**UNITED STATES SECURITIES AND EXCHANGE COMMISSION**

**Washington,D.C. 20549**

 

**FORM 10-Q**

 
| **ý** | **QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE  SECURITIES EXCHANGE ACT OF 1934.**  |
|------------|-------------------------------------------------------------------------------------------------|
|       |                                                                                            |   |
|       | **For  the quarterly period ended: September 30, 2001**                                         |   |
|       |                                                                                            |   |
| **OR**     |
|       |                                                                                            |   |
| **o**      | **TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE  SECURITIES EXCHANGE ACT OF 1934.** |

 

 

Commission FileNumber:  **1-13485**

 

**AMERICAN RESIDENTIAL INVESTMENT TRUST, INC.**

(Exact name of registrantas specified in its charter)

 

| **Maryland**                                               |   | **33-0741174**                        |
|------------------------------------------------------------|--------|---------------------------------------|
| (State or other  jurisdiction of                           |   | (I.R.S. Employer  Identification No.) |
| incorporation or  organization)                            |   |                                  |
|                                                       |   |                                  |
|                                                       |   |                                  |
| **445  Marine View Avenue, Suite 230 Del Mar, California** |   | **92014**                             |
| (Address of principal  executive offices)                  |   | (Zip Code)                            |

 

**(858)350-5000**

(Registrant’s telephonenumber, including area code)

 

 

(Former name, former address and former fiscal year,if changed since last report)

 

Indicate by check mark whether the registrant (1) has filed all reportsrequired to be filed by Section 13 or 15 (d) of the Securities Exchange Act of1934 during the preceding 12 months (or for such shorter period that theregistrant was required to file such reports), and (2) has been subject to suchfiling requirements for the past 90 days.

YES   ý   NO  o

 

Indicate the number of shares outstanding of each of the issuer’sclasses of common stock, as of the latest practicable date.

 

Common Stock ($0.01)

7,959,900 as of October17, 2001

 

 

INDEX

 
| PART I.  FINANCIAL INFORMATION                                                                                                                                                                                                 |   |   |
|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|--------|--------|
|                                                                                                                                                                                                                                |   |   |
| Item 1.  Consolidated Financial Statements                                                                                                                                                                                     |   |   |
|                                                                                                                                                                                                                                |   |   |
| Consolidated Balance Sheets  at September 30, 2001 and December 31, 2000                                                                                                                                                            |   |   |
|                                                                                                                                                                                                                                |   |   |
| Consolidated  Statements of Operations and Comprehensive Income (Loss) for the three months  ended September 30, 2001 and September 30, 2000 and for the nine months ended  September 30, 2001 and September 30, 2000 respectively. |   |   |
|                                                                                                                                                                                                                                |   |   |
| Consolidated  Statements of Cash Flows for the nine months ended September 30, 2001 and  September 30, 2000.                                                                                                                        |   |   |
|                                                                                                                                                                                                                                |   |   |
| Notes to  Consolidated Financial Statements                                                                                                                                                                                         |   |   |
|                                                                                                                                                                                                                                |   |   |
| Item  2.  Management’s Discussion and  Analysis of Financial Condition and Results of Operations                                                                                                                          |   |   |
|                                                                                                                                                                                                                                |   |   |
| Item  3.  Quantitative and Qualitative  Disclosures about Market Risk                                                                                                                                                          |   |   |
|                                                                                                                                                                                                                                |   |   |
| PART II.  OTHER INFORMATION                                                                                                                                                                                                    |   |   |
|                                                                                                                                                                                                                                |   |   |
| Item 1.  Legal Proceedings                                                                                                                                                                                                     |   |   |
|                                                                                                                                                                                                                                |   |   |
| Item  2.  Changes in Securities and Use of  Proceeds                                                                                                                                                                           |   |   |
|                                                                                                                                                                                                                                |   |   |
| Item 3.  Defaults Upon Senior Securities                                                                                                                                                                                       |   |   |
|                                                                                                                                                                                                                                |   |   |
| Item  4.  Submission of Matters to a Vote of  Security Holders                                                                                                                                                                 |   |   |
|                                                                                                                                                                                                                                |   |   |
| Item 5.  Other Information                                                                                                                                                                                                     |   |   |
|                                                                                                                                                                                                                                |   |   |
| Item 6.  Exhibits and Reports on Form 8-K                                                                                                                                                                                      |   |   |

 

PART I. FINANCIAL INFORMATION

Item 1. Consolidated Financial Statements

 

American Residential Investment Trust, Inc. and Subsidiaries

Consolidated Balance Sheets

(inthousands, except share and per share data)

 
|                                                                                                                                                                                                                      |   |
|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|--------|
|                                                                                                                                                                                                                      |   | **September 30, 2001** |   | **December 31, 2000** |   |
| ASSETS                                                                                                                                                                                                                    |   |
| Cash and cash equivalents                                                                                                                                                                                                 |   | $ | 24,488 |   | $ | 14,688 |   |
| Bond collateral, mortgage loans, net                                                                                                                                                                                      |   | 524,374 |   | 847,265 |   |
| Bond collateral, real estate owned                                                                                                                                                                                        |   | 8,627 |   | 7,685 |   |
| Retained interest in securitization                                                                                                                                                                                       |   | 1,587 |   | 3,249 |   |
| Interest rate cap agreements                                                                                                                                                                                              |   | - |   | 1,115 |   |
| Accrued interest receivable, net                                                                                                                                                                                          |   | 3,294 |   | 6,315 |   |
| Due from affiliate                                                                                                                                                                                                        |   | 448 |   | 355 |   |
| Investment in American Residential  Holdings, Inc.                                                                                                                                                                        |   | 1,714 |   | 1,480 |   |
| Other assets                                                                                                                                                                                                              |   | 692 |   | 421 |   |
|                                                                                                                                                                                                                      |   | $ | 565,224 |   | $ | 882,573 |   |
|                                                                                                                                                                                                                      |   |   |   |   |   |
| LIABILITIES AND STOCKHOLDERS' EQUITY                                                                                                                                                                                      |   |
| Liabilities:                                                                                                                                                                                                              |   |   |   |   |   |
| Short-term debt                                                                                                                                                                                                           |   | $ | 938 |   | $ | 5,083 |   |
| Long-term debt, net                                                                                                                                                                                                       |   | 490,029 |   | 797,182 |   |
| Accrued interest payable                                                                                                                                                                                                  |   | 125 |   | 309 |   |
| Due to affiliate                                                                                                                                                                                                          |   | 1,686 |   | 1,347 |   |
| Accrued expenses and other liabilities                                                                                                                                                                                    |   | 628 |   | 143 |   |
| Management fees payable                                                                                                                                                                                                   |   | 172 |   | 271 |   |
| Accrued dividends                                                                                                                                                                                                         |   | - |   | 1,611 |   |
| Total liabilities                                                                                                                                                                                                         |   | 493,578 |   | 805,946 |   |
|                                                                                                                                                                                                                      |   |   |   |   |   |
| Stockholders' Equity:                                                                                                                                                                                                     |   |   |   |   |   |
| Preferred stock, par value $.01 per  share; 1,000 shares authorized; no shares issued and outstanding                                                                                                                     |   | - |   | - |   |
| Common stock, par value $.01 per share;  25,000,000 shares authorized; 7,959,900 shares issued and outstanding at  September 30, 2001 and 8,055,500 shares issued and 8,020,900 shares  outstanding at December 31, 2000. |   | 80 |   | 81 |   |
| Treasury Stock (34,600 shares at  December 31, 2000)                                                                                                                                                                      |   | - |   | (84 | ) |
| Additional paid-in-capital                                                                                                                                                                                                |   | 108,992 |   | 109,271 |   |
| Accumulated deficit                                                                                                                                                                                                       |   | (37,426 | ) | (32,641 | ) |
| Total stockholders' equity                                                                                                                                                                                                |   | 71,646 |   | 76,627 |   |
|                                                                                                                                                                                                                      |   | $ | 565,224 |   | $ | 882,573 |   |

 

Seeaccompanying notes to consolidated financial statements.

 

American Residential Investment Trust, Inc. and Subsidiaries

Consolidated Statements of Operations and Comprehensive Income(Loss), unaudited

(inthousands, except per share data)

