**UNITED STATES SECURITIES ANDEXCHANGE COMMISSION**

**Washington, D. C.20549**

 

**FORM 10-Q**

 

**(mark one)**

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

 

**APEX MORTGAGE CAPITAL, INC.**

(Exact name of Registrant as specified in its Charter)

 

| **Maryland**                                                          |   | **95-4650863**                           |
|-----------------------------------------------------------------------|--------|------------------------------------------|
| (State or other jurisdiction of incorporation or  organization)       |   | (I.R.S. Employer Identification  Number) |
|                                                                  |   |                                     |
| **865 South Figueroa Street, Suite 1800****Los  Angeles, California** |   | **90017**                                |
| (Address of principal executive offices)                              |   | (Zip Code)                               |

 

Registrant’stelephone number, including area code **(213) 244-0000**

 

Securitiesregistered pursuant to Section 12(b) of the Act:

 

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

 

Indicate by check mark whetherthe Registrant (1) has filed all reports required to be filed bySection 13 or 15(d) of the Securities Exchange Act of 1934 during thepreceding 12 months (or for such shorter period that the Registrant wasrequired to file such reports), and (2) has been subject to such filingrequirements for the past 90 days.

Yes  ý              No  o

 

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

Yes  ý              No  o

 

On November 4, 2003 thenumber of shares of our common stock outstanding was 29,857,000.

 

 

----

 

**APEXMORTGAGE CAPITAL, INC.**

**FORM10-Q**

 

**INDEX**

 
| **PART  I.**   | **FINANCIAL  INFORMATION**                                                                                                            |
|----------------|---------------------------------------------------------------------------------------------------------------------------------------|
|           |                                                                                                                                  |
| ITEM 1.        | FINANCIAL  STATEMENTS                                                                                                                 |
|           |                                                                                                                                  |
|           | BALANCE SHEETS AT  SEPTEMBER 30, 2003 AND DECEMBER 31, 2002 (UNAUDITED)                                                     |
|           |                                                                                                                                  |
|           | STATEMENTS OF OPERATIONS  FOR THE THREE MONTHS AND NINE MONTHS ENDED SEPTEMBER 30, 2003 AND  SEPTEMBER 30, 2002 (UNAUDITED) |
|           |                                                                                                                                  |
|           | STATEMENT OF STOCKHOLDERS’  EQUITY FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2003 (UNAUDITED)                                 |
|           |                                                                                                                                  |
|           | STATEMENTS OF CASH FLOWS  FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2003 AND SEPTEMBER 30, 2002  (UNAUDITED)                  |
|           |                                                                                                                                  |
|           | NOTES TO FINANCIAL  STATEMENTS (UNAUDITED)                                                                                            |
|           |                                                                                                                                  |
| ITEM 2.        | MANAGEMENT’S  DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS                                           |
|           |                                                                                                                                  |
| ITEM 3.        | QUANTITATIVE  AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK                                                                           |
|           |                                                                                                                                  |
| ITEM 4.        | CONTROLS AND PROCEDURES                                                                                                               |
|           |                                                                                                                                  |
| **PART II.**   | **OTHER INFORMATION**                                                                                                                 |
|           |                                                                                                                                  |
| ITEM 1.        | LEGAL PROCEEDINGS                                                                                                                     |
|           |                                                                                                                                  |
| ITEM 2.        | CHANGES  IN SECURITIES AND USE OF PROCEEDS                                                                                            |
|           |                                                                                                                                  |
| ITEM 3.        | DEFAULTS  UPON SENIOR SECURITIES                                                                                                      |
|           |                                                                                                                                  |
| ITEM 4.        | SUBMISSION  OF MATTERS TO A VOTE OF SECURITY HOLDERS                                                                                  |
|           |                                                                                                                                  |
| ITEM 5.        | OTHER INFORMATION                                                                                                                     |
|           |                                                                                                                                  |
| ITEM 6.        | EXHIBITS  AND REPORTS ON FORM 8-K                                                                                                     |
|           |                                                                                                                                  |
| SIGNATURES     |
|           |                                                                                                                                  |
| EXHIBIT INDEX  |
|           |                                                                                                                                  |
| CERTIFICATIONS |

 

1

----

 

**Apex Mortgage Capital, Inc.**

 

**Balance Sheets**

**(Unaudited)**

 
|                                                                                                                                                             |   | **September 30,  2003** |          | **December 31,  2002** |   |
|------------------------------------------------------------------------------------------------------------------------------------------------------------------|--------|------------------------------|---------------|-----------------------------|--------|
| **Assets**                                                                                                                                                       |   |                         |          |                        |   |
|                                                                                                                                                             |   |                         |          |                        |   |
| Cash  and cash equivalents                                                                                                                                       |   | $                            | 8,708,000     |                        | $      | 1,456,000 |   |
| Fixed  income trading securities, at fair value                                                                                                                  |   | 22,083,000                   |          | 606,014,000                 |   |
| Fixed  income securities available-for-sale, at fair value                                                                                                       |   | 1,343,636,000                |          | 1,818,893,000               |   |
| Equity  securities available-for-sale, at fair value                                                                                                             |   | —                       |          | 4,168,000                   |   |
| Accrued  interest receivable                                                                                                                                     |   | 5,444,000                    |          | 12,012,000                  |   |
| Principal  payments receivable                                                                                                                                   |   | 5,335,000                    |          | 248,000                     |   |
| Other  assets                                                                                                                                                    |   | 5,080,000                    |          | 2,587,000                   |   |
|                                                                                                                                                             |   | $                            | 1,390,286,000 |                        | $      | 2,445,378,000 |   |
|                                                                                                                                                             |   |                         |          |                        |   |
| **Liabilities and Stockholders’ Equity**                                                                                                                    |   |                         |          |                        |   |
|                                                                                                                                                             |   |                         |          |                        |   |
| Liabilities                                                                                                                                                      |   |                         |          |                        |   |
|                                                                                                                                                             |   |                         |          |                        |   |
| Reverse  repurchase agreements                                                                                                                                   |   | $                            | 927,079,000   |                        | $      | 2,112,444,000 |   |
| Payable  for unsettled securities                                                                                                                                |   | 237,750,000                  |          | —                      |   |
| Accrued  interest payable                                                                                                                                        |   | 1,744,000                    |          | 2,444,000                   |   |
| Dividend  payable                                                                                                                                                |   | —                       |          | 13,509,000                  |   |
| Interest  rate swaps, at fair value                                                                                                                              |   | 58,105,000                   |          | 120,098,000                 |   |
| Accrued  expenses and other liabilities                                                                                                                          |   | 1,512,000                    |          | 2,224,000                   |   |
|                                                                                                                                                             |   | 1,226,190,000                |          | 2,250,719,000               |   |
|                                                                                                                                                             |   |                         |          |                        |   |
| Commitments  and contingencies (Note 6)                                                                                                                          |   |                         |          |                        |   |
|                                                                                                                                                             |   |                         |          |                        |   |
| Stockholders’  Equity                                                                                                                                       |   |                         |          |                        |   |
|                                                                                                                                                             |   |                         |          |                        |   |
| Preferred  stock, par value $0.01 per share; 50,000,000 shares authorized; no shares  outstanding                                                                |   | —                       |          | —                      |   |
| Common  stock, par value $0.01 per share; 100,000,000 shares authorized; 29,857,000  shares outstanding as of September 30, 2003 and December 31, 2002 |   | 299,000                      |          | 299,000                     |   |
| Additional  paid-in-capital                                                                                                                                      |   | 331,521,000                  |          | 331,499,000                 |   |
| Accumulated  other comprehensive loss                                                                                                                            |   | (55,414,000                  | )             | (95,880,000                 | )      |
| Accumulated  deficit                                                                                                                                             |   | (112,310,000                 | )             | (41,259,000                 | )      |
|                                                                                                                                                             |   | 164,096,000                  |          | 194,659,000                 |   |
|                                                                                                                                                             |   | $                            | 1,390,286,000 |                        | $      | 2,445,378,000 |   |

 

See accompanying notes tofinancial statements

 

2

----

 

**Apex Mortgage Capital, Inc.**

 

**Statementsof Operations**

**(Unaudited)**

 
|                                                                                   |   | **Three Months  Ended  September 30, 2003** |        | **Three Months  Ended  September 30, 2002** |   | **Nine Months  Ended  September 30, 2003** |   | **Nine Months  Ended  September 30, 2002** |        |
|----------------------------------------------------------------------------------------|--------|--------------------------------------------------|-------------|--------------------------------------------------|--------|-------------------------------------------------|--------|-------------------------------------------------|-------------|
|                                                                                   |   |                                             |        |                                             |   |                                            |   |                                            |        |
| **Interest Income:**                                                                   |   |                                             |        |                                             |   |                                            |   |                                            |        |
| Fixed  income securities                                                               |   | $                                                | 14,923,000  |                                             | $      | 53,701,000                                      |   | $                                               | 72,520,000  |   | $ | 126,206,000 |   |
| Cash  and cash equivalents                                                             |   | 45,000                                           |        | 14,000                                           |   | 92,000                                          |   | 87,000                                          |        |
|                                                                                   |   | 14,968,000                                       |        | 53,715,000                                       |   | 72,612,000                                      |   | 126,293,000                                     |        |
|                                                                                   |   |                                             |        |                                             |   |                                            |   |                                            |        |
| **Interest Expense**                                                                   |   | 14,927,000                                       |        | 29,237,000                                       |   | 60,629,000                                      |   | 63,331,000                                      |        |
| **Net Interest Income**                                                                |   | 41,000                                           |        | 24,478,000                                       |   | 11,983,000                                      |   | 62,962,000                                      |        |
|                                                                                   |   |                                             |        |                                             |   |                                            |   |                                            |        |
| **Dividend Income**                                                                    |   | 34,000                                           |        | 106,000                                          |   | 236,000                                         |   | 341,000                                         |        |
| **Net Interest and Dividend Income**                                                   |   | 75,000                                           |        | 24,584,000                                       |   | 12,219,000                                      |   | 63,303,000                                      |        |
|                                                                                   |   |                                             |        |                                             |   |                                            |   |                                            |        |
| **General and Administrative Expenses:**                                               |   |                                             |        |                                             |   |                                            |   |                                            |        |
| Management  fee                                                                        |   | 466,000                                          |        | 539,000                                          |   | 1,570,000                                       |   | 1,360,000                                       |        |
| Incentive  fee                                                                         |   | (1,287,000                                       | )           | (1,437,000                                       | )      | —                                          |   | —                                          |        |
| Insurance                                                                              |   | 164,000                                          |        | 83,000                                           |   | 491,000                                         |   | 250,000                                         |        |
| Professional  fees                                                                     |   | 1,025,000                                        |        | 62,000                                           |   | 1,277,000                                       |   | 161,000                                         |        |
| Directors’  fees                                                                  |   | 30,000                                           |        | 22,000                                           |   | 74,000                                          |   | 66,000                                          |        |
| Non-employee  stock options                                                            |   | 7,000                                            |        | 23,000                                           |   | 22,000                                          |   | 73,000                                          |        |
| Other                                                                                  |   | 202,000                                          |        | 151,000                                          |   | 635,000                                         |   | 550,000                                         |        |
|                                                                                   |   | 607,000                                          |        | (557,000                                         | )      | 4,069,000                                       |   | 2,460,000                                       |        |
|                                                                                   |   |                                             |        |                                             |   |                                            |   |                                            |        |
| **Net Interest and Dividend Income (Loss) After General and  Administrative Expenses** |   | (532,000                                         | )           | 25,141,000                                       |   | 8,150,000                                       |   | 60,843,000                                      |        |
|                                                                                   |   |                                             |        |                                             |   |                                            |   |                                            |        |
| **Net Loss from Investment and Derivative Activities**                                 |   | (80,670,000                                      | )           | (15,645,000                                      | )      | (66,592,000                                     | )      | (26,097,000                                     | )           |
| **Net Income (Loss)**                                                                  |   | $                                                | (81,202,000 | )                                                | $      | 9,496,000                                       |   | $                                               | (58,442,000 | ) | $ | 34,746,000 |   |
|                                                                                   |   |                                             |        |                                             |   |                                            |   |                                            |        |
| **Net Income Per Share:**                                                              |   |                                             |        |                                             |   |                                            |   |                                            |        |
| Basic                                                                                  |   | $                                                | (2.72       | )                                                | $      | 0.32                                            |   | $                                               | (1.96       | ) | $ | 1.39 |   |
| Diluted                                                                                |   | $                                                | (2.72       | )                                                | $      | 0.32                                            |   | $                                               | (1.96       | ) | $ | 1.38 |   |
|                                                                                   |   |                                             |        |                                             |   |                                            |   |                                            |        |
| **Weighted Average Number of Shares Outstanding:**                                     |   |                                             |        |                                             |   |                                            |   |                                            |        |
| Basic                                                                                  |   | 29,857,000                                       |        | 29,857,000                                       |   | 29,857,000                                      |   | 24,976,000                                      |        |
| Diluted                                                                                |   | 29,857,000                                       |        | 29,992,000                                       |   | 29,857,000                                      |   | 25,105,000                                      |        |
|                                                                                   |   |                                             |        |                                             |   |                                            |   |                                            |        |
| **Dividends Declared Per Share:**                                                      |   | $                                                | —      |                                             | $      | 0.50                                            |   | $                                               | 0.42        |   | $ | 1.50 |   |

