**UNITED STATES SECURITIES ANDEXCHANGE COMMISSION**

**Washington, D. C.20549**

 

**FORM 10-Q**

 

| **(mark one)**                        |
|---------------------------------------|
| **ý**                            |   | **QUARTERLY  REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934** |
|                                  |   |   |
|                                  |   | **For the quarter  ended:           JUNE  30, 2003** |
|                                  |   |   |
| **OR**                                |
|                                  |   |   |
| **o**                                 |   | **TRANSITION  REPORT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934** |
|                                  |   |   |
|                                  |   | **For the transition period from        to** |
|                                  |   |   |
| **Commission File Number: 001-13637** |

 

**APEX MORTGAGE CAPITAL, INC.**

(Exact name of Registrant as specified in its Charter)

 

| **Maryland**                                                                |   | **95-4650863**                           |
|-----------------------------------------------------------------------------|--------|------------------------------------------|
| (State or other jurisdiction of incorporation or  organization)             |   | (I.R.S. Employer Identification  Number) |
|                                                                        |   |                                     |
| **865 South Figueroa Street, Suite 1800  Los Angeles, California**          |   | **90017**                                |
| (Address of principal executive offices)                                    |   | (Zip Code)                               |
|                                                                        |   |                                     |
| Registrant’s telephone number, including area code **(213)  244-0000** |
|                                                                        |   |                                     |
| Securities registered pursuant to Section 12(b) of the Act:                 |

 

| **Title of  Each Class**      |   | **Name of  Exchange Which Registered** |
|-------------------------------|--------|----------------------------------------|
| Common Stock ($.01 par value) |   | American Stock Exchange                |

 

Indicate by check mark whetherthe Registrant (1) has filed all reports required to be filed by Section 13 or15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (orfor such shorter period that the Registrant was required to file such reports),and (2) has been subject to such filing requirements for the past 90 days.

Yes ý    No o

 

Indicate by check mark whetherthe Registrant is an accelerated filer (as defined in Rule 12b-2 of theExchange Act).

Yes ý    No o

 

At July 28, 2003, the aggregatemarket value of the voting stock held by non-affiliates was $175,559,160 basedon the closing price of the common stock on the American Stock Exchange.

 

Number of shares of our commonstock outstanding at July 28, 2003: 29,857,000

 

 

----

 

**APEX MORTGAGE CAPITAL, INC.**

**FORM 10-Q**

 

**INDEX**

 
| **PART I.**    | **FINANCIAL INFORMATION**                                                                   |
|----------------|---------------------------------------------------------------------------------------------|
|           |                                                                                        |
| ITEM 1.        | FINANCIAL  STATEMENTS                                                                       |
|           |                                                                                        |
|           |                                                                                        | BALANCE  SHEETS AT JUNE 30, 2003 AND DECEMBER 31, 2002 (UNAUDITED) |
|           |                                                                                        |   |
|           |                                                                                        | STATEMENTS OF OPERATIONS FOR THE THREE MONTHS AND SIX MONTHS  ENDED JUNE 30, 2003 AND JUNE 30, 2002 (UNAUDITED) |
|           |                                                                                        |   |
|           |                                                                                        | STATEMENT OF STOCKHOLDERS’ EQUITY FOR THE  SIX MONTHS ENDED  JUNE 30, 2003 (UNAUDITED) |
|           |                                                                                        |   |
|           |                                                                                        | STATEMENTS OF CASH FLOWS FOR THE SIX MONTHS ENDED  JUNE 30, 2003 AND JUNE 30, 2002 (UNAUDITED) |
|           |                                                                                        |   |
|           |                                                                                        | NOTES TO FINANCIAL STATEMENTS (UNAUDITED) |
|           |                                                                                        |
| ITEM 2.        | MANAGEMENT’S DISCUSSION AND ANALYSIS OF  FINANCIAL CONDITION AND RESULTS OF OPERATIONS |
|           |                                                                                        |
| ITEM 3.        | QUANTITATIVE AND QUALITATIVE DISCLOSURES  ABOUT MARKET RISK                                 |
|           |                                                                                        |
| ITEM 4.        | CONTROLS AND PROCEDURES                                                                     |
|           |                                                                                        |
| **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                                                            |
|           |                                                                                        |
| SIGNATURES     |
|           |                                                                                        |
| EXHIBIT  INDEX |
|           |                                                                                        |
| CERTIFICATIONS |

 

1

----

 

**Apex Mortgage Capital, Inc.**

 

**BalanceSheets**

**(Unaudited)**

 
|                                                                                                                                               |   | **June 30, 2003** |          | **December 31, 2002** |   |
|----------------------------------------------------------------------------------------------------------------------------------------------------|--------|-------------------|---------------|-----------------------|--------|
| **Assets**                                                                                                                                         |   |              |          |                  |   |
|                                                                                                                                               |   |              |          |                  |   |
| Cash and cash equivalents                                                                                                                          |   | $                 | 2,081,000     |                  | $      | 1,456,000 |   |
| Fixed income trading securities, at fair value                                                                                                     |   | 39,207,000        |          | 606,014,000           |   |
| Fixed income securities available-for-sale, at fair value                                                                                          |   | 2,493,028,000     |          | 1,818,893,000         |   |
| Equity securities available-for-sale, at fair value                                                                                                |   | 4,364,000         |          | 4,168,000             |   |
| Accrued interest receivable                                                                                                                        |   | 11,672,000        |          | 12,012,000            |   |
| Principal payments receivable                                                                                                                      |   | —            |          | 248,000               |   |
| Other assets                                                                                                                                       |   | 311,000           |          | 2,587,000             |   |
|                                                                                                                                               |   |              |          |                  |   |
|                                                                                                                                               |   | $                 | 2,550,663,000 |                  | $      | 2,445,378,000 |   |
|                                                                                                                                               |   |              |          |                  |   |
| **Liabilities and Stockholders’ Equity**                                                                                                      |   |              |          |                  |   |
|                                                                                                                                               |   |              |          |                  |   |
| Liabilities                                                                                                                                        |   |              |          |                  |   |
|                                                                                                                                               |   |              |          |                  |   |
| Reverse repurchase agreements                                                                                                                      |   | $                 | 2,220,593,000 |                  | $      | 2,112,444,000 |   |
| Accrued interest payable                                                                                                                           |   | 2,399,000         |          | 2,444,000             |   |
| Dividend payable                                                                                                                                   |   | 5,103,000         |          | 13,509,000            |   |
| Interest rate swaps, at fair value                                                                                                                 |   | 137,233,000       |          | 120,098,000           |   |
| Accrued expenses and other liabilities                                                                                                             |   | 3,211,000         |          | 2,224,000             |   |
|                                                                                                                                               |   |              |          |                  |   |
|                                                                                                                                               |   | 2,368,539,000     |          | 2,250,719,000         |   |
|                                                                                                                                               |   |              |          |                  |   |
| Commitments and contingencies (Note 6)                                                                                                             |   |              |          |                  |   |
|                                                                                                                                               |   |              |          |                  |   |
| Stockholders’ Equity                                                                                                                          |   |              |          |                  |   |
|                                                                                                                                               |   |              |          |                  |   |
| Preferred stock, par value $0.01 per share; 50,000,000 shares  authorized; no shares outstanding                                                   |   | —            |          | —                |   |
| Common stock, par value $0.01 per share; 100,000,000 shares  authorized; 29,857,000 shares outstanding as of June 30, 2003 and December  31, 2002. |   | 299,000           |          | 299,000               |   |
| Additional paid-in-capital                                                                                                                         |   | 331,514,000       |          | 331,499,000           |   |
| Accumulated other comprehensive loss                                                                                                               |   | (118,581,000      | )             | (95,880,000           | )      |
| Accumulated deficit                                                                                                                                |   | (31,108,000       | )             | (41,259,000           | )      |
|                                                                                                                                               |   |              |          |                  |   |
|                                                                                                                                               |   | 182,124,000       |          | 194,659,000           |   |
|                                                                                                                                               |   | $                 | 2,550,663,000 |                  | $      | 2,445,378,000 |   |

 

See accompanying notes to financialstatements

 

2

----

 

**Apex Mortgage Capital, Inc.**

 

**Statementsof Operations**

**(Unaudited)**

 
|                                                                            |   | **Three Months  Ended  June 30, 2003** |       | **Three Months  Ended  June 30, 2002** |   | **Six Months  Ended  June 30, 2003** |   | **Six Months  Ended  June 30, 2002** |       |
|---------------------------------------------------------------------------------|--------|----------------------------------------|------------|----------------------------------------|--------|--------------------------------------|--------|--------------------------------------|------------|
|                                                                            |   |                                   |       |                                   |   |                                 |   |                                 |       |
| **Interest Income:**                                                            |   |                                   |       |                                   |   |                                 |   |                                 |       |
| Fixed income securities                                                         |   | $                                      | 27,490,000 |                                   | $      | 45,252,000                           |   | $                                    | 57,597,000 |   | $ | 72,506,000 |   |
| Cash and cash equivalents                                                       |   | 38,000                                 |       | 18,000                                 |   | 48,000                               |   | 73,000                               |       |
|                                                                            |   | 27,528,000                             |       | 45,270,000                             |   | 57,645,000                           |   | 72,579,000                           |       |
|                                                                            |   |                                   |       |                                   |   |                                 |   |                                 |       |
| **Interest Expense**                                                            |   | 23,023,000                             |       | 21,390,000                             |   | 45,702,000                           |   | 34,095,000                           |       |
|                                                                            |   |                                   |       |                                   |   |                                 |   |                                 |       |
| **Net Interest Income**                                                         |   | 4,505,000                              |       | 23,880,000                             |   | 11,943,000                           |   | 38,484,000                           |       |
|                                                                            |   |                                   |       |                                   |   |                                 |   |                                 |       |
| **Dividend Income**                                                             |   | 101,000                                |       | 109,000                                |   | 202,000                              |   | 235,000                              |       |
|                                                                            |   |                                   |       |                                   |   |                                 |   |                                 |       |
| **Net Interest and Dividend Income**                                            |   | 4,606,000                              |       | 23,989,000                             |   | 12,145,000                           |   | 38,719,000                           |       |
|                                                                            |   |                                   |       |                                   |   |                                 |   |                                 |       |
| **General and Administrative Expenses:**                                        |   |                                   |       |                                   |   |                                 |   |                                 |       |
| Management fee                                                                  |   | 560,000                                |       | 503,000                                |   | 1,105,000                            |   | 822,000                              |       |
| Incentive fee                                                                   |   | 628,000                                |       | (1,213,000                             | )      | 1,286,000                            |   | 1,437,000                            |       |
| Insurance                                                                       |   | 164,000                                |       | 83,000                                 |   | 327,000                              |   | 167,000                              |       |
| Professional fees                                                               |   | 58,000                                 |       | 72,000                                 |   | 96,000                               |   | 99,000                               |       |
| Directors’ fees                                                            |   | 24,000                                 |       | 22,000                                 |   | 44,000                               |   | 44,000                               |       |
| Non-employee stock options                                                      |   | 7,000                                  |       | 23,000                                 |   | 15,000                               |   | 50,000                               |       |
| Other                                                                           |   | 334,000                                |       | 230,000                                |   | 590,000                              |   | 398,000                              |       |
|                                                                            |   | 1,775,000                              |       | (280,000                               | )      | 3,463,000                            |   | 3,017,000                            |       |
|                                                                            |   |                                   |       |                                   |   |                                 |   |                                 |       |
| **Net Interest and Dividend Income After General and  Administrative Expenses** |   | 2,831,000                              |       | 24,269,000                             |   | 8,682,000                            |   | 35,702,000                           |       |
|                                                                            |   |                                   |       |                                   |   |                                 |   |                                 |       |
| **Net Gain (Loss) from Investment and Derivative  Activities**                  |   | 13,630,000                             |       | (8,748,000                             | )      | 14,078,000                           |   | (10,453,000                          | )          |
|                                                                            |   |                                   |       |                                   |   |                                 |   |                                 |       |
| **Net Income**                                                                  |   | $                                      | 16,461,000 |                                   | $      | 15,521,000                           |   | $                                    | 22,760,000 |   | $ | 25,249,000 |   |
|                                                                            |   |                                   |       |                                   |   |                                 |   |                                 |       |
| **Net Income Per Share:**                                                       |   |                                   |       |                                   |   |                                 |   |                                 |       |
| Basic                                                                           |   | $                                      | 0.55       |                                   | $      | 0.58                                 |   | $                                    | 0.76       |   | $ | 1.12 |   |
| Diluted                                                                         |   | $                                      | 0.55       |                                   | $      | 0.58                                 |   | $                                    | 0.76       |   | $ | 1.12 |   |
|                                                                            |   |                                   |       |                                   |   |                                 |   |                                 |       |
| **Weighted Average Number of Shares Outstanding:**                              |   |                                   |       |                                   |   |                                 |   |                                 |       |
| Basic                                                                           |   | 29,857,000                             |       | 26,628,000                             |   | 29,857,000                           |   | 22,495,000                           |       |
| Diluted                                                                         |   | 29,857,000                             |       | 26,796,000                             |   | 29,857,000                           |   | 22,636,000                           |       |
|                                                                            |   |                                   |       |                                   |   |                                 |   |                                 |       |
| **Dividends Declared Per Share:**                                               |   | $                                      | 0.17       |                                   | $      | 0.50                                 |   | $                                    | 0.42       |   | $ | 1.00 |   |

 

See accompanying notes to financial statements

 

3

----

 

**Apex Mortgage Capital, Inc.**

 

**Statementof Stockholders’ Equity**

**(Unaudited)**

 
|                                                                                        |   |              |   |        |    |              |   | **Accumulated**    |   |                   |         |              |   |                 |       |
|---------------------------------------------------------------------------------------------|--------|-------------------|--------|-------------|---------|-------------------|--------|--------------------|--------|------------------------|--------------|-------------------|--------|----------------------|------------|
|                                                                                        |   |              |   |        |    | **Additional**    |   | **Other**          |   |                   |         | **Total**         |   |                 |       |
|                                                                                        |   | **Common  Stock** |   | **Paid-in** |    | **Comprehensive** |   | **Accumulated**    |   | **Stockholders’** |         | **Comprehensive** |   |
|                                                                                        |   | **Shares**        |   | **Amount**  |    | **Capital**       |   | **Income  (Loss)** |   | **Deficit**            |         | **Equity**        |   | **Income /  (Loss)** |       |
|                                                                                        |   |              |   |        |    |              |   |               |   |                   |         |              |   |                 |       |
| **Balance, January 1, 2003**                                                                |   | 29,857,000        |   | $           | 299,000 |              | $      | 331,499,000        |   | $                      | (95,880,000  | )                 | $      | (41,259,000          | )          | $ | 194,659,000 |   |   |   |
|                                                                                        |   |              |   |        |    |              |   |               |   |                   |         |              |   |                 |       |
| **Amortization of non-employees stock options**                                             |   | —            |   | —      |    | 15,000            |   | —             |   | —                 |         | 15,000            |   |                 |       |
|                                                                                        |   |              |   |        |    |              |   |               |   |                   |         |              |   |                 |       |
| **Net income**                                                                              |   | —            |   | —      |    | —            |   | —             |   | 22,760,000             |         | 22,760,000        |   | $                    | 22,760,000 |   |
|                                                                                        |   |              |   |        |    |              |   |               |   |                   |         |              |   |                 |       |
| **Other comprehensive income (loss):**                                                      |   |              |   |        |    |              |   |               |   |                   |         |              |   |                 |       |
| Net change in unrealized gains (losses) on available-for-sale  securities                   |   | —            |   | —      |    | —            |   | (9,334,000         | )      | —                 |         | (9,334,000        | )      | (9,334,000           | )          |
|                                                                                        |   |              |   |        |    |              |   |               |   |                   |         |              |   |                 |       |
| Net change in deferred gain (loss) on terminated interest rate swaps                        |   | —            |   | —      |    | —            |   | 3,768,000          |   | —                 |         | 3,768,000         |   | 3,768,000            |       |
|                                                                                        |   |              |   |        |    |              |   |               |   |                   |         |              |   |                 |       |
| Net change in unrealized Gain (loss) on interest rate swaps  classified as cash flow hedges |   | —            |   | —      |    | —            |   | (17,135,000        | )      | —                 |         | (17,135,000       | )      | (17,135,000          | )          |
|                                                                                        |   |              |   |        |    |              |   |               |   |                   |         |              |   |                 |       |
| **Comprehensive income (loss)**                                                             |   |              |   |        |    |              |   |               |   |                   |         |              |   | $                    | 59,000     |   |
|                                                                                        |   |              |   |        |    |              |   |               |   |                   |         |              |   |                 |       |
| **Dividends declared**                                                                      |   | —            |   | —      |    | —            |   | —             |   | (12,609,000            | )            | (12,609,000       | )      |                 |       |
|                                                                                        |   |              |   |        |    |              |   |               |   |                   |         |              |   |                 |       |
| **Balance, June 30, 2003**                                                                  |   | 29,857,000        |   | $           | 299,000 |              | $      | 331,514,000        |   | $                      | (118,581,000 | )                 | $      | (31,108,000          | )          | $ | 182,124,000 |   |   |   |
|                                                                                             |        |                   |        |             |         |                   |        |                    |        |                        |              |                   |        |                      |            |  |  |  |  |  |  |  |

