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**UNITED STATES SECURITIES AND EXCHANGE COMMISSION****Washington, D. C. 20549**

**FORM 10-Q**

ý       **QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OFTHE SECURITIES EXCHANGE ACT OF 1934**

**Forthe quarterly period ended: JUNE 30, 2001**

**OR**

o       **TRANSITION REPORT TO SECTION 13 OR 15(d) OF THESECURITIES 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**(State or  other jurisdiction of incorporation or organization)                         | **95-4650863**  (I.R.S. Employer Identification Number) |
|-----------------------------------------------------------------------------------------------------|---------------------------------------------------------|
|                                                                                                |                                                    |
|                                                                                                |                                                    |
| **865 South Figueroa Street Los Angeles, California**(Address of  principal executive offices) | **90017**(Zip Code)                                     |
|                                                                                                |                                                    |

**(213) 244-0440**Registrant’stelephone number, including area code

 

Indicate bycheck mark whether the Registrant (1) has filed all reports required to befiled by Section 13 or 15(d) of the Securities Exchange Act of 1934 during thepreceding 12 months (or for such shorter period that the Registrant was requiredto file such reports), and (2) has been subject to such filing requirements forthe past 90 days.

             Yesý   Noo

**APPLICABLE ONLY TO CORPORATE ISSUERS:**

 

Indicate the number of shares outstanding of theissuer’s classes of common stock, as of the last practicable date.

Common Stock($0.01 par value)                                                                           5,753,000 as ofAugust 9, 2001

 

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**APEX MORTGAGE CAPITAL,INC.**

**FORM 10-Q**

 

**INDEX**

 

| PART I.    |   | FINANCIAL INFORMATION                                                   |   |
|------------|--------|-------------------------------------------------------------------------|--------|
|       |   |                                                                    |
| Item 1.    |   | FINANCIAL STATEMENTS                                                    |   |
|       |   |                                                                    |
|       |   | BALANCE SHEETS AT JUNE 30, 2001  (UNAUDITED) AND DECEMBER 31, 2000      |   |   |
|       |   |                                                                    |   |   |
|       |   | STATEMENTS OF OPERATIONS FOR  THE SIX MONTHS ENDED                      |   |   |
|       |   | JUNE 30, 2001 AND JUNE 30,  2000 (UNAUDITED)                            |   |   |
|       |   |                                                                    |   |   |
|       |   | STATEMENT OF  STOCKHOLDERS’ EQUITY FOR THE  SIX  MONTHS ENDED |   |   |
|       |   | JUNE 30, 2001  (UNAUDITED)                                              |   |   |
|       |   |                                                                    |   |   |
|       |   | STATEMENTS OF CASH FLOWS FOR  THE SIX MONTHS ENDED                      |   |   |
|       |   | JUNE 30, 2001 AND JUNE 30,  2000 (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             |   |   |
|       |   |                                                                    |   |   |
| PART II    | .      | OTHER INFORMATION                                                       |   |   |
|       |   |                                                                    |   |   |
| Item 1.    |   | LEGAL  PROCEEDINGS                                                      |   |   |
|       |   |                                                                    |   |   |
| Item 2.    |   | CHANGES  IN SECURITIES                                                  |   |   |
|       |   |                                                                    |   |   |
| 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 |   |                                                                    |   |
|            |        |                                                                         |        |  |  |  |

 

 

**PART1.     FINANCIAL INFORMATION**

**Item1       Financial Statements**

**Apex Mortgage Capital,Inc.**

**Balance Sheets**

|                                                                       | **June 30,  2001** |        | **December 31  2000** |   |
|----------------------------------------------------------------------------|--------------------|-------------|-----------------------|--------|
| **Assets**                                                                 | (Unaudited)        |        |                  |   |
|                                                                       |               |        |                  |   |
| Cash and  cash equivalents                                                 | $                  | 2,357,000   |                  | $      | 140,000 |   |
| Fixed  income trading securities, at fair value (Note 3)                   | 527,996,000        |        | -                     |   |
| Fixed  income securities available-for-sale, at fair value (Note 3)        | 5,467,000          |        | 600,131,000           |   |
| Equity  securities available-for-sale, at fair value (Note 3)              | 10,240,000         |        | 9,068,000             |   |
| Accrued  interest receivable                                               | 3,409,000          |        | 3,734,000             |   |
| Principal  payments receivable                                             | -                  |        | 288,000               |   |
| Other  assets                                                              | 693,000            |        | 712,000               |   |
|                                                                       |                    |        |                       |   |
|                                                                       | $                  | 550,162,000 |                  | $      | 614,073,000 |   |
|                                                                       |                    |        |                       |   |
|                                                                       |               |        |                  |   |
|                                                                       |               |        |                  |   |
| **Liabilities and Stockholders'  Equity**                                  |               |        |                  |   |
|                                                                       |               |        |                  |   |
| Liabilities                                                                |               |        |                  |   |
|                                                                       |               |        |                  |   |
| Reverse  repurchase agreements (Note 4)                                    | $                  | 501,604,000 |                  | $      | 545,434,000 |   |
| Payable  for unsettled securities                                          | -                  |        | 14,514,000            |   |
| Accrued  interest payable                                                  | 572,000            |        | 569,000               |   |
| Dividend  payable                                                          | 2,446,000          |        | 2,073,000             |   |
| Unrealized  loss on forward contracts, at fair value (Note 10)             | 158,000            |        | 3,731,000             |   |
| Deferred  gain on interest rate swap contracts                             | -                  |        | 2,546,000             |   |
| Accrued  expenses and other liabilities                                    | 370,000            |        | 823,000               |   |
|                                                                       |                    |        |                       |   |
|                                                                       | 505,150,000        |        | 569,690,000           |   |
|                                                                       |                    |        |                       |   |
|                                                                       |               |        |                  |   |
| Commitments  and contingencies (Notes 3, 4, 9, and 10)                     |               |        |                  |   |
|                                                                       |               |        |                  |   |
| Stockholders'  Equity                                                      |               |        |                  |   |
|                                                                       |               |        |                  |   |
| Preferred  stock, par value $0.01 per share; 50,000,000 shares authorized; |               |        |                  |   |
| no shares  outstanding                                                     |               |        |                  |   |
| Common  stock, par value $0.01 per share; 100,000,000 shares               |               |        |                  |   |
| authorized;  5,753,000 shares outstanding (Notes 6 and 8)                  | 58,000             |        | 58,000                |   |
| Additional  paid-in-capital                                                | 82,802,000         |        | 82,800,000            |   |
| Accumulated  other comprehensive income (loss)                             | 2,617,000          |        | (1,079,000            | )      |
| Retained  Deficit                                                          | (40,465,000        | )           | (37,396,000           | )      |
|                                                                       |                    |        |                       |   |
|                                                                       | 45,012,000         |        | 44,383,000            |   |
|                                                                       |                    |        |                       |   |
|                                                                       | $                  | 550,162,000 |                  | $      | 614,073,000 |   |
|                                                                       |                    |        |                       |   |
|                                                                       |               |        |                  |   |
| See accompanying notes to financial statements                             |               |        |                  |   |

** **

 

 

**ApexMortgage Capital, Inc.**

**Statements of Operations**

**(Unaudited)**

|                                                              |                                    | ** ** |               | ** ** |               | ** ** |               | ** ** |
|-------------------------------------------------------------------|-----------------------------------------|------------|--------------------|------------|--------------------|------------|--------------------|------------|
|                                                              | **Three  Months**                       | ** ** | **Three  Months**  | ** ** | **Six  Months**    | ** ** | **Six  Months**    | ** ** |
|                                                              | **Ended**                               | ** ** | **Ended**          | ** ** | **Ended**          | ** ** | **Ended**          | ** ** |
|                                                              | **June  30, 2001**                      | ** ** | **June  30, 2000** | ** ** | **June  30, 2001** | ** ** | **June  30, 2000** | ** ** |
|                                                              |                                    |       |               |       |               |       |               |       |
| **Interest Income:**                                              |                                    |       |               |       |               |       |               |       |
|                                                              | Fixed income securities                 | $          | 9,730,000          |       | $                  | 10,789,000 |               | $          | 20,708,000 |   | $ | 22,868,000 |   |
|                                                              | Cash and cash equivalents               | 34,000     |               | 105,000    |               | 76,000     |               | 162,000    |   |
|                                                              |                                    |            |               |            |               |            |               |            |   |
|                                                              | 9,764,000                               |       | 10,894,000         |       | 20,784,000         |       | 23,030,000         |       |
|                                                              |                                    |       |               |       |               |       |               |       |
| **Interest Expense**                                              | 4,988,000                               |       | 8,590,000          |       | 12,064,000         |       | 18,278,000         |       |
|                                                              |                                    |       |               |       |               |       |               |       |
|                                                              |                                         |       |                    |       |                    |       |                    |       |
| **Net Interest Income**                                           | 4,776,000                               |       | 2,304,000          |       | 8,720,000          |       | 4,752,000          |       |
|                                                              |                                    |       |               |       |               |       |               |       |
| **Dividend Income**                                               | 306,000                                 |       | 354,000            |       | 494,000            |       | 724,000            |       |
|                                                              |                                    |       |               |       |               |       |               |       |
|                                                              |                                         |       |                    |       |                    |       |                    |       |
| **Total Operating Income**                                        | 5,082,000                               |       | 2,658,000          |       | 9,214,000          |       | 5,476,000          |       |
|                                                              |                                         |       |                    |       |                    |       |                    |       |
| **General and Administrative Expenses:**                          |                                    |       |               |       |               |       |               |       |
|                                                              | Management fee (Note 7)                 | 84,000     |               | 147,000    |               | 172,000    |               | 303,000    |   |
|                                                              | Incentive fee from operations  (Note 7) | -          |               | (152,000   | )                  | -          |               | -          |   |
|                                                              | Other                                   | 216,000    |               | 246,000    |               | 397,000    |               | 461,000    |   |
|                                                              |                                         |       |                    |       |                    |       |                    |       |
|                                                              | 300,000                                 |       | 241,000            |       | 569,000            |       | 764,000            |       |
|                                                              |                                    |       |               |       |               |       |               |       |
|                                                              |                                         |       |                    |       |                    |       |                    |       |
| **Operating Income, net of General and Administrative  Expenses** | 4,782,000                               |       | 2,417,000          |       | 8,645,000          |       | 4,712,000          |       |
|                                                              |                                         |       |                    |       |                    |       |                    |       |
|                                                              |                                    |       |               |       |               |       |               |       |
| **Net (Loss) from Investment Activities**                         | (4,382,000                              | )          | (7,532,000         | )          | (6,840,000         | )          | (7,532,000         | )          |
|                                                              |                                    |       |               |       |               |       |               |       |
| **Reclassification of Previously Unrealized Gains (Note 2)**      | -                                       |       | -                  |       | 1,742,000          |       | -                  |       |
|                                                              |                                    |       |               |       |               |       |               |       |
| **Net Income (Loss) Before Cumulative Effect of**                 |                                         |       |                    |       |                    |       |                    |       |
|                                                              | **Change in  Accounting Principle**     | 400,000    |               | (5,115,000 | )                  | 3,547,000  |               | (2,820,000 | ) |
|                                                              |                                         |       |                    |       |                    |       |                    |       |
|                                                              |                                    |       |               |       |               |       |               |       |
| **Cumulative Effect of Change in Accounting Principle**           | -                                       |       | -                  |       | (2,173,000         | )          | -                  |       |
|                                                              |                                         |       |                    |       |                    |       |                    |       |
| **Net Income (Loss)**                                             | $                                       | 400,000    |               | $          | (5,115,000         | )          | $                  | 1,374,000  |   | $ | (2,820,000 | ) |
|                                                              |                                         |       |                    |       |                    |       |                    |       |
|                                                              |                                    |       |               |       |               |       |               |       |
| Net  Income (Loss) Per Share Before Cumulative Effect of          |                                    |       |               |       |               |       |               |       |
|                                                              | Change in Accounting Principle:         |       |               |       |               |       |               |       |   |
|                                                              | Basic                                   | $          | 0.07               |       | $                  | (0.89      | )                  | $          | 0.62 |   | $ | (0.49 | ) |
|                                                              |                                         |       |                    |       |                    |       |                    |       |
|                                                              | Diluted                                 | $          | 0.07               |       | $                  | (0.89      | )                  | $          | 0.61 |   | $ | (0.49 | ) |
|                                                              |                                         |       |                    |       |                    |       |                    |       |
| Effect  of Accounting Change Per Share:                           |                                    |       |               |       |               |       |               |       |
|                                                              | Basic                                   | $          | -                  |       | $                  | -          |               | $          | (0.38 | ) | $ | - |   |
|                                                              |                                    |            |               |            |               |            |               |            |   |
|                                                              | Diluted                                 | $          | -                  |       | $                  | -          |               | $          | (0.37 | ) | $ | - |   |
|                                                              |                                         |       |                    |       |                    |       |                    |       |
| Net  Income (Loss) Per Share:                                     |                                    |       |               |       |               |       |               |       |
|                                                              | Basic                                   | $          | 0.07               |       | $                  | (0.89      | )                  | $          | 0.24 |   | $ | (0.49 | ) |
|                                                              |                                    |            |               |            |               |            |               |            |   |
|                                                              | Diluted                                 | $          | 0.07               |       | $                  | (0.89      | )                  | $          | 0.24 |   | $ | (0.49 | ) |
|                                                              |                                    |            |               |            |               |            |               |            |   |
| Weighted  Average Number of Shares Outstanding:                   |                                    |       |               |       |               |       |               |       |
|                                                              | Basic                                   | 5,753,000  |               | 5,753,000  |               | 5,753,000  |               | 5,753,000  |   |
|                                                              |                                    |            |               |            |               |            |               |            |   |
|                                                              | Diluted                                 | 5,819,000  |               | 5,753,000  |               | 5,819,000  |               | 5,753,000  |   |
|                                                              |                                         |       |                    |       |                    |       |                    |       |
| Dividends  Declared Per Share                                     | $                                       | 0.40       |               | $          | 0.35               |       | $                  | 0.75       |   | $ | 0.81 |   |
|                                                              |                                         |       |                    |       |                    |       |                    |       |