 

See accompanying notes tofinancial statements

 

3

----

 

**Apex Mortgage Capital, Inc.**

 

**Statementof Stockholders’ Equity**

**(Unaudited)**

 
|                                                                                         |   |       |   |   |    | **Additional  Paid-in  Capital** |   | **Accumulated  Other  Comprehensive  Income (Loss)** |   | **Accumulated  Deficit** |        | **Total  Stockholders’  Equity** |   | **Comprehensive  Income / (Loss)** |        |
|----------------------------------------------------------------------------------------------|--------|------------|--------|--------|---------|----------------------------------|--------|------------------------------------------------------|--------|--------------------------|-------------|---------------------------------------|--------|------------------------------------|-------------|
|                                                                                         |   |       |
| **Common Stock**                                                                             |
| **Shares**                                                                                   |   | **Amount** |
|                                                                                         |   |       |   |   |    |                             |   |                                                 |   |                     |        |                                  |   |                               |        |
| **Balance, January 1, 2003**                                                            |   | 29,857,000 |   | $      | 299,000 |                             | $      | 331,499,000                                          |   | $                        | (95,880,000 | )                                     | $      | (41,259,000                        | )           | $ | 194,659,000 |   |   |   |
|                                                                                         |   |       |   |   |    |                             |   |                                                 |   |                     |        |                                  |   |                               |        |
| **Amortization of non-employees stock options**                                              |   | —     |   | — |    | 22,000                           |   | —                                               |   | —                   |        | 22,000                                |   |                               |        |
|                                                                                         |   |       |   |   |    |                             |   |                                                 |   |                     |        |                                  |   |                               |        |
| **Net loss**                                                                                 |   | —     |   | — |    | —                           |   | —                                               |   | (58,442,000              | )           | (58,442,000                           | )      | $                                  | (58,442,000 | ) |
|                                                                                         |   |       |   |   |    |                             |   |                                                 |   |                     |        |                                  |   |                               |        |
| **Other comprehensive income (loss):**                                                       |   |       |   |   |    |                             |   |                                                 |   |                     |        |                                  |   |                               |        |
| Net  change in unrealized gain (loss) on available-for-sale securities                       |   | —     |   | — |    | —                           |   | (26,130,000                                          | )      | —                   |        | (26,130,000                           | )      | (26,130,000                        | )           |
|                                                                                         |   |       |   |   |    |                             |   |                                                 |   |                     |        |                                  |   |                               |        |
| Net  change in deferred gain (loss) on terminated interest rate swaps                        |   | —     |   | — |    | —                           |   | 4,603,000                                            |   | —                   |        | 4,603,000                             |   | 4,603,000                          |        |
|                                                                                         |   |       |   |   |    |                             |   |                                                 |   |                     |        |                                  |   |                               |        |
| Net  change in unrealized gain (loss) on interest rate swaps classified as cash  flow hedges |   | —     |   | — |    | —                           |   | 61,993,000                                           |   | —                   |        | 61,993,000                            |   | 61,993,000                         |        |
|                                                                                         |   |       |   |   |    |                             |   |                                                 |   |                     |        |                                  |   |                               |        |
| **Comprehensive income (loss)**                                                              |   |       |   |   |    |                             |   |                                                 |   |                     |        |                                  |   | $                                  | (17,976,000 | ) |
|                                                                                         |   |       |   |   |    |                             |   |                                                 |   |                     |        |                                  |   |                               |        |
| **Dividends declared**                                                                       |   | —     |   | — |    | —                           |   | —                                               |   | (12,609,000              | )           | (12,609,000                           | )      |                               |        |
|                                                                                         |   |       |   |   |    |                             |   |                                                 |   |                     |        |                                  |   |                               |        |
| **Balance, September 30, 2003**                                                         |   | 29,857,000 |   | $      | 299,000 |                             | $      | 331,521,000                                          |   | $                        | (55,414,000 | )                                     | $      | (112,310,000                       | )           | $ | 164,096,000 |   |   |   |

 

The following is apresentation of the changes in accumulated other comprehensive income (loss)for the nine months ended September 30, 2003.

 
|                                                                                         |   | **Nine Months  Ended  September 30, 2003** | ** **  |
|----------------------------------------------------------------------------------------------|--------|-------------------------------------------------|-------------|
|                                                                                         |   |                                            |        |
| *Unrealized Gains (Losses) on Available-for-Sale  Securities:*                               |   |                                            |        |
|                                                                                         |   |                                            |        |
| Change  in unrealized gains (losses) during the period                                       |   | $                                               | (48,828,000 | ) |
|                                                                                         |   |                                            |        |
| Realized  (gains) losses on sale of securities during the period                             |   | 22,698,000                                      |        |
|                                                                                         |   |                                            |        |
| Net  change in unrealized gains (losses) on available-for-sale securities                    |   | $                                               | (26,130,000 | ) |
|                                                                                         |   |                                            |        |
| *Deferred Gain (Loss) on Terminated Interest Rate Swaps:*                                    |   |                                            |        |
|                                                                                         |   |                                            |        |
| Deferred  gain (loss) on interest rate swaps terminated during the period                    |   | $                                               | (42,435,000 | ) |
|                                                                                         |   |                                            |        |
| Accelerated  loss recognition during the period                                              |   | 42,479,000                                      |        |
|                                                                                         |   |                                            |        |
| Reclassification  for amortization into interest expense                                     |   | 4,559,000                                       |        |
|                                                                                         |   |                                            |        |
| Net  change in deferred gain (loss) on terminated interest rate swaps                        |   | $                                               | 4,603,000   |   |
|                                                                                         |   |                                            |        |
| *Unrealized Gain (Loss) on Interest Rate Swaps Classified  as Cash Flow Hedges:*             |   |                                            |        |
|                                                                                         |   |                                            |        |
| Change  in unrealized gain (loss) during the period                                          |   | $                                               | (18,457,000 | ) |
|                                                                                         |   |                                            |        |
| Deferred  loss on interest rate swaps terminated during the period                           |   | 42,435,000                                      |        |
|                                                                                         |   |                                            |        |
| Reclassification  for adjustments to interest expense                                        |   | 38,015,000                                      |        |
|                                                                                         |   |                                            |        |
| Net  change in unrealized gain (loss) on interest rate swaps classified as cash  flow hedges |   | $                                               | 61,993,000  |   |

 

See accompanying notes tofinancial statements

 

4

----

 

**Apex Mortgage Capital, Inc.**

 

**Statementsof Cash Flows**

**(Unaudited)**

 
|                                                                                                 |   | **Nine  Months Ended  September 30, 2003** |        | **Nine  Months Ended  September 30, 2002** |   |
|------------------------------------------------------------------------------------------------------|--------|-------------------------------------------------|-------------|-------------------------------------------------|--------|
|                                                                                                 |   |                                            |        |                                            |   |
| **Operating Activities:**                                                                            |   |                                            |        |                                            |   |
| Net  (loss) income                                                                                   |   | $                                               | (58,442,000 | )                                               | $      | 34,746,000 |   |
| Adjustments  to reconcile net (loss) income to net cash provided by (used in) operating  activities: |   |                                            |        |                                            |   |
| Net  amortization                                                                                    |   | 19,822,000                                      |        | 669,000                                         |   |
| Net  loss from investment and derivative activities                                                  |   | 66,592,000                                      |        | 26,097,000                                      |   |
| Trading  activities                                                                                  |   | 532,696,000                                     |        | (594,929,000                                    | )      |
| Change  in assets and liabilities:                                                                   |   |                                            |        |                                            |   |
| Accrued  interest receivable                                                                         |   | 6,568,000                                       |        | (10,867,000                                     | )      |
| Other  assets                                                                                        |   | (2,493,000                                      | )           | 238,000                                         |   |
| Accrued  interest payable                                                                            |   | (700,000                                        | )           | 2,953,000                                       |   |
| Accrued  expenses and other liabilities                                                              |   | (712,000                                        | )           | (9,542,000                                      | )      |
| Net  cash provided by (used in) operating activities                                                 |   | 563,331,000                                     |        | (550,635,000                                    | )      |
|                                                                                                 |   |                                            |        |                                            |   |
| **Investing Activities:**                                                                            |   |                                            |        |                                            |   |
| Purchase  of fixed income securities available-for-sale                                              |   | (2,303,271,000                                  | )           | (1,503,945,000                                  | )      |
| Proceeds  from sales of fixed income securities available-for-sale                                   |   | 2,257,126,000                                   |        | 109,153,000                                     |   |
| Proceeds  from sales of equity securities                                                            |   | 4,299,000                                       |        | 1,937,000                                       |   |
| Principal  payments on fixed income securities available-for-sale                                    |   | 697,250,000                                     |        | 138,330,000                                     |   |
| Net  cash provided by (used in) investing activities                                                 |   | 655,404,000                                     |        | (1,254,525,000                                  | )      |
|                                                                                                 |   |                                            |        |                                            |   |
| **Financing Activities:**                                                                            |   |                                            |        |                                            |   |
| Net  change in reverse repurchase agreements                                                         |   | (1,185,365,000                                  | )           | 1,689,237,000                                   |   |
| Dividend  distributions                                                                              |   | (26,118,000                                     | )           | (40,025,000                                     | )      |
| Issuance  of common stock                                                                            |   | —                                          |        | 155,819,000                                     |   |
| Net  cash (used in) provided by financing activities                                                 |   | (1,211,483,000                                  | )           | 1,805,031,000                                   |   |
|                                                                                                 |   |                                            |        |                                            |   |
| **Net Increase (Decrease) in Cash and Cash Equivalents**                                             |   | 7,252,000                                       |        | (129,000                                        | )      |
|                                                                                                 |   |                                            |        |                                            |   |
| **Cash and Cash Equivalents at Beginning of Period**                                                 |   | 1,456,000                                       |        | 4,330,000                                       |   |
|                                                                                                 |   |                                            |        |                                            |   |
| **Cash and Cash Equivalents at End of Period**                                                       |   | $                                               | 8,708,000   |                                            | $      | 4,201,000 |   |
|                                                                                                 |   |                                            |        |                                            |   |
| **Supplemental Disclosure of Cash Flow Information:**                                                |   |                                            |        |                                            |   |
| Cash  paid for interest                                                                              |   | $                                               | 57,273,000  |                                            | $      | 61,406,000 |   |
| Noncash  Investing and Financing Activities:                                                         |   |                                            |        |                                            |   |
| Change  in accumulated other comprehensive loss                                                      |   | (40,466,000                                     | )           | (71,874,000                                     | )      |
| Change  in receivable for unsettled securities                                                       |   | —                                          |        | 330,567,000                                     |   |
| Change  in payable for unsettled securities                                                          |   | 237,750,000                                     |        | (384,730,000                                    | )      |
| Change  in dividends declared, not yet paid                                                          |   | (13,509,000                                     | )           | 2,473,000                                       |   |

 

See accompanying notes to financial statements

 

5

----

 

**Apex Mortgage Capital, Inc.**

**Notes to FinancialStatements**

**(Unaudited)**

** **

# **Note1 - The Company**

 

Apex Mortgage Capital,Inc., or the “Company,” was incorporated in Maryland on September 15,1997. The Company commenced its operations of acquiring and managing aportfolio of mortgage related assets on December 9, 1997, upon receipt ofthe net proceeds from the initial public offering of the Company’s commonstock. The Company uses its equity capital and borrowed funds to seek togenerate income based on the difference between the yield on its investmentsand the cost of its borrowings.  TheCompany is structured for tax purposes as a real estate investment trust, orREIT, under the Internal Revenue Code of 1986, as amended, or the “Code.”

 

The Company entered intoa management agreement, or the “Management Agreement,” as amended, with TCWInvestment Management Company, or the “Manager,” a wholly owned subsidiary ofThe TCW Group, Inc., pursuant to which the Manager manages the Company’sday-to-day operations, subject to the direction and oversight of the Company’sBoard of Directors.  The ManagementAgreement was initially executed on December 9, 1997.

 

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

 

## *Overview*

## * *

Certain information andnote disclosures normally included in annual financial statements prepared inaccordance with accounting principles generally accepted in the United Statesof America, or “GAAP,” have been condensed or omitted pursuant to the rules andregulations of the Securities and Exchange Commission, or the “SEC,” forinterim financial statements. The unaudited financial statements should be readin conjunction with the audited financial statements and notes thereto includedin the Company’s Annual Report on Form 10-K for the year ended December 31,2002. The accounting policies used in the preparation of these interimfinancial statements were consistent with those used in the preparation of thefinancial statements for the year ended December 31, 2002, unlessotherwise noted.

 

## *Derivatives and Hedging Transactions*

## * *

The Company may enterinto interest rate swaps and other financial instruments in order to mitigatethe impact of rising interest rates on the cost of its short-term borrowingsand market value of its portfolio securities. The Company may also enter into forward contracts to sell U.S. Treasurysecurities and other financial instruments in order to mitigate the negativeimpact of rising interest rates on the fair value of its fixed incomesecurities.  Such financial instrumentsare generally referred to as “derivatives.”

 

The Company adopted SFASNo. 133, *Accountingfor Derivative Instruments and Hedging Activities*, as amended, onJanuary 1, 2001. Under SFAS No. 133, all derivatives are recorded at fairvalue and presented as either assets or liabilities on the Company’s balancesheets.