 

See accompanying notes to financialstatements

 

The following is a presentation of thechanges in accumulated other comprehensive income (loss) for the six monthsended June 30, 2003.

 
|                                                                                        |   | **Six Months  Ended  June 30, 2003** |        |
|---------------------------------------------------------------------------------------------|--------|--------------------------------------|-------------|
|                                                                                        |   |                                 |        |
| *Unrealized Gains (Losses) on Available-for-Sale  Securities:*                              |   |                                 |        |
|                                                                                        |   |                                 |        |
| Change in unrealized gains (losses) during the period                                       |   | $                                    | 5,753,000   |   |
|                                                                                        |   |                                 |        |
| Realized (gains) losses on sale of securities during the period                             |   | (15,087,000                          | )           |
|                                                                                        |   |                                 |        |
| Net change in unrealized gains (losses) on available-for-sale  securities                   |   | $                                    | (9,334,000  | ) |
|                                                                                        |   |                                 |        |
| *Deferred Gain (Loss) on Terminated Interest Rate  Swaps:*                                  |   |                                 |        |
|                                                                                        |   |                                 |        |
| Reclassification for amortization into interest expense                                     |   | $                                    | 3,768,000   |   |
|                                                                                        |   |                                 |        |
| Net change in deferred gain (loss) on terminated interest rate swaps                        |   | $                                    | 3,768,000   |   |
|                                                                                        |   |                                 |        |
| *Unrealized Gain (Loss) on Interest Rate Swaps  Classified as Cash Flow Hedges:*            |   |                                 |        |
|                                                                                        |   |                                 |        |
| Change in unrealized gain (loss) during the period                                          |   | $                                    | (44,922,000 | ) |
|                                                                                        |   |                                 |        |
| Reclassification for adjustments to interest expense                                        |   | 27,787,000                           |        |
|                                                                                        |   |                                 |        |
| Net change in unrealized gain (loss) on interest rate swaps  classified as cash flow hedges |   | $                                    | (17,135,000 | ) |

 

4

----

 

**Apex Mortgage Capital, Inc.**

 

**Statementsof Cash Flows**

**(Unaudited)**

 
|                                                                                         |   | **Six Months Ended  June 30, 2003** |       | **Six Months Ended  June 30, 2002** | ** ** |
|----------------------------------------------------------------------------------------------|--------|-------------------------------------|------------|-------------------------------------|------------|
|                                                                                         |   |                                |       |                                |       |
| **Operating Activities:**                                                                    |   |                                |       |                                |       |
| Net income                                                                                   |   | $                                   | 22,760,000 |                                | $          | 25,249,000 |   |
| Adjustments to reconcile net income to net cash provided by (used in)  operating activities: |   |                                |       |                                |       |
| Net amortization                                                                             |   | 14,333,000                          |       | 14,000                              |       |
| Net (gain) loss from investment and derivative activities                                    |   | (14,078,000                         | )          | 10,453,000                          |       |
| Trading activities                                                                           |   | 563,641,000                         |       | (765,132,000                        | )          |
| Change in assets and liabilities:                                                            |   |                                |       |                                |       |
| Accrued interest receivable                                                                  |   | 340,000                             |       | (10,260,000                         | )          |
| Other assets                                                                                 |   | 2,276,000                           |       | 139,000                             |       |
| Accrued interest payable                                                                     |   | (45,000                             | )          | 1,907,000                           |       |
| Accrued expenses and other liabilities                                                       |   | 987,000                             |       | 2,178,000                           |       |
| Net cash provided by (used in) operating activities                                          |   | 590,214,000                         |       | (735,452,000                        | )          |
|                                                                                         |   |                                |       |                                |       |
| **Investing Activities:**                                                                    |   |                                |       |                                |       |
| Purchase of fixed income securities available-for-sale                                       |   | (1,842,155,000                      | )          | (1,345,807,000                      | )          |
| Proceeds from sales of fixed income securities available-for-sale                            |   | 747,570,000                         |       | 104,153,000                         |       |
| Proceeds from sales of equity securities                                                     |   | —                              |       | 1,695,000                           |       |
| Principal payments on fixed income securities available-for-sale                             |   | 417,862,000                         |       | 44,394,000                          |       |
| Net cash used in investing activities                                                        |   | (676,723,000                        | )          | (1,195,565,000                      | )          |
|                                                                                         |   |                                |       |                                |       |
| **Financing Activities:**                                                                    |   |                                |       |                                |       |
| Net change in reverse repurchase agreements                                                  |   | 108,149,000                         |       | 1,813,454,000                       |       |
| Dividend distributions                                                                       |   | (21,015,000                         | )          | (25,013,000                         | )          |
| Issuance of common stock                                                                     |   |                                |       | 155,856,000                         |       |
| Net cash provided by financing activities                                                    |   | 87,134,000                          |       | 1,944,297,000                       |       |
|                                                                                         |   |                                |       |                                |       |
| **Net Increase in Cash and Cash Equivalents**                                                |   | 625,000                             |       | 13,280,000                          |       |
|                                                                                         |   |                                |       |                                |       |
| **Cash and Cash Equivalents at Beginning of Period**                                         |   | 1,456,000                           |       | 4,330,000                           |       |
|                                                                                         |   |                                |       |                                |       |
| **Cash and Cash Equivalents at End of Period**                                               |   | $                                   | 2,081,000  |                                | $          | 17,610,000 |   |
|                                                                                         |   |                                |       |                                |       |
| **Supplemental Disclosure of Cash Flow Information:**                                        |   |                                |       |                                |       |
| Cash paid for interest                                                                       |   | $                                   | 41,979,000 |                                | $          | 32,188,000 |   |
| Noncash Investing and Financing Activities:                                                  |   |                                |       |                                |       |
| Change in accumulated other comprehensive loss                                               |   | (22,701,000                         | )          | (10,284,000                         | )          |
| Change in receivable for unsettled securities                                                |   | —                              |       | 4,026,000                           |       |
| Change in dividends declared, not yet paid                                                   |   | (12,609,000                         | )          | 2,415,000                           |       |

 

See accompanying notes to financialstatements

 

5

----

 

**Apex Mortgage Capital, Inc.**

**Notesto Financial Statements**

**(Unaudited)**

 

**Note1 - The Company**

 

Apex MortgageCapital, Inc., or the “Company,” was incorporated in Maryland on September 15,1997. The Company commenced its operations of acquiring and managing aportfolio of mortgage related assets on December 9, 1997, upon receipt of thenet proceeds from the initial public offering of the Company’s common stock.The Company uses its equity capital and borrowed funds to seek to generateincome based on the difference between the yield on its investments and thecost of its borrowings.  The Company isstructured for tax purposes as a real estate investment trust, or REIT, underthe Internal Revenue Code of 1986, as amended, or the “Code.”

 

The Companyentered into a management agreement, or the “Management Agreement,” as amended,with TCW Investment Management Company or the “Manager,” a wholly ownedsubsidiary of The TCW Group, Inc., pursuant to which the Manager manages theCompany’s day-to-day operations, subject to the direction and oversight of theCompany’s Board of Directors.  TheManagement Agreement was initially executed on December 9, 1997.

 

**Note2 - Summary of Significant Accounting Policies and Certain Risks**

 

*Overview*

 

Certaininformation and note disclosures normally included in annual financialstatements prepared in accordance with accounting principles generally acceptedin the United States of America, or “GAAP,” have been condensed or omittedpursuant to the rules and regulations of the Securities and ExchangeCommission, or the “SEC,” for interim financial statements. The unaudited financialstatements should be read in conjunction with the audited financial statementsand notes thereto included in the Company’s Annual Report on Form 10-K for theyear ended December 31, 2002. The accounting policies used in the preparationof these interim financial statements were consistent with those used in thepreparation of the financial statements for the year ended December 31, 2002,unless otherwise noted. Certain reclassifications may have been made to theprior period financial statements to conform to the current periodpresentation.

 

*Derivatives and Hedging Transactions*

 

The Companymay enter into interest rate swaps and other financial instruments in order tomitigate the impact of rising interest rates on the cost of its short-termborrowings and market value of its portfolio securities.  The Company may also enter into forwardcontracts to sell U.S. Treasury securities and other financial instruments inorder to mitigate the negative impact of rising interest rates on the fairvalue of its fixed income securities.  Such financial instruments are generally referred to as “derivatives.”

 

The Companyadopted SFAS No. 133, *Accounting for Derivative Instruments and HedgingActivities*, as amended, on January 1, 2001. Under SFAS No. 133, allderivatives are recorded at fair value and presented as either assets orliabilities on the Company’s balance sheets.

 

Prior toadopting SFAS No. 133, the Company accounted for changes in fair values of theforward contracts through adjustments to acummulated other comprehensiveincome. Following adoption of SFAS No. 133, the Company recognizes changes infair values of forward contracts as a component of net gain (loss) oninvestment and derivative activities in the statements of operations.

 

6

----

 

At June 30,2003 and December 31, 2002, the Company’s outstanding interest rate swapsqualify as cash flow hedges and are deemed to be fully effective as hedgesunder SFAS No. 133.  Changes in fairvalues of such swaps are not reflected in current earnings, but are reflectedin other comprehensive income. Currently, fair value of the interest rate swaps is determined by theaverage of values obtained from two market analytics systems, i.e., The YieldBook and Bloomberg.  If the Company wereto change current or anticipated borrowings so that they were no longerappropriately matched to the swap agreements, the agreements might no longerqualify for hedge accounting treatment. In that case, changes in their fairvalues would affect net income.

 

*Stock-based Compensation*

 

The Companygrants stock options to Directors and to certain directors, officers andemployees of the Manager. Options granted to Directors of the Company areaccounted for using the intrinsic-value method, and generally no compensationexpense is recognized in the statements of operations for such options. Optionsgranted to persons other than Directors (i.e., to non-employees) are accountedfor using the fair value method; such stock options are measured at their fairvalue when they are granted and are recognized as general and administrativeexpense during the periods when the options are vested and the related servicesare performed.  During the six monthsended June 30, 2003 and June 30, 2002, the Company did not issue any stockoptions. The effects of previously issued and unvested stock options to theCompany’s directors did not have an impact for either of the quarters presentedbelow.

 

The followingtable represents the pro forma effects on net income (loss) and net income(loss) per share if compensation costs related to the director stock optionswere measured using the fair value method as prescribed under SFAS No. 123, *Accounting for Stock-based Compensation:*

** **
|                                                                                                                                          |   | **Three Months  Ended  June 30, 2003** |       | **Three Months  Ended****June 30, 2002** |   | **Six Months  Ended****June 30, 2003** |   | **Six Months  Ended****June 30, 2002** |       |
|-----------------------------------------------------------------------------------------------------------------------------------------------|--------|----------------------------------------|------------|------------------------------------------|--------|----------------------------------------|--------|----------------------------------------|------------|
|                                                                                                                                          |   |                                   |       |                                     |   |                                   |   |                                   |       |
| Reported net income                                                                                                                           |   | $                                      | 16,461,000 |                                     | $      | 15,521,000                             |   | $                                      | 22,760,000 |   | $ | 25,249,000 |   |
|                                                                                                                                          |   |                                   |       |                                     |   |                                   |   |                                   |       |   |   |   |   |
| Deduct: Total stock-based  employee compensation expense determined under fair value based method for  all awards, net of related tax effects |   | —                                 |       | 1,000                                    |   | —                                 |   | 1,000                                  |       |
| Pro forma net income                                                                                                                          |   | $                                      | 16,461,000 |                                     | $      | 15,520,000                             |   | $                                      | 22,760,000 |   | $ | 25,248,000 |   |
|                                                                                                                                          |   |                                   |       |                                     |   |                                   |   |                                   |       |
| Earnings per share:                                                                                                                           |   |                                   |       |                                     |   |                                   |   |                                   |       |
| Basic - as reported                                                                                                                           |   | $                                      | 0.55       |                                     | $      | 0.58                                   |   | $                                      | 0.76       |   | $ | 1.12 |   |
| Basic - pro forma                                                                                                                             |   | $                                      | 0.55       |                                     | $      | 0.58                                   |   | $                                      | 0.76       |   | $ | 1.12 |   |
|                                                                                                                                          |   |                                   |       |                                     |   |                                   |   |                                   |       |
| Diluted - as reported                                                                                                                         |   | $                                      | 0.55       |                                     | $      | 0.58                                   |   | $                                      | 0.76       |   | $ | 1.12 |   |
| Diluted - pro forma                                                                                                                           |   | $                                      | 0.55       |                                     | $      | 0.58                                   |   | $                                      | 0.76       |   | $ | 1.12 |   |

 

7

----

 

*Recent Accounting Developments*

 

In April 2003,the Financial Accounting Standards Board issued Statement of FinancialAccounting Standards No. 149, *Amendment ofStatement 133 on Derivative Instruments and Hedging Activities*(“SFAS 149”), which clarifies and amends financial accounting and reporting forderivative instruments, including certain derivative instruments embedded inother contracts and for hedging activities under Statement of FinancialAccounting Standards No. 133, *Accounting forDerivative Instruments and Hedging Activities*(“SFAS 133”). Ingeneral, SFAS 149 is effective for contracts entered into or modified afterJune 30, 2003 and for hedging relationships designated after June 30, 2003.Implementation of this standard is not expected to have a material effect onthe earnings, cash flows or financial position of the Company.

 

**Note 3 – Fixed Income and Equity Securities**

 

At June 30,2003, fixed income and equity securities consisted of the following:

 
| **(in thousands)**             |   | **Fixed Income  Trading Securities** |   | **Fixed Income  Securities****Available-For-Sale** |   | **Equity Securities  Available-For-Sale** |   |
|--------------------------------|--------|--------------------------------------|--------|----------------------------------------------------|--------|-------------------------------------------|--------|
| Principal Amount               |   | $                                    | 38,534 |                                               | $      | 2,422,391                                 |   |   |   |
| Unamortized Premium (Discount) |   | (253                                 | )      | 47,093                                             |   |                                      |   |
| Adjusted Cost                  |   | 38,281                               |   | 2,469,484                                          |   | $                                         | 2,844  |   |
| Gross Unrealized Gains         |   | 926                                  |   | 25,141                                             |   | 1,520                                     |   |
| Gross Unrealized Losses        |   | —                               |   | (1,597                                             | )      | —                                    |   |
| Fair Value                     |   | $                                    | 39,207 |                                               | $      | 2,493,028                                 |   | $ | 4,364 |   |

 

At December31, 2002, fixed income and equity securities consisted of the following:

 
| **(in thousands)**             |   | **Fixed Income  Trading Securities** |    | **Fixed Income  Securities****Available-For-Sale** |   | **Equity Securities  Available-For-Sale** |   |
|--------------------------------|--------|--------------------------------------|---------|----------------------------------------------------|--------|-------------------------------------------|--------|
| Principal Amount               |   | $                                    | 585,817 |                                               | $      | 1,765,448                                 |   |   |   |
| Unamortized Premium (Discount) |   | 12,838                               |    | 20,371                                             |   |                                      |   |
| Adjusted Cost                  |   | 598,655                              |    | 1,785,819                                          |   | $                                         | 2,844  |   |
| Gross Unrealized Gains         |   | 7,359                                |    | 33,225                                             |   | 1,324                                     |   |
| Gross Unrealized Losses        |   | —                               |    | (151                                               | )      | —                                    |   |
| Fair Value                     |   | $                                    | 606,014 |                                               | $      | 1,818,893                                 |   | $ | 4,168 |   |

 

Thecontractual final maturity of the mortgage loans supporting fixed incomemortgage securities is generally between 15 and 30 years at origination.  Because of prepayments on the underlyingmortgage loans, the actual weighted average maturity is expected to besubstantially less.