 
|                                                                          |   | **For the**            |          | **For the**            |          | **For the**            |   | **For the**            |   |
|-------------------------------------------------------------------------------|--------|------------------------|---------------|------------------------|---------------|------------------------|--------|------------------------|--------|
|                                                                          |   | **Three Months Ended** |          | **Three Months Ended** |          | **Nine Months Ended**  |   | **Nine Months Ended**  |   |
|                                                                          |   | **September 30, 2001** |          | **September 30, 2000** |          | **September 30, 2001** |   | **September 30, 2000** |   |
| Interest  income:                                                             |   |                   |          |                   |          |                   |   |                   |   |
| Mortgage assets                                                               |   | $                      | 12,590        |                   | $             | 19,780                 |   | $                      | 44,648 |   | $ | 67,103 |   |
| Cash and  investments                                                         |   | 188                    |          | 226                    |          | 544                    |   | 647                    |   |
| Interest rate  cap and floor agreement expense                                |   | -                      |          | (131                   | )             | (9                     | )      | (473                   | )      |
| Total interest  income                                                        |   | 12,778                 |          | 19,875                 |          | 45,183                 |   | 67,277                 |   |
| Interest  expense                                                             |   | 7,079                  |          | 16,925                 |          | 30,318                 |   | 53,704                 |   |
| Net interest  spread                                                          |   | 5,699                  |          | 2,950                  |          | 14,865                 |   | 13,573                 |   |
| Premium  amortization                                                         |   | 6,934                  |          | 2,500                  |          | 12,371                 |   | 8,436                  |   |
| Net interest  income (loss)                                                   |   | (1,235                 | )             | 450                    |          | 2,494                  |   | 5,137                  |   |
| Provision for  loan losses                                                    |   | 2,176                  |          | 2,396                  |          | 4,596                  |   | 3,892                  |   |
| Net interest  income (loss after provision for loan losses)                   |   | (3,411                 | )             | (1,946                 | )             | (2,102                 | )      | 1,245                  |   |
| Other operating  income:                                                      |   |                   |          |                   |          |                   |   |                   |   |
| Management fee  income                                                        |   | 41                     |          | 69                     |          | 138                    |   | 267                    |   |
| Equity in  income of American Residential Holdings, Inc.                      |   | 76                     |          | 8                      |          | 233                    |   | 313                    |   |
| Prepayment  penalty income                                                    |   | 635                    |          | 929                    |          | 2,309                  |   | 2,800                  |   |
| Total other  operating income                                                 |   | 752                    |          | 1,006                  |          | 2,680                  |   | 3,380                  |   |
| Net operating  income (loss)                                                  |   | (2,659                 | )             | (940                   | )             | 578                    |   | 4,625                  |   |
| Other expenses:                                                               |   |                   |          |                   |          |                   |   |                   |   |
| Impairment on  retained interest in securitization                            |   | -                      |          | 4,702                  |          | -                      |   | 4,702                  |   |
| Loss on sale of  real estate owned, net                                       |   | 111                    |          | 340                    |          | 264                    |   | 1,107                  |   |
| Loss on loans  sales                                                          |   | -                      |          | 167                    |          | -                      |   | 167                    |   |
| Management fees                                                               |   | 553                    |          | 919                    |          | 1,992                  |   | 3,017                  |   |
| General and  administrative expenses                                          |   | 649                    |          | 365                    |          | 1,563                  |   | 1,264                  |   |
| Write-off of  acquisition due diligence costs                                 |   | 149                    |          | -                      |          | 664                    |   | -                      |   |
| Total other  expenses                                                         |   | 1,462                  |          | 6,493                  |          | 4,483                  |   | 10,257                 |   |
| Loss before  cumulative effect of a change in accounting principle            |   | (4,121                 | )             | (7,433                 | )             | (3,905                 | )      | (5,632                 | )      |
| Adoption of  SFAS 133 Accounting Change:  Reduce Cap Agreement cost to market |   | -                      |     | -                      |     | (1,106                 | )      | -                      |   |
| Net loss                                                                      |   | (4,121                 | )             | (7,433                 | )             | (5,011                 | )      | (5,632                 | )      |
| Other  comprehensive income (loss)                                            |   |                   |          |                   |          |                   |   |                   |   |
| Unrealized  gains (losses retained interest interest in securitization)       |   | 3                      |          | -                      |          | 217                    |   | (1,150                 | )      |
| Reclassification  adjustment for loss included in net income                  |   | -                      |          | 3,650                  |          | -                      |   | 3,650                  |   |
| Unrealized  holding gains (losses arising during the period)                  |   | 3                      |          | 3,650                  |          | 217                    |   | 2,500                  |   |
| Comprehensive  (loss)                                                         |   | (4,118                 | )             | (3,783                 | )             | (4,794                 | )      | (3,132                 | )      |
|                                                                          |   |                   |          |                   |          |                   |   |                   |   |
| (Loss) per  share before cumulative effect of accounting change               |   | $                      | (0.52         | )                      | $             | (0.92                  | )      | $                      | (0.49  | ) | $ | (0.70 | ) |
| Net income  (loss per share of common stock-basic and diluted)                |   | $                      | (0.52         | )                      | $             | (0.92                  | )      | $                      | (0.63  | ) | $ | (0.70 | ) |
| Dividends per  share of common stock for the related period                   |   | $                      | -             |                   | $             | 0.20                   |   | $                      | -      |   | $ | 0.60 |   |

 

See accompanying notes to consolidated financial statements.

American Residential Investment Trust, Inc. and Subsidiaries

Consolidated Statements of Cash Flows, unaudited

(inthousands)

 
|                                                                               |   | **For the**            |          | **For the**            |          |
|------------------------------------------------------------------------------------|--------|------------------------|---------------|------------------------|---------------|
|                                                                               |   | **Nine Months Ended**  |          | **Nine Months Ended**  |          |
|                                                                               |   | **September 30, 2001** |          | **September 30, 2000** |          |
| CASH FLOWS FROM OPERATING ACTIVITIES                                               |   |                   |          |                   |          |
| Net (loss)                                                                         |   | $                      | (5,011        | )                      | $             | (5,632 | ) |
| Adjustments to reconcile net income to  net cash provided by operating activities: |   |                   |     |                   |     |
| Amortization of mortgage assets premiums                                           |   | 12,371                 |          | 8,436                  |          |
| Cumulative effect of change in  accounting principle                               |   | 1,106                  |          | -                      |          |
| Amortization of interest rate cap agreements                                       |   | 9                      |          | 778                    |          |
| Amortization of CMO capitalized costs                                              |   | 894                    |          | 783                    |          |
| Amortization of CMO premium                                                        |   | (78                    | )             | (117                   | )             |
| Provision for loan losses                                                          |   | 4,596                  |          | 3,892                  |          |
| Equity in income of American Residential  Holdings, Inc.                           |   | (233                   | )             | (313                   | )             |
| Decrease in deposits to retained  interest in securitization                       |   | 1,877                  |          | 596                    |          |
| Decrease on retained interest in  securitization                                   |   | 4                      |          | 4,702                  |          |
| Loss on sale of real estate owned                                                  |   | 132                    |          | 1,107                  |          |
| Loss on loan sales                                                                 |   | -                      |          | 167                    |          |
| Decrease in accrued interest receivable                                            |   | 5,437                  |          | 4,390                  |          |
| (Increase) decrease in other assets                                                |   | (271                   | )             | 196                    |          |
| Increase in due from affiliate                                                     |   | (93                    | )             | (13                    | )             |
| Decrease in accrued interest payable                                               |   | (184                   | )             | (320                   | )             |
| Increase (decrease) in accrued expenses  and management fees payable               |   | 386                    |          | (226                   | )             |
| Increase in due to affiliate                                                       |   | 339                    |          | 382                    |          |
| Net cash provided by operating  activities                                         |   | 21,281                 |          | 18,808                 |          |
| CASH FLOWS FROM INVESTING ACTIVITIES:                                              |   |                   |          |                   |          |
| Payments for interest rate cap  agreements                                         |   | -                      |          | (554                   | )             |
| Purchase of mortgage loans  held-for-investment                                    |   | -                      |          | (622                   | )             |
| Sale of mortgage loans  held-for-investment                                        |   | -                      |          | 66,525                 |          |
| Eurodollar hedge return                                                            |   | -                      |          | 1,962                  |          |
| Principal payments on bond collateral                                              |   | 292,863                |          | 273,821                |          |
| Proceeds from sale of real estate owned                                            |   | 9,572                  |          | 6,518                  |          |
| Net cash provided by investing  activities                                         |   | 302,435                |          | 347,650                |          |
| CASH FLOWS FROM FINANCING ACTIVITIES:                                              |   |                   |          |                   |          |
| Issuance of CMO bonds                                                              |   | -                      |          | 56,210                 |          |
| Decrease in net borrowings from  short-term debt                                   |   | (4,145                 | )             | (113,666               | )             |
| Dividends paid                                                                     |   | (1,606                 | )             | (5,639                 | )             |
| Payments on long-term debt                                                         |   | (307,969               | )             | (296,252               | )             |
| Increase in capitalized costs                                                      |   | -                      |          | (216                   | )             |
| Purchase of Treasury Stock                                                         |   | (196                   | )             | -                      |          |
| Net cash used in financing activities                                              |   | (313,916               | )             | (359,563               | )             |
| Net increase in cash and cash  equivalents                                         |   | 9,800                  |          | 6,895                  |          |
| Cash and cash equivalents at beginning  of period                                  |   | 14,688                 |          | 8,550                  |          |
| Cash and cash equivalents at end of  period                                        |   | $                      | 24,488        |                   | $             | 15,445 |   |
|                                                                               |   |                   |          |                   |          |
| Supplemental information - interest paid                                           |   | $                      | 29,319        |                   | $             | 46,656 |   |
| Non-cash transactions:                                                             |   |                   |          |                   |          |
| Transfers from mortgage loans  held-for-investment to bond collateral              |   | $                      | -             |                   | $             | 58,279 |   |
| Transfers from bond collateral to real  estate owned                               |   | $                      | 12,684        |                   | $             | 10,722 |   |

 

Seeaccompanying notes to consolidated financial statements.

 

AMERICAN RESIDENTIAL INVESTMENT TRUST, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

 

**Note 1.  Summary of Significant Accounting Policies and Practices**

 

*Basis of FinancialStatement Presentation*

 

The interim financial statements included herein have been prepared byAmerican Residential Investment Trust, Inc., (“AmRIT”or the “Company”) without audit, pursuant tothe rules and regulations of the Securities and Exchange Commission(“SEC”).  Certain information andfootnote disclosures, normally included in financial statements prepared inaccordance with accounting principles generally accepted in the United Statesof America, have been condensed or omitted pursuant to such SEC rules andregulations.  These financial statementsshould be read in conjunction with the audited financial statements and notesthereto included in the Company’s latest Annual Report.  In the opinion of management, alladjustments, including normal recurring adjustments necessary to present fairlythe consolidated financial position of the Company with respect to the interimfinancial statements and the results of the operations for the interim periodended September 30, 2001, have been included. Certain reclassifications may have been made to prior interim periodamounts to conform to the current presentation.  The results of operations for interim periods are not necessarilyindicative of results for the full year. 