 

Prior to adopting SFASNo. 133, the Company accounted for changes in fair values of the forwardcontracts through adjustments to accumulated other comprehensive income (loss).Following adoption of SFAS No. 133, the Company recognizes changes in fairvalues of forward contracts as a component of net gain (loss) on investment andderivative activities in the statements of operations.

 

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

 

*Stock-based Compensation*

 

The Company grants stockoptions to directors and to certain directors, officers and employees of theManager. Options granted to directors of the Company are accounted for usingthe intrinsic-value method, and generally no compensation expense is recognizedin the statements of operations for such options. Options granted to personsother than directors (i.e., to non-employees) are accounted for using the fairvalue method; such stock options are measured at their fair value when they aregranted and are recognized as general and administrative expense during theperiods when the options are vested and the related services areperformed.  During the nine months endedSeptember 30, 2003 and September 30, 2002, the Company did not issueany stock options. The effects of previously issued and unvested stock optionsto the Company’s directors did not have an impact for either of the periodspresented below.

 

The following tablerepresents the pro forma effects on net income (loss) and net income (loss) pershare if compensation costs related to the director stock options were measuredusing the fair value method as prescribed under SFAS No. 123, *Accounting for Stock-based Compensation:*

 
|                                                                                                                                          |   | **Three Months  Ended****September 30,  2003** |        | **Three Months  Ended****September 30,  2002** |   | **Nine Months****Ended  September 30,  2003** |   | **Nine Months****Ended  September 30,  2002** |        |
|-----------------------------------------------------------------------------------------------------------------------------------------------|--------|-----------------------------------------------------|-------------|-----------------------------------------------------|--------|----------------------------------------------------|--------|----------------------------------------------------|-------------|
|                                                                                                                                          |   |                                                |        |                                                |   |                                               |   |                                               |        |
| Reported net income (loss)                                                                                                                    |   | $                                                   | (81,202,000 | )                                                   | $      | 9,496,000                                          |   | $                                                  | (58,442,000 | ) | $ | 34,746,000 |   |
| Deduct: Total stock-based  employee compensation expense determined under fair value based method for  all awards, net of related tax effects |   | —                                              |        | —                                              |   | —                                             |   | 1,000                                              |        |
|                                                                                                                                          |   |                                                |        |                                                |   |                                               |   |                                               |        |
| Pro forma net income (loss)                                                                                                                   |   | $                                                   | (81,202,000 | )                                                   | $      | 9,496,000                                          |   | $                                                  | (58,442,000 | ) | $ | 34,745,000 |   |
|                                                                                                                                          |   |                                                |        |                                                |   |                                               |   |                                               |        |
| Earnings (losses) per share:                                                                                                                  |   |                                                |        |                                                |   |                                               |   |                                               |        |
| Basic - as reported                                                                                                                           |   | $                                                   | (2.72       | )                                                   | $      | 0.32                                               |   | $                                                  | (1.96       | ) | $ | 1.39 |   |
| Basic - pro forma                                                                                                                             |   | $                                                   | (2.72       | )                                                   | $      | 0.32                                               |   | $                                                  | (1.96       | ) | $ | 1.39 |   |
|                                                                                                                                          |   |                                                |        |                                                |   |                                               |   |                                               |        |
| Diluted - as reported                                                                                                                         |   | $                                                   | (2.72       | )                                                   | $      | 0.32                                               |   | $                                                  | (1.96       | ) | $ | 1.38 |   |
| Diluted - pro forma                                                                                                                           |   | $                                                   | (2.72       | )                                                   | $      | 0.32                                               |   | $                                                  | (1.96       | ) | $ | 1.38 |   |

 

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*Recent Accounting Developments*

 

In April 2003, theFinancial Accounting Standards Board issued Statement of Financial AccountingStandards No. 149, *Amendment of Statement133 on Derivative Instruments and Hedging Activities* (“SFAS 149”),which clarifies and amends financial accounting and reporting for derivativeinstruments, including certain derivative instruments embedded in othercontracts and for hedging activities under Statement of Financial AccountingStandards No. 133, *Accounting for DerivativeInstruments and Hedging Activities*(“SFAS 133”). In general, SFAS149 is effective for contracts entered into or modified after June 30,2003 and for hedging relationships designated after June 30, 2003.Implementation of this standard is not expected to have a material effect onthe earnings, cash flows or financial position of the Company.

 

**Note 3 – Fixed Income and EquitySecurities**

 

At September 30,2003, fixed income securities consisted of the following:

 
| **(in thousands)**             |   | **Fixed Income  Trading Securities** |   | **Fixed Income  Securities****Available-For-Sale** |   | **Equity Securities  Available-For-Sale** |   |
|--------------------------------|--------|--------------------------------------|--------|----------------------------------------------------|--------|-------------------------------------------|--------|
| Principal Amount               |   | $                                    | 21,710 |                                               | $      | 1,319,450                                 |   |   |   |
| Unamortized (Discount) Premium |   | (147                                 | )      | 15,918                                             |   |                                      |   |
| Adjusted Cost                  |   | 21,563                               |   | 1,335,368                                          |   | $                                         | — |   |
| Gross Unrealized Gains         |   | 520                                  |   | 14,079                                             |   | —                                    |   |
| Gross Unrealized Losses        |   | —                               |   | (5,811                                             | )      | —                                    |   |
| Fair Value                     |   | $                                    | 22,083 |                                               | $      | 1,343,636                                 |   | $ | — |   |

 

At December 31,2002, fixed income and equity securities consisted of the following:

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

 

The contractual finalmaturity of the mortgage loans supporting fixed income mortgage securities isgenerally between 15 and 30 years at origination.  Because of prepayments on the underlying mortgage loans, theactual weighted average maturity is expected to be substantially less.

 

Fixed-ratemortgage securities comprised approximately 48.4% and 99.0% of the Company’sportfolio of fixed income securities at September 30, 2003 andDecember 31, 2002, respectively. The shift from fixed-rate mortgage securities to adjustable-ratemortgage securities was made by the Manager to seek to reduce exposure to pricevolatility and to seek to increase exposure to securities that have morefavorable prepayment characteristics. The decrease in fixed income trading securities from December 31,2002 to September 30, 2003 was primarily due to the sale of $432,761,000of fixed income trading securities and $147,456,000 of principal prepayments onfixed income trading

 

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securities.  The expected average remaining maturity of the Company’s other fixedincome securities as of September 30, 2003 and December 31, 2002 wasapproximately 27 years and less than one year, respectively.

 

Adjustable-rate mortgagesecurities comprised approximately 49.1% and 0.4% of the Company’s portfolio offixed income securities at September 30, 2003 and December 31, 2002,respectively.  A portion of theadjustable-rate mortgage securities in the Company’s portfolio are backed byloans subject to periodic and lifetime caps that limit the amount thesecurities’ effective interest rates can change during any given period andover the lives of the assets.  Both atSeptember 30, 2003 and December 31, 2002, the portion ofadjustable-rate mortgage securities subject to periodic caps had an averageperiodic cap equal to 2.0%. At September 30, 2003 and December 31,2002, the portion of adjustable-rate mortgage securities subject to lifetimecaps had an average lifetime cap equal to 9.5% and 11.3%, respectively.

 

During the nine monthsended September 30, 2003, the Company reported a net loss on investmentand derivative activities of $66,592,000 in the statement of operations.  The loss consisted of a loss of $42,479,000on terminated swaps, a net loss of $24,153,000 on the sale of $2,257,126,000 offixed income securities available-for-sale, a gain of $5,424,000 on the sale of$432,761,000 of fixed income trading securities, a gain of $1,455,000 on thesale of $4,299,000 of equity securities available-for-sale, and an unrealizedloss of $6,839,000 on fixed income trading securities.

 

During the nine monthsended September 30, 2002, the Company reported a net loss on investmentand derivative activities of $26,097,000 in the statement of operations.  This loss consisted of a net loss of$55,800,000 on closed forward contracts, a loss of $229,000 on the sale of$98,634,000 of fixed income securities available-for-sale, a gain of$29,907,000 on the sale of $894,372,000 of fixed income trading securities, again of $594,000 on the sale of $1,937,000 of equity securitiesavailable-for-sale, and an unrealized loss of $569,000 on fixed income tradingsecurities.

 

# **Note4 - Reverse Repurchase Agreements**

 

The Company has enteredinto reverse repurchase agreements to finance certain of its investments.  These agreements are secured by a portion ofthe Company’s investments and bear interest rates that have historically movedin close relationship to LIBOR. Reverse repurchase agreements are accounted foras short-term borrowings and recorded as a liability on the balance sheet.

 

At September 30,2003, the Company had outstanding $927,079,000 of reverse repurchase agreementswith a weighted average current borrowing rate of 1.11% per annum and aweighted average maturity of one month. The reverse repurchase agreements were collateralized by the Company’ssecurities with an estimated fair value of $952,656,000.

 

At December 31,2002, the Company had outstanding $2,112,444,000 of reverse repurchaseagreements with a weighted average current borrowing rate of 1.40% per annumand a weighted average maturity of one month. The reverse repurchase agreements were collateralized by the Company’ssecurities with an estimated fair value of $2,199,852,000.

 

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

 

The Company has enteredinto interest rate swap agreements as summarized below.  Under these agreements, the Company receivesa floating rate and pays a fixed rate. The swaps qualify as cash flow hedges for accounting purposes, andeffectively fix the interest rate paid on $771,500,000, as ofSeptember 30, 2003, of current and anticipated future borrowings underreverse repurchase

 

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agreements.  The Company estimates that approximately$19,325,000 of unrealized and deferred realized losses on interest rate swapscurrently included in accumulated other comprehensive loss will be reclassifiedinto interest expense within the next twelve months as net settlements occur.As of September 30, 2003, the maximum length of time over which theCompany is hedging its exposure to the variability in future cash flows for currentand anticipated future transactions is approximately 8.7 years.

 

Interest Rate Swaps atSeptember 30, 2003:

 

(Dollars in thousands)

 
| **Current  Notional Amount** |    | **Average  Fixed Rate** |   | **Floating  Rate** |         | **Par  Weighted  Average  Maturity** |      | **Unrealized  Losses** |   |
|------------------------------|---------|-------------------------|--------|--------------------|--------------|--------------------------------------|-----------|------------------------|--------|
|                         |    |                    |   |               |         |                                 |      |                   |   |
| $                            | 771,500 |                    | 4.884  | %                  | 1Month LIBOR |                                 | 4.7 years |                   | $      | 58,105 |   |
|                              |         |                         |        |                    |              |                                      |           |                        |        |  |  |

 

Interest Rate Swaps atDecember 31, 2002:

 

(Dollars in thousands)

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

 

During the fourth quarterof 2002, the Company terminated a portion of the outstanding interest rate swapagreements with a combined notional amount of $544,500,000, which resulted in adeferred loss of approximately $13,872,000 with an average term of 1.3 yearsand an average rate of 3.57% per annum. Also, during the third quarter of 2003, the Company terminated anotherportion of the outstanding interest rate swap agreements with a combinednotional amount of $907,000,000 which resulted in a deferred loss ofapproximately $42,435,000 with an average term of 5.1 years and an average rateof 4.44% per annum.

 

As a result of decliningreverse repurchase agreement balances as of September 30, 2003, theCompany accelerated the deferred loss recognition and reclassified $42,479,000from accumulated other comprehensive income (loss) to net loss from investmentand derivative activities for the nine months ended September 30, 2003.  The acceleration of the deferred lossrecognition depends on the balance of reverse repurchase agreements maintainedby the Company.  If the general level ofreverse repurchase agreements were to decline further, the Company may berequired to accelerate the deferred loss recognition in the future.  The remaining deferred loss of $5,575,000 isbeing amortized as an adjustment to interest expense over the remaining livesof the original swap agreements.

 

During the nine monthsended September 30, 2003, interest expense was increased by $38,015,000paid to swap counterparties and $4,559,000 from amortization of deferred losseson terminated swap contracts.  Duringthe nine months ended September 30, 2002, interest expense was increasedby $29,342,000 paid to swap counterparties and decreased by $180,000 fromamortization of deferred gains on terminated swap contracts.

 

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# **Note6 – Commitments and Contingencies**

 

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

 

# **Note7 - Risks and Uncertainties**

 

The Company’sfuture results of operations and overall book value involve a number of risksand uncertainties that affect volatility of earnings and book value.  Factors that could affect the Company’sfuture operating results and/or book value and cause actual results to varymaterially from expectations include, but are not limited to the following:further adverse changes in general economic conditions, further changes ininterest rates; and fluctuations in overall market conditions formortgage-backed securities.