 

Fixed-ratemortgage securities composed approximately 83.6% and 99.0% of the Company’sportfolio of fixed income securities at June 30, 2003 and December 31, 2002,respectively. The decrease in fixed income trading securities from December 31,2002 to June 30, 2003 was primarily due to the sale of $432,761,000 of fixedincome trading securities and $130,632,000 principal prepayments on fixedincome trading securities.  The expected average remaining maturity ofthe

 

8

----

 

Company’s other fixed incomesecurities as of June 30, 2003 and December 31, 2002 was approximately 28 yearsand less than one year, respectively.

 

Adjustable-ratemortgage securities composed approximately 14.7% and 0.4% of the Company’sportfolio of fixed income securities at June 30, 2003 and December 31, 2002,respectively.  A portion of theadjustable-rate mortgage securities in the Company’s portfolio are backed byloans subject to periodic and lifetime caps that limit the amount thesecurities’ effective interest rates can change during any given period andover the lives of the assets.  Both atJune 30, 2003 and December 31, 2002, the portion of adjustable-rate mortgagesecurities subject to periodic cap had an average periodic cap equal to 2.0%.At June 30, 2003 and December 31, 2002, the portion of adjustable-rate mortgagesecurities subject to a lifetime cap had an average lifetime cap equal to 9.9%and 11.3%, respectively.

 

During the sixmonths ended June 30, 2003, the Company reported a gain on investment andderivative activities of $14,078,000 in the statement of operations.  The gain consisted of a net gain of$15,087,000 on the sale of $747,570,000 of fixed income securitiesavailable-for-sale, a gain of $5,424,000 on the sale of $432,761,000 of fixedincome trading securities, and an unrealized loss of $6,433,000 on fixed incometrading securities.

 

During the sixmonths ended June 30, 2002, the Company reported a net loss on investment andderivative activities of $10,453,000 in the statement of operations.  This loss consisted of a net loss of$23,922,000 on closed forward contracts, a loss of $229,000 on the sale of$98,634,000 of fixed income securities available-for-sale, a gain of $17,000 onthe sale of $6,535,000 of fixed income trading securities, a gain of $518,000on the sale of $1,695,000 of equity securities available-for-sale, and anunrealized gain of $13,163,000 on fixed income trading securities.

 

**Note4 - Reverse Repurchase Agreements**

 

The Companyhas entered into reverse repurchase agreements to finance certain of itsinvestments.  These agreements aresecured by a portion of the Company’s investments and bear interest rates thathave historically moved in close relationship to LIBOR. Reverse repurchaseagreements are accounted for as short-term borrowings and recorded as aliability on the balance sheet.

 

At June 30,2003, the Company had outstanding $2,220,593,000 of reverse repurchaseagreements with a weighted average current borrowing rate of 1.08% per annumand a weighted average maturity of one month. The reverse repurchase agreements were collateralized by securities withan estimated fair value of $2,287,232,000.

 

At December31, 2002, the Company had outstanding $2,112,444,000 of reverse repurchaseagreements with a weighted average current borrowing rate of 1.40% per annumand a weighted average maturity of one month. The reverse repurchase agreements were collateralized by securities withan estimated fair value of $2,199,852,000.

 

**Note5 – Derivative Financial Instruments and Hedging Activities**

 

The Companyhas entered into interest rate swap agreements as summarized below.  Under these agreements, the Company receivesa floating rate and pays a fixed rate. The swaps qualify as cash flow hedges for accounting purposes, andeffectively fix the interest rate paid on $1,678,500,000, as of June 30,2003, of current and anticipated future borrowings under reverse repurchaseagreements.  The Company estimates thatapproximately $47,845,000 of unrealized and deferred realized losses oninterest rate swaps currently included in accumulated other comprehensive losswill be

 

9

----

 

reclassifiedinto interest expense within the next twelve months as net settlements occur.As of June 30, 2003, the maximum length of time over which the Company ishedging its exposure to the variability in future cash flows for current andanticipated future transactions is approximately 9.0 years.

 

Interest RateSwaps at June 30, 2003:

 

(Dollars inthousands)

 
| **Current  Notional Amount** |      | **Average  Fixed Rate** |   | **Floating  Rate** |         | **Par  Weighted  Average  Maturity** |      | **Unrealized  Losses** |   |
|------------------------------|-----------|-------------------------|--------|--------------------|--------------|--------------------------------------|-----------|------------------------|--------|
|                         |      |                    |   |               |         |                                 |      |                   |   |
| $                            | 1,678,500 |                    | 4.643  | %                  | 1Month LIBOR |                                 | 3.9 years |                   | $      | 137,233 |   |
|                              |           |                         |        |                    |              |                                      |           |                        |        |  |  |

 

Interest RateSwaps at December 31, 2002:

 

(Dollars inthousands)

 
| **Current  Notional Amount** |      | **Average  Fixed Rate** |   | **Floating  Rate** |         | **Par  Weighted  Average  Maturity** |      | **Unrealized  Losses** |   |
|------------------------------|-----------|-------------------------|--------|--------------------|--------------|--------------------------------------|-----------|------------------------|--------|
|                         |      |                    |   |               |         |                                 |      |                   |   |
| $                            | 1,678,500 |                    | 4.643  | %                  | 1Month LIBOR |                                 | 4.4 years |                   | $      | 120,098 |   |
|                              |           |                         |        |                    |              |                                      |           |                        |        |  |  |

 

During thefourth quarter of 2002, the Company terminated a portion of the outstandinginterest rate swap agreements with a combined notional amount of $544,500,000,which resulted in a deferred loss of approximately $13,872,000 with an averageterm of 1.3 years and an average rate of 3.57% per annum. The deferred loss isbeing amortized as an adjustment to interest expense over the remaining livesof the original swap agreements. However, the Company may be required toaccelerate the deferred loss recognition if the general level of reverserepurchase agreements maintained by the Company declines in the future.

 

During the sixmonths ended June 30, 2003, interest expense was increased by $27,787,000 paidto swap counterparties and $3,768,000 from amortization of deferred losses onterminated swap contracts. During the six months ended June 30, 2002, interestexpense increased by $15,153,000 paid to swap counterparties and decreased by$180,000 from amortization of deferred gains on terminated swap contracts.

 

**Note6 – Commitments and Contingencies**

 

There havebeen no material changes to the matters disclosed in “Note 10 - Commitments andContingencies” on the Company’s Annual Report on Form 10-K for the year endedDecember 31, 2002.

 

**Note7 - Risks and Uncertainties**

 

The Company’sfuture results of operations and overall book value involve a number of risksand uncertainties that are subject to volatility. Factors that could affect theCompany’s future operating

 

10

----

 

results and/orbook value and cause actual results to vary materially from expectationsinclude, but are not limited to, further adverse changes in general economicconditions; further changes in interest rates and fluctuations in overallmarket conditions for mortgage backed securities.

 

**Note8 – Subsequent Events**

 

On July 14,2003, we announced that we entered into a definitive agreement and plan ofmerger dated July 12, 2003, with American Home Mortgage Holdings, Inc., orAmerican Home, and American Home Mortgage Investment Corp. (formerly called AHMNew Holdco, Inc.), or the AHM Investment Corp., a wholly-owned subsidiary ofAmerican Home, providing for the acquisition of the Company by American Homepursuant to the merger of the Company with and into AHM Investment Corp., withAHM Investment Corp. surviving the merger. Prior to the merger, American Home will engage in an internalreorganization pursuant to which American Home will merge with and into awholly-owned subsidiary of AHM Investment Corp.  As a result of this reorganization, AHM Investment Corp. willbecome the new parent company and will own 100% of the capital stock ofAmerican Home, and each outstanding share of American Home common stock will beconverted into one share of AHM Investment Corp. common stock.  In the merger, and subject to the terms andconditions of the agreement and plan of merger, each issued and outstandingshare of our common stock will be converted automatically into and becomeexchangeable for a number of shares of AHM Investment Corp. common stock equalto 107.5% of our book value per share, subject to a collar adjustment, as setforth in the agreement and plan of merger. The completion of the merger is subject to the approval by ourstockholders and those of American Home, the receipt of regulatory approvalsand other customary conditions.  Uponthe successful completion of the merger, the Company’s Manager has agreed thatit will terminate its Management Agreement for a termination fee equal to 40%of the premium over book value received by our stockholders in the merger,which is less than the amount the Company was originally obligated to pay theManager under the Management Agreement, not to exceed $10,000,000, in the eventof a termination without cause by the Company.

 

In earlyAugust 2003, in response to rising interest rates and other market conditions,the Company sold approximately $1,125,381,000 of its mortgage-backedsecurities, realizing losses of approximately $25,762,000.  In connection with such sales, the Companyalso reduced its borrowings under its repurchase agreements by $1,049,836,000and terminated certain interest-rate swaps with notional amounts of$907,000,000, resulting in realized losses on the terminated swaps of$42,435,000.  Because themortgage-backed securities and the swaps were being carried on the Company’sbalance sheet at fair value, selling the mortgage-backed securities andterminating the swaps had no effect on the Company’s book value.  However, the net decline in the fair valueof the mortgage-backed securities and the swaps between July 1, 2003 and July31, 2003 was approximately $29,252,000 and the Company's book value declinedapproximately $33,479,000 during the same period.  The Company expects to use the proceeds from the sales and otherperiodic payments received on portfolio securities, and new repurchaseagreement borrowings, to purchase new mortgage-backed securities.

 

**ITEM2.  MANAGEMENT’S DISCUSSION AND ANALYSISOF FINANCIAL CONDITION AND RESULTS OF OPERATIONS**

 

*The followingdiscussion of our financial condition and results of operations should be readin conjunction with the financial statements and the notes to those statementsincluded elsewhere in this Quarterly Report on Form 10-Q and our auditedfinancial statements for the year ended December 31, 2002 included in ourAnnual Report on Form 10-K previously filed with the SEC.*

 

**SAFE HARBOR/FORWARDLOOKING STATEMENTS**

 

Certaininformation contained in this Quarterly Report on Form 10-Q constitutes“forward-looking statements” which can be identified by the use offorward-looking terminology such as “may,” “will,” “should,” “anticipate,”“estimate,” “intend,” “continue” or “believes” or the negatives thereof orother variations thereon or comparable terminology. Some important factors thatwould cause actual results to differ materially from those in anyforward-looking statements include the possibility that the merger withAmerican Home Mortgage Holdings, Inc. will not be completed; changes ininterest rates; decline in book value; domestic and foreign business, market,financial or legal conditions; differences in the actual allocation of theassets of the Company from those assumed; and the degree to which assets arehedged and the effectiveness of the hedge, among other factors. In addition,the degree of risk in the Company’s investments is increased by the Company’sleveraging of its assets. For additional discussion of factors that could causeactual results to differ from those contained in such forward-lookingstatements, see “Principal Risks and Special Considerations”, “Item 7Management’s Discussion and Analysis of Financial Conditions and Results ofOperations” and “Item 7A Quantitative and Qualitative Disclosures About MarketRisk” in the Company’s annual report on Form 10-K for the year ended December31, 2002. The Company does not undertake, and specifically disclaims anyobligation, to update

 

11

----

 

any forward-looking statementsto reflect occurrences or unanticipated events or circumstances after the dateof such statements.

 

**GENERAL**

 

Apex MortgageCapital, Inc., or the Company, a Maryland corporation, was formed on September15, 1997, primarily to acquire United States agency and other highly rated,single-family real estate adjustable and fixed rate mortgage relatedassets.  The Company commencedoperations on December 9, 1997, following the initial public offering of theCompany’s common stock.  The Company’sprincipal executive offices are located at 865 South Figueroa Street, Suite1800, Los Angeles, California 90017, and its telephone number is (213)244-0000.

 

The Companyuses its equity capital and borrowed funds to seek to generate income based onthe difference between the yield on its mortgage related assets and the cost ofits borrowings.  The Company has electedto be taxed as a real estate investment trust, or REIT, under the InternalRevenue Code of 1986, as amended, or the Code. The Company will not generally be subject to federal taxes on its incometo the extent that it distributes its net income to its stockholders andmaintains its qualification as a REIT.

 

The day-to-dayoperations of the Company are managed by an external management company, TCWInvestment Management Company, or the Manager, subject to the direction andoversight of the Company’s Board of Directors. A majority of the Board of Directors are unaffiliated with the TCWGroup, Inc. (“TCW” and, together with its subsidiaries and affiliates, the “TCWGroup”), or the Manager.  The Manager isa wholly-owned subsidiary of TCW.  TheManager was established in 1987, and the TCW Group began operations in 1971 throughone of its affiliates.  The Company’sinvestment management team are selected members of the TCW Group’sMortgage-Backed Securities Group (the “MBS Group”), all of whom have overfifteen years of experience in raising and managing mortgage capital.  The Company has elected to be externallymanaged by the Manager. The Manager’s key officers have experience in raisingand managing mortgage capital, mortgage finance and the purchase andadministration of mortgage related assets.

 

**WebsiteAccess to Our Periodic SEC Reports**

 

Our internetaddress is www.apexreit.com.  We makeour periodic SEC reports (Form 10-Q and Form 10-K) and current reports (Form8-K) available free of charge through our website as soon as reasonablypracticable after they are filed electronically with the SEC.  We may from time to time provide importantdisclosures to investors by posting them in the investor relations section ofour website, as allowed by SEC rules.

 

Materials wefile with the SEC may be read and copied at the SEC’s Public Reference Room at450 Fifth Street, N.W., Washington, D.C. 20549.  Information on the operation of the Public Reference Room may beobtained by calling the SEC at 1-800-SEC-0330. The SEC also maintains an Internet Website at www.sec.gov that containsreports, proxy and information statements, and other information regarding ourcompany that we file electronically with the SEC.

 

**RECENT EVENTS**

 

*Merger Agreement with American Home MortgageHoldings, Inc.* On July 14, 2003, we announced that we entered into a definitiveagreement and plan of merger dated July 12, 2003, with American Home MortgageHoldings, Inc., or American Home, and American Home Mortgage Investment Corp.(formerly called AHM New Holdco, Inc.), or the AHM Investment Corp., awholly-owned subsidiary of American Home, providing for the acquisition of theCompany by American Home pursuant to the merger of the Company with and intoAHM Investment Corp., with AHM Investment Corp. surviving the merger.  Prior to the merger, American Home will engagein an internal reorganization pursuant to which American Home will merge withand into a wholly-owned subsidiary of AHM Investment Corp.  As a result of this reorganization, AHMInvestment Corp. will become the new parent company and will own 100% of thecapital stock of American

 

12

----

 

Home, and each outstandingshare of American Home common stock will be converted into one share of AHMInvestment Corp. common stock.  In themerger, and subject to the terms and conditions of the agreement and plan ofmerger, each issued and outstanding share of our common stock will be convertedautomatically into and become exchangeable for a number of shares of AHMInvestment Corp. common stock equal to 107.5% of our book value per share,subject to a collar adjustment, as set forth in the agreement and plan ofmerger.  The completion of the merger issubject to the approval by our stockholders and those of American Home, thereceipt of regulatory approvals and other customary conditions.