 

*NewAccounting Standard*

* *

SFAS 133 establishes accounting and reporting standards for derivativeinstruments, including certain derivative instruments embedded in othercontracts, (collectively referred to as derivatives) and for hedgingactivities. On January 1, 2001, we adopted SFAS 133, and at that time,determined that our interest rate cap agreements did not meet the hedgingrequirements of SFAS 133.  Previously,we had designated these interest rate cap agreements as hedges to assure thatwe maintained a positive gap between the cost of borrowing and the yield on ourmortgage portfolio. With the implementation of SFAS 133, we recorded transitionamounts associated with establishing the fair values of the derivative instrumentson the balance sheet as an increase of $1,106,000 to net loss.  Under old accounting rules, the Companywould have expensed the cost of the interest rate caps over their effectiveperiod.  

 

**Note 2. Income (Loss)  Per Share**

 

The following table illustrates the computation of basic and dilutedincome (loss)  per share (in thousands, except share and per sharedata): 

 
|                                                                                                              |   | **For the**                            |          | **For the**            |          | **For the**            |          | **For the**            |          |
|-------------------------------------------------------------------------------------------------------------------|--------|----------------------------------------|---------------|------------------------|---------------|------------------------|---------------|------------------------|---------------|
|                                                                                                              |   | **Three Months**                       |          | **Three Months**       |          | **Nine Months**        |          | **Nine Months**        |          |
|                                                                                                              |   | **Ended**                              |          | **Ended**              |          | **Ended**              |          | **Ended**              |          |
|                                                                                                              |   | **September 30, 2001**                 |          | **September 30, 2000** |          | **September 30, 2001** |          | **September 30, 2001** |          |
|                                                                                                              |   | **(in thousands, except  share data)** |          |
|                                                                                                              |   |                                   |          |                   |          |                   |          |                   |          |
| Numerator:                                                                                                        |   |                                   |          |                   |          |                   |          |                   |          |
| Numerator for  basic income per share before cumulative effect of accounting change                               |   | $                                      | (4,121        | )                      | $             | (7,433                 | )             | $                      | (3,905        | ) | $ | (5,632 | ) |
| Numerator for  basic income per share net loss                                                                    |   | (4,121                                 | )             | (7,433                 | )             | (5,011                 | )             | (5,632                 | )             |
| Denominator:                                                                                                      |   |                                   |          |                   |          |                   |          |                   |          |
| Denominator for  basic income per share - weighted average number of common shares outstanding  during the period |   | 7,959,900                              |     | 8,055,500              |     | 7,963,274              |     | 8,055,500              |     |
| Incremental  common shares attributable to exercise of outstanding options                                        |   | -                                      |     | -                      |     | -                      |     | -                      |     |
| Denominator for  diluted income per share                                                                         |   | 7,959,900                              |          | 8,055,500              |          | 7,963,274              |          | 8,055,500              |          |
|                                                                                                              |   |                                   |          |                   |          |                   |          |                   |          |
| Loss per share  before cumulative effect of  accounting  change                                              |   | $                                      | (0.52         | )                      | $             | (0.92                  | )             | $                      | (0.49         | ) | $ | (0.70 | ) |
| Basic loss per  share                                                                                             |   | $                                      | (0.52         | )                      | $             | (0.92                  | )             | $                      | (0.63         | ) | $ | (0.70 | ) |
| Diluted loss per  share                                                                                           |   | $                                      | (0.52         | )                      | $             | (0.92                  | )             | $                      | (0.63         | ) | $ | (0.70 | ) |

For the nine months ended September 30, 2001 and 2000 there were1,202,100 and 1,036,100 options, respectively, that were antidilutive and,therefore, not included in the calculations above. 

 

**Note3.  Bond Collateral, Mortgage Loans, net**

 

AmRIT has pledged mortgage loans as collateral in order to securelong-term-debt.  Bond collateralconsists primarily of adjustable-rate, conventional, 30-year mortgage loanssecured by first liens on one to four-family residential properties.  All bond collateral is pledged to securerepayment of the related long-term-debt obligation.  All principal and interest (less servicing and related fees) onthe bond collateral is remitted to a trustee and is available for payment onthe long-term-debt obligation.  Theobligations under the long-term-debt are payable solely from the bondcollateral and are otherwise non-recourse to AmRIT. The components of the bondcollateral at September 30, 2001 and December 31, 2000 are summarized asfollows (dollars in thousands):

 
|                                                           |   | **CMO/REMIC**      |       | **CMO/REMIC**      |       | **CMO**            |       | **CMO**            |       | **CMO/FASIT**      |       |                |       |
|----------------------------------------------------------------|--------|--------------------|------------|--------------------|------------|--------------------|------------|--------------------|------------|--------------------|------------|---------------------|------------|
|                                                           |   | **2000-2**         |       | **1999-A**         |       | **1999-2**         |       | **1999-1**         |       | **1998-1**         |       | **TOTAL**           |       |
|                                                           |   | **Securitization** |       | **Securitization** |       | **Securitization** |       | **Securitization** |       | **Securitization** |       | **Bond Collateral** |       |
| **At September 30, 2001**                                      |   |               | ** ** |               | ** ** |               | ** ** |               | ** ** |               | ** ** |                | ** ** |
| Mortgage loans                                                 |   | $                  | 39,348     |               | $          | 131,519            |       | $                  | 200,353    |               | $          | 80,863              |       | $ | 56,343 |   | $ | 508,426 |   |
| Unamoritized  premium                                          |   | 1,343              |       | 5,220              |       | 8,826              |       | 3,120              |       | 1,873              |       | 20,382              |       |
| Allowance for  loan losses                                     |   | (228               | )          | (1,361             | )          | (1,035             | )          | (1,068             | )          | (742               | )          | (4,434              | )          |
|                                                           |   | $                  | 40,463     |               | $          | 135,378            |       | $                  | 208,144    |               | $          | 82,915              |       | $ | 57,474 |   | $ | 524,374 | ** ** |
|                                                           |   |               | ** ** |               | ** ** |               | ** ** |               | ** ** |               | ** ** |                | ** ** |
| Weighted  average net coupon                                   |   | 9.08               | %          | 10.72              | %          | 9.44               | %          | 9.54               | %          | 11.30              | %          | 9.89                | %          |
| Unamortized  premiums as a ** **percent of Mortgage Loans |   | 3.41               | %          | 3.97               | %          | 4.41               | %          | 3.86               | %          | 3.32               | %          | 4.01                | %          |
|                                                           |   |               | ** ** |               | ** ** |               | ** ** |               | ** ** |               | ** ** |                | ** ** |
| **At December 31, 2000**                                       |   |               | ** ** |               | ** ** |               | ** ** |               | ** ** |               | ** ** |                | ** ** |
| Mortgage loans                                                 |   | $                  | 51,414     |               | $          | 246,198            |       | $                  | 313,392    |               | $          | 116,760             |       | $ | 91,250 |   | $ | 819,014 |   |
| Unamoritized  premium                                          |   | 1,885              |       | 8,877              |       | 12,470             |       | 5,323              |       | 4,213              |       | 32,768              |       |
| Allowance for  loan losses                                     |   | (196               | )          | (621               | )          | (1,399             | )          | (1,413             | )          | (888               | )          | (4,517              | )          |
|                                                           |   | $                  | 53,103     |               | $          | 254,454            |       | $                  | 324,463    |               | $          | 120,670             |       | $ | 94,575 |   | $ | 847,265 | ** ** |
|                                                           |   |               | ** ** |               | ** ** |               | ** ** |               | ** ** |               | ** ** |                | ** ** |
| Weighted  average net coupon                                   |   | 9.09               | %          | 9.48               | %          | 8.98               | %          | 10.08              | %          | 12.08              | %          | 9.63                | %          |
| Unamortized  premiums as a ** **percent of Mortgage Loans |   | 3.67               | %          | 3.61               | %          | 3.98               | %          | 4.56               | %          | 4.62               | %          | 4.00                | %          |

 

The Company maintains an allowance for losses on mortgage loansheld-for-investment and bond collateral, mortgage loans at an amount which itbelieves is sufficient to provide adequate protection against losses in themortgage loan portfolio.   

 

**Note4.  Bond Collateral, Real Estate Owned**

** **

The Company owned 143 properties and 120 properties as of September 30,2001 and December 31, 2000, respectively. Upon transfer of the loans to real estate owned, the Company recorded acorresponding charge against the allowance for loan losses to write-down thereal estate owned to fair value less estimated cost of disposal.  At September 30, 2001 and December 31, 2000real estate owned totaled approximately $8.6 million and $7.7 million, respectively.

**Note 5.  Short-Term Debt**

** **

At September 30, 2001 and December 31, 2000, there were no mortgageloan reverse repurchase agreements outstanding. At September 30, 2001,short-term borrowings outstanding were $938 thousand.  These borrowings were secured by the Company’s interest in REMICSecurities 1999-A Series.  Interest ispayable monthly at LIBOR plus 150 basis points.  The note is due February 26, 2002.