 

# **Note8 – Subsequent Events**

 

In addition,on July 14, 2003, **theCompany** announced that **it**entered into a definitive agreement and plan of merger dated July 12,2003, with American Home Mortgage Holdings, Inc., or American Home, andAmerican Home Mortgage Investment Corp. (formerly called AHM New Holdco, Inc.), or AHM Investment Corp., a wholly-ownedsubsidiary of American Home, providing for the acquisition of the Company byAmerican Home pursuant to the merger of the Company with and into AHMInvestment Corp., with AHM Investment Corp. surviving the merger.  Prior to the merger, American Home willengage in an internal reorganization pursuant to which American Home will mergewith and into a wholly-owned subsidiary of AHM Investment Corp.  As a result of this reorganization, AHMInvestment Corp. will become the new parent company and will own 100% of thecapital stock of American Home, and each outstanding share of American Homecommon stock will be converted into one share of AHM Investment Corp. commonstock.  In the merger, and subject tothe terms and conditions of the agreement and plan of merger, each issued andoutstanding share of **the Company’s** common stockwill be converted automatically into and become exchangeable for a number ofshares of AHM Investment Corp. common stock equal to 107.5% of our book valueper share, subject to a collar adjustment, as set forth in the agreement andplan of merger.  The completion of themerger is subject to the approval by **theCompany’s** stockholders and those of American Home, thereceipt of regulatory approvals and other customary conditions.  Upon the successful completion of themerger, the Company’s Manager has agreed that it will terminate its ManagementAgreement for a termination fee equal to 40% of the premium over book valuereceived by our stockholders in the merger, not to exceed $10,000,000, which isless than the amount the Company was originally obligated to pay the Managerunder the Management Agreement in the event of a termination without cause bythe Company.

 

**On October 27, 2003, the Company announced that theRegistration Statement on Form S-4, Amendment #3, filed by AHM Investment Corp.relating to the proposed acquisition of the Company by American Home wasdeclared effective by the SEC on October 24, 2003.**

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**ITEM2.****                             MANAGEMENT’SDISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS**

 

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

 

**SAFE HARBOR/FORWARDLOOKING STATEMENTS**

 

Certain information contained in this Quarterly Report on Form 10-Qconstitutes “forward-looking statements” which can be identified by the use offorward-looking terminology such as “may,” “will,” “should,” “anticipate,”“estimate,” “intend,” “continue” or “believes” or the negatives thereof orother variations thereon or comparable terminology. Some important factors thatwould cause actual results to differ materially from those in anyforward-looking statements include the following: the possibility that themerger with American Home Mortgage Holdings, Inc. will not be completed;changes in interest rates; a decline in our book value; domestic and foreignbusiness, market, financial or legal conditions; differences in the actualallocation of the assets of the Company from those assumed; and the degree towhich assets are hedged and the effectiveness of the hedge, among otherfactors. In addition, the degree of risk in the Company’s investments isincreased by the Company’s leveraging of its assets. For additional discussionof factors that could cause actual results to differ from those contained insuch 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, 2002. The Company does not undertake, andspecifically disclaims any obligation, to update any forward-looking statementsto reflect occurrences or unanticipated events or circumstances after the dateof such statements.

 

**GENERAL**

 

Apex Mortgage Capital, Inc., or the Company, a Maryland corporation, was formed on September 15, 1997,primarily to acquire United States agency and other highly rated, single-familyreal estate adjustable and fixed rate mortgage related assets.  The Company commenced operations onDecember 9, 1997, following the initial public offering of the Company’scommon stock.  The Company’s principalexecutive offices are located at 865 South Figueroa Street, Suite 1800, LosAngeles, California 90017, and its telephone number is (213) 244-0000.

 

The Company uses its equity capital and borrowed funds to seek togenerate income based on the difference between the yield on its mortgagerelated assets and the cost of its borrowings. The Company has elected to be taxed as a real estate investment trust,or REIT, under the Internal Revenue Code of 1986, as amended, or the Code.  The Company will not generally be subject tofederal taxes on its income to the extent that it distributes its net income toits stockholders and maintains its qualification as a REIT.

 

The day-to-day operations of the Company are managed by an externalmanagement company, TCW Investment Management Company, or the Manager, subjectto the direction and oversight of the Company’s Board of Directors.  A majority of the Board of Directors areunaffiliated 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 in1987, 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 fifteen years ofexperience in raising and managing mortgage capital.  The Company is externally

 

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managed by the Manager.  The Manager’s key officers have experiencein raising and managing mortgage capital, mortgage finance and the purchase andadministration of mortgage related assets.

 

###### **WebsiteAccess to Our Periodic SEC Reports**

 

Our internet address is www.apexreit.com.  We make our periodic SEC reports (Form 10-Q and Form 10-K) andcurrent reports (Form 8-K)available free of charge through our website as soon as reasonably practicableafter they are filed electronically with the SEC.  We may from time to time provide important disclosures toinvestors by posting them in the investor relations section of ourwebsite, as allowed by SEC rules.

 

Materials we file with the SEC may be read and copied at the SEC’sPublic Reference Room at 450 Fifth Street, N.W., Washington, D.C. 20549.  Information on the operation of the PublicReference Room may be obtained by calling the SEC at 1-800-SEC-0330.  The SEC also maintains an Internet Websiteat www.sec.gov that contains reports, proxy and information statements, andother information regarding our company that we file electronically with theSEC.

 

#### **RECENTEVENTS**

#### ** **

*Merger Agreement with American Home MortgageHoldings, Inc.* On July 14, 2003, we announced that we entered into a definitive agreement and plan of mergerdated July 12, 2003, with American Home Mortgage Holdings, Inc., orAmerican Home, and American Home Mortgage Investment Corp. (formerly called AHMNew Holdco, Inc.), or the AHM Investment Corp., a wholly-owned subsidiary ofAmerican Home, providing for the acquisition of the Company by American Homepursuant to the merger of the Company with and into AHM Investment Corp., withAHM Investment Corp. surviving the merger. Prior to the merger, American Home will engage in an internalreorganization pursuant to which American Home will merge with and into awholly-owned subsidiary of AHM Investment Corp.  As a result of this reorganization, AHM Investment Corp. willbecome the new parent company and will own 100% of the capital stock ofAmerican Home, and each outstanding share of American Home common stock will beconverted into one share of AHM Investment Corp. common stock.  In the merger, and subject to the terms andconditions of the agreement and plan of merger, each issued and outstandingshare of our common stock will be converted automatically into and becomeexchangeable for a number of shares of AHM Investment Corp. common stock equalto 107.5% of our book value per share, subject to a collar adjustment, as setforth in the agreement and plan of merger. The completion of the merger is subject to the approval by ourstockholders and those of American Home, the receipt of regulatory approvalsand other customary conditions.

 

*Special stockholders’ meeting*.  As previously announced, our specialstockholders’ meeting to vote on the proposed merger with American Home will beheld on November 21, 2003 for our stockholders of record onOctober 10, 2003.

 

*Termination of the Management Agreement. *In connection withthe proposed merger, we have agreed to terminate the Management Agreement withour Manager, TCW Investment Management Company, at the closing of the proposedmerger.  Pursuant to the existing termsof the Management Agreement, the Manager is entitled to a fee upon terminationof the Management Agreement equal to the fair market value of the ManagementAgreement.  In connection with theagreement and plan of merger with American Home, we have agreed to enter into athird amendment to the Management Agreement at the closing of the merger thatprovides that we will pay a termination fee to the Manager immediately prior tothe closing of the merger, equal to 40% of the premium over net book valuereceived by our stockholders in the merger. This amount is substantially less than the amount the Manager would beentitled to receive from the Company under the existing terms of the ManagementAgreement, which is less than the amount the Company was originally obligatedto pay the Manager under the Management Agreement in the event of a terminationwithout cause by the Company.

 

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By way of example, based on an Apex net book value per share ofapproximately $5.50 as of September 30, 2003 and (without giving effect tocertain transaction expenses which will be deducted from Apex’s actual net bookvalue, including the Manager’s termination fee) an American Home average priceof $20.14702 as of October 21, 2003, the termination fee will equalapproximately $4.9 million, which is less than the amount Apex was originallyobligated to pay to the Manager under the Management Agreement in the event ofa termination without cause by Apex. The actual Apex net book value, American Home average price andtermination fee can, and probably will, differ from these figures.

 

*No declaration of a dividend distribution forthe third quarter of 2003.*  On September 23, 2003 we announced that, due to costsassociated with the anticipated closing of the merger with American Home andthe restructuring of our investment portfolio in accordance with the terms ofthe merger, our board of directors decided not to declare a third quarter 2003dividend distribution to our stockholders.

 

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

 

**STRATEGY**

 

Subject to the agreement and plan of merger with American Home, andassuming the contemplated merger is completed, in order to achieve our businessobjective and generate dividend yields that provide a competitive rate of returnfor our stockholders, our strategy is to seek to:

 

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

 

•                  manage thecredit risk of our mortgage related assets through, among other activities, thefollowing: (i) carefully selecting mortgage related assets to be acquired; (ii)complying with our investment policy; (iii) actively monitoring the ongoingcredit quality and servicing of our mortgage related assets; and (iv)maintaining appropriate capital levels and allowances for possible creditlosses;

 

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

 

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

 

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

 

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

 

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

 

There can be no assurance that we will be able to generate competitiveearnings and dividends while holding primarily high quality mortgage relatedassets and maintaining a disciplined risk-control profile.

 

In the event that the merger does not close as contemplated, we mayattempt to increase the return to stockholders over time by: (i) raisingadditional capital in order to increase our ability to invest in additionalmortgage related assets; (ii) lowering our effective borrowing costs throughdirect funding with collateralized

 

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lenders, inaddition to using Wall Street intermediaries, and investigating the possibilityof using collateralized commercial paper and medium-term note programs; and(iii) improving the efficiency of our balance sheet structure by issuinguncollateralized subordinated debt and other forms of capital.

 

### **THE MANAGEMENT AGREEMENT**

### ** **

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

 

At all times, the Manager is subject to the direction and oversight ofthe Company’s board of directors and has only such functions and authority asthe Company delegates to it.  TheManager is responsible for the day-to-day operations of the Company.

 

In the event that the proposed merger is not completed as contemplated,the Management Agreement may be renewed for additional one-year terms at thediscretion of the unaffiliated directors, unless previously terminated by theCompany or the Manager upon written notice. Except in the case of a termination or non-renewal by the Company forcause, upon termination or non-renewal of the Management Agreement by theCompany, the Company is obligated to pay the Manager a termination ornon-renewal fee, which may be significant. The termination or non-renewal fee shall be equal to the fair marketvalue of the Management Agreement without regard to the Company’s terminationright, as determined by an independent appraisal.  The selection of the independent appraiser shall be subject tothe approval of the unaffiliated directors. Neither the fair market value of the Management Agreement nor thevarious factors which the appraiser may find relevant in its determination ofthe fair market value can be determined at this time.

 

The fair market value of the Management Agreement will be affected bysignificant variables, including the following: (i) the historical managementfees paid to the Manager; (ii) any projections of future management fees to bepaid to the Manager determined by the independent appraiser; and (iii) otherfactors, all of which may be unrelated to the performance of the Manager.

 

The Management Agreement may be assigned by the Manager to an affiliateof TCW without the consent of the Company. The Management Agreement may be assigned to a non-affiliate of TCW onlywith the approval of a majority of the unaffiliated directors.

 

*Termination of the Management Agreement. *In connection withthe proposed merger with American Home, we have agreed to terminate theManagement Agreement with our Manager, TCW Investment Management Company, atthe closing of the proposed merger. Pursuant to the existing terms of the Management Agreement, the Manageris entitled to a fee upon termination equal to the fair market value of theManagement Agreement.  In connectionwith the agreement and plan of merger with American Home, we have agreed toenter into a third amendment to the Management Agreement at the closing of themerger that provides that we will pay a termination fee to the Managerimmediately prior to the closing of the merger, equal to 40% of the premiumover net book value received by our stockholders in the merger.  This amount is

 

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substantially less than theamount the Manager would be entitled to receive from the Company under theexisting terms of the Management Agreement.

 

By way of example, based on an Apex net book value per share ofapproximately $5.50 as of September 30, 2003 and (without giving effect tocertain transaction expenses which will be deducted from Apex’s actual net bookvalue, including the Manager’s termination fee) an American Home average priceof $20.14702 as of October 21, 2003, the termination fee will equalapproximately $4.9 million, which is less than the amount Apex was originallyobligated to pay to the Manager under the Management Agreement in the event ofa termination without cause by Apex. The actual Apex net book value, American Home average price andtermination fee can, and probably will, differ from these figures

 

###### **Manager Compensation**

 

The Manager receives annual base management compensation based on theAverage Net Invested Capital of the Company, payable monthly in arrears, equalto 3/4 of 1% of Average Net Invested Capital. The term “Average Net InvestedCapital” means the month end sum of (1) the Company’s total stockholders’equity computed in accordance with accounting principles generally accepted inthe United States of America, plus (2) any unsecured debt that has beenapproved for inclusion by the unaffiliated directors at issuance, plus or minus(3) an adjustment to exclude the impact of any unrealized gains, losses orother items that do not affect realized net income.  Accordingly, incurring collateralized debtto finance specific investment purchases does not ordinarily increase AverageNet Invested Capital.

 

The Manager shall also be entitled to receive as incentive compensationfor each fiscal quarter, an amount equal to 30% of the Net Income of theCompany, before incentive compensation, in excess of the amount that wouldproduce an annualized Return on Equity equal to the Ten-Year U.S. Treasury Rateplus 1%.  The incentive compensationcalculation and payment will be made quarterly in arrears.  The term “Return on Equity” is calculatedfor any quarter by dividing the Company’s Net Income for the quarter by itsAverage Net Worth for the quarter.  Forpurposes of calculating the incentive compensation payable, the definition“Return on Equity” is not related to the actual distributions received bystockholders or to an individual investor’s actual return on investment.  For such calculations, the “Net Income” ofthe Company means the taxable income of the Company (including net capitalgains, if any) before the Manager’s incentive compensation, net operating lossdeductions arising from losses in prior periods and deductions permitted by theCode in calculating taxable income for a REIT plus the effects of adjustments,if any, necessary to record hedging and interest transactions in accordancewith accounting principles generally accepted in the United States ofAmerica.  A deduction for all of the Company’sinterest expenses for borrowed funds is taken into account in calculating NetIncome. “Average Net Worth” for any period means the arithmetic average of thesum of the gross proceeds from any offering of its equity securities by theCompany, before deducting any underwriting discounts and commissions and otherexpenses and costs relating to the offerings, plus the Company’s retainedearnings (without taking into account any losses incurred in prior periods)computed by taking the average of such values at the end of each month duringsuch period, minus the cumulative amounts paid by the Company to repurchase itsshares.