Seeaccompanying notes to financial statements

 

** **

**Apex Mortgage Capital, Inc.**

**Statement ofStockholders' Equit****y**

**(Unaudited)**

 

|                         |                           |   |       |   |                |   |                        |       |          |      |            |         |       |       |
|------------------------------|--------------------------------|--------|------------|--------|---------------------|--------|-----------------------------|------------|---------------|-----------|-----------------|--------------|------------|------------|
|                         |                           |   |       |   |                |   |                        |       | Accumulated   |      |            |         |       |       |
|                         | Common Stock                   |   | Additional |   | Accumulated         |   | Dividend                    |       |          |      |            |         |
|                         |                                |   | Paid-in    |   | Other  Comprehenive |   | Distributions  in Excess of |       | Comprehensive |      |            |         |
|                         | Shares                         |   | Amount     |   | Capital             |   | Income (Loss)               |       | Net Income    |      | Income / (Loss) |         | Total      |       |
|                         |                                |   |            |   |                     |   |                             |       |               |      |                 |         |            |       |
|                         |                           |   |       |   |                |   |                        |       |          |      |            |         |       |       |
| Balance,  December 31, 2000  | 5,753,000                      |   | $          | 58,000 |                | $      | 82,800,000                  |       | ($1,079,000   | )         | ($37,396,000    | )            |       |       | $ | 44,383,000 |   |
|                         |                           |   |       |   |                |   |                        |       |          |      |            |         |       |       |
| Issuance  of stock options   |                           |   |       |   |                |   |                        |       |          |      |            |         |       |       |
| to non-employees (Note 8)    |                           |   |       |   | 1,000               |   |                        |       |          |      |            |         | 1,000      |       |
|                         |                           |   |       |   |                |   |                        |       |          |      |            |         |       |       |
| Net  income                  |                           |   |       |   |                |   |                        |       | 974,000       |      | $               | 974,000      |       | 974,000    |   |
|                         |                           |   |       |   |                |   |                        |       |          |      |            |         |       |       |
|                         | Other comprehensive income:    |   |       |   |                |   |                        |       |          |      |            |         |       |       |   |
|                         | Cumulative effect of change    |   |       |   |                |   |                        |       |          |      |            |         |       |       |   |
|                         | in accounting principle        |   |       |   |                |   |                        | 2,173,000  |          |      |            | 2,173,000    |       | 2,173,000  |   |
|                         | (Note 2)                       |   |       |   |                |   |                        |       |          |      |            |         |       |       |   |
|                         |                           |   |       |   |                |   |                        |       |          |      |            |         |       |       |   |
|                         | Reclassification of previously |   |       |   |                |   |                        |       |          |      |            |         |       |       |   |
|                         | unrealized gains               |   |       |   |                |   |                        | (1,742,000 | )             |      |            | (1,742,000   | )          | (1,742,000 | ) |
|                         |                           |   |       |   |                |   |                        |       |          |      |            |         |       |       |   |
|                         | Change in unrealized gain on   |   |       |   |                |   |                        |       |          |      |            |         |       |       |   |
|                         | available-for-sale securities  |   |       |   |                |   |                        | 2,450,000  |          |      |            | 2,450,000    |       | 2,450,000  |   |
|                         |                           |   |       |   |                |   |                        |       |          |      |            |         |       |       |   |
|                         | Cumulative effect of change    |   |       |   |                |   |                        |       |          |      |            |         |       |       |   |
|                         | in accounting principle -      |   |       |   |                |   |                        |       |          |      |            |         |       |       |   |
|                         | reclassification of deferred   |   |       |   |                |   |                        |       |          |      |            |         |       |       |   |
|                         | gain on terminated swaps       |   |       |   |                |   |                        | 2,546,000  |          |      |            | 2,546,000    |       | 2,546,000  |   |
|                         |                           |   |       |   |                |   |                        |       |          |      |            |         |       |       |   |
|                         | Amortization of deferred       |   |       |   |                |   |                        |       |          |      |            |         |       |       |   |
|                         | gain on terminated swaps       |   |       |   |                |   |                        | (1,152,000 | )             |      |            | (1,152,000   | )          | (1,152,000 | ) |
|                         |                           |   |       |   |                |   |                        |       |          |      |            |         |       |       |
|                         |                           |   |       |   |                |   |                        |       |          |      |                 |         |       |       |
| Comprehensive  income        |                           |   |       |   |                |   |                        |       |          |      | $               | 5,249,000    |       |       |   |
|                         |                           |   |       |   |                |   |                        |       |          |      |                 |         |       |       |
| Dividends  declared          |                           |   |       |   |                |   |                        |       | (2,073,000    | )         |            |         | (2,073,000 | )          |
|                         |                                |   |            |   |                     |   |                             |       |               |      |            |         |            |       |
| Balance,  March 31, 2001     | 5,753,000                      |   | 58,000     |   | 82,801,000          |   | 3,196,000                   |       | (38,495,000   | )         |            |         | 47,560,000 |       |
|                         |                           |   |       |   |                |   |                        |       |          |      |            |         |       |       |
| Issuance  of stock options   |                           |   |       |   |                |   |                        |       |          |      |            |         |       |       |
| to non-employees (Note 8)    |                           |   |       |   | 1,000               |   |                        |       |          |      |            |         | 1,000      |       |
|                         |                           |   |       |   |                |   |                        |       |          |      |            |         |       |       |
| Net  income                  |                           |   |       |   |                |   |                        |       | 400,000       |      | $               | 400,000      |       | 400,000    |   |
|                         |                           |   |       |   |                |   |                        |       |          |      |            |         |       |       |
| Other  comprehensive income: |                           |   |       |   |                |   |                        |       |          |      |            |         |       |       |
|                         | Change in unrealized gain on   |   |       |   |                |   |                        |       |          |      |            |         |       |       |   |
|                         | available-for-sale securities  |   |       |   |                |   |                        | 367,000    |          |      |            | 367,000      |       | 367,000    |   |
|                         |                           |   |       |   |                |   |                        |       |          |      |            |         |       |       |   |
|                         | Amortization of deferred       |   |       |   |                |   |                        |       |          |      |            |         |       |       |   |
|                         | gain on terminated swaps       |   |       |   |                |   |                        | (946,000   | )             |      |            | (946,000     | )          | (946,000   | ) |
|                         |                           |   |       |   |                |   |                        |       |          |      |                 |         |       |       |
| Comprehensive  loss          |                           |   |       |   |                |   |                        |       |          |      | $               | (179,000     | )          |       |   |
|                         |                           |   |       |   |                |   |                        |       |          |      |                 |         |       |       |
| Dividends  declared          |                           |   |       |   |                |   |                        |       | (2,370,000    | )         |            |         | (2,370,000 | )          |
|                         |                                |   |            |   |                     |   |                             |       |               |      |            |         |            |       |
| Balance,  June 30, 2001      | 5,753,000                      |   | $          | 58,000 |                | $      | 82,802,000                  |       | $             | 2,617,000 |            | ($40,465,000 | )          |       |   | $ | 45,012,000 |   |
|                         |                                |   |            |   |                     |   |                             |       |               |      |            |         |            |       |
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See accompanying notes to financialstatements****Apex Mortgage Capital,  Inc.**          **Statements of Cash Flows** **(Unaudited)**** **    ** ** ** ** ** ** ** ** **Three Months** **Three Months** **Six Months** **Six Months**** ** **Ended** **Ended** **Ended** **Ended**** ** **June 30, 2001** **June 30, 2000** **June 30, 2001** **June 30, 2000**** **         **Operating Activities:**         Net Income (Loss)$400,000 $(5,115,000)$1,374,000 $(2,820,000) Adjustments to reconcile net income to net cash provided  by operating activities:                 .Amortization(1,214,000)(522,000)(2,944,000)(431,000) Net loss on investing activities4,382,000 7,532,000 6,840,000 7,532,000  Cumulative effect of change in accounting principle- - 2,173,000 -  Reclassification of previously unrealized gains- - (1,742,000)-  Change in assets and liabilities:         Trading securities49,145,000 - 42,809,000 -  Accrued interest receivable334,000 922,000 325,000 2,579,000  Other assets(56,000)39,000 19,000 472,000  Accrued interest payable(80,000)474,000 3,000 (2,898,000) Accrued expenses and other liabilities(328,000)(178,000)(453,000)(368,000)      Net cash provided by operating activities52,583,000 3,152,000 48,404,000 4,066,000      **Investing Activities:**         Payments on closed forward contracts- (5,343,000)- (6,462,000) Proceeds from sales of equity securities1,712,000 5,088,000 1,712,000 5,088,000  Proceeds from sales of fixed income securities- 96,513,000 - 96,513,000  Proceeds from closed forward contracts- 426,000 - 5,891,000  Proceeds from terminating interest rate swaps- 5,554,000 - 5,554,000  Principal payments on fixed income         securities available-for-sale- 19,230,000 - 41,077,000       Net cash provided by investing activities1,712,000 121,468,000 1,712,000 147,661,000      **Financing Activities:**         Net (repayments) on reverse repurchase agreements(54,143,000)(121,280,000)(43,830,000)(145,469,000) Dividend distributions(2,034,000)(2,775,000)(4,069,000)(5,449,000)      Net cash used in financing activities(56,177,000)(124,055,000)(47,899,000)(150,918,000)     **Net (Decrease) Increase in Cash and Cash Equivalents**(1,882,000)565,000 2,217,000 809,000          **Cash and Cash Equivalents at Beginning of Period**4,239,000 2,849,000 140,000 2,605,000      **Cash and Cash Equivalents at End of Period**$2,357,000 $3,414,000 $2,357,000 $3,414,000      **Supplemental Disclosure of Cash Flow Information:**         Cash paid for interest$6,013,000 $8,039,000 $14,159,000 $21,071,000      **Noncash Investing and Financing Activities:**         Change in accumulated other         comprehensive income$(579,000)$4,302,000 $3,696,000 $(136,000)      Principal payments, not yet received$- $191,000 $288,000 $3,537,000       Securities purchased, not yet settled$- $- $(14,514,000)$-       Dividends declared, not yet paid$(2,446,000)$(2,073,000)$(2,073,000)$(2,724,000)        See accompanying notes  to financial statements 
 

