOME PROPERTY MORTGAGES (E) COSTS AND FEES MORTGAGES (E) IN 2004 - -------- -------------- -------------- ------------- --------------- FIRST MORTGAGE LOANS: Sunset Gardens Eagle Pass, TX $ 1,479 $ -- $ 1,479 $ 173 Alexandrine (H) Detroit, MI -- -- -- 12 Desert View (I) Coolidge, AZ 771 -- 771 86 ----------------------------------------------------------------------- Subtotal First Mortgage Loans 2,250 -- 2,250 271 ----------------------------------------------------------------------- MEZZANINE LOANS (J): The Hollows (K) Greenville, NC 1,549 (116) 1,433 174 Northbrooke (L)(M)(N) Harris County, TX 1,500 (131) 1,369 60 Elmhurst Village (L)(M) Oveido, FL 2,874 (360) 2,514 320 Club at Brazos (K)(O) Rosenberg, TX 1,962 (74) 1,888 200 Del Mar Villas Dallas, TX 765 -- 765 47 Mountain Valley Dallas, TX -- -- -- 35 Villas at Highpoint Lewisville, TX 2,599 (140) 2,459 385 Villas at Highpoint Lewisville, TX 314 (38) 276 40 The Pines Las Vegas, NV 4,600 (41) 4,559 186 Sawmill Plaza Columbus, OH 2,000 -- 2,000 80 Champaign Offices Champaign, IL 1,900 (37) 1,863 10 ----------------------------------------------------------------------- Subtotal Mezzanine Loans 20,063 (937) 19,126 1,537 ----------------------------------------------------------------------- Total Mortgage Loans $ 22,313 $(937) $21,376 $ 1,808 ======================================================================= 2003 Total Mortgage Loans $ 14,781 $(917) $13,864 $ 2,597 =======================================================================
50 AMERICAN MORTGAGE ACCEPTANCE COMPANY AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (A) The maturity date on this first mortgage loan is past due. We are currently in the process of extending the maturity date, providing the loan is partially paid down with equity being held with Fannie Mae. The loan is fully collateralized and, as such, there is no impairment of the loan. (B) Loans are subject to mandatory prepayment at our option ten years after construction completion, with one year's notice. Loans with a call date of "TBD" are still under construction. (C) Interest on the mezzanine loan is based on a fixed percentage of the unpaid principal balance of the related first mortgage loan. The amount shown is the approximate effective rate earned on the balance of the mezzanine loan. The mezzanine loan also provides for payments of additional interest based on a percentage of cash flow remaining after debt service and participation in sale or refinancing proceeds and certain provisions that cap our total yield, including additional interest and participations, over the term of the loan. (D) Lifetime interest cap represents the maximum annual return, including interest, fees and participations, that we can earn over the life of the mezzanine loan, computed as a percentage of the balance of the first mortgage loan plus the mezzanine loan. (E) As of December 31, 2004, all interest payments on the mortgage loans are current, except as noted. (F) Carrying amounts of the loans are net of unamortized origination costs and fees and loan discounts. (G) Interest only payments are due monthly, with loan balance due at maturity. (H) The first mortgage loan, which matured in December 2003, was paid off in April 2004. (I) Loan was purchased in April 2003 in connection with the performance under a guarantee we made. (J) The principal balance of the mezzanine loan 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 loan are secured by a second mortgage deed of trust and are guaranteed for the first 36 months after construction completion by an entity related to the general partner of the entity that owns the underlying property. (K) We do not have an interest in the first lien position relating to this mezzanine loan. (L) We have an interest in the first lien position relating to this mezzanine loan. (M) The first mortgage loans related to these properties were converted from participations in FHA loans to ownership of the GNMA certificates and are held by us - see Note 2. (N) This mezzanine loan stopped making interest payments in May 2004. We are currently in the process of determining the necessary steps we need to take to protect our investment. We have done an internal analysis for the property underlying the mortgage and the analysis indicates that the value of the property exceeds the carrying amount of our investment. Accordingly, we have not recorded an allowance for probable losses on this investment. (O) The funding of this mezzanine loan is based on property level operational achievements. (P) Interest cap on these loans is the maximum rate permitted by law. 51 AMERICAN MORTGAGE ACCEPTANCE COMPANY AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Further information relating to investments in mortgage loans is as follows:
(In thousands) 2004 2003 -------- -------- Balance at beginning of year $ 13,864 $ 22,384 Advances made 8,802 50,680 Conversion to real estate owned -- (49,808) Loan origination fees (net of acquisition expenses) (46) (187) Repayments (1,306) (9,463) Amortization and accretion -- net 62 258 -------- -------- Balance at end of year $ 21,376 $ 13,864 ======== ========
NOTE 4 - Investment in ARCap We own 800,000 preferred equity units of ARCap with a face amount of $25 per unit and limited voting rights. The preferred equity units are convertible, at our option, into ARCap common units. If converted into common units, the conversion price is equivalent to $25 per unit, subject to certain adjustments. Also, if not already converted, for a period of 60 days following the fifth anniversary of the first closing date, which will be August 4, 2005, the preferred equity units are convertible, at our option, into a three-year note bearing interest at 12% that would be junior to all of ARCap's then existing indebtedness. The preferred equity units are also redeemable, at the option of ARCap, up until the fifth anniversary of the first closing date. As of December 31, 2004, through our investment in ARCap, we have a substantial indirect investment in the $879.1 million of commercial mortgage backed securities ("CMBS") it owns. Multifamily properties underlie approximately one third of ARCap's CMBS. 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 us 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 would need to obtain the consent of the board of managers of ARCap before we could transfer our interest in ARCap to any party other than a current member. The carrying amount of the investment in ARCap is not necessarily representative of the amount we would receive upon a sale of the interest. ARCap has shifted its focus to CMBS fund management, whereby it manages CMBS investment funds raised from third-party investors. ARCap is generally a minority investor in these funds and ARCap thereby diversifies its revenue base by increasing its proportion of revenue derived from fees as opposed to interest income. 52 AMERICAN MORTGAGE ACCEPTANCE COMPANY AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Summarized information for ARCap as of December 31, 2004 and 2003, and the years then ended is as follows:
2004 2003 ------ ------ (in millions) Investment securities - available for sale $ 771 $ 739 Investment securities - trading 108 282 Other assets 89 29 ------ ------ Total assets $ 968 $1,050 ====== ====== Repurchase agreements and long-term debt $ 426 $ 625 Other liabilities 339 215 Members' equity 203 210 ------ ------ Total liabilities and equity $ 968 $1,050 ====== ====== Total revenues $ 205 $ 115 Total expenses 140 99 ------ ------ Net income $ 65 $ 16 ====== ======
53 AMERICAN MORTGAGE ACCEPTANCE COMPANY AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS NOTE 5 - Bridge Loans/Notes Receivable Our notes receivable are collateralized by equity interests in the owner of the underlying property and consist of the following as of December 31, 2004:
(In thousands) Remaining Outstanding Committed Principal Unamortized Carrying Balance to Interest Property Location Balance Fees Amount Fund Rate Maturity - ------------------------------------------------------------------------------------------------------------------------------ Noble Towers (1)(2)(3) Oakland, CA $ 7,245 $ (11) $ 7,234 54 9.75% July 2005 December 2004 Clarks Crossing (1) Laredo, TX 926 -- 926 -- 12.00% (6) Georgia King (1) Newark, NJ 945 -- 945 -- 11.50% January 2005 Reserve at Thornton (1) Thornton, CO 538 (5) 533 412 11.00% August 2006 LIBOR + 4.625% Del Mar Villas Dallas, TX 5,554 -- 5,554 -- (5) October 2005 LIBOR + 4.500% Oaks of Baytown (4) Baytown, TX 3,582 (6) 3,576 243 (5) August 2005 LIBOR + 3.600% Quay Point (4) Houston, TX 1,223 (2) 1,221 -- (5) August 2005 Woods of Mandarin Jacksonville, FL 3,122 -- 3,122 428 13.50% July 2007 ============================================ Total $ 23,135 $ (24) $ 23,111 $ 1,137 ============================================ 2003 Total $ 36,111 $ 165 $ 35,946 $ 6,469 ============================================
(1) These loans are to limited partnerships affiliated with our Advisor (see Note 11). (2) An affiliate of our Advisor has provided a full guarantee on the payment of principal and interest due on this note. (3) During February 2005, this loan was partially repaid in the approximate amount of $5.9 million. (4) Pledged as collateral in connection with warehouse facility (see Note 9). (5) 30-day LIBOR at December 31, 2004 was 2.42%. (6) Awaiting permanent financing to take place - loan has not paid off. 54 AMERICAN MORTGAGE ACCEPTANCE COMPANY AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS NOTE 6 - Taxable Revenue Bonds During October 2003, we purchased nine taxable revenue bonds at a discount (99% of par) from CharterMac (our affiliate, see Note 11) for $7.6 million. These bonds, each of which is secured by a first mortgage position (held by CharterMac) on a multifamily property, carry a weighted average interest rate of 8.69%. The price paid was determined by an independent third party valuation. The bonds' fair value at December 31, 2004 and 2003 was $6.7 million and $7.6 million, respectively. NOTE 7- Real Estate Owned Our real estate owned consisted of the following (dollars in thousands):