 

**Note 6.  Long-Term Debt, Net**

 

The components of the long-term-debt at September 30, 2001 and December31, 2000, along with selected other information are summarized below (dollarsin thousands):

 
|                                |   | **CMO/REMIC**      |       | **FASCO**          |       | **CMO**            |       | **CMO**            |       | **CMO/FASIT**      |       | **TOTAL**          |       |
|-------------------------------------|--------|--------------------|------------|--------------------|------------|--------------------|------------|--------------------|------------|--------------------|------------|--------------------|------------|
|                                |   | **2000-2**         |       | **1999-A**         |       | **1999-2**         |       | **1999-1**         |       | **1998-1**         |       | **Long-Term Debt** |       |
| **At September 30, 2001**           |   | **Securitization** |       | **Securitization** |       | **Securitization** |       | **Securitization** |       | **Securitization** |       |               |       |
| Long-Term debt                      |   | $                  | 38,738     |               | $          | 125,688            |       | $                  | 194,811    |               | $          | 75,859             |       | $ | 56,516 |   | $ | 491,612 |   |
| Capitalized costs on long-term debt |   | (148               | )          | (12                | )          | (880               | )          | (543               | )          | -                  |       | (1,583             | )          |
| Total Long-Term debt                |   | $                  | 38,590     |               | $          | 125,676            |       | $                  | 193,931    |               | $          | 75,316             |       | $ | 56,516 |   | $ | 490,029 |   |
|                                |   |               |       |               |       |               |       |               |       |               |       |               |       |
| Weighted average financing rates    |   | 4.02               | %          | 3.81               | %          | 4.56               | %          | 3.93               | %          | 4.80               | %          | 4.26               | %          |
|                                |   |               |       |               |       |               |       |               |       |               |       |               |       |
| **At December 31, 2000**            |   |               | ** ** |               | ** ** |               | ** ** |               | ** ** |               | ** ** |               | ** ** |
| Long-Term debt                      |   | $                  | 50,871     |               | $          | 239,617            |       | $                  | 306,274    |               | $          | 113,874            |       | $ | 88,946 |   | $ | 799,582 |   |
| CMO premium, net                    |   | -                  |       | -                  |       | -                  |       | -                  |       | 78                 |       | 78                 |       |
| Capitalized costs on long-term debt |   | (195               | )          | (23                | )          | (1,372             | )          | (785               | )          | (103               | )          | (2,478             | )          |
| Total Long-Term debt                |   | $                  | 50,676     |               | $          | 239,594            |       | $                  | 304,902    |               | $          | 113,089            |       | $ | 88,921 |   | $ | 797,182 |   |
|                                |   |               |       |               |       |               |       |               |       |               |       |               |       |
| Weighted average financing rates    |   | 7.01               | %          | 6.79               | %          | 6.98               | %          | 6.97               | %          | 7.74               | %          | 7.00               | %          |
|                                     |        |                    |            |                    |            |                    |            |                    |            |                    |            |                    |            |  |  |  |  |  |  |  |

 

**Note7.  Potential Acquisition**

 

As of April 16, 2001 the Company signed a letter of intent to purchasea controlling interest in LoanCity.com, a leading provider of loan search softwareand fulfillment tailored to the needs of mortgage brokers and mortgage bankers.As of June 7, 2001 negotiations were terminated. All costs associated with duediligence research for acquiring LoanCity.com have been written-off. Additionalcosts of approximately $129 thousand which were outside of due diligence costshad been invoiced to LoanCity.com for reimbursement but have since been deemeduncollectable and were written off.  

 

**Note8.  Subsequent Events**

 

A taxable subsidiary was formed with the name of American MortgageNetwork, Inc.  The purpose of thissubsidiary is to concentrate on building a mortgage loan origination andmortgage banking capability targeted at mortgage brokers. The product emphasiswill be on loans to high-credit quality borrowers and loans typically referredto as A quality mortgage loans.  Thissubsidiary is expected to be operational and originating mortgage loans byNovember 2001.  

 

The Company has signed aletter of intent to purchase the portfolio management contract of Home AssetManagement Corporation (“HAMCO”), the external REIT manager, and to terminatethe Securities Purchase Agreement dated February 11, 1997 (the "SecuritiesPurchase Agreement").  The purchaseof the contract is valued at $10 million and is expected to be finalized beforeDecember 31, 2001.  In connection withthe buyout of the management agreement, the Company intends to obtain a $5million subordinated credit facility with or guaranteed by TCW/Crescent Mezzanine,L.L.C., the senior lender to HAMCO.

 

ITEM 2.  MANAGEMENT’S DISCUSSION AND ANALYSIS OFFINANCIAL CONDITION AND RESULTS OF OPERATIONS.

 

*The statements contained in this Form 10–Q thatare not purely historical are forward looking statements, including statementsregarding our expectations, hopes, beliefs, intentions, or strategies regardingthe future.  Statements that use thewords “expects”, “will”, “may”, “anticipates”, “goal”, “intends”, “seeks”,“strategy” and derivatives of such words are forward looking statements.  These forward looking statements includestatements regarding:*

 

·        *repurchasingthe Management Contract, terminating  the SecuritiesPurchase Agreement**and entering into arelated $5 Million subordinated credit facility*

·        *the effect on our  interest income, interest expense andoperating performance of changes in interest rates*

·        *diversifyingand re-building our revenue streams*

·        *ouranticipated lack of dividends in 2001*

·        *our belief regardingfuture prepayment rates, future borrowing costs and appropriate premiumamortization levels*

·        *the effectiveness ofour hedge instruments*

·        *our transfer to newexecutive office*

·        *the sufficiency of ourcash reserves*

 

*In addition, we have included a number of statementsregarding the development of our new mortgage loan origination capabilities,all or which are forward looking.  Thesestatements include statements regarding:*

 

·        *ourcreation of operational capabilities to originate and sell A quality mortgageloans*

·        *growthand profit potential from AmNet*

·        *projectedloan origination volumes*

·        *expensesassociated with AmNet*

·        *ourability to finalize debt facilities to fund AmNet loan originations*

·        *ourability to resell our loans on the secondary market*

·        *thelevels of investment that we will need to make in our loan inventory*

·        *achieving profitabilityat the Amnet level*

·        *sources of revenue thatmay be generated by our loan origination operations*

 

*These forward looking statements are based on informationavailable to the Company on the date hereof, and the Company assumes noobligation to update any such forward looking statement. It is important tonote that the Company’s actual results and timing of certain events coulddiffer materially from those in such forward looking statements due to a numberof factors, including but not limited to, general economic conditions, overallinterest rates, the shape of the yield curve, reductions in the value ofretained interest in securitizations, completion of the buyout of itsmanagement contract, termination of the Securities Purchase Agreement, theCompany’s ability to successfully launch its origination subsidiary and theCompany’s ability to obtain the financing necessary to*

*fund its origination business.  Other risk factors that could cause actual results to differmaterially and are set forth under item 2 under the heading “Business Risks.”*

 

**Introduction**

** **

The Company’s operations to date have consisted primarily of thepurchase of Mortgage Assets in the secondary market.  The Company has reduced these operations over the last twenty-onemonths in part to conserve capital that will be necessary to implement a directloan origination strategy.  The Companyhas recently begun to implement a direct loan origination strategy.  It anticipates that it will begin togenerate loans in November 2001 and anticipates that loan origination willbecome an increasingly larger portion of the Company’s operations over the nextseveral years.  

 

**MortgageAsset Investment**  

 

Currently, the Company’s revenue primarily consists of interest incomegenerated from its Mortgage Assets (consisting mainly of mortgage loans securedby residential properties) and its cash and investment balances (collectively,“earning assets”), prepayment penalty income, income generated by equity inincome of American Residential Holdings, Inc. and management fees.  

 

The Company has funded the acquisition of earning assets with both itsequity capital and with borrowings.  Forthat portion of the Company’s earning assets funded with equity capital(“equity-funded lending”), net interest income is derived from the averageyield on earning assets.  Due to theadjustable-rate nature of the majority of its earning assets, the Companyexpects that income from this source will tend to increase (tempered byprepayments) as interest rates rise and will tend to decrease as interest ratesfall, but only after the expiration of any initial fixed teaser periods andthen only periodically once or twice each year.  

 

For that portion of the Company’s earning assets funded with borrowings(“spread lending”), the resulting net interest income is a function of thevolume of spread lending and the difference between the Company’s average yieldon earning assets and the cost of borrowed funds.   Gross income from spread lending will generally decrease followingan increase in short term interest rates due to increases in borrowing costsbut a lag in adjustments to the earning asset yields.  Yields on adjustable rate loans generally adjust based on a shortterm interest rate index, but the majority of the Company’s earning assets areadjustable rate loans which are subject to an initial fixed teaser period oftwo years, and then adjust periodically every six months.  Gross income from spread lending willgenerally increase following a fall in short term interest rates due todecreases in borrowing costs and a lag in downward adjustments to the earningasset yields.  

 

The Company’s primary expenses, beside its borrowing costs, areamortization of loan purchase premiums, provision for loan losses, managementand administrative expenses, losses on sale of real estate owned (“REO”), andinterest rate cap and floor agreement expenses and beginning in the firstquarter of 2001, mark-to-market adjustments. Provision for loan losses represent the Company’s best estimate ofexpenses related to loan defaults.  Losses on the sale of REO represent a shortfall between saleproceeds and the net carrying amount of the property. The carrying valueincludes a reduction (credit provision) to reflect an estimate of net proceedsat time of sale.  Premiums are amortizedusing the interest method over their estimated lives.  Management fees and administrative costs are generally based onthe size of the earning asset portfolio. Interest rate cap and floor  agreement costs, includingmark-to-market adjustments,  are based on the size of theportfolio subject to gap risk and the market prices for interest rate capagreements.  

 

During the past twenty-one months the Company’s asset base has declineddue to the Company’s decision to avoid loan acquisitions if market conditionsdid not meet its investment criteria and to reserve capital for the pursuit ofdirect loan origination strategies. At September 30, 2001, the Company’s cashand cash equivalents totaled approximately $24.5 million, or approximately$3.08 per share of outstanding common stock, on a fully diluted basis. Whilecash balances have increased and leverage has declined, revenues have declinedin direct proportion to the decline in Mortgage Assets from approximately$1,292 million at December 31, 1999 to $858 million at December 31, 2000; $655million at June 30, 2001; and $535 million at September 30, 2001.  Simultaneously, premium amortization andcredit provision expense have increased as a percentage of gross revenue, reflectingincreases in prepayments and delinquencies tied to a favorable refinance marketand normal seasoning of the Mortgage Assets in the Company’s portfolio.  

 

**MortgageLoan Origination**  

 

One of the Company’s primary objectives continues to be diversifyingits income stream.  There are now significantcash reserves and leverage opportunities and the Company intends to deploycapital to augment declining revenues from its current, declining portfolio Theprimary strategy will be to establish a direct loan origination business. Thiswould result in less reliance on spread lending and more upon mortgage loanorigination and sale activities and related fees and gains, net of originationexpenses.  