**ApexMortgage Capital, Inc.**

**Notes to FinancialStatements**

**Note 1 - The Company**

Apex Mortgage Capital, Inc. (the “Company”) wasincorporated in Maryland on September 15, 1997.  The Company commenced its operations of acquiring and managing aportfolio of mortgage assets on December 9, 1997, upon receipt of the netproceeds from the initial public offering of the Company’s common stock.  The Company uses its equity capital andborrowed funds to seek to generate income based on the difference between theyield on its investments and the cost of its borrowings.  The Company is structured for tax purposesas a real estate investment trust (“REIT”) under the Internal Revenue Code of1986, as amended (the “Code”).

**Note 2 - Summary ofSignificant Accounting Policies**

*Basis of Presentation*

Theaccompanying financial statements of Apex Mortgage Capital, Inc. have beenprepared in accordance with the instructions to Form 10-Q.  In the opinion of management, alladjustments (consisting of normal recurring adjustments) considered necessaryfor a fair presentation have been included. These statements should be read in conjunction with the consolidatedfinancial statements and notes thereto included in our 2000 Annual Report onForm 10-K filed with the Securities and Exchange Commission.  Interim results are not necessarilyindicative of results for a full year.

Certainbalances shown in prior period Balance Sheets and Statements of Operations havebeen reclassified to conform to the current period presentation for comparativepurposes.

*Cash and CashEquivalents*

Cash and cash equivalents include cash andhighly liquid investments with original maturities of three months orless.  The carrying amount of cash equivalentsapproximates their fair value.

*Fixed Income Securities*

The Company’s fixed income securities consistprimarily of residential mortgage securities and other fixed incomesecurities.  All fixed income securitiesare recorded at cost on the date the assets are purchased.  Realized gains and losses on sales of thesecurities are determined on an average cost basis.  A majority of the Company's fixed income securities are expectedto qualify as real estate assets under the REIT Provisions of the Code.

Interest income on the Company’s mortgagesecurities is accrued based on the actual coupon rate and the outstandingprincipal amount.  Premiums anddiscounts are amortized into interest income over the lives of the securitiesusing the effective yield method adjusted for the effects of estimatedprepayments.  When securities are deemedto be impaired, an impairment reserve is recorded.  Such reserve is accounted for as an adjustment to the cost of thesecurities and is accreted into income on the same basis as the originaldiscount.

Interest income on the Company’s other fixedincome securities is accrued using the effective interest method appliedprospectively based on current market assumptions.

Beginning on January 1, 2001, the Company'spolicy is to generally classify its fixed income securities that are subject toa hedging strategy and are generally expected to experience a higher level ofturnover as trading securities.  Thesefixed income securities are reported at fair value with unrealized gains and lossesincluded in earnings each reporting period. Fixed income securities that are generally not subject to hedging andare expected to experience a lower level of turnover are classified asavailable-for-sale.  These fixed incomesecurities are reported at fair value with unrealized gains and losses excludedfrom earnings and reported in accumulated other comprehensive income.

*Equity Securities*

The Company’s equity securities consistprimarily of equity securities issued by other real estate investment trusts.

Dividend income on equity securities is recordedon the declaration date.  Realized gainsand losses on sales of the securities are determined on an average costbasis.  A majority of the Company'sequity securities are expected to qualify as real estate assets under the REITProvisions of the Code.

The Company’s policy is to generally classifyits equity securities as available-for-sale. Equity securities are reported at fair value with unrealized gains andlosses excluded from earnings and reported in accumulated other comprehensiveincome.

* *

* *
* 

*Interest Rate HedgingTransactions*

The Company may enter into interest rate swapand interest rate cap agreements in order to mitigate the impact of risinginterest rates on the cost of its short-term borrowings.  The Company may also enter into forwardcontracts to sell U.S. Treasury notes in order to mitigate the negative impactof rising interest rates on the fair value of certain fixed income securities.  Prior to December 31, 2000, unrealized gainsand losses on open forwards were shown as assets and liabilities, respectively,and as accumulated other comprehensive income in the balance sheets.  Realized gains and losses on terminatedforwards were recorded as deferred gains and losses, included in accumulatedother comprehensive income in the balance sheets and were amortized over theremaining lives of the fixed income securities being hedged as an adjustment toincome in the statements of operations. Beginning on January 1, 2001, all realized and unrealized gains andlosses on forward contracts are recognized in net gains and losses from tradingactivities in the statement of operations.

*Stock Based Compensation*

The Company grants stock options to itsdirectors and officers and to certain directors, officers and employees of itsinvestment manager and the investment manager itself, as discussed in Note8.  Options granted to directors of theCompany are accounted for using the intrinsic value method, and generally nocompensation expense is recognized in the statements of operations for suchoptions.  Other options are accountedfor using the fair value method; such options are measured at their fair valuewhen they are granted and are recognized as a general and administrativeexpense during the periods when the options vest and the related services areperformed.

*Federal and StateIncome Taxes*

The Company has elected to be taxed as a REITand generally is not subject to federal and state taxes on its income to theextent it distributes annually 95% of its predistribution taxable income tostockholders and meets certain other asset, income and stock ownershiptests.  As such, no accrual for incometaxes has been included in the financial statements.

*Net Income Per Share*

Basic net income per share is calculated on thebasis of the weighted average number of common shares outstanding during eachperiod.  Diluted net income per shareincludes the additional dilutive effect of common stock equivalents andoutstanding stock options, and is calculated using the treasury stock method.

570,000 stock options that could potentiallydilute net income per share in the future were not included in the computationof diluted net income per share in 2000 because they would have beenantidilutive for the period presented.

* Income Recognition*

Income and expenses are recorded on the accrualbasis of accounting.

*Credit Risk*

The Company has limited its exposure to creditlosses on its portfolio of fixed income securities by purchasing securitiesthat are either rated “AAA” by at least one nationally recognized rating agencyor are issued by the Federal Home Loan Mortgage Corporation (“FHLMC”), FannieMae (formerly known as the Federal National Mortgage Corporation) or theGovernment National Mortgage Association (“GNMA”).  The payment of principal and interest on the FHLMC, Fannie Maeand GNMA securities are guaranteed by those respective agencies.  In addition, the Company has the ability topurchase up to 10% of the portfolio in below investment grade securities.

* *
* 

*Use of Estimates*

The preparation of financial statements inconformity with accounting principles generally accepted in the United Statesof America requires management to make estimates and assumptions that affectthe reported amounts of assets and liabilities at the date of the financialstatements and the reported amounts of revenues and expenses during thereporting period.  Actual results coulddiffer from those estimates.

*Recently IssuedAccounting Standards**– Transition Adjustment*

The Company adopted SFAS No. 133 and the relatedamendments on January 1, 2001.  Thisadoption resulted in a transition adjustment that reclassified $2,173,000 ofnet losses on unrealized and deferred gains and losses on investment securitiesand forward contracts from accumulated other comprehensive income to currentincome.  Also, deferred gains oninterest rate swaps previously designated as hedges were reclassified fromother liabilities to accumulated other comprehensive income.

In conjunction with the adoption of SFAS No.133, the Company reclassified $594,469,000 of its mortgage securities from theavailable-for-sale category to the trading category for investments accountedfor under SFAS No. 115.  This changeresulted in the reclassification of $1,742,000 net unrealized gains from accumulatedother comprehensive income to current income, in addition to net unrealizedgains included in the SFAS No. 133 transition adjustment discussed above.

In 2001, the Company adopted the provisions ofSFAS No. 140, "Accounting for Transfers and Servicing of Financial Assetsand Extinguishments of Liabilities." This statement revises the standards for accounting for securitizationsand other transfers of financial assets and collateral and requires certaindisclosures, but otherwise carries over most of the provisions of SFAS No. 125without reconsideration.  The adoptionof SFAS No. 140 had no immediate effect on the results of operations, financialposition or cash flows of the Company. The future effect, if any, will depend on whether the Company entersinto any securitization transactions or other financial transactions to whichSFAS No. 140 provisions may apply.