Carrying Value Carrying Value as of as of December 31, December 31, Number of Units Location 2004 2003 --------------------------------------------------------------------- Real Estate Owned - Held and Used - --------------------------------- Plaza at San Jacinto (1) 132 La Porte, TX $ 7,929 $ -- Less: accumulated depreciation (425) -- Concord Mezzanine (2) 852 Houston, TX 54,425 -- Less: accumulated depreciation --- (1,718) -- -------- -------- Total Real Estate Owned - Held and Used, net 984 $ 60,211 $ -- === ======== ======== Real Estate Owned - Subject to Sales Contracts - ---------------------------------------------- Concord at Little York (2) 276 Houston, TX -- $ 16,274 Concord at Gessner (2) 288 Houston, TX -- 17,194 Concord at Gulfgate (2) 288 Houston, TX -- 18,148 --- -------- -------- Total Real Estate Owned - Subject to Sales Contracts, net 852 $ -- $ 51,616 === ======== ======== Real Estate Owned - Held for Sale - --------------------------------- Reserve at Autumn Creek (3) 212 Friendswood, TX $ 17,924 $ 17,924 === Plaza at San Jacinto (1) -- 7,878 -------- -------- Total Real Estate Owned - Held for Sale $ 17,924 $ 25,802 ======== ========
(1) In March 2003, we exercised our rights under the subordinated promissory note and other documents to take possession of the real estate collateral of the Plaza at San Jacinto and, in May 2003, acquired the real estate at a foreclosure auction. We classified our investment in this property as Real Estate Owned - Held for Sale. We have focused on increasing the occupancy and the operating income generated from the property. We reclassified the property as Real Estate Owned - Held and Used in March 2004 and began to depreciate the property, including depreciation for the period the property had been classified as Held for Sale. During February 2005, this property was sold (see Note 17). (2) The three properties underlying these notes receivable stopped paying interest in May 2003. We subsequently exercised our rights under the subordinated promissory notes and other documents and took possession of all three properties. We purchased the first mortgages and acquired the real estate at foreclosure auctions and sold all three properties to a qualified 501(c)(3) entity during 2003. Because we provided 100% financing to the purchaser, the transaction did not meet the criteria for sale recognition pursuant to SFAS No. 66. In connection with the foreclosure of the Concord at Gessner property, we acquired a land parcel which we subsequently sold to a third party. The sales price of the land was approximately $224,000, net of closing costs. We provided 55 AMERICAN MORTGAGE ACCEPTANCE COMPANY AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS seller financing, in the form of a bridge note, to the buyer, for approximately $187,000. We allocated approximately $206,000 of cost basis to the land parcel resulting from the Concord at Gessner foreclosure and recognized a gain on the sale of approximately $18,000. In December 2004, UBS Real Estate Investments, Inc. provided first mortgages of $41.0 million for these properties. We restructured the remaining balance due from the borrower, approximately $13.4 million, in the form of a mezzanine loan. The mezzanine loan bears interest at a rate of 8% per annum and matures in December 2014. We account for the properties under the deposit method in accordance with SFAS No. 66. Following the provisions of SFAS No. 66, we have reclassified the properties as Real Estate Owned - Held and Used until full sale recognition is achieved. We have recorded the $41.0 million mortgage as a liability and have recorded depreciation of the properties, including depreciation for the entire period held, which totaled approximately $1.7 million. Income on the $13.4 million mezzanine loan will be classified as rental income in 2005, when earned. Income recognized for all three properties in 2004, exclusive of depreciation we recorded, totaled approximately $3.8 million and is recorded as income from real estate owned on the consolidated statements of income due to the classification of such properties as Real Estate Owned - Subject to Sales Contracts when the income was earned. (3) Certain required debt service payments were not paid, causing the mezzanine loan to be in default. In October 2003, we exercised our rights under the subordinated promissory note and other documents to take possession of the real estate collateral of the property, subject to the first mortgage loan. See Note 17 regarding the purchase of the first mortgage. NOTE 8 - Repurchase Facilities Prior to March 2004, we had a repurchase facility with Nomura Securities International Inc. ("Nomura"), which enabled us to borrow up to 97% of the fair market value of GNMA and FNMA DUS Certificates we owned. Interest on borrowings was at 30-day LIBOR plus 0.02%. During 2004, Nomura terminated the repurchase facility. We executed new repurchase agreements with three counterparties, Greenwich Capital, Bear Stearns, and RBC Capital Markets, which provided us the capacity to repay the Nomura facility. Terms of the three newly executed agreements offer advance rates between 94% and 97% and borrowing rates between the LIBOR minus 3 basis points and LIBOR plus 10 basis points. The borrowings are subject to 30-day settlement terms. As of December 31, 2004 and 2003, the amounts outstanding under repurchase facilities were $157.6 and $149.5 million and weighted average interest rates were 2.64% and 1.56%, respectively. Certain of our debt securities are pledged as collateral in connection with these repurchase facilities (see Note 2). NOTE 9 - Warehouse Facility In October 2002, we entered into a mortgage warehouse line of credit with Bank of America (the "Warehouse Facility") in the amount of up to $40.0 million. Under the terms of the Warehouse Facility, Bank of America will advance up to 83% of loans we issue for the acquisition/refinancing and minor renovation of existing, lender-approved multifamily properties. This facility, which matures August 2005, bears interest at a rate of 30, 60, 90 or 180-day LIBOR + 200 basis points, or prime, at our discretion, payable monthly on the total amounts advanced. Principal is due upon the earlier of refinance or sale of the underlying project or upon maturity. We pay a fee of 12.5 basis points, paid quarterly, on any unused portion of the facility. From time to time, we will use this facility to finance real estate owned. As of December 31, 2004 and December 31, 2003, we had approximately $3.8 and $34.9 million, respectively, in borrowings outstanding under this program at an interest rate of 4.42% and 3.12%, respectively. Included in the $34.9 million of outstanding borrowings under this program at December 31, 2003, was $14.0 million we borrowed to repay an intercompany loan from CharterMac (see Note 11); we subsequently repaid the $14.0 million with proceeds from the Concord refinancing (see Note 7). 56 AMERICAN MORTGAGE ACCEPTANCE COMPANY AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS NOTE 10 - Line of Credit - Related Party In June 2004, we entered into a revolving credit facility (the "Revolving Facility") with CharterMac. The Revolving Facility, which is unsecured, will provide up to $20.0 million in borrowings to be used to purchase new investments, and bears interest at 30-day LIBOR plus 300 basis points. The Revolving Facility is for a term of one year with a one-year optional extension and contains customary restrictions/covenants that are similar to our Warehouse Facility. In the opinion of our management, the terms of this facility are consistent with those of transactions with independent third parties. As of December 31, 2004, we had approximately $4.6 million in borrowings outstanding on the Revolving Facility at an interest rate of 5.42% NOTE 11 - Related Party Transactions Pursuant to the amended Advisory Agreement between us and our Advisor dated April 6, 1999 (the "Amended Advisory Agreement"), we pay certain fees, in addition to reimbursements of certain administrative and other costs our Advisor incurs on our behalf, for its ongoing management and operations of our Company: Fees/Compensation Annual Amount ----------------- ------------- I. Asset 0.355% for investments in mortgage loans management fees 0.355% for certain investment grade investments 0.750% for certain non-investment grade investments 1.000% for unrated investments 0.625% for investments held prior to the adoption of the Amended Advisory Agreement. II. Annual incentive Subject to (1) a minimum annual distributions management fees being made to shareholders from cash available for distribution ("CAD") of $1.45 per share and (2) the Company achieving at least annual Adjusted Funds from Operations (defined below) per share of $1.60 (net of this incentive fee), the Advisor shall be entitled to receive incentive compensation for each fisca year in an amount equal to the product of: (A) 25% of the dollar amount by which (1) Adjusted Funds From Operations before this incentive management fee per share exceed (2) the greater of: (a) (i) the weighted average of (x) $20 and (y) the prices per share of any secondary offerings by the Company multiplied by (ii) the Ten Year U.S. Treasury Rate plus 2% per annum; and; (b) $1.45 multiplied by (B) the weighted average number of shares outstanding during such year. 57 AMERICAN MORTGAGE ACCEPTANCE COMPANY AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS "Adjusted Funds From Operations" means net income (computed in accordance with GAAP) including realized gains (or losses) from debt restructuring and sales of assets, plus depreciation and amortization on real property, and after adjustments for unconsolidated partnerships and joint ventures. "CAD" means cash available for distributions, which shall consist of our net income (as determined pursuant to GAAP) adjusted for certain non-cash charges (as determined pursuant to GAAP). Prior to 2004, the incentive management fee was calculated pursuant to the Company achieving at least annual GAAP net income of $1.60 per share, net of the incentive management fee without the additional requirement that net income had to exceed CAD of $1.45 per share. In addition, with respect to new mortgage loans we acquire, any origination points paid by borrowers will first be paid to the Advisor for amounts up to 1.0% of the principal amount of each mortgage loan and we will receive any excess origination points paid by borrowers, if any, above the 1.0%. During 2002, our Advisor waived approximately $71,000 in net fees and expense reimbursements, in light of higher than usual expenses related to the origination of investments that were never completed. During 2003, our Advisor waived approximately $67,000 in asset management fees relating to additional services it performed with regard to real estate we now own (see Note 7). As our Advisor was paid a fee at the time the loans were originated, it agreed to waive the additional fees. The costs recorded for related parties transactions were as follows:
(in thousands) Years Ended December 31, --------------------------------------- 2004 2003 2002 ------------- ------------ ---------- Shared service expenses $ 682 $ 725 $ 447 Asset management fees 1,274 1,087 838 Incentive management fee -- -- 235 ------ ------ ------ $1,956 $1,812 $1,520 ====== ====== ======
Some of our notes receivable (see Note 5), and all of our stabilization loan guarantees and standby loan commitments (Note 16) are to limited partnerships in which the general partner is an unaffiliated third party and the limited partner is affiliated with the Advisor. The Noble Towers note receivable is guaranteed by an affiliate of the Advisor (see Note 5). In September 2003, we transferred certain of our obligations under the Fannie Mae loan program to CMC, a subsidiary of CharterMac. See Note 16 for more details on the transaction. In October 2003, we purchased nine taxable revenue bonds from CharterMac (see Note 6). In October 2003, we funded a bridge loan to Related Capital Guaranteed Corporate Partners II, L.P. Series A, an affiliate of the Advisor, for approximately $1.3 million. We received a fee of $10,000 for funding the loan, which was repaid the same month. In December 2003, we borrowed approximately $11.3 million from CharterMac in order to aid in the purchase of the Concord at Gulfgate first mortgage in the total amount of $14.1 million (see Note 7). CharterMac charged us interest at an annual rate of 3.17% on the borrowings, which was based on LIBOR plus 2%, the same rate we paid on our Warehouse Facility. Shortly thereafter, we received a $14.0 million loan through the Warehouse Facility, and used the proceeds to repay the loan to CharterMac. 58 AMERICAN MORTGAGE ACCEPTANCE COMPANY AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS See Note 10 for information regarding our Revolving Facility with CharterMac. NOTE 12 - Earnings Per Share
(In thousands, except per share amounts) Year Ended December 31, 2004 Income Shares Per Share ------------- ------------- ------------- Basic EPS $ 11,273 8,336 $ 1.35 Effect of dilutive securities -- 7 -- ------------- ------------- ------------- Diluted EPS $ 11,273 8,343 $ 1.35 ============= ============= ============= Year Ended December 31, 2003 Basic EPS $ 11,884 7,803 $ 1.52 Effect of dilutive securities -- 12 -- ------------- ------------- ------------- Diluted EPS $ 11,884 7,815 $ 1.52 ============= ============= ============= Year Ended December 31, 2002 Basic EPS $ 9,660 6,018 $ 1.61 Effect of dilutive securities -- -- -- ------------- ------------- ------------- Diluted EPS $ 9,660 6,018 $ 1.61 ============= ============= =============
NOTE 13 - Shareholders' Equity Capital Shares - -------------- On February 25, 2002, we completed a public offering of approximately 2.5 million common shares at a price of $13.00 per share. The common shares were offered through Friedman, Billings, Ramsey and RBC Capital Markets. The net proceeds from this offering, approximately $30.9 million, net of underwriter's discount and expenses, were used to fund investments. On April 23, 2003, we completed a public offering of approximately 2.0 million common shares at a price of $15.00 per share, resulting in proceeds, net of underwriters' discount and expenses, of approximately $27.5 million. The common shares were offered through JMP Securities and RBC Capital Markets. The net proceeds from this offering were used to fund investments. During 2004, we issued approximately 2,600 common shares to our trustees as compensation. No such shares were issued in 2003. Share Repurchase Program - ------------------------ In August 2003, our Board of Trustees approved a share repurchase plan. The plan enables us to repurchase, from time to time, up to 1,000,000 common shares. The repurchases will be made in the open market, and the timing will be dependent on the availability of shares and other market conditions. This program has no expiration date. During 2004, we repurchased 4,000 shares at a cost of approximately $53,000. 59 AMERICAN MORTGAGE ACCEPTANCE COMPANY AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Accumulated Other Comprehensive Income - -------------------------------------- Changes in accumulated other comprehensive income
Net unrealized Net unrealized (loss) gain on gain on interest rate (in thousands) investments derivatives Total ----------------- ------------------ ----------------- Balance at January 1, 2002 $ 560 $ -- $ 560 Period change 8,143 -- 8,143 ----------------- ------------------ ----------------- Balance at December 31, 2002 8,703 -- 8,703 Period change 25 (278) (253) ----------------- ------------------ ----------------- Balance at December 31, 2003 8,728 (278) 8,450 Period change 1,260 407 1,667 ----------------- ------------------ ----------------- Balance at December 31, 2004 $ 9,988 $ 129 $10,117 ================= ================== =================
NOTE 14 - Incentive Share Option Plan In accordance with our Amended and Restated Incentive Share Option Plan (the "Plan"), our board of trustees can award share options to trustees, officers and employees of AMAC and our Advisor and its affiliates. A maximum of 833,680 options can be granted, with annual limits based upon formulas specified in the Plan. Option terms and vesting requirements are determined at the time of grant, provided that the term is no longer than ten years. In April 2003, our Compensation Committee granted 190,000 options to employees of an affiliate of the Advisor at an exercise price of $15.03, the market price of our common shares on the grant date. These options vest equally, in thirds, in April 2004, 2005 and 2006 and expire in April 2013. In accordance with SFAS No. 123, we accrue compensation cost based on the estimated fair value of the options issued and amortize those costs over the vesting period. Because the grant recipients are not our employees and vesting of the options is contingent upon the recipient continuing to provide services to us, we estimate the fair value of the options at each period-end up to the vesting date, and adjust recorded amounts accordingly. The assumptions used for valuing these options and the results of the valuations were as follows:
Assumptions: 2004 2003 ------------- --------------- Dividend Yield 9.30% 9.63% Estimated Volatility 16.00% 16.00% Risk Free Interest Rate 3.93% 4.27% Expected Lives 8.30 years 9.41 years Fair Value $85,100 $51,300 Compensation Costs $45,500 $22,700
No options were exercised during 2004 and 2003 and 90,000 shares were forfeited during 2004. There were 733,680 shares available for issuance as of December 31, 2004. 60 AMERICAN MORTGAGE ACCEPTANCE COMPANY AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS NOTE 15 - Selected Quarterly Financial Data
(unaudited) 2004 Quarter Ended ------------------------------------------------------------- (In thousands except per share amounts) March 31 June 30 September 30 December 31 ------------- -------------- -------------- ----------- Total revenues $ 3,879 $ 3,773 $ 4,155 $ 4,102 ============= ============== ============== =========== Net income $ 3,325 $ 3,351 $ 3,249 $ 1,348 ============= ============== ============== =========== Net income per share (basic and diluted) $ 0.40 $ 0.40 $ 0.39 $ 0.16 ============= ============== ============== =========== 2003 Quarter Ended ------------------------------------------------------------- March 31 June 30 September 30 December 31 ------------- -------------- -------------- ----------- Total revenues $ 4,233 $ 3,303 $ 3,625 $ 3,890 ============= ============== ============== =========== Net income $ 3,192 $ 2,573 $ 2,776 $ 3,343 ============= ============== ============== =========== Net income per share (basic and diluted) $ 0.50 $ 0.32 $ 0.33 $ 0.40 ============= ============== ============== ===========
NOTE 16 - Commitments and Contingencies a) Legal On October 27, 2003, prior to taking possession of the real estate collateral supporting a loan investment, we were named in a lawsuit, Concord Gulfgate, Ltd. vs. Robert Parker, Sunrise Housing Ltd., and American Mortgage Acceptance Company, Cause No. 2003-59290 in the State District Court of Harris County, Texas. The suit claims, among other causes of action against the respective defendants, that we conducted wrongful foreclosure in that the loan guarantor did not derive any benefit from our loan and that the limited partners of the loan guarantor did not authorize the loan transaction. The suit seeks, among other relief, actual, consequential, exemplary, and punitive damages, a declaration that the loan made by us is unenforceable, and that we were involved in a conspiracy to defraud the loan guarantor. The suit is currently in the discovery phase. A trial date has not been set. Subsequently, we filed a countersuit on November 25, 2003 against the limited partners of the loan guarantor seeking to recover unpaid taxes and misappropriated property receipts. We are currently unable to determine the possible outcome of the litigation. b) Guarantees In June and October of 2000, we originated two loans totaling $3.3 million under an agreement with Fannie Mae. That agreement provided for our guaranteeing a first-loss position on the loans, which could potentially result in exposure of $7.5 million. In September 2003, we transferred and assigned all of our obligations to the two loans we originated under this program to CMC (which was formerly known as PW Funding Inc.), a subsidiary of CharterMac, both of which are affiliates of the Advisor. Pursuant to the agreement with CMC, CharterMac guaranteed CMC's obligations, and we agreed to indemnify both CMC and CharterMac for any losses incurred in exchange for retaining all fees which we were otherwise entitled to receive under the program. The maximum exposure at December 31, 2004, was $3.2 million, although we expect that we will not be called upon to fund these guarantees. In the first quarter of 2003, we discontinued our loan program with Fannie Mae and will issue no further guarantees pursuant to such program. 61 AMERICAN MORTGAGE ACCEPTANCE COMPANY AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Standby, Forward Loan and GNMA Commitments - ------------------------------------------ We issued the following standby and forward bridge and permanent loan commitments for the purpose of constructing/rehabilitating certain multifamily apartment complexes in various locations.