 

The ability of the Company to achieve an annualized Return on Equity inexcess of the Ten-Year U.S.  TreasuryRate plus 1%, and of the Manager to earn the incentive compensation describedin the preceding paragraph, is dependent upon the level and volatility ofinterest rates, the Company’s ability to react to changes in interest rates andto utilize successfully the operating strategies described herein, and otherfactors, many of which are not within the Company’s or the Manager’scontrol.  The Manager’s basecompensation shall be calculated by the Manager within 15 days after the end ofeach month, and such calculation shall be promptly delivered to theCompany.  The Company is obligated topay the base compensation within 30 days after the end of each month.  The Manager shall compute the quarterlyincentive compensation within 45 days after the end of each fiscal quarter, andthe Company shall pay the incentive compensation with respect to each fiscalquarter within 15 days following the delivery to the Company of the Manager’swritten statement setting forth the computation of the incentive compensationfor such quarter.  Quarterly incentive

 

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

 

**POLICIES**

 

The Company’s current investment policies are set forth in its AnnualReport on Form 10-K for the year ended December 31, 2002.

 

### **PRINCIPAL RISKS AND SPECIAL CONSIDERATIONS**

### ** **

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

 

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

 

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

 

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

 

***Equity Risk.***  Equity risk is the possibility that theCompany could lose money if its equity investments decline in value.  Such a decline could be caused by a numberof factors, including, but not limited to, overall

 

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market conditions, suspensionor omission of dividends, bankruptcies and litigation.  This is especially true during periods ofeconomic uncertainty or during economic downturns.

 

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

 

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

 

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

 

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

 

Although American Home and the Company have signed the agreement andplan of merger in furtherance of a proposed merger of the Company with and intoAHM Investment Corp., the completion of the merger is subject to stockholderand regulatory approvals, and there is no assurance that all of the conditionsto closing will be met and that the merger will be completed.  In addition, either party may unilaterallyterminate the Merger Agreement if the merger is not completed on or beforeJanuary 12, 2004, or, if the failure to close relates solely togovernmental approval or antitrust matters, on or before April 12,2004.  In addition, if the American Homeaverage price is less than $14.57443 per share, the Company may terminate theagreement and plan of merger, subject to American Home’s right to adjust theexchange ratio.  Similarly, if AmericanHome’s average price is greater than $24.29071 per share, American Home may terminatethe agreement and plan of merger, subject to our right to adjust the exchangeratio.

 

If the merger is not completed for any reason, the Company may beharmed in a number of ways, including the following:

 

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

 

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

 

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

 

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

 

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

 

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If the agreement and plan of merger with American Home is terminatedunder certain circumstances, we may be required to pay American Home a $12million break-up fee, plus American Home’s expenses incurred in connection withthe proposed merger, which may be substantial.

 

**Stockholderswho purchase our common stock after October 10, 2003 will be bound by theoutcome of the stockholders’ vote in connection with the proposed merger, butwill not have the right to vote.**

 

Our board of directors set a record date of October 10, 2003 in connectionwith our stockholders’ meeting to be held on November 21, 2003 to vote onthe merger with American Home.  Thosestockholders who purchase shares of our common stock after the record date willnot have the right to vote on the proposed merger.  Nonetheless, if our stockholders entitled to vote at thestockholders’ meeting approve the merger with American Home, those stockholderswho previously purchased our stock after the record date will be bound by theoutcome of the vote.

 

**FINANCIAL CONDITION**

 

# **FixedIncome Securities**

 

At September 30, 2003 and December 31, 2002, the Company held$1,365,719,000 and $2,424,907,000 of fixed income securities, respectively. The original maturity of asignificant portion of the fixed income securities ranges from fifteen tothirty years, however, the actual maturity is subject to change based on theprepayments of the underlying mortgage loans.

 

The following table is a schedule of fixed income securities heldand listed by security type (dollars in thousands):

 
|                          |   | **September 30, 2003** |      |                      |   | **December 31, 2002** |   |                      |   |
|-------------------------------|--------|-----------------------------|-----------|---------------------------|--------|----------------------------|--------|---------------------------|--------|
| **Fixed Income Securities**   |   | **Carrying  Value**         |      | **Percent of  Portfolio** |   | **Carrying  Value**        |   | **Percent of  Portfolio** |   |
|                          |   |                        |      |                      |   |                       |   |                      |   |
| Mortgage Securities:          |   |                        |      |                      |   |                       |   |                      |   |
| Adjustable Rate (1)           |   | $                           | 668,267   |                      | 48.93  | %                          | $      | 9,173                     |   | 0.38 | % |
| Fixed Rate                    |   | 660,987                     |      | 48.40                     | %      | 2,415,484                  |   | 99.61                     | %      |
| Other Fixed Income Securities |   | 36,465                      |      | 2.67                      | %      | 250                        |   | 0.01                      | %      |
| Totals                        |   | $                           | 1,365,719 |                      | 100.00 | %                          | $      | 2,424,907                 |   | 100.00 | % |

 

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(1)          AtSeptember 30, 2003, the interest rate indices for 36% and 61% of theadjustable rate mortgage securities were based on the one-year U.S. Treasuryrate and the London Inter-Bank Offered Rate, respectively.

 

AtDecember 31, 2002, the interest rate indices for 99% and 1% of theadjustable rate mortgage securities were based on the one-year U.S. Treasuryrate and the London Inter-Bank Offered Rate, respectively.

 

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The following tableshows various weighted average characteristics of the fixed income securitiesheld by the Company at September 30, 2003 (dollars in thousands):

 
| **Security Type**             |   | **Par Amount** |      | **Par as a  Percent of  Category** |   | **Adjusted  Cost Basis** |   | **Market  Price** |   | **Current  Coupon** |   | **Weighted  Average  Life (1)** |   |
|-------------------------------|--------|----------------|-----------|------------------------------------|--------|--------------------------|--------|-------------------|--------|---------------------|--------|---------------------------------|--------|
|                          |   |           |      |                               |   |                     |   |              |   |                |   |                            |   |
| 15 Year Agency Pass-throughs  |   | $              | 205,249   |                               | 15.30  | %                        | 102.47 | %                 | 101.73 | %                   | 4.76   | %                               | 3.4    |   |
| 30 Year Agency Pass-throughs  |   | 439,328        |      | 32.76                              | %      | 100.32                   | %      | 101.94            | %      | 5.73                | %      | 3.4                             |   |
| AAA CMOs                      |   | 4,322          |      | 0.32                               | %      | 98.39                    | %      | 100.28            | %      | 7.25                | %      | 1.8                             |   |
| Total Fixed Rate Holdings     |   | 648,899        |      | 48.38                              | %      | 100.99                   | %      | 101.86            | %      | 5.43                | %      | 3.4                             |   |
|                          |   |           |      |                               |   |                     |   |              |   |                |   |                            |   |
| Other Fixed Income Securities |   | 34,000         |      | 2.54                               | %      | 116.34                   | %      | 107.25            | %      | 5.38                | %      | 27.4                            |   |
| Adjustable Rate Holdings      |   | 658,262        |      | 49.08                              | %      | 100.58                   | %      | 101.52            | %      | 3.93                | %      | 0.9                             |   |
|                          |   |           |      |                               |   |                     |   |              |   |                |   |                            |   |
| Category Total                |   | $              | 1,341,161 |                               | 100.00 | %                        | 101.18 | %                 | 101.83 | %                   | 4.69   | %                               | 2.8    |   |

 

The following table shows various weighted average characteristics ofthe fixed income securities held by the Company at December 31, 2002 (dollars in thousands):

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

 

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(1)          Theweighted average life of the fixed rate mortgage securities is based uponmarket prepayment expectations as of the dates shown.  The actual weighted average life could be longer or shorterdepending on the actual prepayment rates experienced over the life of thesecurities and is sensitive to changes in both prepayment rates and interestrates. The weighted average life shown for the adjustable rate mortgage assetsrepresents the average time until the next coupon reset date.  All averages are shown in years.

 

### **Equity Securities**

 

The Company held no equity securities at September 30, 2003 andheld $4,168,000 equity securities at December 31, 2002. Equity securities consisted primarily of investment inequities issued by other real estate investment trusts.

 

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At December 31, 2002,equity securities consisted of the following:

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

 

**Accrued Interest Receivable and Other Assets**

 

The Company had accrued interest receivable and other assets of$15,859,000 and $14,847,000 at September 30, 2003 and December 31,2002, respectively. The increase was primarily due to the increase inreceivable for unsettled transactions, which was offset by the decrease inaccrued interest receivable at September 30, 2003. Other assets alsoconsist of deferred insurance expense, deferred stockholder rights expense andother prepaid expenses.

 

# **Stockholders’Equity**

 

The Company had stockholders’ equity of$164,096,000 and $194,659,000 at September 30, 2003 and December 31,2002, respectively. The decrease in stockholders’ equity at September 30,2003 was primarily due to an increase in accumulated deficit which waspartially offset by a decrease in accumulated other comprehensive loss duringthe nine months ended September 30, 2003. The accumulated deficit includednet loss and dividends declared for the nine months ended September 30,2003. The decrease in accumulated other comprehensive loss included a decreasein unrealized losses on interest rate swaps and a decrease in deferred loss onterminated interest rate swaps, which was offset by a decrease in unrealizedgains on available-for-sale securities.

 

###### **Hedging Instruments**

###### ** **

There can be no assurance that the Company will enter into hedgingactivities or that, if entered into, such activities will have the desiredbeneficial impact on the Company’s results of operations or financialcondition.  Moreover, no hedgingactivity can completely insulate the Company from the risks associated withchanges 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 Company’s stockholders given the cost of suchhedging transactions and the Company’s desire to maintain its

 

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status as a REIT.  The Company’s policies do not containspecific requirements as to the percentages or amount of interest rate riskthat the Manager is required to hedge.

 

The Company utilizes interest rate swap agreements as a tool to manageinterest rate risk. Under the swap agreements, the Company receives a floatingrate and pays a fixed rate. The notional amount of each agreement is matchedagainst a like amount of current and anticipated borrowings under reverserepurchase agreements to mitigate the potential effect on cash flows and netinterest income of rising interest rates by effectively fixing the rate paid onthe matched borrowings over the life of the contract. In the absence of suchfinancial instruments, interest expense on reverse repurchase agreements andsimilar short-term borrowings, which mature and reprice frequently, canincrease faster than the Company can adjust its interest-earning assets andincrease interest income, because the Company’s mortgage related securitiesgenerally have much longer maturities and have fixed rates of interest.

 

The interest rate swap agreements entered into by the Company areclassified as cash flow hedges for accounting purposes and meet therequirements of SFAS No. 133 for such classification.  Therefore, changes in the fair value of the agreements arereported in accumulated other comprehensive loss, a component of stockholders’equity, and do not affect net income in the period of the change.  Periodic exchanges of cash flows with thecounterparties to the agreements are recorded as adjustments to interestexpense.  If the Company were toterminate the swap agreements prior to their contractual termination dates, orchange current or anticipated borrowings so that they were no longerappropriately matched to the swap agreements, the agreements might not qualifyfor hedge accounting treatment.  In thatcase, changes in their fair values would affect net income.

 

 Borrowings hedged by interestrate swaps are used primarily to acquire and hold fixed income securitiesavailable-for-sale.  Changes in the fairvalues of securities available-for-sale are also reported in accumulated othercomprehensive income, a component of stockholders’ equity.  Changes in fair values of the securitiesonly affect periodic earnings when they are sold or if they have another-than-temporary impairment. Therefore, earnings volatility is reduced by the use of the swapagreements as cash flow hedges and the acquisition of available-for-salesecurities with the borrowings hedged by the agreements.  Impairment of the available-for-salesecurities or decisions to sell the securities prior to their expectedmaturities could result in unanticipated earnings volatility.

 

Duringthe fourth quarter of 2002, the Company terminated a portion of its outstandinginterest rate swap agreements with a combined notional amount of $544,500,000,which resulted in a deferred loss of approximately $13,872,000 with an averageterm of 1.3 years and an average rate of 3.57%. Also, during the third quarterof 2003, the Company terminated another portion of its outstanding interestrate swap agreements with a combined notional amount of $907,000,000 whichresulted in a deferred loss of approximately $42,435,000 with an average termof 5.1 years and an average rate of 4.44% per annum.