 

**Note 3 – Fixed Income andEquity Securities**

At June 30, 2001,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$530,248 $10,400 $7,042  Unamortized Premium (Discount)(10,523)(3,903)-     Adjusted Cost519,725 6,497 7,042  Unrealized Gains9,089 - 3,198  Unrealized Losses(818)(1,030)-     Fair Value$527,996 $5,467 $10,240   
At December 31, 2000, fixedincome and equity securities available-for-sale consisted of the following:

 
 (in  thousands)Adjustable Rate  Mortgage  Securities Fixed Rate  Mortgage  Securities Other Fixed  Income  Securities Equity  Securities     Principal  Amount$39,253 $557,962 $10,400 $8,690  Unamortized  Premium (Discount)978 (15,529)(3,712)-     Adjusted  Cost40,231 542,433 6,688 8,690  Unrealized  Gains46 11,783 - 1,091  Unrealized  Losses(24)- (1,026)(713)    Fair Value$40,253 $554,216 $5,662 $9,068   
 

 

A portion of the other fixed income securitiesheld as available-for-sale generally have an original maturity of five yearssubject to certain acceleration provisions. The expected average remaining maturity at June 30, 2001 and December31, 2000 was approximately 1.5 and 2.0 years, respectively.  The remaining portion of this category has afixed remaining maturity of approximately 1.0 years as of June 30, 2001.

During the quarter ended June 30, 2001, theCompany reported a net loss on investment transactions of $4,382,000 which isincluded in the Statement of Operations. This loss consisted of $65,000 in gains on the sale of $1,712,000 ofequity securities that were available-for-sale, $866,000 in gains on the saleof $59,109,000 of fixed income securities held-for-trading, $6,115,000 lossfrom the net decrease in fair market value of fixed income securitiesheld-for-trading, $2,974,000 gain from the net decrease in unrealized loss onforward contracts, and $2,172,000 in net losses on closed forward contracts.  During the quarter ended June 30, 2000, theCompany realized $6,536,000 in losses on the sale of  $96,513,000 of fixed income securities and $38,000 in losses onthe sale of $5,088,000 of equity securities which were both classified asavailable-for-sale.  The aforementioneditems are included in Net Loss from Investment Activities in the Statement ofOperations.

At June 30, 2001, the Company held equitysecurities and senior unsecured notes issued by Dynex Capital, Inc. (“Dynex”)with fair market values of $4,122,000 and $4,000,000, respectively.  During the year ended December 31, 1999,Dynex suspended the payment of dividends on its preferred stock.  Accordingly, the Company is no longer recognizingdividend income on its equity investments in Dynex.  Dynex is currently paying interest on its senior notes.  Accordingly, the Company is recognizinginterest income on the senior note investments issued by Dynex.  If Dynex were to suspend payment of intereston its senior notes, interest income recognized by the Company would benegatively impacted.

During the quarter ended June 30, 2000, theCompany recorded an impairment charge on its Dynex common stock holdings of$958,000 which is included in Net Loss from Investment Activities in theStatement of Operations.  The impairmentcharge was recorded in order to adjust the cost basis of the investment to fairmarket value in response to an other than temporary decline in value.

**Note 4 - ReverseRepurchase Agreements**

The Company has entered into reverse repurchaseagreements to finance certain of its investments.  These agreements are secured by a portion of the Company’sinvestments and bear interest rates that have historically moved in closerelationship to LIBOR.

At June 30, 2001, the Company had outstanding$501,604,000 of reverse repurchase agreements with a weighted average currentborrowing rate of 3.80% and a maturity of 1.0 months.  The reverse repurchase agreements were collateralized bysecurities with an estimated fair value of $515,338,000.

At December 31, 2000, the Company hadoutstanding $545,434,000 of reverse repurchase agreements with a weightedaverage current borrowing rate of 6.61% and a maturity of 1.1 months.  The reverse repurchase agreements werecollateralized by securities with an estimated fair value of $564,274,000.

For the quarter ended June 30, 2001, the averagereverse repurchase agreement balance was $527,693,000 with a weighted averageinterest cost of 4.44%.

For the year ended December 31, 2000, theaverage reverse repurchase agreement balance was $576,190,000 with a weightedaverage interest cost of 6.33%.

**Note 5 - Fair Value of Financial Instruments**

The following table presents the amortized costand estimated fair values of the Company’s financial instruments.  SFAS No. 107, *Disclosures About Fair Value of Financial Instruments*,defines the fair value of a financial instrument as the amount at which theinstrument could be exchanged in a current transaction between willing parties,other than in a forced or liquidation sale (dollars in thousands):

 
 At June 30, 2001 At December 31, 2000              Adjusted Fair Adjusted Fair  Cost Value Cost Value         Trading  securities$519,725 $527,996     Available-for-sale  securities:        Mortgage  related securities  available-for-sale    $582,664 $594,469Equity  securities7,042 10,240 8,690 9,068 Other fixed  income  securities6,497 5,467 6,688 5,662 Forward  contracts- (158)- (3,731)
The Company bases its fair value estimates formortgage-related securities, equity securities, other fixed income securities,interest rate swaps, and forward contracts primarily on third party priceindications provided by dealers who make markets in these financial instrumentswhen such indications are available. However, the fair value reported reflects estimates and may notnecessarily be indicative of the amounts the Company could realize in a currentmarket exchange.  Cash and cashequivalents, interest receivable and reverse repurchase agreements arereflected in the financial statements at their costs, which approximates theirfair values because of the short-term nature of these instruments.

 

**Note 6 – StockRepurchase Program**

The Company’s Board of Directors has authorizeda program to repurchase shares of the Company’s common stock. At June 30, 2001and December 31, 2000, the Company was authorized to repurchase an additional552,900 shares of the Company’s common stock pursuant to the repurchaseprogram.

During the second quarter of 2001, the Companyrecognized the retirement of its common stock repurchased in priorperiods.  Amounts previously presentedas treasury stock were netted with the amounts of common stock and additionalpaid-in capital, and the number of issued and outstanding shares of commonstock presented were reduced accordingly. Amounts and numbers of issued and outstanding shares related to therepurchased common stock shown in prior period balance sheets have beenreclassified to conform to the current period presentation for comparativepurposes.

 

**Note 7 - Transactionswith Affiliates**

The Company has entered into a ManagementAgreement (the “Management Agreement”), as amended, with TCW InvestmentManagement Company (the “Manager”), a wholly owned subsidiary of The TCW Group,Inc., under which the Manager will manage its day-to-day operations, subject tothe direction and oversight of the Company’s Board of Directors.  The Company will pay the Manager annual basemanagement compensation, payable monthly in arrears, equal to 3/4 of 1% of theaverage net invested capital as further defined in the Management Agreement.

The Company recorded expenses of $84,000 and$147,000 in base management compensation to the Manager during the quartersended June 30, 2001 and 2000, respectively.

The accrued liability for base managementcompensation was $55,000 and $85,000 at June 30, 2001 and December 31, 2000,respectively.

The Company also pays the Manager, as incentivecompensation, 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 US Treasury rate plus 1% asfurther defined in the Management Agreement.

During the quarter ended June 30, 2000, theCompany recorded a credit against future management compensation payable of$152,000.   This credit represented areturn of the first quarter 2000 incentive compensation payment as the net lossincurred during the quarter ended June 30, 2000 resulting in the Manager notearning incentive compensation for the year ended December 31, 2000.  The Company did not record any incentivecompensation to the Manager for the quarter ended June 30, 2001.

At June 30, 2000, the Company had prepaidmanagement compensation of $152,000 resulting from the credit recorded duringthe quarter.  The amount was offset byamounts payable to the Manager in the quarter ended September 30, 2000.

The Company may also grant stock options todirectors, officers and key employees of the Company, the Manager, itsdirectors, officers and key employees (see Note 8).

The Management Agreement may be renewed eachyear at the discretion of the Company’s Board of Directors, unless previouslyterminated by the Company or the Manager upon written notice. Except in thecase of a termination or non-renewal by the Company for cause, upon terminationor non-renewal of the Management Agreement by the Company, the Company isobligated to pay the Manager a termination or non-renewal fee, which may besignificant. The termination or non-renewal fee shall be equal to the fairmarket value of the Management Agreement without regard to the Company'stermination right, as determined by an independent appraisal.  Neither the fair market value of theManagement Agreement nor the various factors that an appraiser may findrelevant in its determination of the fair market value can be determined atthis time.  The fair market value of theManagement Agreement will be affected by significant variables, including (i)the historical management fees paid to the Manager, (ii) any projections offuture management fees to be paid to the Manager determined by the independentappraiser, (iii) the relative valuations of agreements similar to theManagement Agreement and (iv) other factors, all of which may be unrelated tothe performance of the Manager.  Similarmanagement agreements have been valued at as much as eight times the historicalannual fees paid under such agreements. Any termination or non-renewal fee paid may be materially greater thaneight times historical fees and the Company can provide no assurance at thistime as to the amount of any such fee.

The Company’s other fixed income investmentsheld as available-for-sale include securities that are issued by specialpurpose companies that invest primarily in mortgage-related assets.  The Manager serves as the investment managerto these companies and is paid fees in connection with such services.  The Company does not anticipate paying anymanagement fees directly to the Manager in connection with these investments.

**Note 8 - Stock Options**

The Company has adopted a stock option plan (the''Amended and Restated 1997 Stock Option Plan'') that provides for the grant ofboth qualified incentive stock options that meet the requirements of Section422 of the Code, and non-qualified stock options, stock appreciation rights anddividend equivalent rights.  Stockoptions may be granted to directors of the Company (“employees”), and to theManager and the directors, officers and key employees of the Manager(“non-employees”).

The exercise price for any stock option grantedunder the Amended and Restated 1997 Stock Option Plan may not be less than 100%of the fair market value of the shares of common stock at the time the optionis granted.  Each option must terminateno more than ten years from the date it is granted.  Subject to anti-dilution provisions for stock splits, stockdividends and similar events, the Amended and Restated 1997 Stock Option Plan authorizesthe grant of options to purchase an aggregate of 1,000,000 shares of commonstock.

The Company recognized stock option expenserelating to the options granted to the non-employees of $1,000 and $24,000during the quarters ended June 30, 2001 and 2000, respectively.

For stock options outstanding at June 30, 2001,the range of exercise prices is $6.98 to $15.00 per share and theweighted-average remaining contractual life is 7.70 years.

For the year ended December 31, 2000, options topurchase 183,000 shares of the Company’s common stock were granted to directorsof the Company and options to purchase 125,000 shares were granted to officersof the Company and officers and key employees of the Manager.  The exercise price of the options grantedduring 2000 was $6.98 per share.  Noneof the options granted during 2000 include dividend equivalent rights.

 

The fair value of each option granted during2000 was estimated to be $0.04 as of the grant date using the Black-Scholesoption pricing model with the following assumptions: dividend yield of 20% perannum; expected volatility of 30%; risk free interest rate of 5.22% per annum;and an expected life of 10 years.