STANDBY AND FORWARD BRIDGE LOAN COMMITMENTS ------------------------------------------- (In thousands) MAXIMUM AMOUNT OF COMMITMENTS ------------------------------- ISSUE DATE PROJECT LOCATION NO. OF APT. UNITS LESS THAN 1YEAR 1-3 YEARS ---------------------------------------------------------------------------------------------------------- May-04 Oak Village Oakland, CA 117 $ 967 $ -- Feb-03 Noble Towers Oakland, CA 195 54 -- Aug-03 Oaks of Baytown Baytown, TX 248 243 -- June-04 Woods of Mandarin Jacksonville, FL 401 428 -- Dec-03 Reserve at Thornton Thornton, CO 216 412 -- ---------------------------------------------------- TOTAL STANDBY AND FORWARD BRIDGE LOAN COMMITMENTS 1,177 $ 2,104 $ -- ==================================================== STANDBY AND FORWARD MEZZANINE LOAN COMMITMENTS ---------------------------------------------- MAXIMUM AMOUNT OF COMMITMENT ------------------------------- ISSUE DATE PROJECT LOCATION NO. OF APT. UNITS LESS THAN 1YEAR 1-3 YEARS ---------------------------------------------------------------------------------------------------------- April-03 Villas at Highpoint Lewisville, TX 304 $ -- $ 379 ---------------------------------------------------- TOTAL STANDBY AND FORWARD MEZZANINE LOAN COMMITMENT 304 $ -- $ 379 ==================================================== FORWARD GNMA COMMITMENTS ------------------------ MAXIMUM AMOUNT OF COMMITMENTS ------------------------------- ISSUE DATE PROJECT LOCATION LESS THAN 1YEAR 1-3 YEARS ---------------------------------------------------------------------------------------------------------- May-02 Ellington Plaza Washington, DC $ 2,279 $ -- ------------------------------- TOTAL FORWARD GNMA COMMITMENT $ 2,279 -- ------------------------------- TOTAL STANDBY, FORWARD LOAN AND GNMA COMMITMENTS $ 4,383 $ 379 ===============================
Mezzanine Loan/Preferred Stock Commitment - ----------------------------------------- During November 2004, we provided a commitment to fund up to $74.5 million to Prime/Mansur Investment Partners, LLC in connection with its financing of an acquisition. In connection with providing the commitment, we received a commitment fee of $435,000, the recognition of which is deferred on our balance sheet until either the commitment is funded or expires in April 2005. The likelihood that we will be required to fund this commitment is remote. 62 AMERICAN MORTGAGE ACCEPTANCE COMPANY AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Stabilization Loan Guarantees - ----------------------------- During 2002, we entered into an agreement with Wachovia Bank ("Wachovia") to provide stabilization guarantees for new construction of multifamily properties under the LIHTC program in designated areas. We guarantee that properties which have completed construction will stabilize and the associated construction loans will convert to permanent Fannie Mae loans. We receive origination and guarantee fees from the developers for providing the guarantees. If the properties do not stabilize with enough net operating income for Fannie Mae to fully fund its commitment for a permanent loan, we may be required to purchase the construction loan from Wachovia or to fund the difference between the construction loan amount and the reduced Fannie Mae permanent loan amount.
MAXIMUM AMOUNT OF GUARANTEE (IN THOUSANDS) LOAN ADMINISTRATION FEE STABILIZATION LESS THAN 1 (1) GUARANTEE DATE CLOSED PROJECT LOCATION NO. OF UNITS YEAR 1-3 YEARS (ANNUAL PERCENTAGE) FEE (2) - ------------------------------------------------------------------------------------------------------------------------------------ Jul-02 Clark's Crossing Laredo, TX 160 $ 4,770 $ -- 0.500% 0.625% Sept-02 Creekside Apts. Colorado Springs, CO 144 7,500 -- 0.375% -- ------------------------------------------------------------------------------- Total Stabilization Loan Guarantees 304 $ 12,270 $ -- -- -- ===============================================================================
(1) Loan Administration Fee is paid quarterly during the guarantee period. (2) Stabilization Guarantee Fee is an up-front fee - paid at closing and amortized over the guarantee period. For each of these guarantees, and for the guarantees issued under the Fannie Mae loan program discussed above, we monitor the status of the underlying properties and evaluates our exposure under the guarantees. To date, we have concluded that no accrual for probable losses is required under SFAS No. 5, ACCOUNTING FOR CONTINGENCIES. 63 AMERICAN MORTGAGE ACCEPTANCE COMPANY AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS NOTE 17 - Subsequent Events On February 1, 2005, we purchased the Autumn Creek first mortgage at foreclosure auction (see Note 7). The purchase price of the first mortgage was approximately $17.2 million, making the total carrying value of the property, including the mezzanine loan, approximately $19.1 million. On February 17, we sold the Plaza at San Jacinto property to an unaffiliated third party for approximately its carrying value (see Note 7). On March 16, we issued 25,000 Floating Rate Preferred Securities, having a stated liquidation amount of $1,000 per security, bearing a variable rate, reset quarterly, equal to LIBOR plus 3.75% per annum. The proceeds from this offering will be used to make further investments. 64 Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure. None. Item 9A. Disclosure Controls and Procedures (a) EVALUATION OF DISCLOSURE CONTROLS AND PROCEDURES. Our Chief Executive Officer and Chief Financial Officer have evaluated the effectiveness of our disclosure controls and procedures (as such term is defined in Rule 15(e) under the Securities Exchange Act of 1934, as amended (the "Exchange Act")) as of the end of the period covered by this report. Based on such evaluation, such officers have concluded that, as of the end of such period, our disclosure controls and procedures are effective to ensure that information required to be disclosed by the Company in the reports that the Company files or submits under the Exchange Act is recorded, processed, summarized and reported, within the time periods specified in the Securities and Exchange Commission rules and forms, and to ensure that such information is accumulated and communicated to the Company's management, including the Chief Executive Officer and Chief Financial Officer, as appropriate to allow timely decisions regarding required disclosure. (b) INTERNAL CONTROL OVER FINANCIAL REPORTING. There have not been any significant changes in our internal control over financial reporting during the fiscal quarter to which this report relates that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting. 65 PART III Item 10. Directors and Executive Officers of the Company Incorporated by reference to the Company's definitive proxy statement to be filed pursuant to Regulation 14A under the Securities Exchange Act of 1934, as amended (the "Exchange Act"). Item 11. Executive Compensation Incorporated by reference to the Company's definitive proxy statement to be filed pursuant to Regulation 14A under the Exchange Act. Item 12. Security Ownership of Certain Beneficial Owners and Management Incorporated by reference to the Company's definitive proxy statement to be filed pursuant to Regulation 14A under the Exchange Act. Item 13. Certain Relationships and Related Transactions Incorporated by reference to the Company's definitive proxy statement to be filed pursuant to Regulation 14A under the Exchange Act. Item 14. Principal Accounting Fees and Services Incorporated by reference to the Company's definitive proxy statement to be filed pursuant to Regulation 14A under the Exchange Act. PART IV Item 15. Exhibits and Financial Statement Schedules Sequential Page ---------- (a) 1. Financial Statements -------------------- American Mortgage Acceptance Company ------------------------------------ Report of Independent Registered Public Accounting Firm 32 Consent of Independent Registered Public Accounting Firm 33 Management's Report on the Effectiveness of Internal Control over Financial Reporting 34 Report of Independent Registered Public Accounting Firm on Internal Control over Financial Reporting 35 Consolidated Balance Sheets as of December 31, 2004 and 2003 37 Consolidated Statements of Income for the years ended December 31, 2004, 2003 and 2002 38 Consolidated Statements of Shareholders' Equity for the years ended December 31, 2004, 2003 and 2002 39 66 Item 15. Exhibits and Financial Statement Schedules (continued) Sequential Page ---------- Consolidated Statements of Cash Flows for the years ended December 31, 2004, 2003 and 2002 40 Notes to Consolidated Financial Statements 42 ARCap Investors, LLC -------------------- Consolidated 2004 financial statements for ARCap Investors, LLC (see Exhibit 99 (a)) Consolidated 2003 financial statements for ARCap Investors, LLC (see Exhibit 99 (b)) Consolidated 2002 financial statements for ARCap Investors, LLC (see Exhibit 99 (c)) (a) 2. Financial Statement Schedules All schedule have been omitted because they are not required or because the required information is contain- ed in the financial statements or notes thereto. (a) 3. Exhibits -------- 3.4 Second Amended and Restated Declaration of trust, dated as of April 6, 1999 (incorporated by reference to Exhibit 3.4(c) to the Company's March 31, 1999 Quarterly Report on Form 10-Q). 3.5 By-laws* 10(a) Amended and Restated Advisory Services Agreement, ef- fective as of April 6, 1999 (incorporated by reference to Exhibit 10(z) to the Company's September 30, 1999 Quarterly Report on Form 10-Q). 10(b) First Amendment to Amended and Restated Advisory Services Agreement between Related AMI Associates, Inc. and the Company dated November 29, 2001 (incorporated by reference to Exhibit 10.6 to the Company's Registration Statement on Form S-2, filed with the Commission on November 30, 2001). 