 

The Company has created a wholly owned taxable REIT Subsidiary,American Mortgage Network, Inc. (“AmNet”). AmNet has hired four experiencedloan production and loan operations employees as of September 30, 2001 andexpects to hire thirty to fifty additional employees during the fourth quarterof 2001, and will continue to expand AmNet in 2002. Two regional productioncenters located in Oregon and California are anticipated to begin originatingloans in November, and additional centers will open in December 2001 andthroughout 2002.  AmNet plans to utilizea dedicated sales force to offer loans produced through approved wholesalemortgage brokers.  Loans meeting theCompany’s underwriting criteria will be approved and funded at AmNet’s regionalunderwriting centers. The Company’s headquarter office will perform variousfunctions through multiple departments including risk management, secondarymarketing, finance, accounting, administration, and informationtechnology.  The Company intends tobegin relocating to new corporate headquarters in the fourth quarter of 2002 inorder to accommodate the space requirements of the Company and AmNet.  

 

All loans produced will subsequently be sold on a servicing-releasedbasis to large secondary market correspondent investors.  The Company plans to obtain warehouse linesof credit to fund and accumulate loans prior to sale to its correspondentinvestors.  These debt facilities willbe furnished by commercial banks and Wall Street firms. It is anticipated thatthe Company will be required to maintain an equity investment in its loaninventory ranging from 1% to 4%.  

 

The primary sources of revenue for AmNet will be gains from the sale ofloans (net of broker premiums), net interest spread income on loans held forsale and broker fees.  The primaryexpenses for AmNet will be related to sales commissions, personnel and occupancy.  

Due to the level of overhead necessary to establish and support theoperations of AmNet, the Company expects AmNet to generate operating losses in2001 and not reach its breakeven point until the third quarter of 2002.  Achieving profitability is dependent upon anumber of factors, and the Company believes that monthly volume will need to bein the range of $250 to $400 million per month in order to reach breakeven atthe AmNet level.  Furthermore, the profitlevel will generally be directly proportional to the volume of loanproduction.  

 

There can be no assurance however that the direct origination businesswill be successful or that the Company will maintain or increase its revenuesand net income level.  

 

The Company is currently subject to restrictive covenants under theSecurities Purchase Agreement that could limit the Company’s ability toimplement its loan origination strategy. The Company has signed a letter ofintent to purchase its management contract with HAMCO.  This transaction will terminate theSecurities Purchase Agreement, including restrictive covenants that mightotherwise prevent the Company from executing its loan origination strategies.However, there can be no assurance that the Company will reach a definitiveagreement and therefore the Company may be limited or prevented fromimplementing a successful loan origination strategy as a result of therestrictive covenants in the Securities Purchase Agreement.  See “Business Risks”.  

 

**Resultsof Operations**  

 

***Nine Month Results*** 

 

For the  nine months ended September 30,2001, the Company generated a loss of approximately $3.9 million and a loss pershare of common stock diluted of $(.49) prior to SFAS 133 accounting treatmentof cap agreements. After adoption of SFAS133, the Company generated a net lossof approximately $5.0 million and a net loss per share of common stock dilutedof $(0.63) compared to the nine months ended September 30, 2000  whenthe Company had a net loss of approximately $5.6 million and a net loss pershare of common stock diluted of $(.70). 

 

Mortgage Asset interest income decreased approximately $22.5 million(or approximately 33.5%) to approximately $44.6 million for the nine monthsended September 30, 2001 from approximately $67.1 million for the nine monthsended September 30, 2000.  This decreasewas primarily due to lower average Mortgage Assets.  The Mortgage Assets were approximately $1.2 billion at December31, 1999 and approximately $858 million at December 31, 2000 which representsapproximately a 26.4% decline. At September 30, 2001 Mortgage Assets were $535million which is a 37.3% decline from December 31, 2000. The Mortgage Assetdecline was the result of high prepayment activity and no portfolioreplenishment. A large majority of loans are adjustable rate mortgages (“ARM”)which had re-set dates in the second quarter of 2001.  Due to a favorable refinance market, the ARM re-set rates aregenerally higher than rates available in the market place.  Furthermore, in many cases, prepaymentpenalties have expired, or have not served as a deterrent to refinances.  

 

Interest expense decreased by approximately $23.4 million toapproximately $30.3 million for the nine months ended September 30, 2001 fromapproximately $53.7 million for the nine months ended September 30, 2000.  Interest expense was lower between the ninemonths ended September 30, 2001 and 2000 due to the lower average amountborrowed and a decrease in borrowing rates. Amounts borrowed have decreased approximately $373.7 million to approximately$490.0 million for the nine months ended September 30, 2001 from approximately$863.7 million at September 30, 2000. A majority of the Company’s borrowingrates are based upon a spread over the one-month London InterBank Offered Rate(“LIBOR”).  One month LIBOR ratesdecreased from approximately 6.62% at September 30, 2000 to approximately 2.63%at September 30, 2001. These decreases have closely corresponded to decreasesin the Federal Funds rate as set by the Federal Open Market Committee headed byAlan Greenspan.  

 

Net interest income decreased approximately $2.6 million toapproximately $2.5 million for the nine months ended September 30, 2001 fromapproximately $5.1 million for the nine months ended September 30, 2000 due tothe decrease in portfolio size as discussed above and an increase in premiumamortization.  

Premium amortization expense represents the amortization of purchasepremiums paid for mortgage loans acquired in excess of the par value of theloans.  Premium amortization expense wasapproximately $12.4  million for the nine monthsended September 30, 2001 and approximately $8.4 million for the nine monthsended September 30, 2000. At September 30, 2000 the unamortized premiums as apercent of mortgage loans was approximately 3.78%.  At September 30, 2001 the unamortized premiums as a percent ofmortgage loans increased to approximately 4. 01%.  At September 30, 2001 a determination was made that the premiumamortization rate was insufficient in light of higher prepayment rates beingincurred. In the third quarter of 2001, the premium amortization rate wasaccelerated and a charge of $2.2 million against unamortized premium was madeto keep the unamortized premium to mortgage asset ratio at December 31, 2000levels. The Company uses a calculation for determining the premium amortizationwhich is based on the interest method. If future prepayment levels exceedprojections used to set the premium amortization calculation, the potentialexists for accelerated premium amortization or additional premium write-downsas a result of under amortized premiums. At September 30, 2001, the total unamortized premiums are approximately$20.4 million, or $2.56 per share of common stock on a fully diluted basis.  See “Business Risks”.  

 

The following chart represents constant prepayment rates (“CPRs”): 

 
|              |   | **As of September 30, 2001** |   | **As of September 30, 2000** |   |
|-------------------|--------|------------------------------|--------|------------------------------|--------|
|              |   | **Three**                    |   | **Six**                      |   | **Life-** |   | **Three** |   | **Six** |   | **Life-** |   |
|              |   | **Months**                   |   | **Months**                   |   | **Time** |   | **Months** |   | **Months** |   | **Time** |   |
| Bond  collateral: |   |                         |   |                         |   |   |   |   |   |   |   |   |   |
| CMO/FASIT  1998-1 |   | 38.3                         | %      | 49.9                         | %      | 44.8 | % | 52.5 | % | 52.8 | % | 44.2 | % |
| CMO 1999-1        |   | 39.2                         | %      | 38.7                         | %      | 34.7 | % | 46.3 | % | 50.1 | % | 32.7 | % |
| CMO 1999-2        |   | 64.3                         | %      | 57.3                         | %      | 29.6 | % | 19.4 | % | 19.0 | % | 15.8 | % |
| FASCO 1999-A      |   | 62.0                         | %      | 64.3                         | %      | 35.0 | % | 25.0 | % | 24.9 | % | 19.9 | % |
| CMO 2000-2        |   | 32.6                         | %      | 31.0                         | %      | 23.0 | % | - |   | - |   | - |   |

 

Net interest income, after provision for loan losses, decreased by $3.3million from approximately $1.2 million for the nine months ended September 30,2000 to a loss of approximately $2.1 million for the nine months endedSeptember 30, 2001. This was due primarily to the decrease in net interestincome and an increase in premium amortization discussed above and higherprovisions for loan losses. Provisions were $704 thousand higher for the ninemonth period ending September 30, 2001 than for the similar period endingSeptember 30, 2000. Provision for loan losses as a percentage of total interestincome has been steadily increasing. For the nine month period ending September30, 2000 the percentage of the provision for loan losses to total interestincome was approximately 5.8% and for the nine month period ending September30, 2001 the percentage has increased to approximately 10.2%. The increases arerelated to seasoning of the mortgage portfolio and expected increases in thenumber of loans in foreclosure which are likely to result in a loss to theCompany.

 

During the nine months ended September 30, 2001, other operating incomedecreased approximately $700 thousand over the nine months ended September 30,2000, due to decreases in prepayment penalty income of approximately $491thousand; decreases in management fee income of approximately $129 thousand anddecreases in equity income of American Residential Holdings, Inc. ofapproximately $80 thousand.  

 

For the nine months ended September 30, 2001, other expenses decreasedapproximately $1.1million from the nine months ended September 30, 2000.  Losses on the sale of real estate owned bythe Company decreased by approximately $843 thousand, from approximately $1.1 millionfor the nine month period ending September 30, 2000 to approximately $264thousand for the nine month period ending September 30, 2001. This decrease isprimarily related to increased provisions at the point Mortgage Assets areconsidered real estate owned. Higher allowances reduce the loss recognized whenowned real estate is sold. Management fees decreased approximately $1.0 millionas a result of a decrease in the Mortgage Asset portfolio from the same periodending September 30, 2000. Management fee expense is based upon a percentage ofthe Mortgage Asset portfolio.  Generaland administrative expenses increased approximately $299 thousand as a resultof increased legal fees (See Part II. Other Information) from the nine monthsended September 30, 2001 to the nine months ended September 30, 2001. Write-offof acquisition due diligence costs of approximately $664 thousand was incurredin the nine months ended September 30, 2001 as discussed above (See Note 7Potential Acquisition).  