The options granted during 2000 expire inDecember 2010 and vest in two equal installments during the month of Decemberin 2001 and 2002.

For the year ended December 31, 1998, options topurchase 112,000 shares of the Company’s common stock were granted to directorsof the Company and options to purchase 58,000 shares were granted to officersof the Company and officers and key employees of the Manager.  The exercise price of the options grantedduring 1998 was $10.38 per share.  Allof the options granted during 1998 include dividend equivalent rights that entitlethe option holder to receive a cash payment equal to the dividends declared onthe Company’s common stock multiplied by the number of options held until theoptions are exercised or expire.

The fair value of each option granted during1998 was estimated to be $5.32 as of the grant date using the Black-Scholesoption pricing model with the following assumptions: dividend yield of 0% perannum (to account for the dividend equivalent rights); expected volatility of30%; risk free interest rate of 4.57% per annum; and an expected life of 10years.

The options granted during 1998 expire inDecember 2008 and vested in two equal installments during the month of Decemberin 1999 and 2000.

For the year ended December 31, 1997, options topurchase 210,000 shares of the Company’s common stock were granted to directorsof the Company and options to purchase 190,000 shares were granted to officersof the Company and officers and key employees of the Manager.  The exercise price of the options grantedduring 1997 was $15 per share.

The fair value of each option granted during1997 was estimated to be $1.05 as of the grant date using the Black-Scholesoption pricing model with the following assumptions: dividend yield of 11% perannum; expected volatility of 30%; risk free interest rate of 5.82% per annum;and an expected life of 10 years.

The options granted during 1997 expire inDecember 2007 and vest in three equal installments during the month of Februaryin 1999, 2000 and 2001.

If the Company had recorded stock option grantsto Company directors at fair value and related compensation expense, the proforma effect on the Company’s net income (loss) and earnings (loss) per sharewould have been as follows:

 
 Quarter Ended  June 30, 2001 Quarter Ended  June 30, 2000         Net income  (loss) - as reported$400,000 $(5,115,000)Net income  (loss) - pro forma395,000 $(5,139,000)     Basic  earnings (loss) per share - as reported$0.07 $(0.89)Diluted  earnings (loss) per share - as reported$0.07 $(0.89)Basic  earnings (loss) per share - pro forma$0.07 $(0.89)Diluted  earnings (loss) per share - pro forma$0.07 $(0.89)
 

Information regarding stock option activityduring the six months ended June 30, 2001 is as follows:

 
 Shares Weighted Average Exercise Price   Options  Outstanding at January 1, 2001878,000 $11.29 Exercised- - Expired- -     Options  Outstanding at June 30, 2001878,000 $11.29     
**Note 9 – ContractualCommitments**

The Company from time to time may enter intointerest rate swap agreements in order to mitigate the impact of risinginterest rates on the cost of its short-term borrowings.  There were no interest rate swap agreementsopen at June 30, 2001 and December 31, 2000.

The Company received $112,000 from and paid$1,395,000 to the swap counter-parties during the quarter ended June 30, 2000which is included in interest expense in the Statements of Operations.

During the year ended December 31, 2000, theCompany terminated all outstanding interest rate swap agreements with acombined notional amount of $386,213,000 which resulted in a deferred gain of$5,554,000 that is being amortized over the remaining life of the original swapagreements.  The deferred gain isincluded in accumulated other comprehensive income on the balance sheet and theamortization expense is included in interest expense in the statements ofoperations.   During the quarter endedJune 30, 2001, $946,000 of the deferred gain was amortized.  Approximately 95% of the deferred gain willbe amortized by September 30, 2001.  Theremaining deferred gain will be fully amortized by May 31, 2002.

During the year ended December 31, 1999, theCompany terminated interest rate swap agreements with a combined notionalamount of $255,530,000 which resulted in a net deferred loss of $66,000 thatwas amortized over the remaining life of the original swap agreements. Duringthe quarter ended June 30, 2000, $13,000 of the net deferred loss wasamortized. The remaining net deferred loss was fully amortized at August 31,2000.

** **

 

**Note 10 -  Forward Contracts**

At June 30, 2001, the Company had open forwardcontracts to sell U.S. Treasury notes with terms stated below.

 
Current  Notional Amount  (000)Average  Termination  DateNet  Unrealized  Losses  (000)  Average Maturity of  Underlying Securities    $380,0007/23/2001 $(158)8.98 Years
 

At December 31, 2000, the Company had openforward contracts to sell U.S. Treasury notes with terms stated below.

 
Current  Notional Amount  (000)Average  Termination  DateNet  Unrealized  Losses  (000)  Average Maturity of  Underlying Securities    $575,0001/19/2001 $(3,731)2.99 Years
During the six months ended June 30, 2001, atransition adjustment, in connection with the adoption of Statement ofFinancial Accounting Standards ("SFAS") No. 133, was recorded toreclassify $2,173,000 from accumulated other comprehensive income to net losson investment transactions on the statements of operations.  This reclassification consists of $8,505,000net deferred losses on closed forward contracts, $3,731,000 net unrealizedlosses on open forward contracts, and $10,063,000 net unrealized gains onsecurities hedged by open forward contracts at December 31, 2000.  Also, during the six months ended June 30,2001, $11,254,000 of net loss was realized on closed forward contracts and isincluded in net loss from trading activities on the statements of operations.

 

**Note 11 – Adoption ofShareholder Rights Plan**

On June 30, 1999, the Board of Directors of ApexMortgage Capital, Inc. (the “Company”) declared a dividend distribution of oneRight for each outstanding share of Company Common Stock to stockholders ofrecord at the close of business on July 30, 1999 (the “Record Date”).  Each Right entitles the registered holder topurchase from the Company one one-hundredth of a share of Series A JuniorParticipating Preferred Stock, par value $0.01 per share (the “PreferredStock”), at a Purchase Price of $50, subject to adjustment.  The description and terms of the Rights areset forth in a Shareholder Rights Agreement (the “Rights Agreement”) betweenthe Company and The Bank of New York, as Rights Agent.

 

 

Initially, the Rights will be attached to allCommon Stock certificates representing shares then outstanding, and no separateRights Certificates will be distributed. Subject to certain exceptions specified in the Rights Agreement, theRights will separate from the Common Stock and a Distribution Date will occurupon the earlier of (i) 10 business days following a public announcement that aperson or group of affiliated or associated persons (an “Acquiring Person”) hasacquired, or obtained the right to acquire, beneficial ownership of 15% or moreof the outstanding shares of Common Stock (the “Stock Acquisition Date”), otherthan as a result of repurchases of stock by the Company or certain inadvertentactions by institutional or certain other stockholders or (ii) 10 business days(or such later date as the Board shall determine) following the commencement ofa tender offer or exchange offer that would result in a person or groupbecoming an Acquiring Person.  Until theDistribution Date, (i) the Rights will be evidenced by the Common Stockcertificates and will be transferred with and only with such Common Stockcertificates, (ii) new Common Stock certificates issued after the Record Datewill contain a notation incorporating the Rights Agreement by reference and(iii) the surrender for transfer of any certificates for Common Stockoutstanding will also constitute the transfer of the Rights associated with theCommon Stock represented by such certificate. Pursuant to the Rights Agreement, the Company reserves the right torequire that, prior to the occurrence of a triggering event, upon any exerciseof Rights, a number of Rights be exercised so that only whole shares ofPreferred Stock will be issued.

The Rights are not exercisable until theDistribution Date and will expire on July 30, 2009, unless earlier redeemed orexchanged by the Company.

 

**ITEM 2****. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIALCONDITION AND RESULTS OF OPERATIONS**

**SAFEHARBOR/FORWARD LOOKING STATEMENTS**

             Certain information contained inthis Quarterly Report on Form 10-Q constitutes “forward-looking statements”which can be identified by the use of forward-looking terminology such as“may,” “will,” “should,” “expect,” “anticipate,” “estimate,” “intend,”“continue,” or “believes” or the negatives thereof or other variations thereonor comparable terminology.  Discussedbelow are some important factors that would cause actual results to differmaterially from those in any forward-looking statements, including changes ininterest rates; domestic and foreign business, market, financial or legalconditions; differences in the actual allocation of the assets of the Companyfrom those assumed; and the degree to which assets are hedged and theeffectiveness of the hedge, among others. In addition, the degree of risk is increased by the Company’s leveragingof its assets.  For additionaldiscussion of factors that could cause actual results to differ from thosecontained in such forward-looking statements, see “Principal Risks and SpecialConsiderations”, “Item 7 Management's Discussion and Analysis of FinancialConditions and Results of Operations” and “Item 7A Quantitative and QualitativeDisclosures About Market Risk” in the Company’s annual report on Form 10-K forthe year ended December 31, 2000.  TheCompany does not undertake, and specifically disclaims any obligation, toupdate any forward-looking statements to reflect occurrences or unanticipatedevents or circumstances after the date of such statements.

 

**GENERAL**

             Apex Mortgage Capital, Inc.  (the ''Company''), a Maryland corporation,was formed on September 15, 1997, primarily to acquire United States agency andother highly rated, single-family real estate adjustable and fixed rateMortgage Related Assets.  The Companycommenced operations on December 9, 1997 following the initial public offeringof the Company’s Common Stock.  TheCompany's principal executive offices are located at 865 South Figueroa Street,Suite 1800, Los Angeles, California 90017, and its telephone number is (213)244-0440.

             The Company uses its equity capitaland borrowed funds to seek to generate income based on the difference betweenthe yield on its Mortgage Related Assets and the cost of its borrowings.  The Company has elected to be taxed as areal estate investment trust (''REIT'') under the Internal Revenue Code of1986, as amended (the ''Code'').  TheCompany will not generally be subject to federal taxes on its income to theextent that it distributes its net income to its stockholders and maintains itsqualification as a REIT.

 

             The day-to-day operations of theCompany are managed by an external management company, TCW InvestmentManagement Company (the "Manager"), subject to the direction and oversightof the Company's Board of Directors.  Amajority of the Board of Directors are unaffiliated with The TCW Group,Inc.  (''TCW'' and, together with itssubsidiaries and Affiliates, the ''TCW Group'') or the Manager.  The Manager is a wholly-owned subsidiary ofTCW.  The Manager was established in1992 and the TCW Group began operations in 1971 through one of itsaffiliates.  The Company's investmentmanagement team are selected members of the TCW Group's Mortgage-BackedSecurities Group (the ''MBS Group''), all of whom have over twelve years ofexperience in raising and managing mortgage capital.  The Company has elected to be externally managed by the Managerto take advantage of the existing operational systems, expertise and economiesof scale associated with the Manager's current business operations, among otherreasons. The Manager's key officers have experience in raising and managingmortgage capital, mortgage finance and the purchase and administration ofMortgage Related Assets.