10(c) Second Amendment to Amended and Restated Advisory Services Agreement between Related AMI Associates, Inc. and the Company dated February 8, 2002*. 10(d) Third Amendment to Amended and Restated Advisory Services Agreement between Related AMI Associates, Inc. and the Company dated November 12, 2003*. 10(e) Fourth Amendment to Amended and Restated Advisory Services Agreement between Related AMI Associates, Inc. and the Company dated June 9, 2004 (incorporated herein by reference to Exhibit 10(d) to the Company's June 30, 2004 Amended Quarterly Report on Form 10-Q/A). 10(f) First Amendment to the Amended and Restated Incentive Share Option Plan of the Company dated June 9, 2004 (in- corporated herein by reference to Exhibit 10(e) to the Company's June 30, 2004 Amended Quarterly Report on Form 10-Q/A). 10(g) Form of Non-Qualified Share Option Award Agreement* 23(a) Consent of Ernst & Young LLP with respect to incorpor- ation by reference of its report relating to the 2002, 2003 and 2004 financial statements of ARCap Investors, LLC in the Company's Registration Statement on form S-3 and Form S-8** 67 Item 15. Exhibits and Financial Statement Schedules (continued) Sequential Page ---------- 24.1 Power of Attorney (Included on signature page hereto) 31.1 Chief Executive Officer certification pursuant to Section 302 of the Sarbanes-Oxley Act of 2002* 31.2 Chief Financial Officer certification pursuant to Section 302 of the Sarbanes-Oxley Act of 2002* 32.1 Certification pursuant to Section 906 of the Sarbanes-Oxley Act of 2002* 32.2 Certification pursuant to Section 906 of the Sarbanes-Oxley Act of 2002* 99. Additional Exhibits 99(a) The 2004 Financial Statements of ARCap Investors, LLC which invests primarily in subordinated commercial mortgage- backed securities, as required by Regulation S-X, Rule 3-09** 99(b) The 2003 Financial Statements of ARCap Investors, LLC which invests primarily in subordinated commercial mortgage- backed securities, as required by Regulation S-X, Rule 3-09** 99(c) The 2002 Financial Statements of ARCap Investors, LLC which invests primarily in subordinated commercial mortgage- backed securities, as required by Regulation S-X, Rule 3-09** * Filed herewith ** Pursuant to Rule 3-09 of Regulation S-X, SEPARATE FINANCIAL STATEMENTS OF SUBSIDIARIES NOT CONSOLIDATED AND 50 PERCENT OR LESS OWNED PERSONS, as amended effective December 23, 2004, the financial statements of ARCap, a non-accelerated filer, plan to be filed as an amendment to this report within 90 days after the end of our fiscal year. 68 SIGNATURES Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. AMERICAN MORTGAGE ACCEPTANCE COMPANY (Registrant) Date: March 16, 2005 By: /s/ Stuart J. Boesky -------------------- Stuart J. Boesky Chairman of the Board of Trustees, President and Chief Executive Officer Date: March 16, 2005 By: /s/ Alan P. Hirmes ------------------ Alan P. Hirmes Managing Trustee and Chief Financial Officer 69 POWER OF ATTORNEY Each person whose signature appears below hereby constitutes and appoints Stuart J. Boesky and Alan P. Hirmes, and each or either of them, his true and lawful attorney-in-fact with full power of substitution and resubstitution, for him and in his name, place and stead, in any and all capacities, to sign any and all amendments to this Annual Report, and to cause the same to be filed, with all exhibits thereto and other documents in connection therewith, with the Securities Exchange Commission, hereby granting to said attorneys-in-fact and agents, and each of them, full power and authority to do and perform each and every act and thing whatsoever requisite or desirable to be done in and about the premises, as fully to all intents and purposes as the undersigned might or could do in person, hereby ratifying and confirming all acts and things that said attorneys-in-fact and agents, or either of them, or their substitutes or substitute, may lawfully do or cause to be done by virtue hereof. Pursuant to the requirements of the Securities Exchange Act of 1934, as amended, this report has been signed by the following persons on behalf of the registrant and in the capacities and on the dates indicated: Signature Title Date - -------------------- ------------------------------------- ---------------- /s/ Stuart J. Boesky - -------------------- Stuart J. Boesky Chairman of the Board of Trustees, President and Chief Executive Officer March 16, 2005 /s/ Alan P. Hirmes - ------------------- Alan P. Hirmes Managing Trustee and Chief Financial Officer March 16, 2005 /s/ Stanley R. Perla - -------------------- Stanley R. Perla Trustee March 16, 2005 /s/ Richard M. Rosan - -------------------- Richard M. Rosan Trustee March 16, 2005 /s/ Scott M. Mannes - -------------------- Scott M. Mannes Trustee March 16, 2005 70 Exhibit 31.1 CERTIFICATION I, Stuart J. Boesky, hereby certify that: 1. I have reviewed this annual report on Form 10-K of American Mortgage Acceptance Company; 2. Based on my knowledge, this annual report does not contain any untrue statement of a material fact or omit to state a material fact necessary in order to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this annual report; 3. Based on my knowledge, the financial statements, and other financial information included in this annual report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this annual report; 4. The registrant's other certifying officers and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and we have: a) designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure the material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this annual report is being prepared; b) designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principals; c) evaluated the effectiveness of the registrant's disclosure controls and procedures presented in this annual report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and d) disclosed in this report any change in the registrant's internal control over financial reporting that occurred during the registrant's most recent fiscal quarter that has materially affected, or is reasonably likely to materially affect, the registrant's internal control over financial reporting; and 5. The registrant's other certifying officers and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant's auditors and the audit committee of registrant's board of directors or persons performing the equivalent functions: a) all significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant's ability to record, process, summarize and report financial information; and b) any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal control over financial reporting. Date: March 16, 2005 By: /s/ Stuart J. Boesky ----------------- -------------------- Stuart J. Boesky Chief Executive Officer 71 Exhibit 31.2 CERTIFICATION I, Alan P. Hirmes, hereby certify that: 1. I have reviewed this annual report on Form 10-K of American Mortgage Acceptance Company; 2. Based on my knowledge, this annual report does not contain any untrue statement of a material fact or omit to state a material fact necessary in order to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this annual report; 3. Based on my knowledge, the financial statements, and other financial information included in this annual report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this annual report; 4. The registrant's other certifying officers and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and we have: a) designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure the material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this annual report is being prepared; b) designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principals; c) evaluated the effectiveness of the registrant's disclosure controls and procedures presented in this annual report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and d) disclosed in this report any change in the registrant's internal control over financial reporting that occurred during the registrant's most recent fiscal quarter that has materially affected, or is reasonably likely to materially affect, the registrant's internal control over financial reporting; and 5. The registrant's other certifying officers and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant's auditors and the audit committee of registrant's board of directors or persons performing the equivalent functions: a) all significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant's ability to record, process, summarize and report financial information; and b) any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal control over financial reporting. Date: March 16, 2005 By: /s/ Alan P. Hirmes ----------------- ------------------ Alan P. Hirmes Chief Financial Officer 72 Exhibit 32.1 CERTIFICATION PURSUANT TO 18.U.S.C. SECTION 1350, AS ADOPTED PURSUANT TO SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002 In connection with the Annual Report of American Mortgage Acceptance Company (the "Company") on Form 10-K for the year ending December 31, 2004, as filed with the Securities and Exchange Commission on the date hereof (the "Report"), I, Stuart J. Boesky, Chief Executive Officer of the Company, certify, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that: (1) The Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934; and (2) The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company. By: /s/ Stuart J. Boesky -------------------- Stuart J. Boesky Chief Executive Officer March 16, 2005 A signed original of this written statement required by Section 906 has been provided to the Company and will be retained by the Company and furnished to the Securities and Exchange Commission or its staff upon request. 