 

*Proposed Third Amendment to ManagementAgreement. *Inconnection with the proposed merger, we have agreed to terminate the ManagementAgreement with our Manager, TCW Investment Management Company, at the closingof the proposed merger.  Pursuant to theexisting terms of the Management Agreement, the Manager is entitled to a feeupon termination equal to the fair market value of the ManagementAgreement.  In connection with theagreement and plan of merger with American Home, we have agreed to enter into athird amendment to the Management Agreement at the closing of the merger thatprovides that we will pay a termination fee to the Manager immediately prior tothe closing of the merger, equal to 40% of the premium over net book value receivedby our stockholders in the merger.  Thisamount is substantially less than the amount the Manager would be entitled toreceive from the Company under the existing terms of the Management Agreement,which is less than the amount the Company was originally obligated to pay theManager under the Management Agreement in the event of a termination withoutcause by the Company.

 

*Increases in interest rates since June 30,2003*. Increases in interest rates since the end of the second quarter 2003have negatively affected the market value of some of the Company's mortgagerelated assets.  As a result, as of July31, 2003, the Company's book value was approximately $148,645,000 in comparisonwith $182,124,000 as of June 30, 2003, a decrease of 18%.  Currently, the reduction in book valueresults from "mark to market" accounting rules, rather than realizedlosses.  That is, accounting rulesrequire the Company to reduce its stockholders' equity, or book value, by theamount of any decrease in the market value of its mortgage related assets thatare classified as "trading" or "available for sale."  The Company is required to evaluate thesesecurities on a quarterly basis to determine their liquidation value using anaverage price as determined by market makers in these securities.  If interest rates continue to rise, theCompany's book value may continue to be negatively impacted.  Moreover, if the Company were to dispose ofthese mortgage related assets during a period of increases interest rates, theCompany will realize a corresponding loss.

 

*Reporting Period*.  Unless otherwise noted, this reportdescribes the Company’s operations and developments through the date hereof.

 

**STRATEGY**

 

Subject to theagreement and plan of merger with American Home, and assuming the contemplatedmerger is completed, in order to achieve our business objective and generatedividend yields that provide a competitive rate of return for our stockholders,our strategy is to seek to:

 

•                  purchaseprimarily single-family real estate adjustable and fixed rate mortgage relatedassets;

 

•                  manage thecredit risk of its mortgage related assets through, among other activities; (i)carefully selecting mortgage related assets to be acquired; (ii) complying withour investment policy; (iii) actively monitoring the ongoing credit quality andservicing of our mortgage related assets; and (iv) maintaining appropriatecapital levels and allowances for possible credit losses;

 

•                  financepurchases of mortgage related assets with the net proceeds of equity offeringsand, to the extent permitted by our leverage policy, to utilize leverage toincrease potential returns to stockholders through borrowings (primarilyreverse repurchase agreements) with interest rates that will also reflectchanges in short-term market interest rates;

 

•                  structure itsborrowings in accordance with our interest rate risk management policy;

 

•                  utilize interestrate swaps, forward contracts on U.S. Treasury notes, interest rate caps andsimilar financial instruments to mitigate interest rate risks;

 

•                  minimizeprepayment risk primarily by structuring a diversified portfolio with a varietyof prepayment characteristics; and

 

•                  purchase equityand other securities issued by financial entities on an opportunistic basis.

 

13

----

 

There can beno assurance that we will be able to generate competitive earnings anddividends while holding primarily high quality mortgage related assets andmaintaining a disciplined risk-control profile.

 

We may attemptto increase the return to stockholders over time by: (i) raising additionalcapital in order to increase our ability to invest in additional mortgagerelated assets; (ii) lowering our effective borrowing costs through directfunding with collateralized lenders, in addition to using Wall Streetintermediaries, and investigating the possibility of using collateralizedcommercial paper and medium-term note programs; and (iii) improving theefficiency of our balance sheet structure by issuing uncollateralized subordinateddebt and other forms of capital.

 

**THE MANAGEMENT AGREEMENT**

 

The Companyhas renewed its Management Agreement with the Manager for a one-year termending on December 31, 2003.  TheManager is primarily involved in two activities: (i) asset/liabilitymanagement—acquisition, financing, hedging, management and disposition ofmortgage related assets, including credit and prepayment risk management; and(ii) capital management—oversight of the Company’s structuring, analysis,capital raising and investor relations activities.  In conducting these activities, the Manager formulates operatingstrategies for the Company, arranges for the acquisition of mortgage relatedassets by the Company, arranges for various types of financing for the Company,monitors the performance of the Company’s mortgage related assets and providescertain administrative and managerial services in connection with the operationof the Company.  The Manager is requiredto manage the business affairs of the Company in conformity with the policiesthat are approved and monitored by the Company’s Board of Directors.  The Manager is required to prepare regularreports for the Company’s Board of Directors that will review the Company’sacquisitions of mortgage related assets, portfolio composition andcharacteristics, credit quality, performance and compliance with the policiesapproved by the Company’s Board of Directors.

 

At all times,the Manager is subject to the direction and oversight of the Company’s Board ofDirectors and has only such functions and authority as the Company delegates toit.  The Manager is responsible for theday-to-day operations of the Company.

 

The ManagementAgreement may be renewed for additional one-year terms at the discretion of theunaffiliated directors, unless previously terminated by the Company or theManager upon written notice.  Except inthe case of a termination or non-renewal by the Company for cause, upontermination or non-renewal of the Management Agreement by the Company, theCompany is obligated to pay the Manager a termination or non-renewal fee, whichmay be significant.  The termination ornon-renewal fee shall be equal to the fair market value of the ManagementAgreement without regard to the Company’s termination right, as determined byan independent appraisal.  The selectionof the independent appraiser shall be subject to the approval of theunaffiliated directors.  Neither thefair market value of the Management Agreement nor the various factors which theappraiser may find relevant in its determination of the fair market value canbe determined at this time.

 

The fairmarket value of the Management Agreement will be affected by significantvariables, including (i) the historical management fees paid to the Manager,(ii) any projections of future management fees to be paid to the Managerdetermined by the independent appraiser, (iii) the relative valuations ofagreements similar to the Management Agreement, and (iv) other factors, all ofwhich may be unrelated to the performance of the Manager.

 

The ManagementAgreement may be assigned by the Manager to an affiliate of TCW without theconsent of the Company.  The ManagementAgreement may be assigned to a non-affiliate of TCW only with the approval of amajority of the unaffiliated directors.

 

14

----

 

*Proposed Third Amendment to ManagementAgreement. *Inconnection with the proposed merger with American Home, we have agreed toterminate the Management Agreement with our Manager, TCW Investment ManagementCompany, at the closing of the proposed merger.  Pursuant to the existing terms of the Management Agreement, theManager is entitled to a fee upon termination equal to the fair market value ofthe Management Agreement.  In connectionwith the agreement and plan of merger with American Home, we have agreed toenter into a third amendment to the Management Agreement at the closing of themerger that provides that we will pay a termination fee to the Managerimmediately prior to the closing of the merger, equal to 40% of the premiumover net book value received by our stockholders in the merger.  This amount is substantially less than theamount the Manager would be entitled to receive from the Company under the existingterms of the Management Agreement.

 

**ManagerCompensation**

 

The Managerwill receive annual base management compensation based on the Average NetInvested Capital of the Company, payable monthly in arrears, equal to 3/4 of 1%of Average Net Invested Capital.  The term “Average Net Invested Capital” means themonth end sum of (1) the Company’s total stockholders’ equity computed inaccordance with accounting principles generally accepted in the United Statesof America, plus (2) any unsecured debt that has been approved for inclusion bythe unaffiliated directors at issuance, plus or minus (3) an adjustment toexclude the impact of any unrealized gains, losses or other items that do notaffect realized net income. Accordingly, incurring collateralized debt to finance specificinvestment purchases does not ordinarily increase Average Net Invested Capital.

 

The Managershall also be entitled to receive as incentive compensation for each fiscalquarter, an amount equal to 30% of the Net Income of the Company, beforeincentive compensation, in excess of the amount that would produce anannualized Return on Equity equal to the Ten-Year U.S. Treasury Rate plus1%.  The incentive compensationcalculation and payment will be made quarterly in arrears.  The term “Return on Equity” is calculatedfor any quarter by dividing the Company’s Net Income for the quarter by itsAverage Net Worth for the quarter.  Forpurposes of calculating the incentive compensation payable, the definition“Return on Equity” is not related to the actual distributions received by stockholdersor to an individual investor’s actual return on investment.  For such calculations, the “Net Income” ofthe Company means the taxable income of the Company (including net capitalgains, if any) before the Manager’s incentive compensation, net operating lossdeductions arising from losses in prior periods and deductions permitted by theCode in calculating taxable income for a REIT plus the effects of adjustments,if any, necessary to record hedging and interest transactions in accordancewith accounting principles generally accepted in the United States ofAmerica.  A deduction for all of theCompany’s interest expenses for borrowed funds is taken into account incalculating Net Income. “Average Net Worth” for any period means the arithmeticaverage of the sum of the gross proceeds from any offering of its equitysecurities by the Company, before deducting any underwriting discounts andcommissions and other expenses and costs relating to the offerings, plus theCompany’s retained earnings (without taking into account any losses incurred inprior periods) computed by taking the average of such values at the end of eachmonth during such period, minus the cumulative amounts paid by the Company torepurchase its shares.

 

The ability ofthe Company to achieve an annualized Return on Equity in excess of the Ten-YearU.S.  Treasury Rate plus 1%, and of theManager to earn the incentive compensation described in the precedingparagraph, is dependent upon the level and volatility of interest rates, theCompany’s ability to react to changes in interest rates and to utilizesuccessfully the operating strategies described herein, and other factors, manyof which are not within the Company’s or the Manager’s control.  The Manager’s base compensation shall be calculatedby the Manager within 15 days after the end of each month, and such calculationshall be promptly delivered to the Company. The Company is obligated to pay the base compensation within 30 daysafter the end of each month.  TheManager shall compute the quarterly incentive compensation within 45 days afterthe end of each fiscal quarter, and the Company shall pay the incentivecompensation with respect to each fiscal quarter within 15 days following thedelivery to the Company of the Manager’s written statement setting forth thecomputation of the incentive compensation for such quarter.  Quarterly incentive

 

15

----

 

compensation is subject to anannual adjustment so that the incentive compensation is based on earnings forthe entire year. The Company believes that this compensation arrangementbenefits its stockholders because it ties the Manager’s compensation to Returnon Equity and, in periods of low earnings, the Manager’s incentive compensationis reduced or eliminated, thereby lowering the Company’s operating expenses.

 

**POLICIES**

 

The Company’scurrent investment policies are set forth in its Annual Report on Form 10-K forthe year ended December 31, 2002.

 

**PRINCIPAL RISKS AND SPECIAL CONSIDERATIONS**

 

***Leverage Risk****.*  The Company employs a leveraging strategy ofgenerally borrowing up to 92% of its total assets, less any assets that arefunded with committed secured borrowings, plus the market value of any relatedhedging transactions to finance the acquisition of additional mortgage relatedassets.  The Company’s borrowings may,from time to time, exceed 92% of its total assets.  In the event borrowing costs exceed the income on its mortgagerelated assets, the Company will experience negative cash flow and incurlosses. Another risk of leverage is the possibility that the value of thecollateral securing the borrowings will decline.  In such event, additional collateral or repayment of borrowingswould be required.  The Company could berequired to sell mortgage related assets under adverse market conditions inorder to maintain liquidity.  If thesesales were made at prices lower than the carrying value of the mortgage relatedassets, the Company would experience losses.

 

***Interest Rate Risk.***  There is the possibility that the value ofthe Company’s mortgage related assets may decline since fixed income securitiesgenerally decline when interest rates rise. The longer the term of a fixed income instrument, the more sensitive itwill be to fluctuations in value from interest rate changes.  Changes in interest rates may have asignificant effect on the Company’s operations, because it may hold mortgagerelated assets with long terms to maturity. Rising interest rates will negatively impact the Company’s borrowingssince the value of the collateral securing the borrowing will decline in value,requiring additional collateral or repayments of borrowing.  This could reduce the level of borrowingsand reduce returns.  Also, when interestrates rise, the Company’s holdings of mortgage related assets can reducereturns if the owners of the underlying mortgages pay-off their mortgages laterthan anticipated.  This is known as *extensionrisk*.  When interest ratesdecline, the Company’s holdings of the mortgage related assets can reducereturns if the owners of the underlying mortgages pay-off their mortgagessooner than anticipated since the funds prepaid will have to be invested at thethen lower prevailing rate.  This isknown as *prepaymentrisk*.  In addition, when interestrates decline, not only can the value of mortgage related assets decline, butthe yield can decline, particularly where the yield on the security is tied tointerest rates, such as adjustable mortgages.

 

***Liquidity Risk****.*  There is the possibility that the Companymay lose money or be prevented from realizing capital gains if it cannot sell amortgage related asset at a time and price that is most beneficial to theCompany.  The Company is subject toliquidity risk because it invests in mortgage securities which have experiencedperiods of illiquidity.

 

***Credit Risk****.*  Credit risk is the possibility that theCompany could lose money if an issuer is unable to meet its financialobligations, such as the payment of principal and/or interest on an instrument,or goes bankrupt.  The Company mayinvest a portion of its assets in mortgage related assets which are notguaranteed by the U.S. Government or investment grade, which may make theCompany subject to substantial credit risk. This is especially true during periods of economic uncertainty or duringeconomic downturns.

 

***Equity Risk.***  Equity risk is the possibility that theCompany could lose money if its equity investments decline in value.  Such a decline could be caused by a numberof factors, including, but not limited to, overall market conditions,suspension or omission of dividends, bankruptcies and litigation.  This is especially true during periods ofeconomic uncertainty or during economic downturns.

 

16

----

 

***Failure to MaintainREIT Status Risk****.*  Failure to maintain REIT status risk refers to the possibilitythat the Company may become subject to federal income tax as a regularcorporation.  The Company intends at alltimes to maintain substantially all of its investments in, and otherwiseconduct its business in a manner consistent with, the REIT Provisions of theCode.  If the Company fails to qualifyas a REIT, it would be treated as a regular corporation for federal taxpurposes.  This would result in theCompany being subject to federal income tax that would further result in asubstantial reduction of cash available for distribution to stockholders.

 

***Failure to MaintainInvestment Company Act Exemption Risk****.*  The Company intends to conduct its businessso as not to become a “regulated investment company” under the InvestmentCompany Act.  As a result, the Company’sownership of certain mortgage related assets may be limited by the InvestmentCompany Act.  This could have the effectof harming the Company’s operations and returns to stockholders.  In addition, if the Company fails to qualifyfor the exemption from registration as an investment company, its ability touse leverage would be substantially reduced. This could reduce income to the Company and returns to stockholders.

 

***Risks Relating toProposed Merger with American Home Mortgage Holdings, Inc.***

 

**The proposed merger may not be completed,which may significantly harm our stock price.**

 

AlthoughAmerican Home and the Company have signed the Merger Agreement in furtheranceof a proposed merger of the Company with and into AHM Investment Corp., thecompletion of the merger is subject to stockholder and regulatory approvals,and there is no assurance that all of the conditions to closing will be met andthat the merger will be completed.  Inaddition, either party may unilaterally terminate the Merger Agreement if themerger is not completed on or before January 12, 2004, or, if the failure toclose relates solely to governmental approval or antitrust matters, on orbefore April 12, 2004.  In addition, ifthe American Home average price is less than $14.57443 per share, the Companymay terminate the Merger Agreement, subject to American Home’s right to adjustthe exchange ratio.  Similarly, ifAmerican Home’s average price is greater than $24.29071 per share, AmericanHome may terminate the Merger Agreement, subject to our right to adjust theexchange ratio.

 

If the mergeris not completed for any reason, the Company may be harmed in a number of ways,including the following:

 

•                  the price of ourcommon stock may decline to the extent that the current market price of ourstock reflects a market assumption that the merger will be completed;

 

•                  an adversereaction from our investors and potential investors may reduce future financingopportunities and strategic alternatives;

 

•                  the pendency ofthe merger, as well as customary covenants in the merger agreement that limitour ability to take certain actions without American Home’s consent, may causeus to defer or potentially lose business opportunities; and

 

•                  our costsrelated to the merger, including legal and accounting fees, must be paid evenif the merger is not completed.