 

As aresult of declining reverse repurchase agreement balances as ofSeptember 30, 2003, the Company accelerated the deferred loss recognitionand reclassified $42,479,000 from accumulated other comprehensive income (loss)to net loss from investment and derivative activities for the nine months endedSeptember 30, 2003. The acceleration of the deferred loss recognitiondepends on the balance of reverse repurchase agreements maintained by theCompany. If the general level of reverse repurchase agreements were to declinefurther, the Company may be required to accelerate the deferred lossrecognition in the future. The remaining deferred losses are being amortized asan adjustment to interest expense over the remaining lives of the original swapagreements

 

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At September 30, 2003, the Company had entered into interest rateswap agreements summarized below:

 

(Dollars in thousands)

 
| **Current  Notional Amount** |    | **Average  Fixed Rate** |   | **Floating  Rate** |          | **Par  Weighted  Average Maturity** |      | **Unrealized  Losses** |   |
|------------------------------|---------|-------------------------|--------|--------------------|---------------|-------------------------------------|-----------|------------------------|--------|
|                         |    |                    |   |               |          |                                |      |                   |   |
| $                            | 771,500 |                    | 4.884  | %                  | 1 Month LIBOR |                                | 4.7 years |                   | $      | 58,105 |   |
|                              |         |                         |        |                    |               |                                     |           |                        |        |  |  |

 

At December 31, 2002, the Company had entered into interest rateswap agreements summarized below:

 

(Dollars in thousands)

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

 

At various times the Company has used forward contracts to sell U.S.Treasury securities as a means to seek to mitigate the effect of risinginterest rates on the fair value of its mortgage related securities.  The fair values of these forward contractsgenerally move in the opposite direction of the fair values of the mortgagerelated securities, and approximately in the same proportion when thematurities and other terms are appropriately matched.  When interest rates rise, the fair value of the mortgage relatedsecurities declines, but the increasing fair values of the forward contractshelp to preserve net asset value relative to the changing fair value of theshort-term borrowings used to fund them.

 

The Company’s forward contracts do not meet the criteria for hedgeaccounting under SFAS No. 133. Therefore, changes in their fair values affect current earnings, as dochanges in the fair values of the securities to which they are matched – suchsecurities are classified as trading securities.  Although the changes in the fair values of the forward contractsand the trading securities are offsetting, the contracts are not fullyeffective as hedges and, therefore, there can be volatility in periodic earningsto the extent they are not effective.

 

At September 30, 2003 and December 31, 2002, the Company hadno open forward contracts to sell U.S. Treasury notes.

 

# **Liabilities**

 

The Company has entered into reverse repurchase agreements to financecertain of its mortgage-backed securities. These agreements are secured by a portion of the Company’smortgage-backed securities and bear interest rates that have historically movedin close relationship to LIBOR.

 

At September 30, 2003, the Company had outstanding $927,079,000 ofreverse repurchase agreements with a weighted average current borrowing rate of1.11% per annum and a maturity of one month. The reverse repurchase agreementswere collateralized by mortgage-backed securities with an estimated fair valueof $952,656,000.

 

23

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At December 31, 2002, the Company had outstanding $2,112,444,000of reverse repurchase agreements with a weighted average current borrowing rateof 1.40% per annum and a maturity of one month.  The reverse repurchase agreements were collateralized bymortgage-backed securities with an estimated fair value of $2,199,852,000.

 

The Company had interest rate swaps with an unrealized loss of$58,105,000 and $120,098,000 at September 30, 2003 and December 31,2002, respectively. Under the swap agreements, the Company receives a floatingrate and pays a fixed rate.

 

The Company had $3,256,000 and $18,177,000 of other liabilities atSeptember 30, 2003 and December 31, 2002, respectively. The decreasein other liabilities at September 30, 2003 was primarily due to thetermination of dividend distribution during the quarter endedSeptember 30, 2003. Other liabilities also consist of accrued interestpayable and accrued expenses and other liabilities. The Company anticipatessettling all other liabilities within one year.

 

**Contractual Obligations**

 

At September 30, 2003, the Company had contractual obligationssummarized below:

 
|                                 |   | **Payments due by period** |       |
|--------------------------------------|--------|----------------------------|------------|
| **Contractual  Obligations**         |   | **Total**                  |       | **Less than 1  year** |   | **1 - 3  years** |   | **3 - 5  years** |   | **More  than 5  years** |   |
| **(dollars  in  thousands)**    |   |                       |       |   |   |   |   |   |   |   |   |
|                                 |   |                       | ** ** |   | ** ** |   | ** ** |   | ** ** |   | ** ** |
| Reverse repurchase principal payable |   | $                          | 927,079    |   | $ | 927,079 |   | — |   | — |   | — |   |
| Total                                |   | $                          | 927,079    |   | $ | 927,079 |   |   |   |   |   |   |   |

 

**RESULTS OF OPERATIONS**

 

**Three Months Ended September 30, 2003 Compared ToThree Months Ended September 30, 2002**

 

##### *Overview*

##### * *

For the quarter ended September 30, 2003, the Company’s net losswas $81,202,000, or $(2.72) per common share on a basic and diluted basis,based on a weighted average of 29,857,000 shares outstanding. This compares tonet income of $9,496,000, or $0.32 per common share on a basic and dilutedbasis, based on a weighted average shares outstanding of 29,857,000 and29,992,000, respectively, for the three months ended September 30, 2002.The weighted average number of shares used to calculate net income per dilutedshare includes the effect of the assumed exercise of outstanding stockoptions.  The primary reasons for theincrease in net loss was due to a decrease in the net interest margin, realizedlosses on terminated interest rate swaps, and realized losses on the sale offixed income securities available-for-sale.

 

##### *Net Interest Income*

##### * *

Net interest income for the quarter ended September 30, 2003 was$41,000, consisting of interest income on fixed income securities and cashbalances less interest expense on reverse repurchase agreements and interestrate swaps, compared to $24,478,000 for the quarter ended September 30,2002, or a decrease of 100%. The decrease in net interest income was primarilydue to a decrease in net interest margin, from 2.82%

 

24

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for the quarter endedSeptember 30, 2002 to (0.44)% for the quarter ended September 30,2003. Changes in interest income and expense are primarily a function ofchanges in average effective interest rates on the Company’s fixed incomesecurities, reverse repurchase agreements and interest rate swaps, and changesin the average amount of those assets and liabilities outstanding during eachyear.

 

The following table reflects the average balances for each category ofthe Company’s interest earning assets as well as the Company’s interest bearingliabilities, with the corresponding effective rate of interest annualized:

 

#### **AVERAGEBALANCE AND RATE TABLE**

(Dollars in thousands)

 
|                                   |   | **For the  Quarter Ended  September 30, 2003** |      | **For the  Quarter Ended  September 30, 2002** |   |
|----------------------------------------|--------|-----------------------------------------------------|-----------|-----------------------------------------------------|--------|
|                                   |   | **Average  Balance**                                |      | **Effective  Rate**                                 |   | **Average  Balance** |   | **Effective  Rate** |   |
| Interest-Earning Assets:               |   |                                                |      |                                                |   |   |   |   |   |
| Fixed Income Securities                |   | $                                                   | 1,544,446 |                                                | 3.86   | % | $ | 3,372,586 |   | 6.37 | % |
| Cash and Cash Equivalents              |   | 23,229                                              |      | 0.77                                                | %      | 2,185 |   | 2.56 | % |
| Total Interest-Earning Assets          |   | 1,567,675                                           |      | 3.82                                                | %      | 3,374,771 |   | 6.37 | % |
|                                   |   |                                                |      |                                                |   |   |   |   |   |
| Interest-Bearing Liabilities:          |   |                                                |      |                                                |   |   |   |   |   |
| Reverse Repurchase Agreements          |   | 1,401,872                                           |      | 4.26                                                | %      | 3,293,219 |   | 3.55 | % |
|                                   |   |                                                |      |                                                |   |   |   |   |   |
| Net Interest-Earning Assets and Spread |   | $                                                   | 165,803   |                                                | (0.44  | )% | $ | 81,552 |   | 2.82 | % |

 

The effective yield data is computed by dividing the annualized netinterest income or expense, including the effect on interest expense of hedgingtransactions as applicable into the average daily balance shown.

 

The following table reflects the average balances for the Company’sequity securities, with the corresponding effective dividend yield annualized:

 

**AVERAGE BALANCE AND RATE TABLE**

(Dollars in thousands)

 
|              |   | **For the  Quarter Ended  September 30, 2003** |   | **For the  Quarter Ended  September 30, 2002** |   |
|-------------------|--------|-----------------------------------------------------|--------|-----------------------------------------------------|--------|
|              |   | **Average  Balance**                                |   | **Effective  Dividend  Yield**                      |   | **Average  Balance** |   | **Effective  Dividend  Yield** |   |
|              |   |                                                |   |                                                |   |   |   |   |   |
| Equity securities |   | $                                                   | 1,623  |                                                | 8.38   | % | $ | 3,931 |   | 10.79 | % |
|                   |        |                                                     |        |                                                     |        |  |  |  |  |  |  |

 

25

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The following table shows the approximate amounts of the change ininterest income and expense between 2003 and 2002 that was a function of rateand volume changes, and the amount of the change that cannot be ascribedspecifically to either rate or volume changes:

 

**RATE / VOLUME TABLE**

(Dollars in thousands)

 
|                          |   | **Three  Months Ended September 30,  2003 compared to 2002** |    |
|-------------------------------|--------|-------------------------------------------------------------------|---------|
|                          |   | **Total  Change**                                                 |    | **Changes Due  to** |   |
| **Volume (1)**                |   | **Rates (1)**                                                     |
| Interest-Earning Assets       |   |                                                              |    |   |   |   |   |
| Fixed income securities       |   | $                                                                 | (38,778 | ) | $ | (29,109 | ) | $ | (9,669 | ) |
| Cash and cash equivalents     |   | 31                                                                |    | 135 |   | (104 | ) |
|                          |   |                                                              |    |   |   |   |   |
| Total interest income         |   | (38,747                                                           | )       | (28,974 | ) | (9,773 | ) |
|                          |   |                                                              |    |   |   |   |   |
| Interest-Bearing Liabilities  |   |                                                              |    |   |   |   |   |
| Reverse repurchase agreements |   | (14,310                                                           | )       | (16,791 | ) | 2,481 |   |
|                          |   |                                                              |    |   |   |   |   |
| Total interest expense        |   | (14,310                                                           | )       | (16,791 | ) | 2,481 |   |
|                          |   |                                                              |    |   |   |   |   |
| Change In Net Interest Income |   | $                                                                 | (24,437 | ) | $ | (12,183 | ) | $ | (12,254 | ) |

 

----

(1)          Changesin interest income/expense not arising from volume or rate variances areallocated proportionately to rate and volume.

 

A portion of the change in interest expense in the table above isrelated to the Company’s use of interest rate swaps.  Periodic settlements of the swap agreements with theircounterparties result in adjustments to interest expense associated with thereverse repurchase agreements hedged by the swaps.  During the quarter ended September 30, 2003, interestexpense was increased by $10,228,000 due to amounts paid to swap counterpartiesand $791,000 from amortization of deferred losses on terminated swapcontracts.  During the quarter endedSeptember 30, 2002, interest expense was increased by $14,189,000 due toamounts paid to swap counterparties.

 

##### *DividendIncome*

##### * *

The Company reported dividend income of $34,000 from dividends onequity investments for the quarter ended September 30, 2003, compared to$106,000 for the quarter ended September 30, 2002. The decrease was due tothe sale of the equity investments.

 

*Net Gain (Loss) from Investment andDerivative Activities*

 

During the quarter endedSeptember 30, 2003, the Company reported a net loss from investment andderivative activities of $80,670,000 in the statement of operations. The lossconsisted of a loss of 42,479,000 on terminated swaps, a loss of $39,240,000 onthe sale of $1,509,557,000 of fixed income securities available-for-sale, again of $1,455,000 on the sale of $4,299,000 equity securitiesavailable-for-sale, and an unrealized loss of $406,000 on fixed income tradingsecurities.

 

During the quarter endedSeptember 30, 2002, the Company reported a net loss from investment andderivative activities of $15,645,000 in the statement of operations. This lossconsisted of a net loss of $31,878,000 on closed forward contracts, a gain of$29,890,000 on the sale of $887,838,000 of fixed income

 

26

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tradingsecurities, a gain of $76,000 on the sale of $242,000 of equity securitiesavailable-for-sale, and an unrealized loss of $13,733,000 on fixed incometrading securities.

 

##### *Generaland Administrative Expenses*

##### * *

General and administrative expenses increased to $607,000 for thequarter ended September 30, 2003 from ($557,000) for the quarter endedSeptember 30, 2002. The primary reason for the increase was the increasein legal, accounting and other fee expenses associated with the professionalservices rendered in connection with the Company’s pursuit of various strategicalternatives, including our proposed merger with American Home.

 

In the quarterended September 30, 2003, the Company reversed the incentive fee recordedas expense year-to-date.  Incentive feesare calculated based on year-to-date book earnings adjusted for certain itemsnot subject to tax currently and return on equity relative to certainbenchmarks.  Because the Company hadrealized losses on terminated interest rate swap agreements and realized losseson the sale of fixed income securities available-for-sale, distributable incomeyear-to-date through September 30, 2003 did not exceed the benchmark andaccordingly the Company was not required to pay the Manager an incentive feefor the quarter ended September 30, 2003.