For the nine months ended September 30, 2001 the Company wrote off CapAgreement costs of $1.1 million as a result of adoption of SFAS 133 (See Note 1New Accounting Standards). During the nine months ended September 30, 2001overhead expenses associated with AmNet were approximately $147 thousand, andare included in the other expense category discussed above. During the fourthquarter of 2001, personnel and occupancy costs associated with the expansion ofAmNet will increase significantly and will be in the range of  $3.5 to $4.5 million.   These expenses will be partially offset byrevenues from AmNet beginning in December 2001. However, due to the need toestablish foundational operational capabilities ahead of actual loanorigination and sale activities, there are not expected to be significantrevenues generated from AmNet in 2001.  

 

***Three Month Results***  

 

For the  three months ended September30, 2001, the Company generated a net loss of approximately $4.1 million and anet loss per share of $(0.52) compared to the three months ended September 30,2000 when the Company generated a net loss of approximately $7.4 million and anet loss per share of $(0.92).  

 

Mortgage Asset interest income decreased approximately $7.2 million toapproximately $12.6 million for the three months ended September 30, 2001 fromapproximately $19.8 million for the three months ended September 30, 2000.  This decrease was primarily due to loweraverage Mortgage Assets.  MortgageAssets were approximately $925.7 million at September 30, 2000 andapproximately $534.6 million at September 30, 2001 which representsapproximately a 42.3% decline. The Mortgage Asset decline was the result ofhigh prepayment activity and no portfolio replenishment. A large majority ofloans are adjustable rate mortgages (“ARM”) with re-set dates in the secondquarter of 2001.  Due to favorablerefinance market, the ARM re-set rates are generally higher than ratesavailable in the market place. Furthermore, in many cases, prepayment penalties have expired, or havenot served as a deterrent to refinances. 

 

Interest expense decreased by approximately $9.8 million toapproximately $7.1 million for the three months ended September 30, 2001 fromapproximately $16.9 million for the three months ended September 30, 2000. Thisdecrease is attributable to lower borrowings outstanding as well as lowerborrowing rates. A majority of the Company’s borrowing rates are based upon aspread over the one-month London InterBank Offered Rate (“LIBOR”). One monthLIBOR rates decreased from approximately 6.62% at September 30, 2000 toapproximately 2.63% at September 30, 2001. 

 

Net interest income decreased approximately $1.7 million to a loss ofapproximately $1.2  million for the three monthsended September 30, 2001 from approximately $450 thousand for the three monthsended September 30, 2000 due to an increase in net interest spread (discussedin the two preceding paragraphs) and an increase in premium amortization. Thepremium amortization rate for the three months ended June 30, 2001 increasedapproximately $4.4 million from the same period ended September 30, 2000 due tothe use of a level yield amortization method and resulting periodicadjustments. These adjustments were in addition to the $2.2 premiumamortization adjustment discussed above. Premium amortization expenserepresents the amortization of purchase premiums paid for mortgage loansacquired in excess of the par value of the loans.  Premium amortization expense including adjustments, wasapproximately $6.9millionfor the three months ended September 30, 2001 and approximately $2.5 millionfor the three months ended September 30, 2000. 

 

Net interest loss, after provision for loan losses, increased $1.5million from a loss of approximately $1.9 million for the three months endedSeptember 30, 2000, to a loss of approximately $3.4 million for the threemonths ended September 30, 2001, due primarily to the decrease in net interestincome discussed above. Loan loss provisions decreased $220 thousand fromapproximately $2.4 million for the three months ended September 30, 2000 toapproximately $2.2 million for the three months ended September 30, 2001.  

The decreases are related to decreases in the size of the portfolio.However, the provision for loan losses as a percentage of total interest incomehas been steadily increasing. For the three month period ending September 30,2000 the percentage of the provision for loan losses to total interest incomewas approximately 12.1% and for the three month period ending September 30,2001 the percentage has increased to approximately 17.0%. The increases arerelated to seasoning of the mortgage portfolio and expected increases in thenumber of loans in foreclosure which are likely to result in a loss to theCompany.

 

During the three months ended September 30, 2001, other operatingincome decreased $254 thousand as compared to the three months ended September30, 2000, primarily due to decreases in prepayment penalty income ofapproximately $294 thousand and management fee income of approximately $28thousand. Equity income from American Residential Holdings, Inc. increasedapproximately $68 thousand.  

 

For the three months ended September 30, 2001, other expenses decreased$329 thousand as compared to the three months ended September 31, 2000. Thisdecrease was composed of various increases and decreases of items within theother expense category.  Loss on sale ofreal estate owned decreased approximately $229 thousand as a result of higherallowance resulting in less loss recorded at time of sale. Management feesdecreased approximately $366 thousand as a result of a decrease in the averagesize of Mortgage Assets from the same period ending September 30, 2000.Management fee expense is based upon a percentage of the Mortgage Assetportfolio.  General and administrativeexpenses increased $ 284 thousand from the three months ended September 30,2000 to the three months ended September 30, 2001 as a result of attorney fees(See Part II. Other Information).  Awrite-off of acquisition due diligence costs of approximately $149 thousand wasincurred in the three months ended September 30, 2001 as discussed above. Therewere no loan sales in the three-month period ending September 30, 2001 whilethere were losses of approximately $167 thousand for the three period endingSeptember 30, 2000.  

 

During the three months ended September 30, 2001 overhead expensesassociated with AmNet were approximately $128 thousand, and are included in theother expense category discussed above. During the fourth quarter of 2001, personnel and occupancy costsassociated with the expansion of AmNet will increase significantly and be inthe range of  $3.5 to $4.5million.  These expenses will be partially offset byrevenues from AmNet beginning in December 2001.  However, due to need to establish foundational operationalcapabilities ahead of actual loan origination and sale activities, there arenot expected to be significant revenues generated from AmNet in 2001.  

 

**Liquidityand Capital Resources** 

 

During the nine months ended September 30, 2001, net cash provided byoperating activities was approximately $21.3 million.  The difference between net cash provided by operating activitiesand the net loss of approximately $5.0 million was primarily the result of amortizationof Mortgage Asset premiums, a decrease in deposits to retained interest insecuritization, a decrease in accrued interest receivable, and a reduction ofinterest rate cap agreements to market value,  provisionfor loan losses which are non-cash charges. Accrued interest receivable increasedcash flow during the first nine months of 2001 due to the Mortgage Assetportfolio decreasing approximately $323.6 million from December 31, 2000 toSeptember 30, 2001.  The primary uses ofcash that lowered amounts available to fund operations included: an increase inother assets (miscellaneous receivables, furniture and fixtures, prepaidexpenses, leasehold improvements); an increase in equity income of AmericanResidential Holdings, Inc.; a decrease in accrued interest payable; and,payments which increase amounts due from affiliates.  

 

Net cash provided by investing activities for the nine months endedSeptember 30, 2001 was approximately $302.4million. Cash flows from investing activitiesfor the nine months ended September 30, 2001 came from principal payments onbond collateral of approximately $292.9 million and proceeds from the sale ofreal estate owned of approximately $9.6 million.  

 

For the nine months ended September 30, 2001, net cash used infinancing activities was approximately $313.9 million, primarily due topayments on long-term debt of approximately $308.0 million and payments onshort-term debt of approximately $4.1 million. Net cash used in financing was further increased by the payment ofdividends of approximately $1.6 million and the purchase of outstanding commonstock pursuant to the share repurchase program of approximately $196thousand.  

During the nine months ended September 30, 2000, net cash provided byoperating activities was approximately $18.8 million.  The difference between net cash provided by operating activitiesand the net loss of approximately $5.6 million was primarily the result ofamortization of Mortgage Asset premiums, a decrease in retained interest insecuritization, a decrease in accrued interest receivable and provision forloan losses. Amortization of mortgage premium, a decrease in retained interestin securitization and provisions for loan losses are non-cash charges.  Accrued interest receivable increased cashflow during the first nine months of 2001, due to the Mortgage Asset portfoliodecreasing by $323.6 million.  Cashcharges that decreased net cash provided by operating activities primarilyincluded a decrease in accrued interest payable, an increase in equity inincome of American Residential Holdings, Inc, and an increase in accruedexpenses and management fees payable. 

 

Net cash provided by investing activities for the nine-month periodended September 30, 2000, was approximately $347.7 million.  Net cash provided for the nine month periodended September 30, 2000 was positively affected by principal payments ofapproximately $ 273.8 million, the sale of mortgage loans held-for-investmentof approximately $66.5 million, proceeds from the sale of real estate owned ofapproximately $6.5 million and proceeds from a Eurodollar hedge.  Net cash used in investing activities forthe nine months ended September 30, 2000 consisted of the purchase of mortgageloans held-for-investment of approximately $622 thousand and payments forinterest rate cap agreements.  

 

For the nine months ended September 30, 2000, net cash used infinancing activities was approximately $359.6 million, primarily due topayments on long-term debt of approximately $296.3 million and payments onshort-term debt of approximately $113.7 million.  Net cash used in financing was further reduced by the payment ofdividends of approximately $5.6 million. Net cash used in financing activities was positively affected by theissuance of CMO bonds of approximately $56.2 million.  

 

The Company is maintaining a policy, beginning in 2001, of payingdividends based only on estimated taxable net income.  The Company does not expect to pay dividends in 2001 due to a taxloss carry forward.  The Company’spolicy has been to pay 95% of taxable income in the form of dividends in orderto comply with REIT rules.  In light ofthe Company’s decision to enter the mortgage banking marketplace and the needto reinvest earnings and retain capital, continued dividend payments may notfit with the Company’s new growth strategy. Accordingly, the Company is also considering the termination of its REITstatus.  Any definitive decision toterminate the Company’s REIT status will be subject to stockholderapproval.  