73 Exhibit 32.2 CERTIFICATION PURSUANT TO 18.U.S.C. SECTION 1350, AS ADOPTED PURSUANT TO SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002 In connection with the Annual Report of American Mortgage Acceptance Company (the "Company") on Form 10-K for the year ending December 31, 2004, as filed with the Securities and Exchange Commission on the date hereof (the "Report"), I, Alan P. Hirmes, Chief Financial Officer of the Company, certify, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that: (1) The Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934; and (2) The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company. By: /s/ Alan P. Hirmes ------------------- Alan P. Hirmes Chief Financial Officer March 16, 2005 A signed original of this written statement required by Section 906 has been provided to the Company and will be retained by the Company and furnished to the Securities and Exchange Commission or its staff upon request. 74 EXHIBIT 23 (a) INDEPENDENT AUDITORS' CONSENT We consent to the incorporation by reference in Registration Statement (Form S-3 No. 33-42481) of American Mortgage Acceptance Company and in the related Prospectus of our report dated February 6, 2004 and February 4, 2003 on the consolidated financial statements of ARCap Investors, L.L.C. included in this Annual Report (Form 10-K) for the year ended December 31, 2003. /s/ Ernst & Young LLP Dallas, Texas March 5, 2004 75 Exhibit 99 (a) Report of Independent Auditors The Board of Managers ARCap Investors, L.L.C. We have audited the accompanying consolidated balance sheet of ARCap Investors, L.L.C. and subsidiaries (the Company) as of December 31, 2003, and the related consolidated statements of operations, members' equity, and cash flows for the year then ended. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audit. We conducted our audit in accordance with auditing standards generally accepted in the United States. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audit provides a reasonable basis for our opinion. In our opinion, the financial statements referred to above present fairly, in all material respects, the consolidated financial position of ARCap Investors, L.L.C. and subsidiaries at December 31, 2003, and the consolidated results of their operations and their cash flows for the year then ended in conformity with accounting principles generally accepted in the United States. /s/ Ernst & Young LLP February 6, 2004 76 EX-10 2 amac-exhibit1_dec2004.txt OPTION AGREEMENT AMERICAN MUNICIPAL ACCEPTANCE COMPANY NON-QUALIFIED SHARE OPTION AGREEMENT THIS SHARE OPTION AGREEMENT, made as of the XXth day of XXXX, 200X (the "Grant Date"), between American Municipal Acceptance Company, a Massachusetts business trust (the "Company"), and XXXXXXXXXXX (the "Optionee"), entered into pursuant to the Company's Incentive Share Option Plan (the "Plan"). Capitalized terms used herein but not defined herein, shall have the meanings ascribed to them in the Plan. WHEREAS, the Company has adopted the Plan in order to provide additional incentives to certain officers and employees of the Company, its Subsidiaries and its Manager; WHEREAS, the Committee responsible for administration of the Plan has determined to grant an option to the Optionee as provided herein. NOW, THEREFORE, the parties hereto agree as follows: 1. GRANT OF OPTION. 1.1 The Company hereby grants to the Optionee the right and option (the "Option") to purchase all or any part of an aggregate of XXXX common shares of beneficial interest ("Shares") subject to, and in accordance with, the terms and conditions set forth in this Share Option Agreement. The Option is not intended to qualify as an Incentive Stock Option within the meaning of Section 422 of the Code. 1.2 This Share Option Agreement shall be construed in accordance and consistent with, and subject to, the provisions of the Plan (the provisions of which are incorporated herein by reference). 2. PURCHASE PRICE. The price at which the Optionee shall be entitled to purchase Shares upon the exercise of the Option shall be $XX.XX per Share. 3. DURATION OF OPTION. The Option shall be exercisable to the extent and in the manner provided herein for a period of ten (10) years from the Grant Date (the "Exercise Term"); PROVIDED, HOWEVER, that the Option may be earlier terminated as provided in Section 6 hereof. 1 4. EXERCISABILITY OF OPTION. Unless otherwise provided in this Share Option Agreement or the Plan, the Option shall entitle the Optionee to purchase, in whole at any time or in part from time to time, one-third (1/3) of the total number of Shares covered by the Option after the expiration of one (1) year from the Grant Date and an additional one-third (1/3) of the total number of Shares covered by the Option after the expiration of each of the second and third anniversaries of the Grant Date, and each such right of purchase shall be cumulative and shall continue, unless sooner exercised or terminated as herein provided during the remaining period of the Exercise Term. Any fractional number of Shares resulting from the application of the foregoing percentages shall be rounded to the next higher whole number of Shares, but shall not exceed the total number of Shares subject to the Option. 5. MANNER OF EXERCISE AND PAYMENT. 5.1 Subject to the terms and conditions of this Share Option Agreement and the Plan, the Option may be exercised by delivery of written notice to the Company, in the form attached hereto as APPENDIX I, at its principal executive office. Such notice shall state that the Optionee is electing to exercise the Option and the number of Shares in respect of which the Option is being exercised and shall be signed by the person or persons exercising the Option. If requested by the Committee, such person or persons shall (i) deliver this Share Option Agreement to the Secretary of the Company who shall endorse thereon a notation of such exercise and (ii) provide satisfactory proof as to the right of such person or persons to exercise the Option. 5.2 The notice of exercise described in Section 5.1 hereof shall be accompanied by the full purchase price for the Shares in respect of which the Option is being exercised, with the approval of the Committee, by any one or a combination of the following: (i) cash (by check), (ii) transferring fully paid Shares held at least six (6) months to the Company with a Fair Value equal to the aggregate purchase price, or (iii) if requested by the Optionee and agreed to by the Committee in its sole discretion, pursuant to a full recourse promissory note upon such terms as the Committee deems appropriate. Notwithstanding the foregoing, the Committee shall have discretion to determine at any later date (up to and including the date of exercise) the form of payment acceptable in respect of the exercise of the Option. In addition, the Optionee may provide instructions to the Company that upon receipt of the Option purchase price in cash, certified check, or wire transfer of immediately available funds, from a broker or dealer acting at the direction of the Optionee, in payment for any Shares pursuant to the exercise of the Option, the Company shall issue such Shares directly to the designated broker or dealer. 5.3 Upon receipt of notice of exercise and full payment for the Shares in respect of which the Option is being exercised, the Company shall subject to Section 9 of the Plan, take such action as may be necessary to effect the transfer to the Optionee of the number of Shares as to which such exercise 2 was effective, and may issue the Shares to an account maintained in the Optionee's name by Equiserve or another transfer agent if the Optionee has not provided contrary instructions. 5.4 The Optionee shall not be deemed to be the holder of, or to have any of the rights of a holder with respect to any Shares subject to the Option until (i) the Option shall have been exercised pursuant to the terms of this Share Option Agreement and the Optionee shall have paid the full purchase price for the number of Shares in respect of which the Option was exercised, (ii) the Company shall have issued and delivered the Shares to the Optionee, and (iii) the Optionee's name shall have been entered as a shareholder of record on the books of the Company, whereupon the Optionee shall have full voting and other ownership rights with respect to such Shares. 6. TERMINATION OF EMPLOYMENT. 6.1 DEATH, DISABILITY. If the employment of the Optionee with the Company, a Subsidiary, the Manager or any affiliate of the Manger, as the case may be, is terminated as a result of the Optionee's death or disability (within the meaning of Section 22(e)(3) of the Code), or the Optionee dies within three (3) months of the Optionee's termination of employment with or service to the Company, a Subsidiary, the Manager or any affiliate of the Manager, as the case may be, for any reason other than Cause, the Option may be exercised in whole or in part (to the extent vested on the date of the Optionee's termination of employment or service) at any time within the period of one (1) year after the date of such termination of employment or service, but in no event after the expiration of the Exercise Term. In the event of the Optionee's death, the Option shall be exercisable, to the extent provided in the Plan and this Share Option Agreement, by the legatee or legatees under the Optionee's will, or by the Optionee's personal representatives or distributees and such person or persons shall be substituted for the Optionee each time the Optionee is referred to herein. 