 

**Nine Months Ended September 30, 2003 Compared ToNine Months Ended September 30, 2002**

** **

##### *Overview*

##### * *

For the nine months ended September 30, 2003, the Company’s netloss was $58,442,000, or $(1.96) per common share on a basic and diluted basis,based on a weighted average of 29,857,000 shares outstanding. This compares tonet income of $34,746,000, or $1.39 per common share on a basic basis and $1.38on a diluted basis, based on a weighted average of 24,976,000 and 25,105,000shares outstanding, respectively, for the nine months ended September 30,2002. The weighted average number of shares used to calculate net income perdiluted share includes the effect of the assumed exercise of outstanding stockoptions.

 

The primary reasons for the change in operating results for the ninemonths ended September 30, 2003 compared to 2002 are:  (1) changes in interest rates and marketconditions affecting the fair values of the Company’s mortgage relatedsecurities and related derivative financial instruments and net interestincome; and (2) related changes in investment and hedging strategies.

 

##### *Net Interest Income*

##### * *

Net interest income for the nine months ended September 30, 2003was $11,983,000, consisting of interest income on fixed income securities andcash balances less interest expense on reverse repurchase agreements andinterest rate swaps, compared to $62,962,000 for the nine months endedSeptember 30, 2002, or a decrease of 81%. The decrease in net interestincome was primarily due to a decrease in net interest margin, from 3.04% forthe nine months ended September 30, 2002 to 0.37% for the nine monthsended September 30, 2003. Changes in interest income and expense areprimarily a function of changes in average effective interest rates on theCompany’s fixed income securities, reverse repurchase agreements and interestrate swaps, and changes in the average amount of those assets and liabilitiesoutstanding during each year.

 

27

----

 

The following table reflects the average balances for each category ofthe Company’s interest earning assets as well as the Company’s interest bearingliabilities, with the corresponding effective rate of interest annualized:

 

#### **AVERAGEBALANCE AND RATE TABLE**

(Dollars in thousands)

 
|                                   |   | **For the  Nine Months Ended  September 30, 2003** |      | **For the  Nine Months Ended  September 30, 2002** |   |
|----------------------------------------|--------|---------------------------------------------------------|-----------|---------------------------------------------------------|--------|
|                                   |   | **Average  Balance**                                    |      | **Effective  Rate**                                     |   | **Average  Balance** |   | **Effective  Rate** |   |
| Interest-Earning Assets:               |   |                                                    |      |                                                    |   |   |   |   |   |
| Fixed Income Securities                |   | $                                                       | 2,078,309 |                                                    | 4.65   | % | $ | 2,615,606 |   | 6.43 | % |
| Cash and Cash Equivalents              |   | 15,189                                                  |      | 0.81                                                    | %      | 6,442 |   | 1.80 | % |
| Total Interest-Earning Assets          |   | 2,093,498                                               |      | 4.63                                                    | %      | 2,622,048 |   | 6.43 | % |
|                                   |   |                                                    |      |                                                    |   |   |   |   |   |
| Interest-Bearing Liabilities:          |   |                                                    |      |                                                    |   |   |   |   |   |
| Reverse Repurchase Agreements          |   | 1,898,640                                               |      | 4.26                                                    | %      | 2,493,296 |   | 3.39 | % |
|                                   |   |                                                    |      |                                                    |   |   |   |   |   |
| Net Interest-Earning Assets and Spread |   | $                                                       | 194,858   |                                                    | 0.37   | % | $ | 128,752 |   | 3.04 | % |

 

The effective yield data is computed by dividing the annualized netinterest income or expense, including the effect on interest expense of hedgingtransactions as applicable into the average daily balance shown.

 

The following table reflects the average balances for the Company’sequity securities, with the corresponding effective dividend yield annualized:

 

**AVERAGE BALANCE AND RATE TABLE**

(Dollars in thousands)

 
|              |   | **For the  Nine Months Ended  September 30, 2003** |   | **For the  Nine Months Ended  September 30, 2002** |   |
|-------------------|--------|---------------------------------------------------------|--------|---------------------------------------------------------|--------|
|              |   | **Average  Balance**                                    |   | **Effective  Dividend  Yield**                          |   | **Average  Balance** |   | **Effective  Dividend  Yield** |   |
|              |   |                                                    |   |                                                    |   |   |   |   |   |
| Equity securities |   | $                                                       | 3,068  |                                                    | 10.26  | % | $ | 4,159 |   | 10.93 | % |
|                   |        |                                                         |        |                                                         |        |  |  |  |  |  |  |

 

28

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The following table shows the approximate amounts of the change ininterest income and expense between the nine months ended September 30 in2003 and 2002 that was a function of rate and volume changes, and the amount ofthe change that cannot be ascribed specifically to either rate or volumechanges:

 

**RATE / VOLUME TABLE**

(Dollars in thousands)

 
|                          |   | **Nine Months  Ended September 30,  2003 compared to 2002** |    |
|-------------------------------|--------|------------------------------------------------------------------|---------|
|                          |   | **Total  Change**                                                |    | **Changes Due  to** |   |
| **Volume (1)**                |   | **Rates (1)**                                                    |
| Interest-Earning Assets       |   |                                                             |    |   |   |   |   |
| Fixed income securities       |   | $                                                                | (53,686 | ) | $ | (25,925 | ) | $ | (27,761 | ) |
| Cash and cash equivalents     |   | 5                                                                |    | 118 |   | (113 | ) |
|                          |   |                                                             |    |   |   |   |   |
| Total interest income         |   | (53,681                                                          | )       | (25,807 | ) | (27,874 | ) |
|                          |   |                                                             |    |   |   |   |   |
| Interest-Bearing Liabilities  |   |                                                             |    |   |   |   |   |
| Reverse repurchase agreements |   | (2,702                                                           | )       | (15,107 | ) | 12,405 |   |
|                          |   |                                                             |    |   |   |   |   |
| Total interest expense        |   | (2,702                                                           | )       | (15,107 | ) | 12,405 |   |
|                          |   |                                                             |    |   |   |   |   |
| Change In Net Interest Income |   | $                                                                | (50,979 | ) | $ | (10,700 | ) | $ | (40,279 | ) |

 

----

(1)          Changesin interest income/expense not arising from volume or rate variances areallocated proportionately to rate and volume.

 

A portion of the change in interest expense in the table above isrelated to the Company’s use of interest rate swaps.  Periodic settlements of the swap agreements with theircounterparties result in adjustments to interest expense associated with thereverse repurchase agreements hedged by the swaps.  During the nine months ended September 30, 2003, interestexpense was increased by $38,015,000 paid to swap counterparties and $4,559,000from amortization of deferred losses on terminated swap contracts.  During the nine months endedSeptember 30, 2002, interest expense was increased by $29,342,000 paid toswap counterparties and decreased by $180,000 from amortization of deferredgains on terminated swap contracts.

 

##### *DividendIncome*

##### * *

The Company reported dividend income of $236,000 from dividends onequity investments for the nine months ended September 30, 2003, comparedto $341,000 for the nine months ended September 30, 2002. The decrease individend income was due to the sale of our equity investments.

 

*Net Gain (Loss) from Investment andDerivative Activities*

 

During the nine months ended September 30, 2003, the Companyreported a net loss on investment and derivative activities of $66,592,000 inthe statement of operations.  The lossconsisted of a loss of $42,479,000 on terminated swaps, a net loss of$24,153,000 on the sale of $2,257,126,000 of fixed income securitiesavailable-for-sale, a gain of $5,424,000 on the sale of $432,761,000 of fixedincome trading securities, a gain of $1,455,000 on the sale of $4,299,000 ofequity securities available-for-sale, and an unrealized loss of $6,839,000 onfixed income trading securities.

 

During the nine months ended September 30, 2002, the Companyreported a net loss on investment and derivative activities of $26,097,000 inthe statement of operations.  This lossconsisted of a net loss of

 

29

----

 

$55,800,000 on closed forwardcontracts, a loss of $229,000 on the sale of $98,634,000 of fixed income securitiesavailable-for-sale, a gain of $29,907,000 on the sale of $894,372,000 of fixedincome trading securities, a gain of $594,000 on the sale of $1,937,000 ofequity securities available-for-sale, and an unrealized loss of $569,000 onfixed income trading securities.

 

##### *Generaland Administrative Expenses*

##### * *

General and administrative expenses increased to $4,069,000 for thenine months ended September 30, 2003 from $2,460,000 for the nine monthsended September 30, 2002. The increase was primarily due to an increase inlegal, accounting and other fee expenses associated with the professionalservices rendered in connection with the Company’s pursuit of various strategicalternatives, including our proposed merger with American Home.

 

**LIQUIDITY AND CAPITALRESOURCES**

 

The Company’s primary sources of funds as of September 30, 2003and December 31, 2002, consisted of reverse repurchase agreements totaling$927,079,000 and $2,112,444,000, respectively. The Company expects to continue to borrow funds in the form of reverserepurchase agreements.  AtSeptember 30, 2003, the Company had borrowing arrangements withapproximately twenty different investment banking firms.  Increases in short-term interest rates couldnegatively impact the valuation of the Company’s mortgage assets, which couldlimit the Company’s borrowing ability or cause its lenders to initiate margincalls.

 

For liquidity, the Company will also rely on the cash flow fromoperations, primarily monthly principal and interest payments to be received onthe mortgage assets.

 

The Company believes that equity capital, combined with the cash flowfrom operations and the utilization of borrowings, will be sufficient to enablethe Company to meet anticipated liquidity requirements.  However, an increase in prepayment ratessubstantially above the Company’s expectations could cause a liquidityshortfall.  If the Company’s cashresources are at any time insufficient to satisfy the Company’s liquidityrequirements, the Company may be required to liquidate mortgage assets, selldebt or additional equity securities or borrow money to meet itsobligations.  If required, the sale ofmortgage assets at prices lower than the carrying value of such assets wouldresult in losses and reduced income.

 

The Company may in the future increase its capital resources by makingadditional offerings of equity and debt securities, including classes ofpreferred stock, common stock, commercial paper, medium-term notes,collateralized mortgage obligations 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 in 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 any additional offerings as they will dependupon market conditions and other factors.

 

**INFLATION**

 

Most of the Company’s assets and liabilities are financial innature.  As a result, interest rates andother factors drive the Company’s performance far more so than doesinflation.  Changes in interest rates donot necessarily correlate with inflation rates or changes in inflation rates.  The Company’s financial statements areprepared in accordance with accounting principles generally accepted in theUnited States of America and the Company’s dividends are determined by theCompany’s net income as calculated for tax purposes; in each case, theCompany’s activities and balance sheet are measured with reference tohistorical cost and or fair market value without considering inflation.

 

30

----

 

**CRITICAL ACCOUNTING POLICIES**

 

The Company’s financial statements are prepared in accordance withaccounting principles generally accepted in the United States of America. Thefinancial information contained within these financial statements is, to asignificant extent, financial information that is based on approximate measuresof the financial effects of transactions and events that have already occurred.Based on its consideration of accounting policies that involve complex andsubjective decisions and assessments, management has identified its most criticalaccounting policies to be the following:

 

##### *Classificationsof Investment Securities*

##### * *

The Company’s investment securities are classified as either tradingsecurities or available-for-sale securities, as discussed in Note 3 to thefinancial statements. Although all of the Company’s investment securities arecarried on the balance sheets at fair value, the classification of thesecurities as trading or as available-for-sale determines whether changes infair value are recorded immediately through current earnings, as they are fortrading securities, or as adjustments to accumulated other comprehensive income(loss), which is a component of stockholders’ equity, as they are foravailable-for-sale securities. If available-for-sale securities were classifiedas trading securities, there could be substantially greater volatility inearnings from period-to-period.

 

##### *Valuationsof Investment Securities*

##### * *

As noted above, all investment securities are carried on the balancesheets at fair value. Some of the Company’s securities, particularly the equitysecurities, have readily determinable fair values based on quotes provided fromrecognized securities exchanges. However, most of the Company’s fixed incomesecurities have fair values determined by management with reference to priceestimates provided by dealers in the securities, independent pricing services,and other sources. Because the price estimates may vary to some degree betweensources, management must make certain judgments and assumptions about theappropriate price to use to calculate the fair values for financial reportingpurposes. Different judgments and assumptions could result in differentpresentations of value.

 

When the fair value of an available-for-sale security is less thanamortized cost, management considers whether there is an other-than-temporaryimpairment in the value of the security (e.g., whether the security will besold prior to the recovery of fair value). If, in management’s judgment, an other-than-temporary impairment exists,the cost basis of the security is written down to the then-current fair value,and the unrealized loss is transferred from accumulated other comprehensiveincome as an immediate reduction of current earnings (i.e., as if the loss hadbeen realized in the period of impairment).

 

*Interest Income and Dividend Recognition*

 

Interest income on the Company’s mortgage securities and other fixedincome securities is accrued based on the actual coupon rate and theoutstanding principal amount.  Premiumsand discounts are amortized or accreted into interest income over the lives ofthe securities using the effective yield method adjusted for the effects ofestimated prepayments.  In the eventthat the cost basis of a security has been reduced below par because of another-than-temporary impairment in value, the difference is treated like adiscount in determining the appropriate amount of accretion to recognize asinterest income between the date when the cost is adjusted and when thesecurity is ultimately sold.  Also,dividends on equity securities are recognized as income on their declarationdates.