 

During the fourth quarter of 2001, the Company expects to beginoriginating loans thorough AmNet and will begin accumulating loans for sale tocorrespondent investors.  As mentionedabove, the Company will incur significantly greater overhead expenses than ithas incurred historically to support the operations of its new operatingsubsidiary, and it will invest cash to acquire and warehouse loans held forsale.  Additionally, during the fourthquarter of 2001, the Company expects to purchase the Management Contract fromHAMCO, expending approximately $10 million plus legal fees. Additionally, theCompany expects to pay up to approximately $750 thousand in the fourth quarterfor investment banking fees related to a review of strategic alternatives.  While the Company expects to obtain a $5million subordinated line of credit from or guaranteed by TCW/CrescentMezzanine, L.L.C., and fund the majority of its loan inventory with fundsprovided from new debt financings, it is expected that a significant amount ofits cash reserves will be utilized during the fourth quarter of 2001 and firstquarter of 2002.  The Companyanticipates that its cash reserves and cash available from anticipated debtfinancings will be sufficient to fund its operations for the foreseeablefuture.  However, if the Company is notable to obtain the debt financing on favorable terms or at all, if the Companydoes not achieve profitability of its loan origination operations asanticipated or if cash generated by the Company’s mortgage asset portfolio isnot at the levels anticipated, the Company may be required to either reduce,delay or suspend the development of its loan origination operations or seekadditional sources of cash through debt or equity financings. Such financingsmay not be available on favorable terms or at all.

 

**BusinessRisks**  

 

*HighLevels of Mortgage Asset Prepayments Will Reduce Operating Income*  

 

The levels of prepayments of Mortgage Assets purchased with a premiumby the Company directly impacts the level of amortization of capitalizedpremiums. The Company uses a calculation for determining the premiumamortization which is based on the interest method. If prepayment levels exceedprojections used for the premium amortization calculation, the potential existsfor impairment write-downs as a result of under amortized premiums.  In the three-month period ending September30, 2001, the Company has experienced higher than expected levels ofprepayments.  As a result, a $2.2million charge was taken.  While theCompany has increased its assumptions used to set premium amortizationschedules going forward, should prepayment levels continue to exceedprojections used for premium amortization calculations, further premium writedown could occur.  

Mortgage Asset prepayment rates generally increase when new MortgageLoan (mortgage loans secured by residential properties) interest rates fallbelow the current interest rates on Mortgage Loans.  Prepayment experience also may be affected by the expiration ofprepayment penalty clauses, the ability of the borrower to obtain a morefavorable Mortgage Loan, geographic location of the property securing theadjustable-rate Mortgage Loans, the assumability of a Mortgage Loan, conditionsin the housing and financial markets and general economic conditions. The levelof prepayments is also subject to the same seasonal influences as theresidential real estate industry with prepayment rates generally being highestin the summer months and lowest in the winter months. The Company experiencedhigh levels of prepayments during 1999 through September 30, 2001 on itsCMO/FASIT and 99-1 segments of its Mortgage Loan portfolio due principally tothe fact that the underlying adjustable rate loans were subject to their firstinitial interest rate adjustment (after being fixed for the first two years),prepayment penalty clauses expired and borrowers were able to secure morefavorable rates by refinancing. Prepayment rates on the 99-A and 99-2 segmentsof the portfolio have increased in 2001 as the majority of loans in thesesegments of the portfolio reached re-set dates causing the loans to be subjectto rate increases.  Additionallyprepayment penalties have expired on a large portion of the loans in thesesegments.  There can be no assurancethat the Company will be able to achieve or maintain lower prepayment rates orthat prepayment penalty income will offset premium amortization expense.Accordingly, the Company's financial condition and results of operations couldbe materially adversely affected.  

 

As of September 30, 2001 approximately 48% of the Mortgage Loanportfolio had prepayment penalty clauses, with a weighted average of 13 monthsremaining before prepayment penalties expire. Prepayment penalty clauses serveto somewhat deter early prepayments and the penalties collected help to offsetthe premium amortization expense. However, prepayment penalty fees may be in an amount which is less thanthe figure which would fully compensate the Company for its remainingcapitalized premiums, and prepayment penalty provisions may expire before theprepayment occurs.  

 

*BorrowerCredit May Decrease Value of Mortgage Assets*

 

During the time the Company holds Mortgage Loans either for investmentor as bond collateral, it is subject to credit risks, including risks ofborrower defaults, bankruptcies and special hazard losses that are not coveredby standard hazard insurance (such as those occurring from earthquakes orfloods).  In the event of a default onany Mortgage Loan held by the Company or mortgages underlying Bond CollateralorRetained Interest inSecuritization, the Company will bear the risk of loss of principal to theextent of any deficiency between the value of the secured property and theamount owing on the Mortgage Loan, less any payments from an insurer orguarantor.  Although the Company hasestablished an allowance for Mortgage Loan losses, there can be no assurancethat any allowance for Mortgage Loan losses which is established will besufficient to offset losses on Mortgage Loans in the future.  

 

Credit risks associated with non-conforming Mortgage Loans, especiallysub-prime Mortgage Loans, may be greater than those associated with MortgageLoans that conform to Fannie Mae (“FNMA”) and Freddie Mac (“FHLMC”)guidelines.  The principal differencebetween sub-prime Mortgage Loans and conforming Mortgage Loans typicallyinclude one or more of the following: worse credit and income histories of themortgagors, higher loan-to-value ratios, reduced or alternative documentationrequired for approval of the mortgagors, different types of properties securingthe Mortgage Loans, higher loan sizes and the mortgagor’s non-owner occupancystatus with respect to the mortgaged property. As a result of these and other factors, the interest rates charged onnon-conforming Mortgage Loans are often higher than those charged forconforming Mortgage Loans.  Thecombination of different underwriting criteria and higher rates of interest maylead to higher delinquency rates and/or credit losses for non-conforming ascompared to conforming Mortgage Loans and thus require high loan lossallowances.  All of the Company’sMortgage Loans at September 30, 2001 were originated as sub-prime MortgageLoans.

 

The recent down turn in the national economy and the resultant adverseimpact on employment rates could adversely affect Mortgage Loan defaults.  Additional credit could become scarce insuch an environment and therefore risk of loss through loan default anddecreased property value could increase. The Company sees no direct correlationbetween the terrorist attacks of September 11, 2001 and an affect on MortgageAssets. However there may be an indirect affect in that the events may haveaccelerated an economic decline which could therefore accelerate mortgagedefaults. There can be no assurance that a severe economic decline would notheavily impact default rates. See Business Risks, *Requirements to MaintainOvercollateralization Accounts* .The Company believes its allowancesfor such occurrences are adequate based on current forecasts but allowances maybe inadequate should economic conditions worsen significantly, causing higherthan expected defaults and property value decreases.  

 

Even assuming that properties secured by the Mortgage Loans held by theCompany provide adequate security for such Mortgage Loans, substantial delayscould be encountered in connection with the foreclosure of defaulted MortgageLoans and with corresponding delays in the receipt of related proceeds by theCompany. State and local statutes and rules may delay or prevent the Company'sforeclosure on or sale of the mortgaged property and typically prevent theCompany from receiving net proceeds sufficient to repay all amounts due on therelated Mortgage Loan.  

 

*TheDirect Origination of Residential Mortgages is Subject to A Variety of BusinessRisks Including Overhead Exposure, Regulatory Oversight, Competition andPossible Interest Rate Exposure Associated With Commitments to Fund Mortgages*  

 

The Company intends to begin originating Mortgage Loans through AmNetduring the fourth quarter of 2001.The business of originating Mortgage Loans issubject to various specific risks to which the Company has not previously beenexposed. The Company expects to incur significantly greater overhead costs thatmay not be offset by origination fees and other revenues. The Company’sincreased expenses will be primarily related to personnel and occupancy. Duringthe time in which expenses from AmNet exceed its revenues, the Company’scurrent cash position will be diminished. Additionally, the Company will berequired to maintain equity balances in future loan warehouse inventories.These equity balances are expected to vary between 1% and 4% and will furtherdecrease the amount of cash available for other operating activities.  

 

The loan origination strategy is dependent upon additional debtfinancing to enable funding and accumulation of mortgage loans.  If the Company is not able to obtain thedebt financing on favorable terms or at all, if the Company does not achieveprofitability of its loan origination operations as anticipated or if cashgenerated by the Company’s mortgage asset portfolio is not at the levelsanticipated, the Company may be required to reduce, delay or suspend thedevelopment of its loan origination operations or seek additional sources ofcash through debt or equity financings. Such financings may not be available onfavorable terms or at all.

 

As part of its Mortgage origination business, the Company will makecommitments to borrowers to fund loans at certain interest rates. During thetime between the borrower commitment and a commitment from an investor to buythe loan, the Company will have exposure to interest rate movements. While theCompany intends to employ various means of hedging this risk, there can be noassurance that it will be successful with its hedging methods. If interestrates increase after borrower commitments and the Company has not effectivelyhedged its loan inventory, the loan inventory will likely diminish in value andcreate losses for the Company. Such losses could have a material adverse effecton the Company’s earnings and liquidity position.  

 

Because of the planned locations for AmNet branch offices, the Companymay experience geographic concentrations of loans in its warehouse inventory,particularly in the Western coastal regions of the country. Concentration inany one geographic area will increase the exposure of the Company's MortgageAssets to the economic and natural hazard risks associated with that area.  

 

With the anticipated Mortgage origination business, the Company willalso face risks associated with non-compliance with various state and federallaws covering mortgage lending practices, disclosures and loan documentationand pressure on profit margins caused by a highly competitive mortgagemarketplace. There can be no such assurance that all of these risks will befully mitigated.  