6.2 TERMINATION OF EMPLOYMENT FOR CAUSE. If the employment or service of the Optionee with the Company, a Subsidiary, the Manager or any affiliate of the Manager, as the case may be, is terminated for Cause, the right to exercise the Option shall terminate immediately upon the Optionee's termination of employment or service, whether or not vested. 6.3 OTHER TERMINATION OF EMPLOYMENT. If the employment or service of the Optionee with the Company, a Subsidiary, the Manager or any affiliate of the Manager, as the case may be, is terminated for any reason other than the reasons set forth in Section 6.1 or 6.2 hereof (including the Optionee's ceasing to be employed or engaged by a Subsidiary as a result of the sale of such Subsidiary or an interest in such Subsidiary), the right to exercise the Option, to the extent vested, shall terminate three (3) months after the Optionee's termination of employment or service, but in no event after the expiration of the Exercise Term. 3 6.4 ASSIGNMENT OF UNVESTED OPTION. At the time that employment or service of the Optionee with the Company, a Subsidiary, the Manager or any affiliate of the Manager, as the case may be, is terminated for any reason, Optionee, at the Company's request, shall assign Optionee's then unvested Options to the Company or its designee. If the Company does not request Optionee to assign such Options, the Options shall be forfeited to the Company. 7. NONTRANSFERABILITY. The Option shall not be assignable or transferable by the Optionee to whom it is granted, either voluntarily or by operation of law, except by will or the laws of descent and distribution. During the life of the Optionee, the Option shall be exercisable only by or on behalf of such person. 8. NO RIGHT TO CONTINUED EMPLOYMENT. Nothing in this Share Option Agreement or the Plan shall be interpreted or construed to confer upon the Optionee any right with respect to continuance of employment or service by or with the Company, a Subsidiary, the Manager or any affiliate of the Manger, as the case may be, nor shall this Share Option Agreement or the Plan interfere in any way with the right of the Company, a Subsidiary, the Manager or any affiliate of the Manager, as the case may be, to terminate the Optionee's employment or service at any time. 9. ADJUSTMENTS. In the event of a change in capitalization, the Committee may make appropriate adjustments to the number and class of Shares or other shares or securities subject to the Option and the purchase price for such Shares or other shares or securities. The Committee's adjustment shall be made in accordance with the provisions of Section 11 of the Plan and shall be effective and final, binding and conclusive for all purposes of the Plan and this Share Option Agreement. 10. REORGANIZATION. Upon the effective date of (i) a merger or consolidation of the Company with another entity or person other than an Affiliate, where the Company is not a surviving entity (a "Transaction"), or (ii) all or substantially all of the assets or more than 20% of the outstanding equity securities of the Company entitled to vote for trustees is acquired by any other entity or person other than an Affiliate or an entity or person or any Affiliate thereof owning 5% or more of the outstanding voting shares of the Company, or (iii) there is a reorganization or liquidation of the Company, the Committee, or board of directors of any corporation assuming the obligations of the Company, shall as to the Option, either (x) in the case of a merger, consolidation or reorganization of the Company, make appropriate provision for the protection of 4 the Option by the substitution on an equivalent basis of appropriate shares or other securities of the Company or of the merged, consolidated or otherwise reorganized corporation that will be issuable in respect of the Shares (provided that no additional benefits shall be conferred upon the Optionee as a result of such substitution), or (y) upon written notice to the Optionee, provide that the Option must be exercised within a specified number of days of the date of such notice or the Option will be terminated, or (z) upon written notice to the Optionee, provide that the Option shall be purchased by the Company or its successor within a specified number of days of the date of such notice at a price equal to the value the Optionee would have received if they then exercised the Option and immediately received full payment in respect of such exercise, as determined in good faith by the Committee. 11. WITHHOLDING OF TAXES AND NOTICE OF DISPOSITION. The Company shall have the right to deduct from any distribution of cash to the Optionee an amount equal to the federal, state and local income taxes and other amounts as may be required by law to be withheld (the "Withholding Taxes") with respect to the Option. In addition, if the Optionee is entitled to receive Shares upon exercise of the Option, the Optionee shall pay the Withholding Taxes to the Company in cash prior to the issuance, or release from escrow, of such Shares. In satisfaction of the obligation to pay Withholding Taxes to the Company, the Committee may, in its discretion and subject to compliance with applicable securities laws and regulations, withhold Shares having an aggregate Fair Value on the date preceding the date of such issuance equal to the Withholding Taxes. In addition, such withholding of Shares shall occur if the Optionee fails to pay the Withholding Taxes to the Company (in accordance with the terms of this paragraph) promptly after they become due and payable. 12. OPTIONEE RECEIPT OF A PLAN SUMMARY. The Optionee hereby acknowledges receipt of a summary of the Plan. 13. MODIFICATION OF SHARE OPTION AGREEMENT. This Share Option Agreement may be modified, amended, suspended, or terminated, and any terms or conditions may be waived, but only by a written instrument executed by the parties hereto. 14. SEVERABILITY. Should any provision of this Share Option Agreement be held by a court of competent jurisdiction to be unenforceable or invalid for any reason, the remaining provisions of this Share Option Agreement shall not be affected by such holding and shall continue in full force in accordance with their terms. 15. GOVERNING LAW. 5 The validity, interpretation, construction and performance of this Share Option Agreement shall be governed by the laws of the State of Massachusetts without giving effect to the conflicts of laws principles thereof. 16. SUCCESSORS IN INTEREST. This Share Option Agreement shall inure to the benefit of and be binding upon any successor to the Company. This Share Option Agreement shall inure to the benefit of the Optionee's legal representatives. All obligations imposed upon the Optionee and all rights granted to the Company under this Share Option Agreement shall be final, binding and conclusive upon the Optionee's heirs, executors, administrators and successors. 17. RESOLUTION OF DISPUTES. Any dispute or disagreement which may arise under, or as a result of, or in any way relate to, the interpretation, construction or application of this Share Option Agreement shall be determined by the Committee. Any determination made hereunder shall be final, binding and conclusive on the Optionee and Company for all purposes. COMPANY: AMERICAN MUNICIPAL ACCEPTANCE COMPANY By: ____________________________________________ Name: Stuart J. Boesky Title: Chief Executive Officer OPTIONEE: ____________________________________________ 6 Appendix I NOTICE OF EXERCISE OF OPTION UNDER THE AMERICAN MUNICIPAL ACCEPTANCE COMPANY NON-QUALIFIED SHARE OPTION AGREEMENT ------------------------------------ American Municipal Acceptance Company 625 Madison Avenue New York, New York 10022 Attn: Corporate Secretary Gentlemen: I hereby exercise my option to purchase common shares of beneficial interest in American Municipal Acceptance Company (the "Company"), par value $[ ] per share (the "Shares"), under the terms and conditions of that certain Non-Qualified Share Option Agreement, dated April 11, 2003 by and between [ ] and the Company, as follows: (1) Number of shares: (2) Option price per share: (3) Aggregate purchase price [(1) x (2)]: Enclosed is payment in the form of: (a) CASH. Cash, certified check, bank draft or money order in United States dollars payable to the order of the Company in the amount of the aggregate purchase price [(3) above]. (b) SHARES (ONLY WITH THE PRIOR APPROVAL OF THE COMMITTEE). Certificates duly endorsed in blank for Shares of the Company with a Fair Value on the day preceding the date of this notice equal to the aggregate purchase price [(3) above]. (c) PROMISSORY NOTE (ONLY WITH THE PRIOR APPROVAL OF THE COMMITTEE). Note made by the Optionee in favor of the Company upon such terms as approved in advance by the Company in the amount of the aggregate purchase price [(3) above]. (d) SURRENDER OF OTHER SHARES (ONLY WITH THE PRIOR APPROVAL OF THE COMMITTEE). Surrender of my vested right to exercise this Option for Shares whose in-the-money value on the date of the surrender (determined by the excess of the Fair Market Value of the surrendered Shares over their Exercise Price) equals the aggregate purchase price [(3) above]. I RECOGNIZE THAT THIS VALUE WILL BE TAXABLE INCOME TO ME. (e) ANY COMBINATION OF THE ABOVE (ONLY WITH THE PRIOR APPROVAL OF THE COMMITTEE). NOTE: If any portion of the payment is to be made in Shares, please consult the Company prior to submitting this form as to the proper method of payment. Upon receipt of the aggregate purchase price [(3) above], please issue the certificates as follows: (a) In my name; or (b) In the name of my designated broker or dealer, to the extent the Company has received in cash, certified check or wire transfer of immediately available funds, the aggregate purchase price [(3) above] from such broker or dealer acting at my direction. 