 

17

----

 

**Ifthe proposed merger with American Home does not occur, we may incur paymentobligations to American Home.**

 

If theagreement and plan of merger with American Home is terminated under certaincircumstances, we may be required to pay American Home a $12 million break-upfee, plus American Home’s expenses incurred in connection with the proposedmerger, which may be substantial.

 

**Stockholderswho purchase our common stock after the record date will be bound by theoutcome of the stockholders’ vote in connection with the proposed merger, butwill not have the right to vote.**

 

Our board ofdirectors has not yet set a record date in connection with our stockholders’meeting to be held to vote on the merger with American Home.  Those stockholders who purchase shares ofour common stock after the record date will not have the right to vote on theproposed merger.  Nonetheless, if ourstockholders entitled to vote at the stockholders’ meeting approve the mergerwith American Home, those stockholders who previously purchased our stock afterthe record date will be bound by the outcome of the vote.

 

**FINANCIAL CONDITION**

 

**FixedIncome Securities**

 

At June 30,2003 and December 31, 2002, the Company held $2,532,235,000 and $2,424,907,000of fixed income securities, respectively. The original maturity of asignificant portion of the fixed income securities ranges from fifteen tothirty years, however, the actual maturity is subject to change based on theprepayments of the underlying mortgage loans.

 

The followingtable is a schedule of fixed income securities held and listed by security type(dollars in thousands):

 
|                          |   | **June 30, 2003**   |      | **December 31, 2002**     |   |
|-------------------------------|--------|---------------------|-----------|---------------------------|--------|
| **Fixed Income Securities**   |   | **Carrying  Value** |      | **Percent of  Portfolio** |   | **Carrying  Value** |   | **Percent of  Portfolio** |   |
|                          |   |                |      |                      |   |   |   |   |   |
| Mortgage Securities:          |   |                |      |                      |   |   |   |   |   |
| Adjustable Rate (1)           |   | $                   | 371,081   |                      | 14.65  | % | $ | 9,173 |   | 0.38 | % |
| Fixed Rate                    |   | 2,113,838           |      | 83.48                     | %      | 2,415,484 |   | 99.61 | % |
| Other Fixed Income Securities |   | 47,316              |      | 1.87                      | %      | 250 |   | 0.01 | % |
| Totals                        |   | $                   | 2,532,235 |                      | 100.00 | % | $ | 2,424,907 |   | 100.00 | % |

 

----

(1)          AtJune 30, 2003, the interest rate indices for 37% and 63% of the adjustable ratemortgage securities were based on the one-year U.S. Treasury rate and theLondon Inter-Bank Offered Rate, respectively.

 

At December31, 2002, the interest rate indices for 99% and 1% of the adjustable ratemortgage securities were based on the one-year U.S. Treasury rate and theLondon Inter-Bank Offered Rate, respectively.

 

18

----

 

The followingtable shows various weighted average characteristics of the fixed incomesecurities held by the Company at June 30, 2003 (dollars in thousands):

 
| **Security Type**             |   | **Par Amount** |      | **Par as a  Percent of  Category** |   | **Adjusted  Cost Basis** |   | **Market  Price** |   | **Current  Coupon** |   | **Weighted  Average  Life (1)** |   |
|-------------------------------|--------|----------------|-----------|------------------------------------|--------|--------------------------|--------|-------------------|--------|---------------------|--------|---------------------------------|--------|
|                          |   |           |      |                               |   |                     |   |              |   |                |   |                            |   |
| 15 Year Agency Pass-throughs  |   | $              | 779,453   |                               | 31.67  | %                        | 102.27 | %                 | 102.85 | %                   | 4.76   | %                               | 3.5    |   |
| 30 Year Agency Pass-throughs  |   | 1,271,354      |      | 51.66                              | %      | 101.30                   | %      | 102.76            | %      | 5.49                | %      | 2.1                             |   |
| AAA CMOs                      |   | 5,749          |      | 0.24                               | %      | 98.39                    | %      | 100.31            | %      | 7.25                | %      | 1.2                             |   |
| Total Fixed Rate Holdings     |   | 2,056,556      |      | 83.57                              | %      | 101.66                   | %      | 102.79            | %      | 5.22                | %      | 2.6                             |   |
|                          |   |           |      |                               |   |                     |   |              |   |                |   |                            |   |
| Other Fixed Income Securities |   | 42,000         |      | 1.71                               | %      | 116.34                   | %      | 112.66            | %      | 5.38                | %      | 27.6                            |   |
| Adjustable Rate Holdings      |   | 362,369        |      | 14.72                              | %      | 101.63                   | %      | 102.40            | %      | 4.92                | %      | 0.8                             |   |
|                          |   |           |      |                               |   |                     |   |              |   |                |   |                            |   |
| Category Total                |   | $              | 2,460,925 |                               | 100.00 | %                        | 101.90 | %                 | 102.90 | %                   | 5.18   | %                               | 2.8    |   |

 

The followingtable shows various weighted average characteristics of the fixed incomesecurities held by the Company at December 31, 2002 (dollars in thousands):

 
| **Security Type**             |   | **Par Amount** |      | **Par as a  Percent of  Category** |   | **Adjusted  Cost Basis** |   | **Market  Price** |   | **Current  Coupon** |   | **Weighted  Average  Life (1)** |   |
|-------------------------------|--------|----------------|-----------|------------------------------------|--------|--------------------------|--------|-------------------|--------|---------------------|--------|---------------------------------|--------|
|                          |   |           |      |                               |   |                     |   |              |   |                |   |                            |   |
| 30 Year Agency Pass-throughs  |   | $              | 2,327,391 |                               | 98.98  | %                        | 101.54 | %                 | 103.24 | %                   | 6.07   | %                               | 2.7    |   |
| AAA CMOs                      |   | 12,409         |      | 0.53                               | %      | 97.54                    | %      | 101.91            | %      | 7.10                | %      | 1.0                             |   |
| Total Fixed Rate Holdings     |   | 2,339,800      |      | 99.51                              | %      | 101.52                   | %      | 103.23            | %      | 6.08                | %      | 2.7                             |   |
|                          |   |           |      |                               |   |                     |   |              |   |                |   |                            |   |
| Other Fixed Income Securities |   | 2,500          |      | 0.11                               | %      | 16.04                    | %      | 10.00             | %      | 18.28               | %      | 0.3                             |   |
| Adjustable Rate Holdings      |   | 8,965          |      | 0.38                               | %      | 97.42                    | %      | 102.32            | %      | 5.12                | %      | 1.0                             |   |
|                          |   |           |      |                               |   |                     |   |              |   |                |   |                            |   |
| Category Total                |   | $              | 2,351,265 |                               | 100.00 | %                        | 101.41 | %                 | 103.13 | %                   | 6.09   | %                               | 2.7    |   |

 

----

(1)        The weighted averagelife of the fixed rate mortgage securities is based upon market prepaymentexpectations as of the dates shown.  Theactual weighted average life could be longer or shorter depending on the actualprepayment rates experienced over the life of the securities and is sensitiveto changes in both prepayment rates and interest rates. The weighted averagelife shown for the adjustable rate mortgage assets represents the average timeuntil the next coupon reset date.  Allaverages are shown in years.

 

**EquitySecurities**

 

At June 30,2003 and December 31, 2002, the Company held $4,364,000 and $4,168,000 ofequity securities, respectively. Equity securities consist primarily ofinvestment in equities issued by other real estate investment trusts.

 

19

----

 

At June 30, 2003, equitysecurities consisted of the following:

 
| **(In thousands)**                       |   | **Shares Held** |   | **Adjusted Cost** |   | **Fair Value** |   |
|------------------------------------------|--------|-----------------|--------|-------------------|--------|----------------|--------|
|                                     |   |            |   |              |   |           |   |
| Common Stock:                            |   |            |   |              |   |           |   |
|                                     |   |            |   |              |   |           |   |
| Dynex Capital, Inc.                      |   | 75              |   | $                 | 122    |           | $      | 447 |   |
| Total Common Stock                       |   |            |   | 122               |   | 447            |   |
|                                     |   |            |   |              |   |           |   |
| Convertible Preferred Stock:             |   |            |   |              |   |           |   |
|                                     |   |            |   |              |   |           |   |
| Capstead Mortgage Corporation,  Series B |   | 321             |   | 2,722             |   | 3,917          |   |
| Total Convertible Preferred  Stock       |   |            |   | 2,722             |   | 3,917          |   |
|                                     |   |            |   |              |   |           |   |
| Total Equity Securities                  |   |            |   | $                 | 2,844  |           | $      | 4,364 |   |

 

At December 31, 2002, equitysecurities consisted of the following:

 
| **(In thousands)**                       |   | **Shares Held** |   | **Adjusted Cost** |   | **Fair Value** |   |
|------------------------------------------|--------|-----------------|--------|-------------------|--------|----------------|--------|
|                                     |   |            |   |              |   |           |   |
| Common Stock:                            |   |            |   |              |   |           |   |
|                                     |   |            |   |              |   |           |   |
| Dynex Capital, Inc.                      |   | 75              |   | $                 | 122    |           | $      | 363 |   |
| Total Common Stock                       |   |            |   | 122               |   | 363            |   |
|                                     |   |            |   |              |   |           |   |
| Convertible Preferred Stock:             |   |            |   |              |   |           |   |
|                                     |   |            |   |              |   |           |   |
| Capstead Mortgage Corporation,  Series B |   | 321             |   | 2,722             |   | 3,805          |   |
| Total Convertible Preferred  Stock       |   |            |   | 2,722             |   | 3,805          |   |
|                                     |   |            |   |              |   |           |   |
| Total Equity Securities                  |   |            |   | $                 | 2,844  |           | $      | 4,168 |   |

 

**Accrued Interest Receivable and Other Assets**

 

The Companyhad accrued interest receivable and other assets of $11,983,000 and $14,847,000at June 30, 2003 and December 31, 2002, respectively. The decrease wasprimarily due to the decrease in receivable for unsettled transactions andaccrued interest. Other assets also consist of deferred insurance expense,deferred shareholder rights expense and other prepaid expenses.

 

**Stockholders’Equity**

 

The Company had stockholders’ equity of $182,124,000 and $194,659,000at June 30, 2003 and December 31, 2002, respectively. The decrease instockholders’ equity at June 30, 2003 was primarily due to an increase inaccumulated other comprehensive loss during the six months ended June 30, 2003.The increase in accumulated other comprehensive loss included a decrease inunrealized gains on available-for-sale securities, an increase in unrealizedlosses on interest rate swaps, and a decrease in deferred loss on terminatedinterest rate swaps. The decrease in accumulated deficit included net incomeless dividends declared for the six months ended June 30, 2003.

 

20

----

 

**HedgingInstruments**

 

There can beno assurance that the Company will enter into hedging activities or that, ifentered into, such activities will have the desired beneficial impact on theCompany’s results of operations or financial condition.  Moreover, no hedging activity can completelyinsulate the Company from the risks associated with changes in interest ratesand prepayment rates.

 

Hedginginvolves risk and typically involves costs, including transaction costs.  Such costs increase dramatically as theperiod covered by the hedging increases and during periods of rising andvolatile interest rates.  The Companymay increase its hedging activity and, thus, increase its hedging costs duringsuch periods when interest rates are volatile or rising and hedging costs haveincreased.  The Company intendsgenerally to hedge as much of the interest rate risk as the Manager determinesis in the best interest of the Company’s stockholders given the cost of suchhedging transactions and the Company’s desire to maintain its status as aREIT.  The Company’s policies do notcontain specific requirements as to the percentages or amount of interest raterisk that the Manager is required to hedge.

 

The Companyutilizes interest rate swap agreements as a tool to manage interest rate risk. Underthe swap agreements, the Company receives a floating rate and pays a fixedrate. The notional amount of each agreement is matched against a like amount ofcurrent and anticipated borrowings under reverse repurchase agreements tomitigate the potential effect on cash flows and net interest income of risinginterest rates by effectively fixing the rate paid on the matched borrowingsover the life of the contract. In the absence of such financial instruments,interest expense on reverse repurchase agreements and similar short-termborrowings, which mature and reprice frequently, can increase faster than theCompany can adjust its interest-earning assets and increase interest income,because the Company’s mortgage related securities generally have much longermaturities and have fixed rates of interest.

 

The interestrate swap agreements entered into by the Company are classified as cash flowhedges for accounting purposes and meet the requirements of SFAS No. 133 forsuch classification.  Therefore, changesin the fair value of the agreements are reported in accumulated othercomprehensive loss, a component of stockholders’ equity, and do not affect netincome in the period of the change. Periodic exchanges of cash flows with the counterparties to the agreementsare recorded as adjustments to interest expense.  If the Company were to terminate the swap agreements prior totheir contractual termination dates, or change current or anticipatedborrowings so that they were no longer appropriately matched to the swapagreements, the agreements might not qualify for hedge accountingtreatment.  In that case, changes intheir fair values would affect net income.

 

Borrowingshedged by interest rate swaps are used primarily to acquire and hold fixedincome securities available-for-sale. Changes in the fair values of securities available-for-sale are alsoreported in accumulated other comprehensive income, a component ofstockholders’ equity.  Changes in fairvalues of the securities only affect periodic earnings when they are sold or ifthey have an other-than-temporary impairment.  Therefore, earnings volatility is reduced by the use of the swapagreements as cash flow hedges and the acquisition of available-for-salesecurities with the borrowings hedged by the agreements.  Impairment of the available-for-salesecurities or decisions to sell the securities prior to their expectedmaturities could result in unanticipated earnings volatility.

 

During thefourth quarter of 2002, the Company terminated a portion of the outstandinginterest rate swap agreements with a combined notional amount of $544,500,000,which resulted in a deferred loss of approximately $13,872,000 with an averageterm of 1.3 years and an average rate of 3.57%. The deferred loss is beingamortized as an adjustment to interest expense over the remaining lives of theoriginal swap agreements.  However, theCompany may be required to accelerate the deferred loss recognition if thegeneral level of reverse repurchase agreements maintained by the Company declinesin the future.

 

At June 30,2003, the Company had entered into interest rate swap agreements summarizedbelow:

 

21

----

(Dollars inthousands)

 
| **Current  Notional Amount** |      | **Average  Fixed Rate** |   | **Floating  Rate** |          | **Par  Weighted  Average Maturity** |      | **Unrealized  Losses** |   |
|------------------------------|-----------|-------------------------|--------|--------------------|---------------|-------------------------------------|-----------|------------------------|--------|
|                         |      |                    |   |               |          |                                |      |                   |   |
| $                            | 1,678,500 |                    | 4.643  | %                  | 1 Month LIBOR |                                | 3.9 years |                   | $      | 137,233 |   |
|                              |           |                         |        |                    |               |                                     |           |                        |        |  |  |

 

At December31, 2002, the Company had entered into interest rate swap agreements summarizedbelow:

 

(Dollars inthousands)

 
| **Current  Notional Amount** |      | **Average  Fixed Rate** |   | **Floating  Rate** |          | **Par  Weighted  Average Maturity** |      | **Unrealized  Losses** |   |
|------------------------------|-----------|-------------------------|--------|--------------------|---------------|-------------------------------------|-----------|------------------------|--------|
|                         |      |                    |   |               |          |                                |      |                   |   |
| $                            | 1,678,500 |                    | 4.643  | %                  | 1 Month LIBOR |                                | 4.4 years |                   | $      | 120,098 |   |
|                              |           |                         |        |                    |               |                                     |           |                        |        |  |  |

 

At varioustimes the Company has used forward contracts to sell U.S. Treasury securitiesas a means to seek to mitigate the effect of rising interest rates on the fairvalue of its mortgage related securities. The fair values of these forward contracts generally move in theopposite direction of the fair values of the mortgage related securities, andapproximately in the same proportion when the maturities and other terms areappropriately matched.  When interestrates rise, the fair value of the mortgage related securities declines, but theincreasing fair values of the forward contracts help to preserve net assetvalue relative to the changing fair value of the short-term borrowings used tofund them.

 

The Company’sforward contracts do not meet the criteria for hedge accounting under SFAS No.133.  Therefore, changes in their fairvalues affect current earnings, as do changes in the fair values of thesecurities to which they are matched – such securities are classified astrading securities.  Although thechanges in the fair values of the forward contracts and the trading securitiesare offsetting, the contracts are not fully effective as hedges and, therefore,there can be volatility in periodic earnings to the extent they are noteffective.