 

31

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##### *Accountingfor Derivative Financial Instruments and Hedging Activities*

##### * *

In recent periods the Company has used two types of derivativefinancial instruments, as discussed in Notes 2 and 5 to the financialstatements. Both types are used fundamentally for the purpose of hedging theCompany’s exposure to interest rate risk, and both are carried at fair value onthe balance sheets. Forward contracts to sell U.S. Treasury securities arematched against a portion of the Company’s fixed income trading securities.These contracts do not qualify for hedge accounting and, therefore, changes infair values of these instruments are recorded immediately through currentearnings. Such changes tend to offset fair value changes in the oppositedirection for the fixed income trading securities and help to reduce thevolatility of periodic earnings. Interest rate swap agreements are matchedagainst a portion of the Company’s current and anticipated reverse repurchaseagreements (borrowings), effectively fixing the rate of interest paid on thoseborrowings for longer durations. These instruments qualify for hedge accountingand are considered to be cash flow hedges. To the extent that periodic changesin fair values of the swap agreements are deemed to be the result of theireffectiveness as hedges, such changes are recorded as adjustments toaccumulated other comprehensive income, a component of stockholders’ equity,rather than to current earnings. If the swaps no longer qualified as cash flowhedges (for example, if the terms of the swaps were not matched appropriatelyto the terms of the borrowings, or if anticipated borrowings matched to theswaps were not in fact made) all or a portion of the swaps’ fair values couldbecome adjustments to current earnings.

 

##### *Accountingfor Stock Options*

##### * *

The Company issues stock options to its directors and to certainemployees of the Manager. The stock options issued to directors are accountedfor using the intrinsic-value method. Because the options were issued withexercise prices no less than the market price of the Common Stock on the datesof grant, and because the stock options key terms are fixed, use of the intrinsic-valuemethod results in the Company not recognizing compensation expense for thesestock options. Note 2 to the financial statements discloses the effects onrecent earnings if these stock options were accounted for at fair value whengranted and if compensation expense were recognized in periodic earnings overthe vesting periods of the options. If the terms of the options were to bechanged, variable accounting might need to be used, and the Company might thenneed to begin recognizing compensation expense for these options.  Options granted to persons other thandirectors (i.e., to non-employees) are accounted for using the fair valuemethod; such stock options are measured at their fair value when they aregranted and are recognized as general and administrative expense during theperiods when the options are vested and the related services are performed.

 

# **ITEM 3.**                             QUANTITATIVE ANDQUALITATIVE DISCLOSURES ABOUT MARKET RISK

 

**MARKET RISK**

 

The Company’s two primary components of market risk are interest raterisk and equity price risk, as discussed below.

 

### **Interest Rate Risk**

### ** **

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

 

32

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

 

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

 

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

 

Prepayment rates generally increase when prevailing interest rates fallbelow the interest rates on existing mortgage assets.  In addition, prepayment rates generally increase when thedifference between long-term and short-term interest rates declines.  Prepayments of mortgage assets could harmthe Company’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 ofadjustment to a fully indexed rate, the Company will have held the mortgageasset while it was less profitable and lost the opportunity to receive interestat the fully indexed rate over the expected life of the adjustable-ratemortgage asset.  In addition, theprepayment of any mortgage asset that had been purchased at a premium by theCompany would result in the immediate write-off of any remaining capitalizedpremium amount and consequent reduction of the Company’s net interest income bysuch amount.  Finally, in the event thatthe Company is unable to acquire new mortgage assets to replace the prepaidmortgage assets, its financial condition, cash flow and results of operationscould be harmed.

 

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

 

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

 

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

 

The Company funds 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.

 

*Effect on Fair 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.

 

The Company primarily assesses its interest rate risk by estimating theduration of its assets and the duration of its liabilities, including allhedging instruments.  Durationessentially measures the market price volatility of financial instruments asinterest rates change.  The Companygenerally calculates duration using various financial models and empirical dataand different models and methodologies can produce different duration numbersfor the same securities.

 

The following sensitivity analysis table shows the estimated impact onthe fair value of the Company’s interest rate sensitive investments, net of itshedging instruments and reverse repurchase agreement liabilities, assuming ratesinstantaneously rise and fall one hundred, two hundred, and three hundred basispoints. Interest rate sensitive investments currently include fixed incometrading and available-for-sale securities. (Dollars are in thousands except pershare amounts.)

 
|                                                                      |   | **Fair Value  for Scenario Shown**          |    |
|---------------------------------------------------------------------------|--------|---------------------------------------------|---------|
|                                                                      |   | **Interest  Rates Fall  300 Basis  Points** |    | **Interest  Rates Fall  200 Basis  Points** |   | **Interest  Rates Fall  100 Basis  Points** |   | **Unchanged** |   | **Interest  Rates Rise  100 Basis  Points** |   | **Interest  Rates Rise  200 Basis  Points** |   | **Interest  Rates Rise  300 Basis  Points** |   |
|                                                                      |   |                                        |    |   |   |   |   |   |   |   |   |   |   |   |   |
| Interest Rate Sensitive Instruments After  Hedging Instruments            |   | $                                           | 317,917 |   | $ | 343,333 |   | $ | 370,477 |   | $ | 380,535 |   | $ | 363,247 |   | $ | 332,887 |   | $ | 297,938 |   |
|                                                                      |   |                                        |    |   |   |   |   |   |   |   |   |   |   |   |   |
| Change in Fair Value                                                      |   | $                                           | (62,618 | ) | $ | (37,202 | ) | $ | (10,058 | ) | — |   | $ | (17,288 | ) | $ | (47,648 | ) | $ | (82,597 | ) |
|                                                                      |   |                                        |    |   |   |   |   |   |   |   |   |   |   |   |   |
| Change as a Percent of Fair Value of  Interest Rate Sensitive Investments |   | (4.59                                       | )%      | (2.72 | )% | (0.74 | )% | — |   | (1.27 | )% | (3.49 | )% | (6.05 | )% |
|                                                                      |   |                                        |    |   |   |   |   |   |   |   |   |   |   |   |   |
| Change as a Percent of Stockholders’ Equity                          |   | (38.16                                      | )%      | (22.67 | )% | (6.13 | )% | — |   | (10.54 | )% | (29.04 | )% | (50.33 | )% |
|                                                                      |   |                                        |    |   |   |   |   |   |   |   |   |   |   |   |   |
| Change on a Per Share Basis                                               |   | $                                           | (2.10   | ) | $ | (1.25 | ) | $ | (0.34 | ) | — |   | $ | (0.58 | ) | $ | (1.60 | ) | $ | (2.77 | ) |
|                                                                           |        |                                             |         |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |

 

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

 

The Company has established an interest rate risk management policythat is intended to mitigate the negative impact of changing interestrates.  The Company generally intends tomitigate interest rate risk by targeting the difference between the marketweighted average duration on its mortgage related assets funded with securedborrowings to the market weighted average duration of such borrowings to plusor minus one year or less, taking into account all hedging transactions.  The Company generally does not intend tohave any specific duration target for the portion of its mortgage relatedassets that are not funded by secured borrowings.

 

There can be no assurance that the Company will be able to limit suchduration differences and there may be periods of time when the durationdifference will be greater than one year.

 

Although there is no direct link between changes in fair value andchanges in earnings in many cases, a decline in fair value for the Company maytranslate into decreased earnings over the remaining life of the investmentportfolio.

 

If the fair market value of the Company’s portfolio were to declinesignificantly, the Company’s overall liquidity may be impaired which couldresult in the Company being required to sell assets at losses.

 

**The Company’sanalysis of risks is based on management’s experience, estimates, models andassumptions.  These analyses rely onmodels of financial information which utilize estimates of fair value andinterest rate sensitivity.  Actualeconomic conditions or implementation of investment decisions by the Managermay produce results that differ significantly from the estimates andassumptions used in the Company’s models and the projected results shown in theabove tables and in this report.  Theseanalyses contain certain “forward-looking statements” and are subject to theSafe Harbor contained in the Private Securities Litigation Reform Act of 1995.**

 

# **ITEM 4.**                             CONTROLS AND PROCEDURES

 

As ofSeptember 30, 2003, we carried out an evaluation, under the supervisionand with the participation of our management, including our Chief ExecutiveOfficer and our Chief Financial Officer, of the effectiveness of the design andoperation of our disclosure controls and procedures pursuant to Exchange ActRule 13a-14. Based upon the foregoing, our Chief Executive Officer and ourChief Financial Officer concluded that as of September 30, 2003, ourdisclosure controls and procedures are effective in timely alerting them tomaterial information relating to our Company (including our consolidatedsubsidiaries) required to be included in our Exchange Act reports. There havebeen no significant changes in our internal controls or in other factors whichcould significantly affect internal controls subsequent to the date we carriedout our evaluation.

 

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# **PART II.**                        OTHER INFORMATION

# ** **

# **ITEM 1.**                             LEGAL PROCEEDINGS

# ** **

None.

 

# **ITEM 2.**                             CHANGES IN SECURITIES ANDUSE OF PROCEEDS

 

**First Amendment to Shareholder Rights Agreement**

 

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

 

# **ITEM 3.**                             DEFAULTS UPON SENIORSECURITIES

 

Notapplicable.

 

# **ITEM 4.**                             SUBMISSION OF MATTERS TO AVOTE OF SECURITY HOLDERS

 

None.

 

# **ITEM 5.**                             OTHER INFORMATION

 

None.

 

# **ITEM 6.**                             EXHIBITS AND REPORTS ONFORM 8-K

# ** **

# ***a)****                **Exhibits*

 

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

 

# ***b)****                **Reportson Form 8-K*

 

OnAugust 14, 2003, we filed a Current Report on Form 8-K with the SEC,announcing our earnings for the second quarter of 2003.

 

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**SIGNATURES**

 

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

 

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

 

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#### **EXHIBIT INDEX**

 

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

 

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

 
| **Exhibit  No.** |   | **Description**                                                                                                                                                                                                                                                                                                                                                                                                                |
|------------------|--------|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|             |   |                                                                                                                                                                                                                                                                                                                                                                                                                           |
| 2.1              |   | Agreement and Plan of  Merger dated as of July 12, 2003, by and among American Home Mortgage  Holdings, Inc., American Home Mortgage Investment Corp. (formerly called AHM  New Holdco, Inc.), and Apex Mortgage Capital, Inc. (previously filed as  Exhibit 2.1 to the Company’s Current Report on Form 8-K filed with the  Commission on July 15, 2003 and incorporated herein by reference).                 |
|             |   |                                                                                                                                                                                                                                                                                                                                                                                                                           |
| 3.1              |   | Articles of Amendment and  Restatement of the Company, as filed with the State Department of Assessments  and Taxation of Maryland on November 25, 1997, (previously filed as  Exhibit 3.1 to the Company’s Registration Statement on Form S-11 (Commission  File No. 333-36069) Amendment No. 3 filed with the Commission on  November 21, 1997 and incorporated herein by reference).                         |
|             |   |                                                                                                                                                                                                                                                                                                                                                                                                                           |
| 3.2              |   | Articles Supplementary  relating to the Company’s Series A Junior Participating Preferred Stock, as  filed with the State Department of Assessments and Taxation of the State of  Maryland on July 26, 1999 (previously filed as Exhibit 3.1 t the  Company’s Current Report on Form 8-K, dated June 30, 1999 and filed with  the Commission on July 27, 1999, and incorporated herein by reference). |
|             |   |                                                                                                                                                                                                                                                                                                                                                                                                                           |
| 3.3              |   | Amended and Restated  Bylaws of the Company as currently in effect (previously filed as Exhibit 4.4  to the Company’s Registration Statement on Form S-2, Commission File No.  333-73448, Amendment No. 1, and filed with the Commission on  November 27, 2001 and incorporated herein by reference).                                                                                                                |
|             |   |                                                                                                                                                                                                                                                                                                                                                                                                                           |
| 4.1              |   | Form of Share Certificate  for Common Stock (previously filed as Exhibit 4.3 to the Company’s Current  Report on Form 8-K, dated June 30, 1999 and filed with the Commission on  July 27, 1999, and incorporated herein by reference).                                                                                                                                                                          |
|             |   |                                                                                                                                                                                                                                                                                                                                                                                                                           |
| 4.2.1            |   | Shareholder Rights  Agreement between the Company and The Bank of New York, as Rights Agent  (including as Exhibit B the form of Rights Certificate)(previously filed as  Exhibit 4.1 to the Company’s Current Report on Form 8-K, dated June 30,  1999 and filed with the Commission on July 27, 1999, and incorporated  herein by reference).                                                                 |
|             |   |                                                                                                                                                                                                                                                                                                                                                                                                                           |
| 4.2.2            |   | First Amendment to  Shareholder Rights Agreement dated as of July 15, 2003, by and between  Apex Mortgage Capital, Inc. and The Bank of New York (previously filed as  Exhibit 4.1 to the Company’s Current Report on Form 8-K filed with the  Commission on July 15, 2003 and incorporated herein by reference).                                                                                               |

 

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| 31.1*  |   | Certification of Philip A.  Barach under Section 302 of the Sarbanes-Oxley Act of 2002. |
|--------|--------|----------------------------------------------------------------------------------------------|
|   |   |                                                                                         |
| 31.2*  |   | Certification of David S.  DeVito under Section 302 of the Sarbanes-Oxley Act of 2002.  |
|   |   |                                                                                         |
| 32.1*  |   | Certification of Philip A.  Barach under Section 906 of the Sarbanes-Oxley Act of 2002. |
|   |   |                                                                                         |
| 32.2*  |   | Certification of David S.  DeVito under Section 906 of the Sarbanes-Oxley Act of 2002.  |

 

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* Filed herewith.

 

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