 

**RECENT EVENTS**

 

             *Exchange Listing. *Effective February 8, 2001, the Company was listed on theAmerican Stock Exchange and began trading its common stock under the symbolAXM.

*             Recently Issued Accounting Standards –*The Company adopted SFAS No. 133 and therelated amendments on January 1, 2001. This adoption resulted in a transition adjustment that reclassified$2,173,000 of net losses on unrealized and deferred gains and losses oninvestment securities and forward contracts from accumulated othercomprehensive income to current income. Also, deferred gains on interest rate swaps previously designated ashedges were reclassified from other liabilities to accumulated othercomprehensive income.

             In conjunction with the adoption ofSFAS No. 133, the Company reclassified $594,469,000 of its mortgage securitiesfrom the available-for-sale category to the trading category for investmentsaccounted for under SFAS No. 115.  Thischange resulted in the reclassification of $1,742,000 net unrealized gains fromaccumulated other comprehensive income to current income, in addition to netunrealized gains included in the SFAS No. 133 transition adjustment discussedabove. This change is also expected to increase the volatility of net income asboth changes in the fair market value and actual realized gains and losses ofthe fixed income securities and the related hedging instruments will now flowthrough net income each reporting period.

 

**STRATEGY**

             To achieve its business objectiveand generate dividend yields that provide a competitive rate of return for itsstockholders, the Company's strategy is to:
 •purchase primarily single-family fixed and  adjustable rate Mortgage Related Assets;    •manage the credit risk of its Mortgage Related  Assets through, among other activities (i) carefully selecting Mortgage  Related Assets to be acquired, (ii) complying with the Company's investment  policy, (iii) actively monitoring the ongoing credit quality and servicing of  its Mortgage Related Assets, and (iv) maintaining appropriate capital levels and  allowances for possible credit losses;    •finance purchases of Mortgage Related Assets  with the net proceeds of equity offerings and, to the extent permitted by the  Company's leverage policy, to utilize leverage to increase potential returns  to stockholders through borrowings (primarily reverse repurchase agreements)  with interest rates that will also reflect changes in short-term market  interest rates;    •seek to structure its borrowings in accordance  with its interest rate risk management policy;    •utilize interest rate swaps, forward contracts  on U.S. Treasury notes, interest rate caps and similar financial instruments  to mitigate interest rate risks; and    •seek to minimize prepayment risk primarily by  structuring a diversified portfolio with a variety of prepayment  characteristics;    •purchase equity and other securities issued by  financial entities on an opportunistic basis
 

 

             There can be no assurance that theCompany will be able to generate competitive earnings and dividends whileholding primarily High Quality Mortgage Related Assets and maintaining adisciplined risk-control profile.

             The Company may attempt to increasethe return to stockholders over time by: (i) raising additional capital inorder to increase its ability to invest in additional Mortgage Related Assets;(ii) lowering its effective borrowing costs through direct funding withcollateralized lenders, in addition to using Wall Street intermediaries, andinvestigating the possibility of using collateralized commercial paper andmedium-term note programs; and (iii) improving the efficiency of its balancesheet structure by issuing uncollateralized subordinated debt and other formsof capital.

 

 

**POLICIES**

The Company’s current investment policies areset forth in its Annual Report on form 10-K for the year ended December 31,2000.

**FINANCIALCONDITION**

**Fixed Income Securities**

At June 30, 2001 and December 31, 2000, theCompany held $533,463,000 and $600,131,000 of Fixed Income Securities,respectively.  The original maturity ofa significant portion of the Fixed Income Securities ranges from fifteen tothirty years; the actual maturity is subject to change based on the prepaymentsof the underlying mortgage loans.

The following table is a schedule of FixedIncome Securities held as available for sale listed by security type (dollarsin thousands):

 
 June 30, 2001 December 31, 2000             Fixed Income  SecuritiesCarrying  Value Percent of Total  Available-for-  sale Securities Carrying  Value Percent of Total  Available-for-  sale Securities  Mortgage  Securities:        Adjustable  Rate (1)-0- 0.00%$40,253 6.71%Fixed Rate-0- 0.00%554,216 92.35%Other Fixed  Income Securities$5,467 100.00%5,662 0.94%     Totals$5,467 100.00%$600,131 100.00%      (1) At December 31,  2000, the interest rate indices for 97% and 3% of the adjustable rate  mortgage securities were based on the one-year U.S. Treasury rate and the  six-month London Inter-Bank Offered Rate, respectively.
 

The following table is a schedule of FixedIncome Securities held for trading at June 30, 2001 listed by security type(dollars in thousands):

 
 June 30, 2001   Fixed Income  SecuritiesCarrying  Value Percent of Total  Securities Held  for Trading       Mortgage  Securities:    Adjustable  Rate$19,359 3.67%Fixed Rate508,637 96.33%   Totals$527,996 100.00%   
 

             
The followingtable shows various weighted average characteristics of the Fixed IncomeSecurities held as available-for-sale by the Company at June 30, 2001 (dollarsin thousands):

 
Security  TypePar Amount Par as a  Percent of Category Adjusted  Cost Basis Market  Price Current  Coupon Weighted  Average  Life   Other Fixed  Income Securities$10,400 100.00%62.47%52.57%14.86%1.3  
 

             The following table shows variousweighted average characteristics of the Fixed Income Securities held fortrading by the Company at June 30, 2001 (dollars in thousands):

 
Security TypePar Amount Par as  a Percent of Category Adjusted  Cost Basis Market Price Current  Coupon Weighted  Average  Life (1)  20 Year  Agency Pass-throughs$214,959 40.54%97.21%99.48%6.50%4.7 30 Year  Agency Pass-throughs187,047 35.28%100.24%99.98%6.90%5.1 AAA CMOs109,218 20.60%95.28%98.69%6.68%4.9            Total Fixed  Rate Holdings$511,224 96.42%97.91%99.49%6.68%4.9              Adjustable  Rate Holdings19,024 3.58%100.98%101.76%7.63%1.0                         Category  Total$530,248 100.00%98.02%99.58%6.72%4.8            
 

             The following table shows variousweighted average characteristics of the Fixed Income Securities held asavailable-for-sale by the Company at December 31, 2000 (dollars in thousands):

 
Security TypePar Amount Percent of  Total Par  Amount Adjusted  Cost Basis Market  Price Current  Coupon Weighted Average  Life (1)               15 Year  Agency/AAA Pass-throughs$145,251 23.90%98.00%99.90%6.50%4.5 20 Year  Agency Pass-throughs230,193 37.90%97.00%99.30%6.50%5.6 30 Year  Agency Pass-throughs54,759 9.00%99.65%101.23%7.41%5.0 AAA CMOs127,759 21.00%95.68%97.92%6.80%6.4            Total Fixed  Rate Holdings$557,962 91.80%97.22%99.33%6.80%5.4              Other Fixed  Income Securities10,400 1.70%64.31%54.44%15.89%1.8 Adjustable  Rate Holdings39,253 6.50%102.49%102.55%8.00%0.6            Total  Portfolio$607,615 100.00%96.99%98.77%6.90%5.1             (1)The weighted average  life of the fixed rate mortgage securities is based upon market prepayment  expectations as of the dates shown.   The actual weighted average life could be longer or shorter depending  on the actual prepayment rates experienced over the life of the  securities.  The weighted average life  shown for the adjustable rate mortgage assets represents the average time  until the next coupon reset date.  All  averages are shown in years.
 

**Equity Securities**

             At June 30, 2001 and December 31, 2000 the Company held $10,240,000 and$9,068,000 of equity securities held as available-for-sale, respectively.  Equity securities consist primarily ofinvestments in equities issued by other real estate investment trusts.

At June 30,2001, equity securities consisted of the following:

             
(In  thousands)Shares Held Adjusted Cost Fair Value          Common  Stock:      Dynex  Capital, Inc.75 122 148      Total Common  Stock  122 148     Convertible  Preferred Stock:      Capstead  Mortgage Corporation, Series B515 4,365 6,118 Dynex  Capital, Inc., Series A53 420 578 Dynex  Capital, Inc., Series B150 1,167 1,838 Dynex  Capital, Inc., Series C108 968 1,558      Total  Convertible Preferred Stock  6,920 10,092          Total Equity  Securities  $7,042 $10,240     
At December 31,2000, equity securities consisted of the following:

             
(In  thousands)Shares Held Adjusted Cost Fair Value          Common Stock:      American  Residential Investment Trust, Inc.109 $611 $238 Anworth  Mortgage Asset Corporation222 994 900 Dynex  Capital, Inc.75 122 75      Total Common  Stock  1,727 1,213     Convertible  Preferred Stock:      Capstead  Mortgage Corporation, Series B520 4,408 5,492 Dynex  Capital, Inc., Series A53 420 427 Dynex  Capital, Inc., Series B150 1,167 1,088 Dynex  Capital, Inc.,  Series C108 968 848      Total  Convertible Preferred Stock  6,963 7,855          Total Equity  Securities  $8,690 $9,068     
 

**HedgingInstruments**

             There can be no assurance that theCompany will enter into hedging activities or that, if entered into, suchactivities will have the desired beneficial impact on the Company’s results ofoperations or financial condition. Moreover, no hedging activity can completely insulate the Company fromthe risks associated with changes in interest rates and prepayment rates.

             Hedging involves risk and typically involves costs, including transactioncosts.  Such costs increase dramaticallyas the period 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 shareholders of the Company given the cost ofsuch hedging 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.
At June 30,2001, the Company had open forward contracts to sell U.S. Treasury notes withterms stated below.

 
Current  Notional Amount (000)Average  Contract  Price Fair  value of  contracts  (000) Average  Termination  Date Unrealized  Gains (Losses)  (000)           $379,900102.552 $389,594 7/23/2001 $(158)         
 

At December 31,2000, the Company had open forward contracts to sell U.S. Treasury notes withterms stated below.

 
Current  Notional Amount (000)Average  Contract  Price Fair  value of  contracts  (000) Average  Termination Date Unrealized  Gains (Losses)  (000)           $575,000101.099 $585,048 1/19/2001 $(3,731)         
             The contracts were entered into tomitigate the negative impact of rising interest rates on certain fixed incomesecurities that generally have a market weighted average duration approximatelyequal to the contracts shown above.

 

**Liabilities**

             The Company has entered intoreverse repurchase agreements to finance certain of its mortgage-backedsecurities.  These agreements aresecured by a portion of the Company’s mortgage-backed securities and bearinterest rates that have historically moved in close relationship to LIBOR.

             At June 30, 2001, the Company hadoutstanding $501,604,000 of reverse repurchase agreements with a weightedaverage current borrowing rate of 3.80% and a maturity of 1.0 month.  The reverse repurchase agreements werecollateralized by securities with an estimated fair value of $515,338,000.