 

At June 30,2003 and December 31, 2002, the Company had no open forward contracts to sellU.S. Treasury notes.

 

# **Liabilities**

 

The Companyhas entered into reverse repurchase agreements to finance certain of itsmortgage-backed securities.  Theseagreements are secured by a portion of the Company’s mortgage-backed securitiesand bear interest rates that have historically moved in close relationship toLIBOR.

 

At June 30,2003, the Company had outstanding $2,220,593,000 of reverse repurchaseagreements with a weighted average current borrowing rate of 1.08% and amaturity of one month. The reverse repurchase agreements were collateralized bymortgage-backed securities with an estimated fair value of $2,287,232,000.

 

At December31, 2002, the Company had outstanding $2,112,444,000 of reverse repurchaseagreements with a weighted average current borrowing rate of 1.40% and amaturity of one month.  The reverse

 

22

----

 

repurchase agreements werecollateralized by mortgage-backed securities with an estimated fair value of$2,199,852,000.

 

The Companyhad interest rate swaps with an unrealized loss of $137,233,000 and$120,098,000 at June 30, 2003 and December 31, 2002, respectively. Under theswap agreements, the Company receives a floating rate and pays a fixed rate.

 

The Companyhad $10,713,000 and $18,177,000 of other liabilities at June 30, 2003 andDecember 31, 2002, respectively. The decrease in other liabilities at June 30,2003 was primarily due to a decrease of dividend payable during the quarterended June 30, 2003. Other liabilities also consist of accrued interest payableand accrued expenses and other liabilities. The Company anticipates settlingall other liabilities within one year.

 

**ContractualObligations**

 

At June 30,2003 the Company had contractual obligations summarized below:

 
|                                                    |   | **Payments due by period** |       |
|---------------------------------------------------------|--------|----------------------------|------------|
| **Contractual  Obligations****(dollars  in thousands)** |   | **Total**                  |       | **Less than 1  year** |   | **1 - 3   years** |   | **3 - 5   years** |   | **More   than 5   years** |   |
|                                                    |   |                       | ** ** |   | ** ** |   | ** ** |   | ** ** |   | ** ** |
| Reverse repurchase principal payable                    |   | 2,220,593                  |       | 2,220,593 |   | — |   | — |   | — |   |
| Dividend payable                                        |   | 5,103                      |       | 5,103 |   | — |   | — |   | — |   |
| Total                                                   |   | $                          | 2,225,696  |   | $ | 2,225,696 |   |   |   |   |   |   |   |
|                                                         |        |                            |            |  |  |  |  |  |  |  |  |  |  |

 

**RESULTS OF OPERATIONS**

 

**ThreeMonths Ended June 30, 2003 Compared To Three Months Ended June 30, 2002**

 

*Overview*

 

For thequarter ended June 30, 2003, the Company’s net income was $16,461,000, or $0.55per common share on a basic and diluted basis, based on a weighted average of29,857,000 shares outstanding. This compares to net income of $15,521,000, or$0.58 per common share on a basic and diluted basis, based on a weighted averageof 26,628,000 and 26,796,000 shares outstanding, respectively, for the threemonths ended June 30, 2002. The weighted average number of shares used tocalculate net income per diluted share includes the effect of the assumedexercise of outstanding stock options.

 

*Net Interest Income*

 

Net interestincome for the quarter ended June 30, 2003 was $4,505,000, consisting ofinterest income on fixed income securities and cash balances less interestexpense on reverse repurchase agreements and interest rate swaps, compared to$23,880,000 for the quarter ended June 30, 2002, or a decrease of 81%. Thedecrease in net interest income was primarily due to a decrease in net interestmargin, from 3.17% for the quarter ended June 30, 2002 to 0.40% for the quarterended June 30, 2003. Changes in interest income and expense are primarily afunction of changes in average effective interest rates on the Company’s fixedincome securities, reverse repurchase agreements and interest rate swaps, andchanges in the average amount of those assets and liabilities outstandingduring each year.

 

23

----

 

The followingtable reflects the average balances for each category of the Company’s interestearning assets as well as the Company’s interest bearing liabilities, with thecorresponding effective rate of interest annualized:

 

**AVERAGE BALANCE AND RATE TABLE**

(Dollars in thousands)

 
|                                   |   | **For the Quarter Ended  June 30, 2003** |      | **For the Quarter Ended  June 30, 2002** |   |
|----------------------------------------|--------|------------------------------------------|-----------|------------------------------------------|--------|
|                                   |   | **Average  Balance**                     |      | **Effective  Rate**                      |   | **Average  Balance** |   | **Effective  Rate** |   |
| Interest-Earning Assets:               |   |                                     |      |                                     |   |   |   |   |   |
| Fixed Income Securities                |   | $                                        | 2,389,611 |                                     | 4.60   | % | $ | 2,794,702 |   | 6.48 | % |
| Cash and Cash Equivalents              |   | 15,538                                   |      | 0.98                                     | %      | 7,946 |   | 0.91 | % |
| Total Interest-Earning Assets          |   | 2,405,149                                |      | 4.58                                     | %      | 2,802,648 |   | 6.46 | % |
|                                   |   |                                     |      |                                     |   |   |   |   |   |
| Interest-Bearing Liabilities:          |   |                                     |      |                                     |   |   |   |   |   |
| Reverse Repurchase Agreements          |   | 2,206,085                                |      | 4.18                                     | %      | 2,597,048 |   | 3.29 | % |
|                                   |   |                                     |      |                                     |   |   |   |   |   |
| Net Interest-Earning Assets and Spread |   | $                                        | 199,064   |                                     | 0.40   | % | $ | 205,600 |   | 3.17 | % |

 

The effectiveyield data is computed by dividing the annualized net interest income orexpense, including the effect on interest expense of hedging transactions asapplicable into the average daily balance shown.

 

The followingtable reflects the average balances for the Company’s equity securities, withthe corresponding effective dividend yield annualized:

 

**AVERAGE BALANCE AND RATE TABLE**

(Dollars in thousands)

 
|              |   | **For the Quarter Ended  June 30, 2003** |   | **For the Quarter Ended  June 30, 2002** |   |
|-------------------|--------|------------------------------------------|--------|------------------------------------------|--------|
|              |   | **Average  Balance**                     |   | **Effective  Dividend  Yield**           |   | **Average  Balance** |   | **Effective  Dividend  Yield** |   |
|              |   |                                     |   |                                     |   |   |   |   |   |
| Equity securities |   | $                                        | 3,802  |                                     | 10.63  | % | $ | 4,033 |   | 10.81 | % |
|                   |        |                                          |        |                                          |        |  |  |  |  |  |  |

 

24

----

 

The followingtable shows the approximate amounts of the change in interest income andexpense between 2003 and 2002 that was a function of rate and volume changes,and the amount of the change that cannot be ascribed specifically to eitherrate or volume changes:

 

**RATE / VOLUME TABLE**

(Dollars in thousands)

 
|                          |   | **Three  Months Ended June 30,  2003 compared to 2002** |    |
|-------------------------------|--------|---------------------------------------------------------|---------|
|                          |   | **Total  Change**                                       |    | **Changes Due  to** |   |
| **Volume (1)**                |   | **Rates (1)**                                           |
| Interest-Earning Assets       |   |                                                    |    |   |   |   |   |
| Fixed income securities       |   | $                                                       | (17,762 | ) | $ | (6,559 | ) | $ | (11,203 | ) |
| Cash and cash equivalents     |   | 20                                                      |    | 17 |   | 3 |   |
|                          |   |                                                    |    |   |   |   |   |
| Total interest income         |   | (17,742                                                 | )       | (6,542 | ) | (11,200 | ) |
|                          |   |                                                    |    |   |   |   |   |
| Interest-Bearing Liabilities  |   |                                                    |    |   |   |   |   |
| Reverse repurchase agreements |   | 1,633                                                   |    | (3,219 | ) | 4,852 |   |
|                          |   |                                                    |    |   |   |   |   |
| Total interest expense        |   | 1,633                                                   |    | (3,219 | ) | 4,852 |   |
|                          |   |                                                    |    |   |   |   |   |
| Change In Net Interest Income |   | $                                                       | (19,375 | ) | $ | (3,323 | ) | $ | (16,052 | ) |

 

----

(1)   Changes in interest income/expense notarising from volume or rate variances are allocated proportionately to rate andvolume.

 

A portion ofthe change in interest expense in the table above is related to the Company’s useof interest rate swaps.  Periodicsettlements of the swap agreements with their counterparties result inadjustments to interest expense associated with the reverse repurchaseagreements hedged by the swaps.  Duringthe quarter ended June 30, 2003, interest expense increased by $14,005,000 dueto amounts paid to swap counterparties and $1,895,000 from amortization ofdeferred losses on terminated swap contracts. During the quarter ended June 30, 2002, interest expense increased by$9,463,000 due to amounts paid to swap counterparties and decreased by $59,000from amortization of deferred gains on terminated swap contracts.

 

##### *Dividend Income*

 

The Companyreported dividend income of $101,000 from dividends on equity investments forthe quarter ended June 30, 2003, compared to $109,000 for the quarter endedJune 30, 2002.

 

*Net Gain (Loss) from Investment andDerivative Activities*

 

During thequarter ended June 30, 2003, the Company reported net gains from investment andderivative activities of $13,630,000 in the statement of operations. The gainconsisted of a gain of $5,424,000 on the sale of $432,761,000 of fixed incometrading securities, a gain of $15,087,000 on the sale of $747,570,000 of fixedincome securities available-for-sale, and an unrealized loss of $6,881,000 onfixed income trading securities.

 

During thequarter ended June 30, 2002, the Company reported net losses from investmentand derivative activities of $8,748,000 in the statement of operations. Thisloss consisted of a net loss of $23,441,000 on closed forward contracts, a gainof $3,000 on the sale of $1,248,000 of fixed income securitiesavailable-for-sale, a gain of $177,000 on the sale of $578,000 of equitysecurities available-for-sale, and an unrealized gain of $14,513,000 on tradingsecurities.

 

25

----

 

*General and Administrative Expenses*

 

General andadministrative expenses increased to $1,775,000 for the quarter ended June 30,2003 from ($280,000) for the quarter ended June 30, 2002. The primary reasonfor the increase was the reversal of incentive fee expenses during the quarterended June 30, 2002.

 

**SixMonths Ended June 30, 2003 Compared To Six Months Ended June 30, 2002**

 

*Overview*

 

For the sixmonths ended June 30, 2003, the Company’s net income was $22,760,000, or $0.76per common share on a basic and diluted basis, based on a weighted average of29,857,000 shares outstanding. This compares to net income of $25,249,000, or$1.12 per common share on a basic and diluted basis, based on a weightedaverage of 22,495,000 and 22,636,000 shares outstanding, respectively, for thesix months ended June 30, 2002. The weighted average number of shares used tocalculate net income per diluted share includes the effect of the assumedexercise of outstanding stock options.

 

The primaryreasons for the change in operating results for the six months ended June 30,2003 compared to 2002 are:  (1) changesin interest rates and market conditions affecting the fair values of theCompany’s Mortgage Related Securities and related derivative financialinstruments and net interest income; and (2) related changes in investment andhedging strategies.

 

##### *Net InterestIncome*

 

Net interestincome for the six months ended June 30, 2003 was $11,943,000, consisting of interestincome on fixed income securities and cash balances less interest expense onreverse repurchase agreements and interest rate swaps, compared to $38,484,000for the six months ended June 30, 2002, or a decrease of 69%. The decrease innet interest income was primarily due to a decrease in net interest margin,from 3.19% for the six months ended June 30, 2002 to 0.64% for the six monthsended June 30, 2003. Changes in interest income and expense are primarily afunction of changes in average effective interest rates on the Company’s fixedincome securities, reverse repurchase agreements and interest rate swaps, andchanges in the average amount of those assets and liabilities outstandingduring each year.

 

26

----

 

The followingtable reflects the average balances for each category of the Company’s interestearning assets as well as the Company’s interest bearing liabilities, with thecorresponding effective rate of interest annualized:

 

**AVERAGE BALANCE AND RATE TABLE**

(Dollars in thousands)

 
|                                   |   | **For the Six Months Ended   June 30, 2003** |      | **For the Six Months Ended  June 30, 2002** |   |
|----------------------------------------|--------|----------------------------------------------|-----------|---------------------------------------------|--------|
|                                   |   | **Average  Balance**                         |      | **Effective  Rate**                         |   | **Average  Balance** |   | **Effective  Rate** |   |
| Interest-Earning Assets:               |   |                                         |      |                                        |   |   |   |   |   |
| Fixed Income Securities                |   | $                                            | 2,345,020 |                                        | 4.91   | % | $ | 2,237,143 |   | 6.48 | % |
| Cash and Cash Equivalents              |   | 11,101                                       |      | 0.86                                        | %      | 8,605 |   | 1.70 | % |
| Total Interest-Earning Assets          |   | 2,356,121                                    |      | 4.89                                        | %      | 2,245,748 |   | 6.46 | % |
|                                   |   |                                         |      |                                        |   |   |   |   |   |
| Interest-Bearing Liabilities:          |   |                                         |      |                                        |   |   |   |   |   |
| Reverse Repurchase Agreements          |   | 2,151,141                                    |      | 4.25                                        | %      | 2,086,705 |   | 3.27 | % |
|                                   |   |                                         |      |                                        |   |   |   |   |   |
| Net Interest-Earning Assets and Spread |   | $                                            | 204,980   |                                        | 0.64   | % | $ | 159,043 |   | 3.19 | % |

 

The effectiveyield data is computed by dividing the annualized net interest income orexpense, including the effect on interest expense of hedging transactions asapplicable into the average daily balance shown.

 

The followingtable reflects the average balances for the Company’s equity securities, withthe corresponding effective dividend yield annualized:

 

**AVERAGE BALANCE AND RATE TABLE**

(Dollars in thousands)

 
|              |   | **For the Six Months Ended  June 30, 2003** |   | **For the Six Months Ended   June 30, 2002** |   |
|-------------------|--------|---------------------------------------------|--------|----------------------------------------------|--------|
|              |   | **Average  Balance**                        |   | **Effective  Dividend  Yield**               |   | **Average  Balance** |   | **Effective  Dividend  Yield** |   |
|              |   |                                        |   |                                         |   |   |   |   |   |
| Equity securities |   | $                                           | 3,802  |                                         | 10.63  | % | $ | 4,275 |   | 10.99 | % |
|                   |        |                                             |        |                                              |        |  |  |  |  |  |  |

 

27

----

 

The followingtable shows the approximate amounts of the change in interest income andexpense between 2003 and 2002 that was a function of rate and volume changes,and the amount of the change that cannot be ascribed specifically to eitherrate or volume changes:

 

**RATE / VOLUME TABLE**

(Dollars in thousands)

 
|                          |   | **Six Months  Ended June 30,  2003 compared to 2002** |    |
|-------------------------------|--------|-------------------------------------------------------|---------|
|                          |   | **Total  Change**                                     |    | **Changes Due  to** |   |
| **Volume (1)**                |   | **Rates (1)**                                         |
| Interest-Earning Assets       |   |                                                  |    |   |   |   |   |
| Fixed income securities       |   | $                                                     | (14,909 | ) | $ | 3,496 |   | $ | (18,405 | ) |
| Cash and cash equivalents     |   | (25                                                   | )       | 21 |   | (46 | ) |
|                          |   |                                                  |    |   |   |   |   |
| Total interest income         |   | (14,934                                               | )       | 3,517 |   | (18,451 | ) |
|                          |   |                                                  |    |   |   |   |   |
| Interest-Bearing Liabilities  |   |                                                  |    |   |   |   |   |
| Reverse repurchase agreements |   | 11,607                                                |    | 1,053 |   | 10,554 |   |
|                          |   |                                                  |    |   |   |   |   |
| Total interest expense        |   | 11,607                                                |    | 1,053 |   | 10,554 |   |
|                          |   |                                                  |    |   |   |   |   |
| Change In Net Interest Income |   | $                                                     | (26,541 | ) | $ | 2,464 |   | $ | (29,005 | ) |

 

----

(1)   Changes in interest income/expense notarising from volume or rate variances are allocated proportionately to rate andvolume.