7 Please deliver the certificates (including those representing excess shares submitted) and/or any excess cash to: Issue to: Mail or Deliver to: Name Name - ------------------------------------ ------------------------------------ Address Address - ------------------------------------ ------------------------------------ City State Zip Code City State Zip Code - ------------------------------------ ------------------------------------ Social Security Number - ------------------------------------ Dated: ----------------------------- ------------------------------------ (Signature) EX-10 3 amac-exhibit2_dec2004.txt THIRD AMENDMENT TO AMENDED AND RESTATED ADVISORY SERVICES AGREEMENT THIS THIRD AMENDMENT TO AMENDED AND RESTATED ADVISORY SERVICES AGREEMENT ("AMENDMENT") is made as of the 12th day of November, 2003 by and between American Mortgage Acceptance Company, a Massachusetts business trust (the "TRUST") and Related AMI Associates, Inc., a Delaware corporation (the "ADVISOR"). WHEREAS, the Trust and the Advisor have entered into an Amended and Restated Advisory Services Agreement, effective as of April 6, 1999, as amended by the First Amendment dated November 29, 2001 and the Second Amendment dated February 8, 2002 collectively, the "AGREEMENT") pursuant to which the Advisor is entitled to receive an annual incentive fee (the "ANNUAL INCENTIVE FEE"), pursuant to SECTION 12(2) of the Agreement; and WHEREAS, the Trust and the Advisor desire to amend the Agreement in accordance with the terms of this Amendment in order to amend and restate SECTION 12(2) of the Agreement; NOW, THEREFORE, in consideration of the mutual covenants, representations, warranties and agreements contained herein, and of other good and valuable consideration, the receipt and sufficiency of which are hereby acknowledged, and intending to be bound hereby, the Trust and the Advisor agree as follows: 1. AMENDMENT. Section 12(2) of the Agreement is deleted and replaced in its entirety by the following: Annual Incentive Fee. Subject to (1) a minimum annual Distributions being made to Shareholders from CAD of $1.45 per Share AND (2) the Company achieving at least annual GAAP net income per share of $1.60 (net of the Annual Incentive Fee), the Advisor shall 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 Annual Incentive Fee) per Share (based on the weighted average number of Shares outstanding), plus (b) gains (or minus losses) from debt restructuring and sales of property per share (based on the weighted average number of Shares outstanding), exceed (2) an amount equal to the greater of: 1 (a) (i) the weighted average of (x) $20 (the price per Share of the initial public offering) and (y) the prices per Share of any secondary offerings by the Company multiplied by (ii) the Ten-Year U.S. Treasury Rate plus 2% per annum; and (b) $1.45 multiplied by (B) the weighted average number of Shares outstanding during such year. 2. NO FURTHER AMENDMENTS. Except as specifically amended by this Amendment, all of the terms, covenants and conditions of the Agreement shall remain unmodified and in full force and effect and are hereby ratified and confirmed. 3. GOVERNING LAW. This Amendment shall be governed by and construed in accordance with the laws of New York, without giving effect to the conflict of laws principles thereof. 4. COUNTERPARTS. This Amendment may be executed in one or more counterparts, each of which shall be deemed an original but all of which together will constitute one and the same instrument. A facsimile, telecopy or other reproduction of this Amendment may be executed by one or more parties hereto, and an executed copy of this Amendment may be delivered by one or more parties hereto by facsimile or similar instantaneous electronic transmission device pursuant to which the signature of or on behalf of such party can be seen, and such execution and delivery shall be considered valid, binding and effective for all purposes as of the date first written above. At the request of any party hereto, all parties hereto agree to execute an original of this Amendment as well as any facsimile, telecopy or other reproduction hereof. [SIGNATURE PAGE FOLLOWS] 2 IN WITNESS WHEREOF, the parties hereto have caused this Amendment to be executed as of the date first above written. AMERICAN MORTGAGE ACCEPTANCE COMPANY By: /s/ Stuart J. Boesky -------------------- Name: Stuart J. Boesky Title: President and Chief Executive Officer RELATED AMI ASSOCIATES, INC. By: /s/ Alan P. Hirmes ------------------ Name: Alan P. Hirmes Title: Senior Vice President [SIGNATURE PAGE TO AMENDMENT] EX-10 4 amac-exhibit3_dec2004.txt SECOND AMENDMENT TO AMENDED AND RESTATED ADVISORY SERVICES AGREEMENT THIS SECOND AMENDMENT TO AMENDED AND RESTATED ADVISORY SERVICES AGREEMENT ("AMENDMENT") is made as of the 8th day of February, 2002 by and between American Mortgage Acceptance Company, a Massachusetts business trust (the "TRUST") and Related AMI Associates, Inc., a Delaware corporation (the "ADVISOR"). WHEREAS, the Trust and the Advisor have entered into an Amended and Restated Advisory Services Agreement (the "AGREEMENT"), effective as of April 6, 1999, pursuant to which the Advisor is entitled to receive an annual incentive fee (the "Annual Incentive Fee"), pursuant to SECTION 12(2) of the Agreement; and WHEREAS, the Trust and the Advisor desire to amend the Agreement in accordance with the terms of this Amendment in order to amend and restate SECTION 12(2) of the Agreement (the "AMENDMENT"); NOW, THEREFORE, in consideration of the mutual covenants, representations, warranties and agreements contained herein, and of other good and valuable consideration, the receipt and sufficiency of which are hereby acknowledged, and intending to be bound hereby, the Trust and the Advisor agree as follows: 1. AMENDMENT. Section 12(2) of the Agreement is deleted and replaced in its entirety by the following: --------- Annual Incentive Fee. Subject to a minimum annual Distributions being made to Shareholders from CAD of $1.45 per Share, the Advisor shall 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 Annual Incentive Fee) per Share (based on the weighted average number of Shares outstanding), plus (b) gains (or minus losses) from debt restructuring and sales of property per share (based on the weighted average number of Shares outstanding), exceed (2) an amount equal to the greater of: (a) (i) the weighted average of (x) $20 (the price per Share of the initial public offering) and (y) the prices per Share of any secondary offerings by the Company multiplied by 1 (ii) the Ten-Year U.S. Treasury Rate plus 2% per annum; and (b) $1.45 multiplied by (B) the weighted average number of Shares outstanding during such year. 2. NO FURTHER AMENDMENTS. Except as specifically amended by this Amendment, all of the terms, covenants and conditions of the Agreement shall remain unmodified and in full force and effect and are hereby ratified and confirmed. 3. GOVERNING LAW. This Amendment shall be governed by and construed in accordance with the laws of New York, without giving effect to the conflict of laws principles thereof. 4. COUNTERPARTS. This Amendment may be executed in one or more counterparts, each of which shall be deemed an original but all of which together will constitute one and the same instrument. A facsimile, telecopy or other reproduction of this Amendment may be executed by one or more parties hereto, and an executed copy of this Amendment may be delivered by one or more parties hereto by facsimile or similar instantaneous electronic transmission device pursuant to which the signature of or on behalf of such party can be seen, and such execution and delivery shall be considered valid, binding and effective for all purposes as of the date first written above. At the request of any party hereto, all parties hereto agree to execute an original of this Amendment as well as any facsimile, telecopy or other reproduction hereof. [SIGNATURE PAGE FOLLOWS] 2 IN WITNESS WHEREOF, the parties hereto have caused this Amendment to be executed as of the date first above written. AMERICAN MORTGAGE ACCEPTANCE COMPANY By: /S/ STUART J. BOESKY -------------------- Name: Stuart J. Boesky Title: President and Chief Executive Officer RELATED AMI ASSOCIATES, INC. By: /S/ ALAN P. HIRMES ------------------ Name: Alan P. Hirmes Title: Senior Vice President [SIGNATURE PAGE TO AMENDMENT] EX-3.(II) 5 voting-bylaws.txt AMERICAN MORTGAGE ACCEPTANCE COMPANY BYLAWS INTRODUCTORY NOTE The Second Amended and Restated Declaration of Trust, as most recently amended as of February 1, 2001 (as so amended, the "TRUST AGREEMENT") of American Mortgage Acceptance Company (the "COMPANY") generally sets forth those matters which would otherwise be contained in separate Bylaws. Reference should continue to be made to the Trust Agreement for all such matters other than as specifically set forth in these Bylaws. All capitalized terms not otherwise defined in these Bylaws shall have the meanings ascribed to them in the Trust Agreement. ELECTRONIC VOTING Any Shareholder's proxy or other writing or consent to vote at a meeting of Shareholders may be transmitted by facsimile or other electronic means (including, without limitation, by telephone, email and internet)(collectively, "ELECTRONIC TRANSMISSION") , provided that such Electronic Transmission must either be set forth, be submitted with, or provide for, information from which the Company or its agents can determine with reasonable certainty that the Electronic Transmission was authorized by the Shareholder. Amendments These Bylaws may be amended form time to time by the Trustees in accordance with the provisions of the Trust Agreement. -----END PRIVACY-ENHANCED MESSAGE-----