             At December 31, 2000, the Companyhad outstanding $545,434,000 of reverse repurchase agreements with a weightedaverage current borrowing rate of 6.61% and a maturity of 1.1 months.  The reverse repurchase agreements werecollateralized by mortgage-backed securities with an estimated fair value of$564,274,000.

             The Company had $3,546,000 and$24,256,000 of other liabilities at June 30, 2001 and December 31, 2000,respectively, consisting primarily of accrued interest payable, unrealized losson forward contracts and payables for unsettled securities at June 30, 2001 anddeferred gain on interest rate swaps, accrued interest payable and payables forunsettled securities at December 31, 2000. The Company anticipates settling all other liabilities within one year.

 

 

**Other Matters**

             At June 30, 2001, the Company heldequity securities and senior unsecured notes issued by Dynex Capital, Inc.(“Dynex”) with fair market values of $4,122,000 and $4,000,000,respectively.  During the year endedDecember 31, 1999, Dynex suspended the payment of dividends on its preferredstock.  Accordingly, the Company is nolonger recognizing dividend income on its equity investments in Dynex.  Dynex is currently paying interest on itssenior notes.  Accordingly, the Companyis recognizing interest income on the senior note investments issued by Dynex.  If Dynex were to suspend payment of intereston its senior notes, interest income recognized by the Company would benegatively impacted.

 

**Resultsof Operations for the Quarter Ended June 30, 2001**

             For the quarter ended June 30,2001, the Company’s net income was $400,000, or $0.07 per share on both a basicand diluted basis, based on a weighted average of 5,753,000 and 5,819,000shares outstanding, respectively.  Thatcompares to a net loss of $5,115,000, or $0.89 per share both on basic anddiluted basis, based on a weighted average of 5,753,000 shares outstanding forthe quarter ended June 30, 2000.  Netinterest income for the quarter ended June 30, 2001 was $4,776,000 consistingof interest income on mortgage assets and cash balances less interest expenseon reverse repurchase agreements compared to $2,304,000 for the quarter endedJune 30, 2000.  The Company reporteddividend income of $306,000 from dividends on equity investments for thequarter ended June 30, 2001.  TheCompany reported dividend income of $354,000 from dividends on equityinvestments for the quarter ended June 30, 2000.             During the quarter ended June30, 2001, the Company incurred a net loss on investment transactions of$4,382,000 which is reported in the Statement of Operations.  The loss consisted of a realized $65,000gain on the sale of $1,712,000 of equity securities, realized $866,000 gain onthe sale of $59,109,000 of fixed income securities held for trading, reportedlosses of $3,141,000 from the net decrease in fair market value of fixed incomesecurities held for trading and a realized $2,172,000 net loss on closedforward contracts.  The Company realizeda net loss of $7,532,000 primarily from the sale of mortgage-backed securitiesand equity securities for the quarter ended June 30, 2000.  The asset sales during that quarter occurredin response to the added risk associated with an overall increase in interestrate and mortgage spread volatility. Specifically, at the beginning of the second quarter 2000, the Companyhad a portfolio of primarily fixed-rate mortgage securities financed byapproximately 92% short-term borrowings and 8% equity capital.  As interest rates rose significantly duringthe quarter, the value of the mortgage securities in the portfoliodeclined.  Although the Company hadentered into short positions on U.S. Treasury notes as part of a hedgingstrategy, the value of mortgage securities in general declined more than thatof comparable treasuries during the period. Accordingly, the decline in value of the mortgage securities was greaterthan the offsetting gains recognized from hedging.  This net decline in value increased the effective leverage, andtherefore risk, of the portfolio as the ratio of debt to equity increased.  Assets were then sold in order to decreasethe debt to equity ratio as asset sales decrease debt but do not decreaseequity on a fully marked-to market basis. The asset sales resulted in a loss of $6,558,000. This loss representsthe difference between the sale proceeds and the amortized cost of the assetssold.  The remaining loss reportedduring the quarter primarily represents an impairment charge on one of theCompany's equity investments to adjust the cost basis to fair market value inresponse to an other than temporary decline in value.

             The Company incurred operatingexpenses of $300,000 for the quarter ended June 30, 2001 consisting ofmanagement fees, audit, tax, legal, printing, insurance and other expensescompared to $241,000 for the quarter ended June 30, 2000.

 

             The following table reflects theaverage balances for each category of the Company’s interest earning assets aswell as the Company’s interest bearing liabilities, with the correspondingeffective rate of interest annualized:

**AVERAGEBALANCE AND RATE TABLE**(Dollars in thousands)

 
 For  the Quarter Ended  June 30, 2001 For  the Quarter Ended  June 30, 2000       Average  Balance Effective  Rate Average  Balance Effective  Rate               Interest Earning Assets:         Mortgage Securities$536,103 7.05%$632,288 6.64% Other Fixed Income Assets6,532 17.34%7,024 16.69% Cash and Cash Equivalents4,017 3.39%6,234 6.74%               Total Interest Earning Assets546,652 7.14%645,546 6.75%         Interest Bearing Liabilities:         Reverse Repurchase Agreements527,693 3.78%585,494 5.87%     Net Interest Earning Assets and Spread$18,959 3.36%$60,052 0.88%     
             The effective yield data iscomputed by dividing the annualized net interest income or expense includingcertain hedging transactions as applicable into the average daily balanceshown.

             Thefollowing table reflects the average balances for the Company’s equitysecurities:

 

**AVERAGEBALANCE AND RATE TABLE**(Dollars in thousands)

 
 For  the Quarter Ended  June 30, 2001 For  the Quarter Ended  June 30, 2000       Average  Balance Effective  Dividend  Yield Average  Balance Effective  Dividend  Yield      Equity securities$12,535 9.76%$16,624 8.52%
 

**Resultsof Operations  for the Six Months EndedJune 30, 2001**

             For the six months ended June 30,2001, the Company’s net income was $1,374,000, or $0.62 per share on a basicbasis and $0.61 per share on a diluted basis, based on a weighted average of5,753,000 and 5,819,000 shares outstanding, respectively.  That compares to a net loss of $2,820,000 or$0.49 per share on both a basic and diluted basis, based on a weighted averageof 5,753,000 shares outstanding for the six months ended June 30, 2000.  Net interest income for the six months endedJune 30, 2001 was $8,720,000 consisting of interest income on fixed incomesecurities and cash balances less interest expense on reverse repurchaseagreements compared to $4,752,000 for the six months ended June 30, 2000.  The Company reported dividend income of$494,000 from dividends on equity investments for the six months ended June 30,2001 compared to $724,000 for the six months ended June 30, 2000.

             The Company incurred operatingexpenses of $569,000 for the six months ended June 30, 2001 consisting ofmanagement fees, professional, printing, insurance and other expenses.  For the six months ended June 30, 2000, theCompany incurred operating expenses of $764,000 consisting of management fees,professional, printing, insurance and other expenses.

             
             During the six months ended June30, 2001, the Company incurred a net loss on investment transactions of$6,840,000 which is reported in the Statement of Operations.  The loss consisted of a $65,000 gain on thesale of $1,712,000 of equity securities, a realized $4,311,000 gain on the saleof  $201,917,000 of fixed incomesecurities held for trading, a reported gain of $38,000 from the net increasein fair market value of fixed income securities held for trading and a realized$11,254,000 loss on closed forward contracts. The company realized a net loss of $7,532,000 primarily from the sale ofmortgage-backed securities and equity securities for the six months ended June30, 2000.

             On January 1, 2001, the Companyadopted SFAS No. 133 and the related amendments.  This adoption resulted in a transition adjustment thatreclassified $2,173,000 of net losses on unrealized and deferred gains andlosses on investment securities and forward contracts from accumulated othercomprehensive income to current income. Also, deferred gains on interest rate swaps previously designated ashedges were reclassified from other liabilities to accumulated othercomprehensive income.

             Also on January 1, 2001, theCompany reclassified $594,469,000 of its mortgage securities from theavailable-for-sale category to the trading category for investments accountedfor under SFAS No. 115.  This changeresulted in the reclassification of $1,742,000 net unrealized gains fromaccumulated other comprehensive income to current income, in addition to netunrealized gains included in the SFAS No. 133 transition adjustment discussedabove.

             No such accounting changes weremade during the six months ended June 30, 2000.

 

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:

**AVERAGEBALANCE AND RATE TABLE**(Dollars in thousands)

 
 For  the Six Months Ended  June 30, 2001 For  the Six Months Ended  June 30, 2000       Average  Balance Effective  Rate Average  Balance Effective  Rate      Interest Earning Assets:         Mortgage Securities$556,667 7.22%$671,037 6.64% Other Fixed Income Assets6,615 18.17%7,083 16.35% Cash and Cash Equivalents3,682 4.13%5,452 5.94%                 Total Interest Earning Assets566,964 7.33%683,572 6.74%         Interest Bearing Liabilities:         Reverse Repurchase Agreements545,055 4.43%623,725 5.86%              Net Interest Earning Assets and Spread$21,909 2.90%$59,847 0.88%     
             The effective yield data iscomputed by dividing the annualized net interest income or expense includingcertain hedging transactions as applicable into the average daily balanceshown.

             Thefollowing table reflects the average balances for the Company’s equitysecurities:

**AVERAGEBALANCE AND RATE TABLE**(Dollars in thousands)

 
 For  the Six Months Ended  June 30, 2001 For  the Six Months Ended  June 30, 2000       Average Balance Effective Dividend  Yield Average Balance Effective Dividend  Yield               Equity securities$12,774 7.73%$17,997 8.05%
 

 

**Liquidityand Capital Resources**

             The Company’s primary sources offunds as of June 30, 2001 and December 31, 2000, consisted of reverserepurchase agreements totaling $501,604,000 and $545,434,000,respectively.  The Company expects tocontinue to borrow funds in the form of reverse repurchase agreements.  At June 30, 2001, the Company had borrowingarrangements with over 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.

             The Company will also rely on thecash flow from operations, primarily monthly principal and interest payments tobe received on the mortgage assets, for liquidity.

             The Company believes that equitycapital, combined with the cash flow from operations and the utilization ofborrowings, will be sufficient to enable the Company to meet anticipatedliquidity requirements.  If theCompany's cash resources are at any time insufficient to satisfy the Company'sliquidity requirements, the Company may be required to liquidate mortgageassets or sell debt or additional equity securities.  If required, the sale of mortgage assets at prices lower than thecarrying value of such assets would result in losses.

             The Company may in the futureincrease its capital resources by making additional offerings of equity anddebt securities, including classes of preferred stock, common stock, commercialpaper, medium-term notes, CMOs and senior or subordinated notes.  All debt securities, other borrowings, andclasses of preferred stock will be senior to the Common Stock in a liquidationof the Company.  The effect ofadditional equity offerings may be the dilution of stockholders' equity of theCompany or the reduction of the price of shares of the Common Stock, orboth.  The Company is unable to estimatethe amount, timing or nature of additional offerings as they will depend uponmarket conditions and other factors.