 

A portion ofthe change in interest expense in the table above is related to the Company’suse of interest rate swaps.  Periodicsettlements of the swap agreements with their counterparties result inadjustments to interest expense associated with the reverse repurchaseagreements hedged by the swaps.  Duringthe six months ended June 30, 2003, interest expense was increased by$27,787,000 paid to swap counterparties and $3,768,000 from amortization ofdeferred losses on terminated swap contracts. During the six months ended June 30, 2002, interest expense wasincreased by $15,153,000 paid to swap counterparties and decreased by $180,000from amortization of deferred gains on terminated swap contracts.

 

##### *Dividend Income*

 

The Companyreported dividend income of $202,000 from dividends on equity investments forthe six months ended June 30, 2003, compared to $235,000 for the six monthsended June 30, 2002.

 

*Net Gain (Loss) from Investment and DerivativeActivities*

 

During the sixmonths ended June 30, 2003, the Company reported a gain from investment andderivative activities of $14,078,000 in the statement of operations.  The gain consisted of a net gain of$15,087,000 on the sale of $747,570,000 of fixed income securitiesavailable-for-sale, a gain of $5,424,000 on the sale of $432,761,000 of fixedincome trading securities, and an unrealized loss of $6,433,000 on fixed incometrading securities.

 

During the sixmonths ended June 30, 2002, the Company reported net losses from investment andderivative activities of $10,453,000 in the statement of operations. This lossconsisted of a net loss of $23,922,000 on closed forward contracts, a loss of$229,000 on the sale of $98,634,000 of fixed income securitiesavailable-for-sale, a gain of $518,000 on the sale of $1,695,000 of equitysecurities available-for-

 

28

----

 

sale, a gain of $17,000 on thesale of $6,535,000 of fixed income trading securities, and an unrealized gainof $13,163,000 on trading securities.

 

##### *General and AdministrativeExpenses*

 

General andadministrative expenses increased to $3,463,000 for the six months ended June30, 2003 from $3,017,000 for the six months ended June 30, 2002. The increasewas primarily due to an increase in management fees and legal fees expensesduring the six months ended June 30, 2003 compared to the same period endedJune 30, 2002. The increase in management fees was a result of increasedaverage net invested capital, and the increase in legal fees was due toprofessional services rendered in connection with the Company's pursuit ofvarious strategic alternatives.

 

**LIQUIDITY AND CAPITALRESOURCES**

 

The Company’sprimary sources of funds as of June 30, 2003 and December 31, 2002, consistedof reverse repurchase agreements totaling $2,220,593,000 and $2,112,444,000,respectively.  The Company expects tocontinue to borrow funds in the form of reverse repurchase agreements.  At June 30, 2003, the Company had borrowingarrangements with approximately twenty different investment banking firms.  Increases in short-term interest rates couldnegatively impact the valuation of the Company’s mortgage assets, which couldlimit the Company’s borrowing ability or cause its lenders to initiate margincalls.

 

For liquidity,the Company will also rely on the cash flow from operations, primarily monthlyprincipal and interest payments to be received on the mortgage assets.

 

The Companybelieves that equity capital, combined with the cash flow from operations andthe utilization of borrowings, will be sufficient to enable the Company to meetanticipated liquidity requirements. However, an increase in prepayment rates substantially above the Company’sexpectations could cause a liquidity shortfall.  If the Company’s cash resources are at any time insufficient tosatisfy the Company’s liquidity requirements, the Company may be required toliquidate mortgage assets, sell debt or additional equity securities or borrowmoney to meet its obligations.  Ifrequired, the sale of mortgage assets at prices lower than the carrying valueof such assets would result in losses and reduced income.

 

The Companymay in the future increase its capital resources by making additional offeringsof equity and debt securities, including classes of preferred stock, commonstock, commercial paper, medium-term notes, collateralized mortgage obligationsand senior or subordinated notes.  Alldebt securities, other borrowings, and classes of preferred stock will besenior to the common stock in a liquidation of the Company.  The effect of additional equity offeringsmay be the dilution of stockholders’ equity in the Company or the reduction ofthe price of shares of the common stock, or both.  The Company is unable to estimate the amount, timing or nature ofany additional offerings as they will depend upon market conditions and otherfactors.

 

**INFLATION**

 

Most of theCompany’s assets and liabilities are financial in nature.  As a result, interest rates and other factorsdrive the Company’s performance far more so than does inflation.  Changes in interest rates do not necessarilycorrelate with inflation rates or changes in inflation rates.  The Company’s financial statements areprepared in accordance with accounting principles generally accepted in theUnited States of America and the Company’s dividends are determined by theCompany’s net income as calculated for tax purposes; in each case, theCompany’s activities and balance sheet are measured with reference to historicalcost and or fair market value without considering inflation.

 

29

----

 

**CRITICAL ACCOUNTING POLICIES**

 

The Company’sfinancial statements are prepared in accordance with accounting principlesgenerally accepted in the United States of America. The financial informationcontained within these financial statements is, to a significant extent,financial information that is based on approximate measures of the financialeffects of transactions and events that have already occurred. Based on itsconsideration of accounting policies that involve complex and subjectivedecisions and assessments, management has identified its most criticalaccounting policies to be the following:

 

##### *Classifications ofInvestment Securities*

 

The Company’sinvestment securities are classified as either trading securities oravailable-for-sale securities, as discussed in Note 2 to the financialstatements. Although all of the Company’s investment securities are carried onthe balance sheets at fair value, the classification of the securities astrading or as available-for-sale determines whether changes in fair value arerecorded immediately through current earnings, as they are for tradingsecurities, or as adjustments to accumulated other comprehensive income (loss),which is a component of stockholders’ equity, as they are foravailable-for-sale securities. If available-for-sale securities were classifiedas trading securities, there could be substantially greater volatility inearnings from period-to-period.

 

##### *Valuations of InvestmentSecurities*

 

As notedabove, all investment securities are carried on the balance sheets at fairvalue. Some of the Company’s securities, particularly the equity securities,have readily determinable fair values based on quotes provided from recognizedsecurities exchanges. However, most of the Company’s fixed income securitieshave fair values determined by management with reference to price estimatesprovided by dealers in the securities, independent pricing services, and othersources. Because the price estimates may vary to some degree between sources,management must make certain judgments and assumptions about the appropriateprice to use to calculate the fair values for financial reporting purposes. Differentjudgments and assumptions could result in different presentations of value.

 

When the fairvalue of an available-for-sale security is less than amortized cost, managementconsiders whether there is an other-than-temporary impairment in the value ofthe security (e.g., whether the security will be sold prior to the recovery offair value).  If, in management’sjudgment, an other-than-temporary impairment exists, the cost basis of thesecurity is written down to the then-current fair value, and the unrealizedloss is transferred from accumulated other comprehensive income as an immediatereduction of current earnings (i.e., as if the loss had been realized in theperiod of impairment).

 

*Interest Income and Dividend Recognition*

 

Interestincome on the Company’s mortgage securities and other fixed income securitiesis accrued based on the actual coupon rate and the outstanding principalamount.  Premiums and discounts areamortized or accreted into interest income over the lives of the securitiesusing the effective yield method adjusted for the effects of estimatedprepayments.  In the event that the costbasis of a security has been reduced below par because of another-than-temporary impairment in value, the difference is treated like adiscount in determining the appropriate amount of accretion to recognize asinterest income between the date when the cost is adjusted and when thesecurity is ultimately sold.  Also,dividends on equity securities are recognized as income on their declarationdates.

 

30

----

 

*Accounting for Derivative FinancialInstruments and Hedging Activities*

 

In recentperiods the Company has used two types of derivative financial instruments, asdiscussed in Notes 2 and 5 to the financial statements. Both types are usedfundamentally for the purpose of hedging the Company’s exposure to interestrate risk, and both are carried at fair value on the balance sheets. Forwardcontracts to sell U.S. Treasury securities are matched against a portion of theCompany’s fixed income trading securities. These contracts do not qualify forhedge accounting and, therefore, changes in fair values of these instrumentsare recorded immediately through current earnings. Such changes tend to offsetfair value changes in the opposite direction for the fixed income tradingsecurities and help to reduce the volatility of periodic earnings. Interestrate swap agreements are matched against a portion of the Company’s current andanticipated reverse repurchase agreements (borrowings), effectively fixing therate of interest paid on those borrowings for longer durations. Theseinstruments qualify for hedge accounting and are considered to be cash flowhedges. To the extent that periodic changes in fair values of the swap agreementsare deemed to be the result of their effectiveness as hedges, such changes arerecorded as adjustments to accumulated other comprehensive income, a componentof stockholders’ equity, rather than to current earnings. If the swaps nolonger qualified as cash flow hedges (for example, if the terms of the swapswere not matched appropriately to the terms of the borrowings, or ifanticipated borrowings matched to the swaps were not in fact made) all or aportion of the swaps’ fair values could become adjustments to current earnings.

 

##### *Accounting for StockOptions*

 

The Companyissues stock options to its Directors and to certain employees of the Manager.The stock options issued to Directors are accounted for using theintrinsic-value method. Because the options were issued with exercise prices noless than the market price of the Common Stock on the dates of grant, andbecause the stock options key terms are fixed, use of the intrinsic-valuemethod results in the Company not recognizing compensation expense for thesestock options. Note 2 to the financial statements discloses the effects onrecent earnings if these stock options were accounted for at fair value whengranted and if compensation expense were recognized in periodic earnings overthe vesting periods of the options. If the terms of the options were to bechanged, variable accounting might need to be used, and the Company might thenneed to begin recognizing compensation expense for these options.  Options granted to persons other thanDirectors (i.e., to non-employees) are accounted for using the fair valuemethod; such stock options are measured at their fair value when they aregranted and are recognized as general and administrative expense during theperiods when the options are vested and the related services are performed.

 

**ITEM 3.          QUANTITATIVEAND QUALITATIVE DISCLOSURES ABOUT MARKET RISK**

 

**MARKET RISK**

 

The Company’stwo primary components of market risk are interest rate risk and equity pricerisk, as discussed below.

 

**InterestRate Risk**

 

*Effect on NetInterest Income. *TheCompany invests in fixed-rate mortgage assets, among other mortgage assets,that are funded with short-term borrowings. During periods of rising interest rates, the borrowing costs associatedwith funding such fixed-rate assets are subject to increase while the incomeearned on such assets may remain substantially unchanged.  This would result in a narrowing of the netinterest spread between the related assets and borrowings and may even resultin losses. The Company may enter into derivative transactions seeking tomitigate the negative impact of a rising interest rate environment. Hedgingtechniques will be based, in part, on assumed levels of prepayments of theCompany’s mortgage assets.  Ifprepayments are slower or faster than assumed, the life of the mortgage assetswill be longer or shorter which would reduce the effectiveness of the Company’shedging techniques and may result in losses on such

 

31

----

 

transactions.  Hedging techniques involving the use ofderivative securities are highly complex and may produce volatile returns. Thehedging activity of the Company will also be limited by the asset and sourcesof income requirements applicable to the Company as a REIT.

 

*Extension Risk*.  Fixed-rate assets are generally acquiredwith a projected weighted average life based on certain assumptions regardingprepayments.  In general, when afixed-rate mortgage asset is acquired with borrowings, the Company may, but isnot required to, enter into an interest rate swap agreement or other hedginginstrument that effectively fixes the Company’s borrowing costs for a periodclose to the anticipated average life of the related asset.  This strategy is designed to protect theCompany from rising interest rates because the borrowing costs are fixed forthe duration of the asset.  However, ifprepayment rates decrease in a rising interest rate environment, the life ofthe mortgage asset could extend beyond the term of the swap agreement or otherhedging instrument.  This situationcould negatively impact the Company as borrowing costs would no longer be fixedafter the end of the hedging instrument while the income earned on the assetwould remain fixed.  This situation mayalso cause the market value of the Company’s mortgage assets to decline withlittle or no offsetting gain from the related hedging transactions.  In certain situations, the Company may beforced to sell assets and incur losses or borrow money to maintain adequateliquidity.

 

*Prepayment Risk*.  Fixed-rate assets in combination withhedging instruments are also subject to prepayment risk.  In falling interest rate scenarios, thefixed-rate mortgage assets may prepay faster such that the average life becomesshorter than its related hedging instrument. If this were to happen, the Company would potentially need to reinvestat rates lower than that of the related hedging instrument.  This situation may result in the narrowingof interest rate spreads and may cause losses.

 

Prepaymentrates generally increase when prevailing interest rates fall below the interestrates on existing mortgage assets.  Inaddition, prepayment rates generally increase when the difference betweenlong-term and short-term interest rates declines.  Prepayments of mortgage assets could harm the Company’s resultsof operations in several ways.  TheCompany anticipates that a substantial portion of its adjustable-rate mortgageassets may bear initial “teaser” interest rates that are lower than their“fully indexed” rates (the applicable index plus a margin).  In the event that such an adjustable-ratemortgage asset is prepaid prior to or soon after the time of adjustment to afully indexed rate, the Company will have held the mortgage asset while it wasless profitable and lost the opportunity to receive interest at the fullyindexed rate over the expected life of the adjustable-rate mortgage asset.  In addition, the prepayment of any mortgageasset that had been purchased at a premium by the Company would result in theimmediate write-off of any remaining capitalized premium amount and consequentreduction of the Company’s net interest income by such amount.  Finally, in the event that the Company isunable to acquire new mortgage assets to replace the prepaid mortgage assets,its financial condition, cash flow and results of operations could be harmed.

 

*Forward ContractRisk*.  TheCompany may also enter in forward contracts to sell U.S. Treasury notes inaddition to or instead of interest rate swap agreements.  These forward contracts are generallyexpected to mitigate the impact of rising interest rates on the fair value ofthe Company’s fixed income securities. However, if the duration mismatch between mortgage securities and U.S.Treasury notes were to widen, which could occur in both a rising and fallinginterest rate environment, the fair value of the Company’s portfolio wouldgenerally be expected to decline.  Inaddition, the use of forward contracts to sell U.S. Treasury notes generallydoes not directly impact borrowing costs in the same manner as interest rateswap agreements.  Therefore, the use ofsuch forward contracts could result in net income volatility during periods ofinterest rate volatility.

 

The Companyalso invests in adjustable-rate mortgage assets that are typically subject toperiodic and lifetime interest rate caps that limit the amount anadjustable-rate mortgage asset’s interest rate can change during any givenperiod, as well as the minimum rate payable. The Company’s borrowings will not be subject to similarrestrictions.  Hence, in a period ofincreasing interest rates, interest rates on its borrowings could increasewithout limitation by caps, while the interest rates on its mortgage assets aregenerally limited by caps.  This problemwill be magnified to the extent the Company acquires mortgage assets that arenot fully

 

32

----

 

indexed.  Further, some adjustable-rate mortgageassets may be subject to periodic payment caps that result in some portion ofthe interest being deferred and added to the principal outstanding.  This could result in receipt by the Companyof less cash income on its adjustable-rate mortgage assets than is required topay interest on the related borrowings. These factors could lower the Company’s net interest income or cause anet loss during periods of rising interest rates, which would negatively impactthe Company’s financial condition, cash flows and results of operations.

 

The Companyfunds a substantial portion of its acquisitions of adjustable-rate mortgageassets with borrowings that have interest rates based on indices and repricingterms similar to, but of somewhat shorter maturities than, the interest rateindices and repricing terms of the mortgage assets.  Thus, the Company anticipates that in most cases the interestrate indices and repricing terms of its mortgage assets and its funding sourceswill not be identical, thereby creating an interest rate mismatch betweenassets and liabilities.  While the historicalspread between relevant short-term interest rate indices has been relativelystable, there have been periods, especially during the 1979-1982 and 1994interest rate environments, when the spread between such indices was volatile.  During periods of changing interest rates,such interest rate mismatches could negatively impact the Company’s financialcondition, cash flows and results of operations.