 

Certain activities required for a loan origination business are limitedor restricted by the Securities Purchase Agreement dated February 11, 1997 (seeDefault under Securities Purchase Agreement; restrictive covenants). TheCompany has signed a letter of intent to purchase the portfolio managementcontract of Home Asset Management Corporation (“HAMCO”), the external REITmanager, and to terminate the Securities Purchase Agreement. The purchase ofthe contract is valued at $10 million and is expected to be finalized beforeDecember 31, 2001. There can be no assurance that the Company will besuccessful in the purchase of the portfolio management contract and thetermination of the Securities Purchase Agreement. Accordingly, the restrictionunder the Securities Purchase Agreement may limit the Company’s ability topursue a loan origination strategy.  Ifthe purchase is not completed, the Company may limit origination activity toportfolio acquisition, purchase pools of Mortgage Assets and/or consideralternative strategies but there can be no assurance that these strategieswould increase revenues.  

 

*Requirementsto Maintain Overcollateralization Accounts*  

 

Due to the underlying loan to collateral values established by theCompany's short-term lenders, the Company may be subject to calls foradditional capital in the event of adverse market conditions. Such conditionsinclude (i) higher than expected levels of prepayments or borrower defaults onMortgage Loans and (ii) sudden increases in interest rates. Although itslong-term financing agreements are non-recourse, net interest income from theBond Collateral can be “trapped” to pay down debt in order for the Company tomaintain its over-collateralization requirements.  As such, the Company would not be able to use this cash flow tofund its loan origination business or pay other expenses.  There can be no assurances that the Companywill not be required to reduce or cease loan origination should it be requiredto divert cash flow to maintain collateral requirements.  

 

*Defaultunder Securities Purchase Agreement; Restrictive Covenants*  

 

In connection with the private financing of the Manager and theCompany, the Company, the Manager and MDC-REIT Holdings (“MDC-REIT”) enteredinto a Securities Purchase Agreement dated as of February 11, 1997 (the"Securities Purchase Agreement") with the institutional investorstherein (the "Investors") providing for, among other things, thepurchase by the Investors of senior secured notes of the Manager due February11, 2002 (the "Notes"). Pursuant to the Securities Purchase Agreement, the Company must complywith various covenants, including covenants restricting the Company'sinvestment, hedging and leverage policies, leverage ratio and indebtednesslevels, and permitted business activities and tax status.  These restrictions may limit the Company'sability to adequately respond to changing market conditions, which could have amaterial adverse effect on the Company's financial condition and results ofoperations.  

 

The Manager’s default on its obligations with respect to the Notes, orfailure of the Company to comply with various restrictive covenants couldresult in default under the Securities Purchase Agreement. The senior noteholders have not issued waivers, however the parties continue to operate underthe terms of the Securities Purchase Agreement and the ManagementAgreement.  In addition, MDC-REIT haspledged 1.6 million shares of its common stock of the Company to secure theManager's obligations under the Securities Purchase Agreement. As a result ofthe defaults under the Securities Purchase Agreement, the pledged shares couldbe transferred to the holders of the Notes, who will then have certain demandregistration rights. In addition, as a result of breaches of certain covenantsunder the Securities Purchase Agreement by the Manager and the Company,additional restrictive covenants also apply to the Company and these additionalrestrictive covenants may further limit the Company’s operations. Also see,“The Direct Origination of Residential Mortgages is Subject to A Variety ofBusiness Risks Including Overhead Exposure, Regulatory Oversight, Competitionand Possible Interest Rate Exposure Associated With Commitments to FundMortgages”.  

 

**Mortgage Assets Pledgedto Secure Long-Term Debt**  

 

Virtually all of the Company's Mortgage Assets at September 30, 2001were pledged as Bond Collateral to secure bonds (long-term debt). These assetsare subject to the terms of the Long-Term Debt agreements and may not beseparately sold or exchanged. While the Company may sell its interests in theBond Collateral subject to the liens and other restrictions of the Long-TermDebt agreements, there is not a liquid market for such encumbered interests anda significant liquidity discount would be applied. As such, the Company wouldexpect to receive less than its book value should it sell its interests in theBond Collateral.  

*Characteristicsof Underlying Property May Decrease Value of Mortgage Loans*  

 

While the Company’s Mortgage Loan portfolio is secured by residentialproperties throughout the United States, 17% of the properties are inCalifornia and the remaining 83% of the properties have the five highestconcentrations in the following states, Michigan 6.65%, Florida 5.81%, Ohio5.15%, Arizona 4.22% and Texas 4.15%. Concentration in any one geographic areawill increase the exposure of the Company's Mortgage Assets to the economic andnatural hazard risks associated with that area.  

 

Certain properties securing Mortgage Loans may be contaminated byhazardous substances resulting in reduced property values. If the Companyforecloses on a defaulted Mortgage Loan collateralized by such property, theCompany may be subject to environmental liabilities regardless of whether theCompany was responsible for the contamination. 

 

The property values and underlying Mortgage Loans may also be affectedby various factors, many of which are beyond the control of the Company, suchas (i) economic conditions affecting real estate values, and (ii) increasedoperating costs, including energy costsand real estate taxes.  

 

*InterestRate Increases May Reduce Income From Spread Lending*  

 

The majority of the Company's Mortgage Loans now have a repricingfrequency of six months or less, while substantially all of the Company'sborrowings have a repricing frequency of one month or less.  Accordingly, the interest rates on theCompany's borrowings may be based on interest rate indices, which are differentfrom, and adjust more rapidly than, the interest rate indices of its relatedMortgage Loans.  Consequently, increasesin short-term interest rates may significantly influence the Company's netinterest income.  While increases inshort-term interest rates will increase the yields on a portion of theCompany's adjustable-rate Mortgage Loans, rising short term rates will alsoincrease the cost of borrowings by the Company. To the extent such costs risemore than the yields on such Mortgage Loans, the Company's net interest incomewill be reduced or a net interest loss may result.  The Company mitigates its ‘gap’ risk by purchasing interest ratecaps, however potential income from these hedges may only partially offset theadverse impact of rising borrowing costs. 

 

Currently, the Company has entered into transactions which seek toprotect only against gap risk associated with significant increases in interestrates.  Accordingly, the Company may notbe adequately protected against risks associated with interest rate increasesand such increases could adversely affect the Company's financial condition andresults of operations.  

 

ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

 

The Company is exposed to a variety of risks including changes ininterest rates which offset the return of its investments and the cost of itsdebt.  At September 30, 2001, there havenot been any material changes in interest rate risk as reported by the Companyin its Annual Report on Form 10-K for the year ended December 31, 2000.   

 

PART II.  OTHER INFORMATION

 

Item. 1.   Legal Proceedings

On January 3, 2001, the Company filed a lawsuit in the CaliforniaSuperior Court in San Diego seeking to recover damages arising from itspurchase of a pool of residential mortgage loans from Lehman Capital, aDivision of Lehman Brothers Holdings, Inc., in late 1997 and early 1998.  In addition to Lehman Capital, the lawsuitnames Long Beach Mortgage Company, Inc. as a defendant.  

The complaint seeks damages for losses arising out of the Company’sagreement to purchase loans from Lehman Capital, which had acquired the loansfrom Long Beach Mortgage Co.  LehmanCapital assigned the loans and its agreement with Long Beach Mortgage Co. tothe Company.  The complaint alleges,among other claims, that Lehman Capital and Long Beach Mortgage Co. breachedtheir obligations to the Company under the purchase agreements for the sale ofthe loans.  The complaint also seeksrecovery from Lehman Capital and Long Beach Mortgage Co. for negligentmisrepresentations made in connection with the sale of the loans.  The complaint alleges damages for the lossesincurred due to Lehman Capital and Long Beach Mortgage Co.’s failure torepurchase a number of these loans, which damages are estimated to exceed$5,000,000, for additional damages including repayment of all, or a portion of,the premium paid to Lehman Capital on such loans and for damages equal to thelost return on the loans, measured as if the loans had performed asrepresented.  

 

The Company believes that its present allowance is adequate to coverfuture losses arising from the matters alleged in the complaint.  Litigation expenses expected to be incurredin prosecuting the lawsuit have not been provided for and will reduce earningsin future periods as the suit progresses. The timing and amount of such expenses are uncertain.  

 

The lawsuit is presently in the discovery phase.  The outcome of litigation is alwaysuncertain and the facts involved in the allegations of the Company’s lawsuitare complex.  No assurance can be giventhat the Company will recover all or any portion of the amounts claimed.  No resolution can be expected to occur foran extended period of time. 

 

Item 2.    Changesin Securities and Use of Proceeds

                    None.

 

Item 3.    DefaultsUpon Senior Securities

                    Notapplicable.  

 

Item 4.    Submissionof Matters to a Vote of Security Holders

                    None

 

Item 5.    Other Information

                    None.

 

Item 6.    Exhibitsand Reports on Form 8-K:

 

                (a)           Exhibits

 
| *3.1  |   | Articles of Amendment and Restatement of the  Registrant                                                                |
|-------|--------|-------------------------------------------------------------------------------------------------------------------------|
| *3.2  |   | Amended and Restated Bylaws of the Registrant                                                                           |
| **4.1 |   | Rights Agreement dated February 2, 1999 by and  between the Company and American Stock Transfer Company as Rights Agent |
| *     |   | Incorporated by  reference to Registration Statement on Form S-11 (File No. 333-33679)                                  |
| **    |   | Incorporated by  reference to Form 8-K filed on February 17, 1999 (File No. 001-13485)                                  |

 

                (b)           Reports on Form 8-K

                                None.  

SIGNATURES

 

Pursuant to the requirements of the Securities Exchange Act of 1934,the registrant has duly caused this report to be signed on its behalf by theundersigned thereunto duly authorized   

 

 
|                            |   | AMERICAN RESIDENTIAL  INVESTMENT TRUST, INC. |
|---------------------------------|--------|----------------------------------------------|
|                            |   |                                         |
|                            |   |                                         |
| Dated:   November 13, 2001 |   | By:                                          | /s/ Judith A. Berry |
|                            |   |                                         | Judith A. Berry, |
|                            |   |                                         | Executive Vice President |
|                            |   |                                         | Chief Financial Officer |