 

**ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKETRISK**

**MARKETRISK**

             TheCompany’s two primary components of market risk are interest rate risk andequity price risk as discussed below.

**Interest Rate Risk**

*             Effect onNet Interest Income. *TheCompany invests in fixed-rate mortgage assets that are expected to be fundedwith short-term borrowings.  Duringperiods of rising interest rates, the borrowing costs associated with fundingsuch fixed-rate assets are subject to increase while the income earned on suchassets may remain substantially unchanged. This would result in a narrowing of the net interest spread between therelated assets and borrowings and may even result in losses. The Company mayenter into derivative transactions seeking to mitigate the negative impact of arising interest rate environment. Hedging techniques will be based, in part, onassumed levels of prepayments of the Company's mortgage assets.  If prepayments are slower or faster thanassumed, the life of the mortgage assets will be longer or shorter which wouldreduce the effectiveness of the Company's hedging techniques and may result inlosses on such transactions.  Hedgingtechniques involving the use of derivative securities are highly complex andmay produce volatile returns. The hedging activity of the Company will also belimited by the asset and sources of income requirements applicable to theCompany as a REIT.

             *Extension Risk*.  Fixed-rate assets are generally acquired with a projectedweighted average life based on certain assumptions regarding prepayments.  In general, when a fixed-rate mortgage assetis acquired with borrowings, the Company may, but is not required to, enterinto an interest rate swap agreement or other hedging instrument thateffectively fixes the Company’s borrowing costs for a period close to theanticipated average life of the related asset. This strategy is designed to protect the Company from rising interestrates because the borrowing costs are fixed for the duration of the asset.  However, if prepayment rates decrease in arising interest rate environment, the life of the mortgage asset could extendbeyond the term of the swap agreement or other hedging instrument.  This situation could negatively impact theCompany as borrowing costs would no longer be fixed after the end of the hedginginstrument while the income earned on the asset would remain fixed.  This situation may also cause the marketvalue of the Company’s mortgage assets to decline with little or no offsettinggain from the related hedging transactions. In certain situations, the Company may be forced to sell assets andincur losses to maintain adequate liquidity.

             *Prepayment Risk*.  Fixed-rate assets in combination with hedging instruments arealso subject to prepayment risk.  Infalling interest rate scenarios, the fixed-rate mortgage assets may prepayfaster such that the average life becomes shorter than its related hedginginstrument.  If this were to happen, theCompany would potentially need to reinvest at rates lower than that of therelated hedging instrument.  Thissituation may result in the narrowing of interest rate spreads or may causelosses.

             *Forward Contract Risk*.  The Company may also enter into forwardcontracts to sell U.S. Treasury notes in addition to or instead of interestrate swap agreements.  These forwardcontracts are generally expected to mitigate the impact of rising interestrates on the fair value of the Company's fixed income securities.  However, if the interest rate spread betweenmortgage securities and U.S. Treasury notes were to widen, the fair value ofthe Company's portfolio would generally be expected to decline.  In addition, the use of forward contracts tosell U.S. Treasury notes generally does not directly impact borrowing costs inthe same manner as interest rate swap agreements.  Therefore, the use of such forward contracts could result in netincome volatility during periods of interest rate volatility.

             TheCompany also invests in adjustable-rate mortgage assets that are typicallysubject to periodic 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 similar restrictions.  Hence, in a period of increasing interestrates, interest rates on its borrowings could increase without limitation bycaps, while the interest rates on its mortgage assets are generally limited bycaps.  This problem will be magnified tothe extent the Company acquires mortgage assets that are not fullyindexed.  Further, some adjustable-ratemortgage assets may be subject to periodic payment caps that result in someportion of the interest being deferred and added to the principal outstanding.  This could result in receipt by the Company ofless cash income on its adjustable-rate mortgage assets than is required to payinterest 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.

 

             TheCompany intends to fund a substantial portion of its acquisitions ofadjustable-rate mortgage assets with borrowings that have interest rates basedon indices and repricing terms similar to, but of somewhat shorter maturitiesthan, the interest rate indices and repricing terms of the mortgageassets.  Thus, the Company anticipatesthat in most cases the interest rate indices and repricing terms of itsmortgage assets and its funding sources will not be identical, thereby creatingan interest rate mismatch between assets and liabilities.  While the historical spread between relevantshort-term interest rate indices has been relatively stable, there have beenperiods, especially during the 1979-1982 and 1994 interest rate environments,when the spread between such indices was volatile.  During periods of changing interest rates, such interest ratemismatches could negatively impact the Company's financial condition, cashflows and results of operations.

             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 adversely affect theCompany's results of operations in several ways.  The Company anticipates that a substantial portion of itsadjustable-rate mortgage assets may bear initial ''teaser'' interest rates thatare lower than their ''fully indexed'' rates (the applicable index plus amargin).  In the event that such anadjustable-rate mortgage asset is prepaid prior to or soon after the time of adjustmentto a fully indexed rate, the Company will have held the mortgage asset while itwas less 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 is unableto acquire new mortgage assets to replace the prepaid mortgage assets, itsfinancial condition, cash flow and results of operations could be materiallyadversely affected.

             *Effect onFair Value.* Anothercomponent of interest rate risk is the effect changes in interest rates willhave on the market value of the Company's assets*. *This is the risk that the market value of the Company’sassets will increase or decrease at different rates than that of the Company’sliabilities including its hedging instruments.

             TheCompany primarily assesses its interest rate risk by estimating the duration ofits assets and the duration of its liabilities including all hedginginstruments.  Duration essentiallymeasures the market price volatility of financial instruments as interest rateschange.  The Company generallycalculates duration using various financial models and empirical data.

 

The following sensitivity analysis table showsthe estimated impact on the fair value of the Company’s interest rate sensitiveinvestments net of its hedging instruments and reverse repurchase agreementliabilities assuming rates instantaneously fall one hundred basis points andrise one hundred basis points.  (Dollarsare in thousands except per share amounts.)

 
        Fair  Value for Scenario Shown  Interest  Rates  Fall 100 Basis  Points Unchanged Interest  Rates  Rise 100 Basis  Points         Interest Rate Sensitive Instruments$36,064 $31,701 $24,778        Change in Fair Value$4,363 - $(6,923)Change as a Percent of Fair Value0.82%- (1.30)%Change as a Percent of Stockholders’  Equity9.69%- (15.38)%Change on a Per Share Basis$0.76 - $(1.20)
             Itis important to note that the impact of changing interest rates on fair valuecan change significantly when interest rates change beyond one hundred basispoints from current levels.  Therefore,the volatility 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.
             TheCompany has established an interest rate risk management policy that isintended to mitigate the negative impact of changing interest rates.  The Company generally intends to mitigateinterest rate risk by targeting the difference between the market weightedaverage duration on its mortgage related assets funded with secured borrowingsto the market weighted average duration of such borrowings to one year or less,taking into account all hedging transactions. The Company generally does not intend to have any specific durationtarget for the portion of its mortgage-related assets that are not funded bysecured borrowings.

             Therecan be no assurance that the Company will be able to limit such durationdifferences and there may be periods of time when the duration difference willbe greater than one year.

             Beginningwith the quarter ended March 31, 2001, the Company reclassified its fixedincome securities that are generally subject to a hedging strategy from theavailable-for-sale category to the held-for-trading category of SFAS #115.  This change is expected to increase the volatilityof net income as both changes in the fair market value and actual realizedgains and losses of the fixed income securities and the related hedginginstruments will now flow through net income each reporting period.

 

**Equity Price Risk**

             Another component of market riskfor the Company is equity price risk. This is the risk that the market value of the Company’s equityinvestments will decrease.  Thefollowing table shows the impact on the Company’s fair value as the price ofits equity securities change assuming price decreases of 10% and increases of10%.  Actual price decreases orincreases may be greater or smaller. (Dollars are in thousands except per share amounts.)

 
  Fair Value for Scenario Shown  Prices  Decrease  10% Unchanged Prices  Increase  10%  Equity  Investments$9,216 $10,240 $11,264        Change  in Fair Value(1,024)- 1,024 Change  as a Percent of Fair Value(10)%- 10%Change  as a Percent of Stockholders’ Equity(2.3)%- 2.3%Change  on a Per Share Basis(0.18)- 0.18 
             Althoughthere is no direct link between changes in fair value and changes in earningsin many cases, a decline in fair value for the Company may translate intodecreased earnings over the remaining life of the investment portfolio.

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

**             TheCompany’s analysis of risks is based on management's experience, estimates,models and assumptions.  These analysesrely on models of financial information which utilize estimates of fair valueand interest 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 this report.  Theseanalyses contain certain "forward-looking statements" and are subjectto the Safe Harbor contained in the Private Securities Litigation Reform Act of1995.**

 

**PART 2.           OTHERINFORMATION**

 
Item 1.Legal Proceedings None.    Item  2.Changes in Securities None.    Item  3.Defaults Upon Senior Securities Not Applicable.    Item 4.Submission of Matters to a Vote of  Security Holders   
 
 (a) On the June 26, 2001, the Annual Meeting of  Stockholders of the Company was held for the purpose of voting on:     (i) The election of two Directors to the Board of  Directors; and (ii) Ratification of the appointment of Deloitte  & Touche LLP as independent auditor for 2001.     (b) The stockholders of the Company approved the  following matters, with the following votes cast with respect to each proposal:     (i) Election of two Directors to the Board of  Directors:
 
DirectorShares  Voted For:Share  Votes Withheld:   John A. Gavin5,590,28440,124Marc I. Stern5,595,48434,924
 
 The other directors whose terms continued  after the Annual Meeting are: John C, Argue, Carl C. Gregory, III, Jeffrey E.  Gundlach, Peter G. Allen and Philip A. Barach.      (ii)Ratification of Deloitte & Touche LLP as  Independent Auditors for 2001:     Shares Voted For:Share Votes WithheldShare Votes Abstained      5,585,90827,20017,300
 
Item  5.Other Information .  None  Item 6.Exhibits and Reports on Form 8-K:    None  The following exhibits are part of this  quarterly report on Form 10-Q and are numbered in accordance with Item 601 of  Regulation S-K. 
None.
**SIGNATURES**

Pursuant to therequirements of Section 13 or 15(d) of the Securities and Exchange Act of 1934,the Registrant has duly caused this report to be signed on its behalf by theundersigned, thereunto duly authorized.
                       Apex Mortgage Capital, Inc.           (Registrant)            Dated: August 10, 2001          /s/ Philip A. Barach                      Philip A. Barach           President and Chief Executive Officer           (Principal Executive Officer)            Dated: August 10, 2001          /s/ Daniel K. Osborne                      Daniel K. Osborne           Executive Vice President           Chief Operating Officer and           Chief Financial Officer           (Principal Accounting Officer)
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