 

*Effect on Fair Value*.  Another component of interest rate risk isthe effect changes in interest rates will have on the market value of theCompany’s assets.  This is the risk thatthe market value of the Company’s assets will increase or decrease at differentrates than that of the Company’s liabilities, including its hedginginstruments.

 

The Company primarilyassesses its interest rate risk by estimating the duration of its assets andthe duration of its liabilities, including all hedging instruments.  Duration essentially measures the marketprice volatility of financial instruments as interest rates change.  The Company generally calculates durationusing various financial models and empirical data and different models andmethodologies can produce different duration numbers for the same securities.

 

The followingsensitivity analysis table shows the estimated impact on the fair value of theCompany’s interest rate sensitive investments, net of its hedging instrumentsand reverse repurchase agreement liabilities, assuming rates instantaneouslyrise and fall one hundred, two hundred, and three hundred basis points.Interest rate sensitive investments currently include fixed income trading andavailable-for-sale securities. (Dollars are in thousands except per shareamounts.)

 
|                                                                      |   | **Fair Value  for Scenario Shown**          |    |
|---------------------------------------------------------------------------|--------|---------------------------------------------|---------|
|                                                                      |   | **Interest  Rates Fall  300 Basis  Points** |    | **Interest  Rates Fall  200 Basis  Points** |   | **Interest  Rates Fall  100 Basis  Points** |   | **Unchanged** |   | **Interest  Rates Rise  100 Basis  Points** |   | **Interest  Rates Rise  200 Basis  Points** |   | **Interest  Rates Rise  300 Basis  Points** |   |
|                                                                      |   |                                        |    |   |   |   |   |   |   |   |   |   |   |   |   |
| Interest Rate Sensitive Instruments After Hedging Instruments             |   | $                                           | 88,077  |   | $ | 122,411 |   | $ | 157,332 |   | $ | 174,409 |   | $ | 142,741 |   | $ | 78,360 |   | $ | 4,572 |   |
|                                                                      |   |                                        |    |   |   |   |   |   |   |   |   |   |   |   |   |
| Change in Fair Value                                                      |   | $                                           | (86,332 | ) | $ | (51,998 | ) | $ | (17,077 | ) | — |   | $ | (31,668 | ) | $ | (96,049 | ) | $ | (169,837 | ) |
|                                                                      |   |                                        |    |   |   |   |   |   |   |   |   |   |   |   |   |
| Change as a Percent of Fair Value of Interest Rate Sensitive  Investments |   | (3.41                                       | )%      | (2.05 | )% | (0.67 | )% | — |   | (1.25 | )% | (3.79 | )% | (6.71 | )% |
|                                                                      |   |                                        |    |   |   |   |   |   |   |   |   |   |   |   |   |
| Change as a Percent of Stockholders’ Equity                          |   | (47.44                                      | )%      | (28.57 | )% | (9.38 | )% | — |   | (17.40 | )% | (52.78 | )% | (93.32 | )% |
|                                                                      |   |                                        |    |   |   |   |   |   |   |   |   |   |   |   |   |
| Change on a Per Share Basis                                               |   | $                                           | (2.89   | ) | $ | (1.74 | ) | $ | (0.57 | ) | — |   | $ | (1.06 | ) | $ | (3.22 | ) | $ | (5.69 | ) |
|                                                                           |        |                                             |         |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |

 

33

----

 

It isimportant to note that the impact of changing interest rates on fair value canchange significantly when interest rates change beyond one hundred basis pointsfrom current levels.  Therefore, thevolatility in fair value for the Company could increase significantly wheninterest rates change beyond one hundred basis points.  In addition, there are other factors thatimpact the fair value of the Company’s interest rate sensitive investments andhedging instruments, such as the shape of the yield curve, market expectationsas to future interest rate changes and other market conditions.  Accordingly, there may be differencesbetween the fair value changes shown above and actual changes in fair value asinterest rates change, and those differences may be material and adverse.

 

The Companyhas established an interest rate risk management policy that is intended tomitigate the negative impact of changing interest rates.  The Company generally intends to mitigateinterest rate risk by targeting the difference between the market weighted averageduration on its mortgage related assets funded with secured borrowings to themarket weighted average duration of such borrowings to plus or minus one yearor less, taking into account all hedging transactions.  The Company generally does not intend tohave any specific duration target for the portion of its mortgage relatedassets that are not funded by secured borrowings.

 

There can beno assurance that the Company will be able to limit such duration differencesand there may be periods of time when the duration difference will be greaterthan one year.

 

**Equity Price Risk**

 

Anothercomponent of market risk for the Company is equity price risk.  This is the risk that the market value ofthe Company’s equity investments will decrease.  The following table shows the impact on the Company’s fair valueas the price of its equity securities change, assuming price decreases of 10%and price increases of 10%.  Actualprice decreases or increases may be greater or smaller.  (Dollars are in thousands except per shareand percentage amounts.)

** **

|                                             |   | **Fair Value for Scenario Shown** |   |
|--------------------------------------------------|--------|-----------------------------------|--------|
|                                             |   | **Prices  Decrease  10%**         |   | **Unchanged** |   | **Prices  Increase  10%** |   |
|                                             |   |                              |   |   |   |   |   |
| Equity Investments                               |   | $                                 | 3,928  |   | $ | 4,364 |   | $ | 4,800 |   |
|                                             |   |                              |   |   |   |   |   |
| Change in Fair Value                             |   | (436                              | )      | — |   | 436 |   |
| Change as a Percent of Fair Value                |   | (10                               | )%     | — |   | 10 | % |
| Change as a Percent of Stockholders’ Equity |   | (0.2                              | )%     | — |   | 0.2 | % |
| Change on a Per Share Basis                      |   | $                                 | (0.01  | ) | — |   | $ | 0.01 |   |
|                                                  |        |                                   |        |  |  |  |  |  |  |  |

 

Although thereis no direct link between changes in fair value and changes in earnings in manycases, a decline in fair value for the Company may translate into decreasedearnings over the remaining life of the investment portfolio.

 

If the fairmarket value of the Company’s portfolio were to decline significantly, theCompany’s overall liquidity may be impaired which could result in the Companybeing required to sell assets at losses.

 

**The Company’sanalysis of risks is based on management’s experience, estimates, models andassumptions.  These analyses rely onmodels of financial information which utilize estimates of fair value andinterest rate sensitivity.  Actualeconomic conditions or implementation of investment decisions by the Managermay produce results that differ significantly from the estimates andassumptions used in the Company’s models and the projected results shown in theabove tables and in**

34

----

 

**this report. These analyses contain certain “forward-looking statements” and aresubject to the Safe Harbor contained in the Private Securities LitigationReform Act of 1995.**

 

**ITEM4.          CONTROLS AND PROCEDURES**

 

As of June 30, 2003, we carried out an evaluation, under thesupervision and with the participation of our management, including our ChiefExecutive Officer and our Chief Financial Officer, of the effectiveness of thedesign and operation of our disclosure controls and procedures pursuant toExchange Act Rule 13a-14.  Based uponthe foregoing, our Chief Executive Officer and our Chief Financial Officerconcluded that as of June 30, 2003, our disclosure controls and procedures areeffective in timely alerting them to material information relating to ourCompany (including our consolidated subsidiaries) required to be included inour Exchange Act reports.  There havebeen no significant changes in our internal controls or in other factors whichcould significantly affect internal controls subsequent to the date we carriedout our evaluation.

 

**PARTII.        OTHER INFORMATION**

 

**ITEM1.          LEGAL PROCEEDINGS**

 

None.

 

**ITEM2.          CHANGES IN SECURITIES AND USEOF PROCEEDS**

 

**First Amendment to Shareholder Rights Agreement**

 

Previously, our board of directors adopted a shareholder rights plan,pursuant to which we issued to holders of our common stock certain preferredstock purchase rights.  The terms andconditions of these rights are set forth in a Shareholder Rights Agreementdated as of July 19, 1999, by and between the Company and The Bank of New York,as the Rights Agent.  On July 15, 2003,the Company and The Bank of New York executed a First Amendment to our originalRights Agreement.  The First Amendmentamends the definition of “Exempt Person” as used in the original RightsAgreement to include American Home Mortgage Holdings, Inc. and AHM New Holdco,Inc. and their respective affiliates until such time as the agreement and planof merger, which we entered into on July 12, 2003 with such parties, isterminated in accordance with its terms. In all other respects, the original Rights Agreement remains in fullforce and effect and unmodified.

 

**ITEM3.          DEFAULTS UPON SENIORSECURITIES**

 

Notapplicable.

 

35

----

 

**ITEM4.          SUBMISSION OF MATTERS TO AVOTE OF SECURITY HOLDERS**

 

On June 19,2003, we held our Annual Meeting of Stockholders for the purpose of voting on:

 

1.               Theelection of two directors to our board of directors; and

 

2.               Ratificationof the appointment of Deloitte & Touche LLP as independent auditor for2003.

 

Ourstockholders approved the following matters, with the following votes cast withrespect to each proposal:

 

**Election of two Directors to our Board ofDirectors**

 
| **Director**     |   | **Shares  Voted For:** |   | **Share  Votes Withheld:** |   |
|------------------|--------|------------------------|--------|----------------------------|--------|
|             |   |                   |   |                       |   |
| Peter G. Allen   |   | 26,123,108             |   | 3,048,410                  |   |
|             |   |                   |   |                       |   |
| Philip A. Barach |   | 25,920,345             |   | 3,241,173                  |   |

 

The followingdirectors’ terms are also continuing:

 

Marc I. Stern

Samuel P. Bell

The Hon. JohnA. Gavin

Carl C.Gregory, III

Jeffrey E.Gundlach

 

**Ratification of the appointment of Deloitte& Touche LLP as independent auditor for 2003:**

 
| **Shares Voted For:** |   | **Share  Votes Withheld:** | ** ** | **Share  Votes Abstained** | ** ** |
|-----------------------|--------|----------------------------|------------|----------------------------|------------|
|                  |   |                       |       |                       |       |
| 27,912,711            |   | 1,107,050                  |       | 141,757                    |       |

 

**ITEM5.          OTHER INFORMATION**

 

None.

 

**ITEM6.          EXHIBITS AND REPORTS ON FORM8-K**

 

*a)    Exhibits*

 

The exhibitslisted on the Exhibit List, which appears below following the signature page,are included or incorporated by reference in this Quarterly Report.

 

*b)    Reportson Form 8-K*

 

On July 15,2003, we filed a Current Report on Form 8-K announcing the execution of (i)that certain agreement and plan of merger dated July 12, 2003, by and amongAmerican Home Mortgage Holdings, Inc., AHM New Holdco, Inc. and Apex MortgageCapital, Inc., and (ii) that certain First Amendment to Shareholder RightsAgreement dated as of July 15, 2003, by and between Apex Mortgage Capital, Inc.and The Bank of New York.

 

36

----

 

**SIGNATURES**

 

Pursuant to the requirements ofSection 13 or 15(d) of the Securities and Exchange Act of 1934, the Registranthas duly caused this report to be signed on its behalf by the undersigned,thereunto duly authorized.

 

 
|                    |   |                  | Apex  Mortgage Capital, Inc.           |
|-------------------------|--------|-----------------------|----------------------------------------|
|                    |   |                  | (Registrant)                           |
|                    |   |                  |                                   |
|                    |   |                  |                                   |
| Dated:  August 14, 2003 |   | /s/ Philip  A. Barach |                                   |
|                    |   |                  | Philip A.  Barach                      |
|                    |   |                  | President  and Chief Executive Officer |
|                    |   |                  | (Principal  Executive Officer)         |
|                    |   |                  |                                   |
|                    |   |                  |                                   |
| Dated:  August 14, 2003 |   | /s/ David S.  DeVito  |                                   |
|                    |   |                  | David S.  DeVito                       |
|                    |   |                  | Chief  Financial Officer               |
|                    |   |                  | (Principal  Accounting Officer)        |
|                         |        |                       |                                        |  |

 

37

----

 

**EXHIBITINDEX**

 

Pursuant to Item 601 (a)(2) ofRegulation S-K, this exhibit index immediately precedes the exhibits.

 

The following exhibits are partof this Quarterly Report on Form 10-Q and are numbered in accordance with Item601 of Regulation S-K.

* *
| **Exhibit No.** |   | **Description**                                                                                                                                                                                                                                                                                                                                                                                                 |
|-----------------|--------|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|            |   |                                                                                                                                                                                                                                                                                                                                                                                                            |
| 2.1             |   | Agreement and Plan of  Merger dated as of July 12, 2003, by and among American Home Mortgage  Holdings, Inc., American Home Mortgage Investment Corp. (formerly called AHM  New Holdco, Inc.) and Apex Mortgage Capital, Inc. (previously filed as  Exhibit 2.1 to the Company’s Current Report on Form 8-K filed with the  Commission on July 15, 2003 and incorporated herein by reference).             |
|            |   |                                                                                                                                                                                                                                                                                                                                                                                                            |
| 3.1             |   | Articles of Amendment and  Restatement of the Company, as filed with the State Department of Assessments  and Taxation of Maryland on November 25, 1997, (previously filed as Exhibit  3.1 to the Company’s Registration Statement on Form S-11 (Commission File No.  333-36069) Amendment No. 3 filed with the Commission on November 21, 1997 and  incorporated herein by reference).                    |
|            |   |                                                                                                                                                                                                                                                                                                                                                                                                            |
| 3.2             |   | Articles Supplementary  relating to the Company’s Series A Junior Participating Preferred Stock, as  filed with the State Department of Assessments and Taxation of the State of  Maryland on July 26, 1999 (previously filed as Exhibit 3.1 t the Company’s  Current Report on Form 8-K, dated June 30, 1999 and filed with the Commission  on July 27, 1999, and incorporated herein by reference). |
|            |   |                                                                                                                                                                                                                                                                                                                                                                                                            |
| 3.3             |   | Amended and Restated  Bylaws of the Company as currently in effect (previously filed as Exhibit 4.4  to the Company’s Registration Statement on Form S-2, Commission File No.  333-73448, Amendment No. 1, and filed with the Commission on November 27, 2001  and incorporated herein by reference).                                                                                                      |
|            |   |                                                                                                                                                                                                                                                                                                                                                                                                            |
| 4.1             |   | Form of Share Certificate  for Common Stock (previously filed as Exhibit 4.3 to the Company’s Current  Report on Form 8-K, dated June 30, 1999 and filed with the Commission on July  27, 1999, and incorporated herein by reference).                                                                                                                                                                     |
|            |   |                                                                                                                                                                                                                                                                                                                                                                                                            |
| 4.2.1           |   | Shareholder Rights  Agreement between the Company and The Bank of New York, as Rights Agent  (including as Exhibit B the form of Rights Certificate)(previously filed as  Exhibit 4.1 to the Company’s Current Report on Form 8-K, dated June 30, 1999  and filed with the Commission on July 27, 1999, and incorporated herein by  reference).                                                            |

 

38

----

 
| 4.2.2  |   | First Amendment to  Shareholder Rights Agreement dated as of July 15, 2003, by and between Apex  Mortgage Capital, Inc. and The Bank of New York (previously filed as Exhibit  4.1 to the Company’s Current Report on Form 8-K, filed with the Commission on  July 15, 2003 and incorporated herein by reference). |
|--------|--------|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|   |   |                                                                                                                                                                                                                                                                                                                    |
| 31.1*  |   | Certification of Philip A.  Barach under Section 302 of the Sarbanes-Oxley Act of 2002.                                                                                                                                                                                                                                 |
|   |   |                                                                                                                                                                                                                                                                                                                    |
| 31.2*  |   | Certification of David S.  DeVito under Section 302 of the Sarbanes-Oxley Act of 2002.                                                                                                                                                                                                                                  |
|   |   |                                                                                                                                                                                                                                                                                                                    |
| 32.1*  |   | Certification of Philip A.  Barach under Section 906 of the Sarbanes-Oxley Act of 2002.                                                                                                                                                                                                                                 |
|   |   |                                                                                                                                                                                                                                                                                                                    |
| 32.2*  |   | Certification of David S.  DeVito under Section 906 of the Sarbanes-Oxley Act of 2002.                                                                                                                                                                                                                                  |

----

* Filed herewith.

 

 

39

----